Valmiki J Mehta, J.@mdashNo one appeared for the respondent on 31.10.2011 when the counsel for the appellant, as a courtesy, stated that he will inform the respondent and his counsel. Learned counsel for the appellant has placed on record a letter dated 31.10.2011 which was sent by courier both to the respondent as also his Advocate. No one appears for the respondent although it is 12.45 P.M. I have therefore heard the counsel for the appellant and am proceeding to dispose of the appeal after perusing the record.
2. The facts of the case are that the respondent/plaintiff filed a suit against the appellant/defendant for recovery of Rs. 1,18,000/- alongwith interest on the ground that the appellant/defendant had committed breach of contract being the agreement to sell dated 9.7.1996 whereby double storey house built on 84 square yards of plot bearing No. A-5/139, Paschim Vihar, New Delhi was to be sold to the respondent/plaintiff. It was alleged by the respondent/plaintiff in the plaint that the appellant/defendant committed a default and therefore it was claimed that the appellant/defendant was liable to pay double the amount of earnest money and which amount was claimed in the suit. It may be clarified that it is undisputed that the advance price which the appellant/defendant had received under the agreement to sell was already refunded back to the respondent/plaintiff in the month of January, 1997 and the suit therefore claimed he half of double the amount of earnest money as damages.
3. Learned counsel for the appellant has argued that the pleading/plaint of the respondent/plaintiff did not plead a case of the respondent/plaintiff having suffered a loss on account of the prices of the property increasing on account of breach caused by the appellant/defendant/seller. It is argued on behalf of the appellant/defendant that damages equal to earnest money paid cannot be claimed merely because there is a breach of contract, because a breach simplicitor is not actionable unless loss is in fact pleaded and proved. It is argued that clauses in the contract of payment of double the amount of earnest money are violative of provision of Section 74 of the Contract Act, 1872 and the claim for such damages merely because there was a clause in the contract is therefore illegal and does not lie. Reliance is placed upon a judgment of this Court in the case of Dilip Kumar Bhargava Vs. Urmila Devi Sharma & Ors. RFA No. 129/2011 decided on 31.3.2011.
4. In the decision in the case of Dilip Kumar Bhargava (supra) I have relied upon Constitution Bench decision of the Supreme Court in the case of
3. Learned counsel for the appellant relies upon the Constitution Bench decision of the Supreme Court in the case of
8. The claim made by the plaintiff to forfeit the amount of Rs 24,000 may be adjusted in the light of Section 74 of the Indian Contract Act, which in its material part provides:
When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be, the penalty stipulated for.
The section is clearly an attempt to eliminate the sometime elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.
10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damage"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
15. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties pre-determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression "to receive from the party who has broken the contract" does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract. The court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of the breach.
16. There is no evidence that any loss was suffered by the plaintiff in consequence of the default by the defendant, save as to the loss suffered by him by being kept out of possession of the property. There is no evidence that the property had depreciated in value since the date of the contract provided; nor was there evidence that any other special damage had resulted. The contact provided for forfeiture of Rs 25,000 consisting of Rs, 1039 paid as earnest money and Rs 24,000 paid as part of the purchase price. The defendant has conceded that the plaintiff was entitled to forfeit the amount of Rs 1000 which was paid as earnest money. We cannot however agree with the High Court that 13 percent of the price may be regarded as reasonable compensation in relation to the value of the contract as a whole, as that in our opinion is assessed on an arbitrary assumption. The plaintiff failed to prove the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to find any principle on which compensation equal to ten percent of the agreed price could be awarded to the plaintiff. The plaintiff has been allowed Rs 1000 which was the earnest money as part of the damages. Besides he had use of the remaining sum of Rs 24,000, and we can rightly presume that he must have been deriving advantage from that amount throughout this period. In the absence therefore of any proof of damage arising from the breach of the contract, we are of opinion that the amount of Rs 1000 (earnest money) which has been forfeited, and the advantage that the plaintiff must have derived from the possession of the remaining sum of Rs 24,000 during all this period would be sufficient compensation to him. It may be added that the plaintiff has separately claimed mesne profits for being kept out possession for which he has got a decree and therefore the fact that the plaintiff was out of possession cannot be taken, into account in determining damages for this purpose. The decree passed by the High Court awarding Rs. 11,250 as damages to the plaintiff must therefore be set aside.
