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Thursday, January 15, 2015

CIVIL APPEAL NO. 193 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.32039 OF 2012] M/s. Kailash Nath Associates ...Appellant Versus Delhi Development Authority & Anr. ...Respondents


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 193 OF 2015
                [ARISING OUT OF SLP (CIVIL) NO.32039 OF 2012]

M/s.                 Kailash                 Nath                 Associates


Delhi           Development           Authority            &            Anr.

                               J U D G M E N T

R.F. Nariman, J.

Leave granted.

2.    The present appeal arises out of a public  auction  conducted  by  the
Delhi Development Authority ("DDA") wherein the appellant made  the  highest
bid for Plot No.2-A, Bhikaji Cama Place,  District  Centre,  New  Delhi  for
3.12 Crores (Rupees Three Crores  Twelve  Lakhs).   As  per  the  terms  and
conditions  of  the  auction,  the  appellant,  being  the  highest  bidder,
deposited a sum of Rs.78,00,000/- (Rupees Seventy Eight  Lakhs),  being  25%
of the bid amount, with the DDA, this being earnest money  under  the  terms
of the conditions of auction. The relevant provisions in the  conditions  of
auction read as follows:
"(ii) The highest bidder shall, at the fall of the hammer, pay to the  Delhi
Development Authority through the officer conducting  the  auction,  25%  of
the bid amount as earnest money either in cash or by Bank  Draft  in  favour
of the Delhi Development Authority, or  Cheque  guaranteed  by  a  Scheduled
Bank as "good  for  payment  for  three  months"  in  favour  of  the  Delhi
Development Authority. If the earnest money is not paid,  the  auction  held
in respect of that plot will be cancelled.

(iii) The highest bid shall be subject to the acceptance  of  Vice-Chairman,
DDA or such other officer(s) as may be authorized by him on his behalf.  The
highest bid may be rejected without assigning any reason.

(iv) In case of default, breach or non-compliance of any of  the  terms  and
conditions of the auction  or  mis  -representation  by  the  bidder  and/or
intending purchaser, the earnest money shall be forfeited.

(v) The successful bidder shall submit a duly filled-in application  in  the
form attached immediately  after  the  close  of  the  auction  of  plot  in

(vi) When the bid is accepted by the DDA, the intending purchaser  shall  be
informed of such acceptance in writing and the  intending  purchaser  shall,
within 3 months  thereof,  pay  to  the  Delhi  Development  Authority,  the
balance 75% amount of the bid, in cash or by Bank Draft  in  favour  of  the
Delhi Development Authority or by Cheque guaranteed by a Scheduled  Bank  as
"good for payment for three months"  in  favour  of  the  Delhi  Development
Authority. If the bid is not accepted, the earnest money  will  be  refunded
to the intending purchaser without any interest unless the earnest money  is
forfeited under para 2 (iv) above."

3.    On 18.2.1982, the  DDA  acknowledged  the  receipt  of  Rs.78,00,000/-
(Rupees Seventy Eight Lakhs), accepted the appellant's bid and directed  the
appellant to deposit the remaining 75% by 17.5.1982.  However, as there  was
a general recession in the industry, the  appellant  and  persons  similarly
placed made representations sometime in May, 1982  for  extending  the  time
for payment of the  remaining  amount.   The  DDA  set  up  a  High  Powered
Committee to look into these representations.  The  High  Powered  Committee
on 21.7.1982 recommended granting the  extension  of  time  to  bidders  for
depositing  the  remaining  amount  of  75%.   Based  on  the  High  Powered
Committee's report, by a letter dated 11.8.1982, the DDA extended  time  for
payment upto 28.10.1982 with varying rates of  interest  starting  from  18%
and going upto 36%.

4.    Another High Powered Committee was also set up by the DDA in order  to
find out whether further time should be given to the appellant  and  persons
similarly situate to the appellant.

5.    The second High  Powered  Committee  recommended  that  the  time  for
payment be extended and specifically mentioned the  appellant's  name  as  a
person who should be given more time to pay  the  balance  amount.   Despite
the fact that on 14.5.1984 the  DDA  accepted  the  recommendations  of  the
second High Powered Committee, nothing  happened  till  1.12.1987.   Several
letters had been written by the appellant to DDA from 1984 to  1987  but  no
answer was forthcoming by the DDA.

6.    Vide a letter dated 1.12.1987, which is an  important  letter  on  the
basis of which the fate of this appeal largely depends, the  DDA  stated  as
                             "WITHOUT PREJUDICE'
                         DELHI DEVELOPMENT AUTHORITY
                                 VIKAS SADAN

                                                  New Delhi-23......198... .





M/s. Kailash Nath & Associates,
1006, Kanchanjanga Building,
18, Bara Khamba Road,
New Delhi-110001.

Sub:  Regarding payment of balance premium in respect
      of Plot No.2-A situated in Bhikaji Cama Place
          Distt. Centre.