(Underlining added)
4. To the same effect are the observations in
4. Under the terms of the agreements the amounts deposited by the plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The High Court observed that the deposits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in "The Dictionary of English Law" at p. 689 : "Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by giving to the vendor a nominal sum (e.g. a shilling) as a token that the parties are in earnest or have made up their minds." As observed by the Judicial Committee in Kunwar Chiranjit Singh v. Har Swarup A.I.R.1926 P.C.1
Earnest money is part of the purchase price when the transaction goes forward : it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee.
In the present case the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be regarded as earnest money.
5. Section 74 of the Contract Act provides
When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
...
There is authority, no doubt coloured by the view which was taken in English cases, that Section 74 of the Contract Act has no application to cases of deposit for due performance of a contract which is stipulated to be forfeited for breach : Natesa Aiyar v. Appavu Padayachi ILR [1913] Mad. 178 Singer Manufacturing Company v. Raja Prosad I.L.R.[1909] Cal. 960 Manian Patter v. The Madras Railway Company I.L.R.[1906] Mad.188 But this view is no longer good law in view of the judgment of this Court in
Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty.... The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for.
The Court also observed:
"It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that Section 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases whereupon breach of contract an amount received under the contract is sought to be forfeited. In our judgment the expression "the contract contains any other stipulation by way of penalty" comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by Section 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable but not exceeding the amount specified in the contract as liable to forfeiture.", and that,
There is no ground for holding that the expression "contract contains any other stipulation by way of penalty" is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited.
(Underlining added)
5. In
"11. Having discussed the proper interpretation of Clause 18, we may now turn to consider what is the real nature of the claim for recovery of which the appellant is seeking to appropriate the sums due to the respondent under other contracts. The claim is admittedly one for damages for breach of the contract between the parties. Now, it is true that the damages which are claimed are liquidated damages under Clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages. Section 74 of the Indian Contract Act eliminates the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties : a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due From the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages.................The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant.
(Underlining added)
6. A contract pertaining to breach of an Agreement to Sell is a contract where loss can be calculated, the loss ordinarily being the lesser value of the immovable property on the date of the contract. Such contracts of Agreements to Sell, being contracts where damages can be calculated, even if, there is a provision of forfeiture of a huge amount of Rs. 5 lacs, the same would be a Clause in terrorem. The Clause being in the nature of a penalty or in terrorem, such forfeiture of a huge amount cannot be allowed unless damages are actually proved, the law being that Section 74 only provides the outer limit of damages which can be awarded. The court always awards reasonable compensation depending upon the outer limit of compensation/damages which are prescribed under the contract, and which are in the nature of liquidated damages u/s 74 of the Contract Act. The present case, and other similar cases of breaches of Agreements to Sell, must be distinguished from those class of cases where loss cannot be proved and which contracts were the subject matter before the Supreme Court in the cases reported as
7. On reading of the aforesaid decisions of the Supreme Court it becomes clear that there cannot be forfeiture of an amount which is paid by a buyer under an Agreement to Sell to the respondents, even if, the buyer is guilty of breach of contract because the seller who has received monies, cannot forfeit the monies unless he has suffered loss in the bargain. A seller ordinarily suffers loss under an Agreement to Sell only if value of the property decreases as per the breach committed by the buyer/plaintiff/appellant and in the present case no loss has been pleaded or proved by the respondents. Even assuming therefore that the appellant/plaintiff is guilty of breach of contract, the respondent No. 1, at best, can forfeit only a reasonable amount and not an amount of Rs. 10 lacs out of the total sale consideration of Rs. 55 lacs. It could not be argued with any conviction by the learned counsel for the respondent No. 1/defendant No. 1 that there are any pleadings in the trial court that the respondent No. 1/defendant No. 1 has been caused loss in any manner including by the value of the property having gone down. It is because of lack of any pleadings in this behalf that the respondent No. 1/defendant No. 1 led no evidence as to any fall in the value of the property by a specific amount of Rs. 10 lacs so as to entitle him to forfeit the amount of Rs. 10 lacs received as advance price.