With reference to the above subject, I am directed to inform you  that  your
case for relaxing the provisions of Nazul Rules, 1981, to condone the  delay
for the payment of balance premium  in  installments  was  referred  to  the
Govt. of India, Min. of  Urban  Development.  Before  the  case  is  further
examined by  the  Govt.  of  India,  Min.  of  Urban  Development,  you  are
requested to give your consent for making payment of balance amount  of  75%
premium within the period as may be fixed  alongwith  18%  interest  charges
p.a. on the belated payment. Further the schedule of payment and  conditions
if any will be as per  the  directions  issued  by  the  Ministry  of  Urban
Development, Govt. of India. It is, however, made  clear  that  this  letter
does not carry any commitment.

Your consent should reach to this office within 3 days from the date of
issue of this letter.

Dated 1.12.87
                                                           Yours faithfully,

                                                             DIRECTOR (C.L)"

7.    The appellant replied to the said letter on the  same  day  itself  in
the following terms:

Tel.: 3312648, 3314269

Regd. Ack. Due.
                                                           December 1, 1987.

The Director (C.L.),
Delhi Development Authority,
Vikas Sadan, I.N.A.,
New Delhi-l 10023.

Subject:    Payment of balance premium in respect of plot No.2-A Bhikaji
Cama Place Distt. Centre, New Delhi.

Dear Sir,

We are thankful to you for your letter No. F.30(2)/82-Impl.- I/4 dated nil
received by us this afternoon, on the above subject.

We hereby give our consent that we shall make the  payment  of  the  balance
amount of 75% premium within the period as may be fixed as per the  schedule
of payment and conditions, if any imposed, as per the directions  issued  by
the Ministry of Urban Development, Govt. of India,  alongwith  18%  interest
charges per annum on the belated payment.

We now request you to kindly convey us your formal approval  to  our  making
the said payment in installments as requested for.

Thanking you,

                                                            Yours faithfully
                                              For KAILASH NATH & ASSOCIATES,

                               Advance copy sent through Special Messenger."

8.    The Central Government informed the DDA vide a letter  dated  1.3.1990
that the land auctioned to the appellant was not Nazul land and,  therefore,
the Central Government would have nothing further to  do  with  the  matter.
Meanwhile, the appellant filed Writ Petition No.2395 of 1990  in  the  Delhi
High Court in which it  claimed  that  persons  similar  to  the  appellant,
namely, M/s.  Ansal  Properties  and  Industries  Private  Limited  and  M/s
Skipper Tower Private Limited had  been  allowed  to  pay  the  balance  75%
premium and were in fact allotted other plots.   Pleading  Article  14,  the
appellant stated that they were entitled to the same treatment.

9.    By a judgment and order dated 2.9.1993,  the  Delhi  High  Court  held
that as the auction was held as per terms and conditions of the  auction,  a
dispute regarding the same is a matter of contract and cannot be  gone  into
in proceedings under Article  226  of  the  Constitution.   It  was  further
observed that on facts, the Court found no force in  the  contention  raised
on behalf of the appellant regarding discrimination.  An  SLP  against  this
order was also dismissed on 16.12.1993 by the  Supreme  Court  stating  that
the appellant is at liberty to take whatever  steps  are  permitted  to  the
appellant under law to challenge forfeiture  of  earnest  money,  which  had
been done by a letter of 6.10.1993.  This letter is also important  for  the
correct determination of this appeal and is set out hereinbelow:-

                         DELHI DEVELOPMENT AUTHORITY
                                 VIKAS SADAN

                                                  New Delhi-23,    6.10.1993




M/s. Kailash Nath & Associates,
1006, Kanchanjanga Building,
18, Bara Khamba Road,
New Delhi-l10001.

Subject: Plot No.2-A in Bhikaji Cama Place Distt. Centre.


Consequent upon your failure to deposit  the  balance  75%  premium  of  the
aforesaid plot and dismissal of C.W.P. No. 2395 of 1990 by the Hon'ble  High
Court, Delhi, I am directed to inform you that the  bid/  allotment  of  the
said plot in your favour has been cancelled and earnest money  amounting  to
Rs.78,00,000/- deposited by you at the time of auction has been forfeited.

                                                           Yours faithfully,
                                                           (JAGDISH CHANDER)
                                                       DEPUTY DIRECTOR (CL)"

10.   The appellant then filed a suit for specific performance on  17.2.1994
and in the alternative for recovery of damages and recovery of  the  earnest
amount of Rs.78,00,000/- (Rupees Seventy Eight Lakhs).   Shortly  after  the
suit was filed, on  23.2.1994,  the  DDA  re-auctioned  the  premises  which
fetched a sum  of  Rs.11.78  Crores  (Rupees  Eleven  Crores  Seventy  Eight

11.   The learned Single Judge by  a  judgment  and  order  dated  10.9.2007
dismissed the appellant's suit for  specific  performance  and  damages  but
ordered refund of the earnest money forfeited together  with  9%  per  annum
interest.  The learned Single Judge held:-
"65.  Defendant No.1 instead of following the aforesaid course, found  merit
in the representations  received  not  only  from  the  plaintiff  but  such
similar situated parties.  It is in view thereof that  the  matter  went  as
far as setting up of two committees to repeatedly examine the matter and  to
come to a conclusion.  The case of defendant  no.1  was  that  the  material
produced by the plaintiff and such similar persons gave rise to a  cause  to
extend the time  for  making  the  payment  subject  to  certain  terms  and
conditions.  However, in view of the perception of defendant no.1  that  the
consent of UOI, defendant no.2, would be  required,  the  land  being  Nazul
land, the file was forwarded to defendant no.2.  The matter did not rest  at
this since thereafter UOI did grant such consent but sent back the  file  of
the plaintiff only on account of the fact that the land in question was  not
Nazul land. The net effect of this is that there was no permission  required
from the UOI and the decision taken by defendant no.1  to  extend  the  time
period for making the payment, thus, stood as it is.

66.   In my considered view, it is not open  for  defendant  no.1  to  state
that while it recommended the case of other similarly  situated  parties  in
case of Nazul land to the Government and obtained permission  for  grant  of
extension of time, in case of non-Nazul land where such permission  was  not
required, a different parameter was required to  be  followed.   It  may  be
mentioned at the cost of repetition that the plaintiff  was  a  party  which
volunteered to pay  interest  @18%  per  annum  unlike  some  of  the  other
parties.  There is merit in  the  contention  of  learned  Counsel  for  the
plaintiff that defendant no.1 after  treating  the  contract  as  subsistent
having extended time for making the payment was at least required to give  a
notice to the plaintiff to perform the agreement prior  to  terminating  the
agreement and could not straightaway terminate the  same.   This  conclusion
can draw strength from the observations in Halsbury Laws of England  (supra)
referred to aforesaid as also in Webb v. Hughes (supra).  It  is  clearly  a
case where there has been waiver of the time being essence of  the  contract
by conduct of the parties and, thus, defendant no.1  was  required  to  give
notice on the day appointed for completion of  the  contract  failing  which
only termination could take place.

67.   There were numerous  communications  exchanged  between  the  parties.
The recommendations  of  the  two  high-powered  committees  constituted  by
defendant no.1 made its recommendations which  were  accepted  by  defendant
no.1 vide its resolution dated 14.5.1984 (Ex.  DW2/P-4).    Having  accepted
the recommendations, in  the  case  of  the  plaintiff  defendant  no.1  was
required to do nothing further but mistakenly referred the case to  UOI  for
its approval assuming the case to be one  of  Nazul  land.   Plaintiff  sent
repeated reminders vide letters dated 9-12-1985 (Ex.P-11), 20-10-1986 (Ex.P-
12), 10-12-1986(Ex.P-13), 10-02-1987 (Ex.P-14), 11-04-1987(Ex.P-16),  10-08-
1987(Ex.P-17) and 10-10-1987 (Ex.P-18) calling upon defendant no.1  to  give
an offer of deposit of balance 25% of the premium so as to bring  the  total
payment equivalent to 50% of the  total  premium  and  for  release  of  the
possession of the  land  to  the  plaintiff  for  purpose  of  construction.
Defendant no.1 vide its letter received on 1.12.1987 by the plaintiff (Ex.P-
19) sought the consent of the plaintiff to abide by the  recommendations  of
the high-powered committee and the consent was duly given on the  even  date
(Ex.P-20).  Thereafter no offer was made to the plaintiff  and  without  any
notice  of  compliance  for  payment,  the  letter  of  cancellation   dated
6.10.1993 (Ex.P-26) was issued.  It appears that defendant no.1  itself  was
not aware of the land being non-Nazul land as the  first  communication  was
addressed to the plaintiff only on 1.3.1990.

68.   The present case is one where defendant no.1 has not even  suffered  a
loss.  The plot was to be purchased by the plaintiff at Rs.3.12  crores  and
it was finally sold to a third party at Rs.11.78 crores, i.e.  almost  three
and a half times the price.  During this period defendant no.1 continued  to
enjoy the earnest money of the plaintiff of Rs.78.00 lacs.

69.   In view of the  prolonged  period,  exchange  of  communications,  the
plaintiff making various offers but not complying with  the  initial  terms,
defendant no.1 taking its own time in the decision making process, I  am  of
the considered view that the plaintiff is entitled  to  the  refund  of  the
earnest money of Rs.78.00 lacs but no further amount is liable  to  be  paid
to the plaintiff."

12.   DDA appealed against the Single Judge's judgment to a  Division  Bench
of the Delhi High Court.  The Division Bench set aside the judgment  of  the
Single Judge holding that the forfeiture of the earnest  money  by  the  DDA
was in order.