8. Learned counsel for the respondent No. 1/defendant No. 1, however argues that out of the amount of Rs. 10 lacs, the sum of Rs. 5 lacs was received as earnest money and the other sum of Rs. 5 lacs was received as advance price, and therefore, he argues that the respondent No. 1/defendant No. 1 may not be entitled to forfeit advance price as Rs. 5 lacs, but he is entitled to forfeit a sum of Rs. 5 lacs given as earnest money. I do not agree. The label of payment is not material in law and it is the substance which has to be seen. An amount of around 10% of the total price payable cannot be said to be nominal earnest money of which forfeiture can be made. The said payment is either in reality is a part of advance price or at best a Clause in the nature of penalty/ in terrorem. The Supreme Court in the case of Fateh Chand (supra) has allowed forfeiture of a sum of Rs. 1,000/- out of a total amount of Rs. 24,000/- in the facts of the said case. The Supreme Court has observed that only a reasonable compensation can be awarded. In the facts of the present case, I deem it fit that the respondent, inasmuch as no loss has been pleaded or proved, can forfeit at best a sum of Rs. 50,000/- on account of the breach by the appellant/plaintiff and consequently and the respondent No. 1/defendant No. 1 is bound to refund the sum of Rs. 9,50,000/- received under the Agreement to Sell dated 12.5.2006. I also find that while on the one hand, the respondent No. 1 is unreasonably withholding the monies of the appellant, on the other hand the value of his property is bound to have increased. I can take judicial notice of the fact that values of the property in a city like Delhi are always on the upswing and surely from 2006 till 2011, a period of five years, the value of the property of the respondent No. 1/defendant No. 1 would have appreciated considerably. Since the respondent No. 1/defendant No. 1 has enjoyed the monies illegally of the appellant/plaintiff for this period from 2006 to 2011, I deem it fit that the commercial rate of interest should be awarded in favour of the appellant/plaintiff and against the respondent No. 1/defendant No. 1. Commercial rates of interest vary as per the facts of each transaction, however, I deem it appropriate to take judicial notice of Section 80 of the Negotiable Instruments Act, 1881 which allows interest at 18% in case of dishonor of a Negotiable Instrument for the facts and circumstances of the present case where the value of property of the respondents would have increased. In the present case I am also making reference to Section 80 of the Negotiable Instruments Act, inasmuch as, what is payable is the admitted amount which is received by the respondents/defendants and which has been obdurately withheld.
5. In view of ratio of decision in the case of Dilip Kumar Bhargava (supra), and the fact that there is no pleading proved on behalf of the respondent/plaintiff/buyer that in fact he suffered losses on account of breach of contract, the respondent/plaintiff was therefore only entitled to refund of the advance price paid and which was already received by him before filing of the suit in January, 1997. The impugned judgment and decree therefore is not correct in awarding a sum of Rs. 1 lakh alongwith interest to the respondent/plaintiff and which amount is the damages being double part of the amount of earnest money paid.
6. In view of the above, the appeal is accepted. Impugned judgment and decree dated 19.1.2002 is set aside. The suit of the respondent/plaintiff shall stand dismissed. The appellant/defendant is entitled to seek restitution u/s 144 CPC alongwith interest as the restituting court thinks fit inasmuch as the respondent/plaintiff has recovered the amount from the appellant/defendant in execution. Decree sheet be prepared. Trial Court record be sent back.