13.   Shri Paras Kuhad, learned Senior Advocate appearing on behalf  of  the
appellant, urged that time may have been of the essence under  the  original
terms and conditions of the auction.  However, time  had  been  extended  on
several occasions and, therefore, ceased to be of the  essence.   In  answer
to the letter dated 1.12.1987, the appellant promptly replied  and  said  it
would be willing to pay the entire 75% with  18%  interest  and,  therefore,
there was no breach of contract on  the  part  of  the  appellant.  Further,
since the DDA sold the plot for 11.78 Crores (Rupees Eleven  Crores  Seventy
Eight Lakhs), there was no loss caused to the DDA and, hence  forfeiture  of
earnest  money  would  not  be  in  accordance  with  the  agreement  or  in
accordance with law.

14.   Shri Amarendra Sharan, learned Senior Advocate appearing on behalf  of
the DDA, rebutted these contentions and added that the case was  covered  by
the judgment in Shree Hanuman Cotton Mills & Anr.  v.  Tata  Aircraft  Ltd.,
1970 (3) SCR 127.    He argued further that since the  letter  of  1.12.1987
had been issued under a mistake of fact, it would be void under  Section  20
of the Contract Act and the  said  letter  should,  therefore,  be  ignored.
If it is ignored, then the termination of the contract  and  the  forfeiture
of earnest money are completely in order as the  appellant  was  in  breach.
The fact that the DDA ultimately sold  the  plot  for  a  much  larger  sum,
according  to  learned  counsel,  would  be  irrelevant  inasmuch   as   the
contractual term agreed upon between parties would entitle  him  to  forfeit
earnest money on breach without any necessity of proving actual loss.

15.   Having heard learned counsel for the parties, it is important  at  the
very outset to notice that earnest money can be forfeited  under  sub-clause
(iv) set out hereinabove, only in the  case  of  default,  breach,  or  non-
compliance of any of  the  terms  and  conditions  of  the  auction,  or  on
misrepresentation by the bidder. It may be noted that the balance 75%  which
had to be paid within three months of the acceptance of  the  bid,  was  not
insisted upon by the DDA.  On  the  contrary,  after  setting  up  two  High
Powered Committees which were instructed to look into the grievances of  the
appellant, the DDA extended time at least  twice.  It  is,  therefore,  very
difficult to say that there was a breach of any terms and conditions of  the
auction, as the period of three months which the  DDA  could  have  insisted
upon had specifically been waived.  It is nobody's case that  there  is  any
misrepresentation here by the bidder.   Therefore,  under  sub-clause  (iv),
without more, earnest money could not have been forfeited.

16.   The other noticeable feature  of  this  case  on  facts  is  that  DDA
specifically requested the appellant to  give  their  consent  to  make  the
balance payable along with 18% interest charges on  belated  payment.   This
was on the footing that the Nazul Rules of 1981  would  be  relaxed  by  the
Central  Government.   The  reason  why  the  letter  is   marked   "without
prejudice"  and the DDA made it clear that the letter  does  not  carry  any
commitment, is obviously because the Central Government may  not  relax  the
provision of the Nazul Rules, in which case nothing further  could  be  done
by the DDA.  If, however, the Central Government was willing to condone  the
delay, DDA would be willing to take 75%  of  the  outstanding  amount  along
with 18% interest.

17.   Mr. Sharan argued that since the Central Government  ultimately  found
that this was not a Nazul land, the letter was obviously based on a  mistake
of fact and would be void under Section 20 of  the  Contract  Act.   We  are
afraid we are not  able  to  accept  this  plea.   Long  after  the  Central
Government informed DDA (on 1.3.1990) that  the  property  involved  in  the
present case is  not  Nazul  land,  the  DDA  by  its  letter  of  6.10.1993
cancelled the allotment of the plot because  the  appellant  had  failed  to
deposit the balance 75%.  DDA's understanding, therefore, was that what  was
important was payment of the balance 75% which  was  insisted  upon  by  the
letter  dated  1.12.1987  and  which  was  acceded  to  by  the   respondent
immediately on the same date.  Further, Mr.  Sharan's  argument  that  since
the letter was "without prejudice" and since no commitment  had  been  made,
they were not bound by the terms of the letter also  fails  to  impress  us.
The letter was without prejudice and no commitment could have been given  by
the DDA because the Central Government may well not relax the  Nazul  Rules.
On the other hand, if the Central Government  had,  later  on,  relaxed  the
Nazul Rules, DDA could not be heard to say that  despite  this  having  been
done, DDA would yet cancel the allotment of the plot.  That this  could  not
have been done is clear because of the aforesaid construction of the  letter
dated 1.12.1987 and also because DDA is a public authority bound by  Article
14 and cannot behave arbitrarily.

18.   It now remains to deal with the  impugned  judgment  of  the  Division

19.   The Division Bench followed the judgment of Tilley v. Thomas, (1867  3
Ch.A 61) and distinguished the judgment in Webb v. Hughes, V.C.M. 1870.   It
further went on to follow Anandram Mangturam v. Bholaram Tanumal,  ILR  1946
Bom 218 and held:
"The decision holds that the principle of law is that where,  by  agreement,
time is made of the essence of the  contract,  it  cannot  be  waived  by  a
unilateral act of a party and unless there is consensus ad-idem between  the
parties and a new date is agreed to, merely because a party  to  a  contract
agrees to consider time being extended for the opposite  party  to  complete
the contract, but ultimately refuses to accord concurrence  would  not  mean
that the party has by conduct waived the date originally agreed as being  of
the essence of the contract." (At para 32)

20.   In our judgment, Webb's case would directly apply to the  facts  here.
In that case, it was held:
  "But if time be made the essence of the contract, that may  be  waived  by
the conduct of the purchaser; and if the time is once allowed to  pass,  and
the parties go on negotiating for completion of the purchase, then  time  is
no longer of the essence of the contract.  But, on the other hand,  it  must
be borne in mind that a purchaser is not bound to wait an  indefinite  time;
and if he finds, while the negotiations are going on, that a long time  will
elapse before the contract can be completed, he may in a  reasonable  manner
give notice to the vendor, and fix a period at which the business is  to  be

21.   Based on the facts of this case,  the  Single  Judge  was  correct  in
observing that the letter of cancellation  dated  6.10.1993  and  consequent
forfeiture of earnest money  was  made  without  putting  the  appellant  on
notice that it has to deposit the balance 75% premium of the plot  within  a
certain stated time.  In the absence of such notice, there is no  breach  of
contract on the part of the appellant and consequently earnest money  cannot
be forfeited.
22.    Tilley v. Thomas, (1867 3 Ch.A 61) would not  apply  for  the  reason
that the expression "without  prejudice"  was  only  used  as  stated  above
because the Central Government may not relax the Nazul Rules.

23.   In Anandram Mangturam v. Bholaram  Tanumal,  ILR  1946  Bom  218,  two
separate judgments were delivered, one   by  Chief  Justice  Stone  and  the
other by Chagla,J. as he then was.  Stone C.J. held:-
"In my judgment, reading the correspondence as  a  whole,  it  at  no  stage
passed from the melting pot of negotiations to crystallize as  an  agreement
to extend the time for the performance of the contract. The attitude of  the
purchaser throughout the correspondence was: "Satisfy us that you are  doing
your best to obtain the goods from your suppliers and we will then  consider
fixing a new date for delivery of the goods to us". On the  other  hand  the
attitude of the vendors throughout  the  correspondence  was  to  avoid  the
purchaser's demand and to simply  say:  "You  know  that  we  cannot  effect
delivery from our suppliers and until we do so we cannot deliver  the  goods
to  you".  There  was  never  in  my  judgment  any consensus  ad-idem,   no
agreement, express or implied, to extend the time either to  any  particular
date or to the happening of  some  future  event.  Mere  forbearance  in  my
opinion to institute proceedings or to give notice of rescission  cannot  be
an extension of the time for  the  performance  of  a  contract  within  the
meaning of s. 63 of the Contract Act." (at 226 & 227)

      Chagla, J. in a separate judgment held:-
"Under s. 55 of the Indian Contract Act, the promisee is  given  the  option
to avoid the contract where the promisor fails to perform  the  contract  at
the time fixed in the contract. It is open to the promisee not  to  exercise
the option or to exercise the option at any time, but  it  is  clear  to  my
mind that the promisee cannot by the mere fact of not exercising the  option
change or alter the date of performance fixed  under  the  contract  itself.
Under s. 63 of the Indian  Contract  Act,  the  promisee  may  make  certain
concessions to the promisor which are advantageous to the promisor, and  one
of them is that he may extend the time  for  such  performance.  But  it  is
clear again that such an extension of time cannot be a unilateral  extension
on the part of the promisee. It is only at the request of the promisor  that
the promisee may agree to extend the time of performance and  thereby  bring
about an agreement for extension of time. Therefore it is only as  a  result
of the operation of s. 63 of the Indian Contract Act that the time  for  the
performance of the contract can be  extended  and  that  time  can  only  be
extended by an agreement arrived at between the promisor and the  promisee."
(at 229)

24.   The aforesaid judgment would apply in a  situation  where  a  promisee
accedes to the request of the promisor to extend time that is fixed for  his
own benefit.  Thus,  in  Keshavlal  Lallubhai  Patel  and  Ors.  v.  Lalbhai
Trikumlal Mills Ltd 1959 SCR 213, this Court held:-
"The true legal position  in  regard  to  the  extension  of  time  for  the
performance of a contract is quite clear under s. 63 of the Indian  Contract
Act. Every promisee, as the  section  provides,  may  extend  time  for  the
performance of the contract. The question as to how extension  of  time  may
be agreed upon by the parties has been the subject-matter of  some  argument
at the Bar in the present appeal. There can be  no  doubt,  we  think,  that
both the buyer and the seller must agree to extend time for the delivery  of
goods. It would not be open to the promisee by his unilateral act to  extend
the time for performance of his own accord for his own benefit."

25.   However, such is not the position here.   In  the  present  case,  the
appellant is the promisor and DDA is the promisee.   In  such  a  situation,
DDA can certainly unilaterally extend the time for payment under Section  63
of the Contract Act as the time for payment is not  for  DDA's  own  benefit
but for the benefit of the appellant.  The present case would be covered  by
two judgments of the Supreme Court. In Citi Bank N.A. v. Standard  Chartered
Bank, (2004) 1 SCC Page 12, this Court held:
"50. Under Section 63, unlike Section 62, a promisee  can  act  unilaterally
and may

(i) dispense with wholly or in part, or

(ii) remit wholly or in part,

the performance of the promise made to him, or
(iii) may extend the time for such performance, or

(iv) may accept instead of it any satisfaction which he thinks fit."

26.   Similarly in S. Brahmanand v. K.R. Muthugopal, (2005) 12 SCC 764 the
Supreme Court held:
"34. Thus, this was a situation where the original  agreement  of  10-3-1989
had a "fixed date" for performance, but by the subsequent  letter  of  18-6-
1992 the defendants made a request  for  postponing  the  performance  to  a
future date without fixing  any  further  date  for  performance.  This  was
accepted by the plaintiffs by their act of forbearance and not insisting  on
performance forthwith. There is nothing  strange  in  time  for  performance
being extended, even though originally  the  agreement  had  a  fixed  date.
Section 63 of the Contract  Act,  1872  provides  that  every  promisee  may
extend time for the performance  of  the  contract.  Such  an  agreement  to
extend time need not necessarily be reduced to writing, but  may  be  proved
by oral evidence or, in some cases, even by evidence  of  conduct  including
forbearance on the part of the other party.  [See  in  this  connection  the
observations  of  this   Court   in Keshavlal   Lallubhai   Patel v. Lalbhai
Trikumlal Mills Ltd., 1959 SCR 213 : AIR 1958 SC 512, para 8.  See  also  in
this connection Saraswathamma v. H. Sharad Shrikhande,  AIR  2005  Kant  292
and K.  Venkoji  Rao v. M.  Abdul  Khuddur  Kureshi,  AIR  1991  Kant   119,
following the judgment in Keshavlal Lallubhai Patel (supra).] Thus, in  this
case  there  was  a  variation  in  the  date  of  performance  by   express
representation by the defendants, agreed to by the  act  of  forbearance  on
the part of the plaintiffs. What was originally covered by  the  first  part
of Article 54, now fell within  the  purview  of  the  second  part  of  the
article. Pazhaniappa Chettiyar v. South Indian Planting and  Industrial  Co.
Ltd. [AIR 1953 Trav Co 161] was a similar instance where the  contract  when
initially made had a date fixed for the performance of the contract but  the
Court was of the view that "in the events that happened in  this  case,  the
agreement in question though started with  fixation  of  a  period  for  the
completion of the transaction became one without such period on  account  of
the peculiar facts and circumstances already  explained  and  the  contract,
therefore, became one in which no time was fixed for  its  performance"  and
held that what was originally covered by the first part of  Article  113  of
the Limitation Act, 1908 would fall  under  the  second  part  of  the  said
article because of the supervening circumstances of the case."(at Page 777)

27.   Coming to the  application  of  Article  14,  the  Division  Bench  in
paragraph 37 stated:-
"37. Now, in India, reasonableness in State action is a facet of Article  14
of the Constitution of India and in the  field  of  contract  would  have  a
considerable play at the precontract stage. Once parties have  entered  into
a contractual obligation, they would be bound by the contract and  the  only
reasonableness would be of the kind envisaged by the Supreme  Court  in  the
decision reported as AIR 1963 SC 1144 T.P. Daver v.  Lodge  Victoria  No.363
SC Belgaum & Ors. On the subject of a member of a club being  expelled,  and
the relationship being a contract as per the rules and  regulations  of  the
club, adherence whereto was agreed to by he who became a member of the  club
and the management of the club, the Supreme  Court  observed  that  in  such
private affairs, it would be good faith in taking an action which is  rooted
in the minds of modern men and women i.e. in  a  modern  democratic  society
and no more. The  decision  guides  that  where  a  private  affair  i.e.  a
contract is so perverted by a party that it offends the concept of  a  fair-
play in a modern society, alone then can the action be questioned as not  in
good faith and suffice would it be to state that anything done not  in  good
faith would be unreasonably done."

28.   It will be noticed at once that T.P. Daver v. Lodge Victoria No.  363,
S.C. Belgaum, 1964 (1) SCR 1, is not an authority on Article 14 at all.   It
deals with clubs and the fact that rules or bye-laws which bind  members  of
such clubs have to be strictly  adhered  to.   On  the  other  hand  in  ABL
International Ltd. v. Export Credit Guarantee Corpn. of India  Ltd.,  (2004)
3 SCC 553 at paras 22 and 23, the Supreme Court held:
"22. We do not think the above judgment  in VST  Industries  Ltd. [(2001)  1
SCC 298 : 2001 SCC (L&S) 227] supports the argument of the  learned  counsel
on the question of maintainability of the present writ petition.  It  is  to
be noted that VST Industries Ltd.[(2001) 1 SCC 298 :  2001  SCC  (L&S)  227]
against  whom  the  writ  petition  was  filed  was  not  a  State   or   an
instrumentality  of  a  State  as  contemplated  under  Article  12  of  the
Constitution, hence, in the normal course, no writ could  have  been  issued
against the said industry. But it was the contention of the writ  petitioner
in that case  that  the  said  industry  was  obligated  under  the  statute
concerned to perform certain public functions; failure to do so  would  give
rise to a  complaint  under  Article  226  against  a  private  body.  While
considering such argument, this Court held that when  an  authority  has  to
perform a public function or a public duty, if there is  a  failure  a  writ
petition under Article 226 of  the  Constitution  is  maintainable.  In  the
instant case, as to the fact that the respondent is an instrumentality of  a
State, there is no dispute but the question is:  was  the  first  respondent
discharging a public duty or a public function while repudiating  the  claim
of the appellants arising out of a contract? Answer  to  this  question,  in
our opinion, is found in the judgment of this Court in  the  case  of Kumari
Shrilekha Vidyarthi v. State of U.P. [(1991) 1 SCC  212  :  1991  SCC  (L&S)
742] wherein this Court held: (SCC pp. 236-37, paras 22 & 24)

"The impact of every State action is also on  public  interest.  ...  It  is
really the nature of its personality as State which is significant and  must
characterize all its actions, in whatever  field,  and  not  the  nature  of
function, contractual or otherwise, which  is  decisive  of  the  nature  of
scrutiny permitted for examining the validity of its  act.  The  requirement
of Article 14 being the duty to act fairly, justly and reasonably, there  is
nothing which militates against the concept of requiring  the  State  always
to so act, even in contractual matters."

23. It is clear from the above observations of this Court,  once  the  State
or an instrumentality of the State is a party of the  contract,  it  has  an
obligation in law  to  act  fairly,  justly  and  reasonably  which  is  the
requirement of Article 14 of the Constitution of  India.  Therefore,  if  by
the  impugned  repudiation  of  the  claim  of  the  appellants  the   first
respondent as an instrumentality of the State has acted in contravention  of
the abovesaid requirement of Article 14,  then  we  have  no  hesitation  in
holding that a writ court can issue suitable directions  to  set  right  the
arbitrary actions of the first respondent."

29.   Based on the facts of this case, it would be arbitrary for the DDA  to
forfeit the earnest money on two fundamental grounds.  First,  there  is  no
breach of contract on the part of the appellant as has been held above.  And
second, DDA not having been put to any loss, even if DDA could insist  on  a
contractual stipulation in its favour, it would be arbitrary  to  allow  DDA
as a public authority to appropriate Rs.78,00,000/-  (Rupees  Seventy  Eight
Lakhs) without any loss being caused. It is clear, therefore,  that  Article
14 would apply in the field of contract in this case and the finding of  the
Division Bench on this aspect is hereby reversed.

30.   We now come  to  the  reasoning  which  involves  Section  74  of  the
Contract Act.  The Division Bench held:
"38. The learned Single Judge has held  that  the  property  was  ultimately
auctioned in the year 1994 at a price which fetched DDA  a  handsome  return
of Rupees 11.78 crores and there being no damages suffered by DDA, it  could
not forfeit the earnest money.

39. The said view runs in the teeth of the decision  of  the  Supreme  Court
reported as AIR 1970 SC 1986 Shree Hanuman  Cotton  Mills  &  Anr.  V.  Tata
Aircraft Ltd. which holds that as against  an  amount  tendered  by  way  of
security, amount tendered as earnest money could be forfeited as  per  terms
of the contract.

40. We may additionally observe that original time to pay  the  balance  bid
consideration, as per Ex.P-I was May 18, 1982 and as  extended  by  Ex.  P-8
was October 28, 1982. That DDA could auction the plot in the  year  1994  in
the sum of Rupees 11.78 crore was immaterial and not relevant  evidence  for
the reason damages with  respect  to  the  price  of  property  have  to  be
computed with reference to the date of the breach of the contract."

31.   Section 74 as it originally stood read thus:
"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,  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."

32.   By an amendment made in 1899, the Section was amended to read:
"74. Compensation for breach of  contract  where  penalty  stipulated  for.-
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.

Explanation.-A stipulation for increased interest from the date  of  default
may be a stipulation by way of penalty.

Exception.-When any person enters into any bail-bond, recognizance or  other
instrument of the same nature, or, under  the  provisions  of  any  law,  or
under the orders of the Central  Government  or  of  any  State  Government,
gives any bond for the performance of any public duty or act  in  which  the
public are interested, he shall be liable, upon breach of any  condition  of
any such instrument, to pay the whole sum mentioned therein.

Explanation.-A person who enters into a contract with  Government  does  not
necessarily thereby undertake any public duty, or promise to do  an  act  in
which the public are interested."

33.   Section 74 occurs in Chapter 6 of the Indian Contract Act, 1872  which
reads "Of the consequences of breach of contract". It is in fact  sandwiched
between Sections 73 and 75 which deal with compensation for loss  or  damage
caused by breach of contract and compensation for damage which a  party  may
sustain through non-fulfillment of a contract after  such  party  rightfully
rescinds such contract.   It is important to note that like Sections 73  and
75, compensation is payable for breach of contract  under  Section  74  only
where damage or loss is caused by such breach.

34.   In Fateh Chand v. Balkishan Das, 1964 SCR (1) 515, this Court held:
"The section is clearly an  attempt  to  eliminate  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  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
   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 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  damages";  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."(At page 526, 527)

   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."(At page 530)

35.   Similarly, in Maula Bux v. Union of India (UOI), 1970 (1) SCR 928,  it
was held:

     "Forfeiture of earnest money under a contract  for  sale  of  property-
movable or immovable-if the amount  is  reasonable,  does  not  fall  within
Section 74. That has been decided in several cases :Kunwar  Chiranjit  Singh
v. Har Swarup, A.I.R.1926 P.C.1; Roshan Lal v. The Delhi Cloth  and  General
Mills Company Ltd., Delhi, I.L.R. All.166; Muhammad Habibullah  v.  Muhammad
Shafi, I.L.R. All. 324; Bishan Chand v. Radha Kishan Das, I.D. 19  All.  49.
These cases are easily explained, for  forfeiture  of  a  reasonable  amount
paid as earnest money  does  not  amount  to  imposing  a  penalty.  But  if
forfeiture is of the nature of penalty, Section 74 applies. Where under  the
terms of the contract the party in breach has undertaken to  pay  a  sum  of
money or to forfeit a sum of money which he has already paid  to  the  party
complaining of a breach of contract, the undertaking is of the nature  of  a

Counsel for the Union, however, urged that in the present case Rs.  10,000/-
in respect of the potato contract and Rs. 8,500 in respect  of  the  poultry
contract were genuine pre-estimates of damages which the  Union  was  likely
to suffer as a result of breach of  contract,  and  the  plaintiff  was  not
entitled to any relief against  forfeiture.  Reliance  in  support  of  this
contention was  placed  upon  the  expression  (used  in  Section 74 of  the
Contract Act), "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".  It  is
true that in every case of breach of contract the person  aggrieved  by  the
breach is not required to prove  actual  loss  or  damage  suffered  by  him
before he  can  claim  a  decree,  and  the  Court  is  competent  to  award
reasonable compensation in case of  breach  even  if  no  actual  damage  is
proved to have been suffered in consequence of the breach of  contract.  But
the expression "whether or not actual damage or loss is proved to have  been
caused thereby" is intended to cover different classes  of  contracts  which
come before the Courts. In case of  breach  of  some  contracts  it  may  be
impossible for the Court to assess compensation arising from  breach,  while
in  other  cases  compensation  can  be  calculated   in   accordance   with
established rules. Where the Court is unable  to  assess  the  compensation,
the sum named by the parties if it be regarded  as  a  genuine  pre-estimate
may be taken into consideration as the measure of  reasonable  compensation,
but not if the sum named is in the nature of a penalty. Where loss in  terms
of money can be determined, the party claiming compensation must  prove  the
loss suffered by him.

In the present case, it was possible for the Government  of  India  to  lead
evidence to prove the rates at which potatoes, poultry, eggs and  fish  were
purchased by them when  the  plaintiff  failed  to  deliver  "regularly  and
fully" the quantities stipulated under the terms of the contracts and  after
the contracts were terminated. They could have proved  the  rates  at  which
they had to be purchased and also the other incidental charges  incurred  by
them in procuring  the  goods  contracted  for.  But  no  such  attempt  was
made."(At page 933,934)

36.   In Shree Hanuman Cotton Mills and Anr. v. Tata Aircraft Limited,  1970
(3) SCR 127 it was held:

"From a review of  the  decisions  cited  above,  the  following  principles
emerge regarding "earnest":

(1) It must be given at the moment at which the contract is concluded.

(2) It represents a guarantee that the contract will  be  fulfilled  or,  in
other words, 'earnest' is given to bind the contract.

(3) It is part of the purchase price when the transaction is carried out.

(4) It is forfeited when the transaction falls  through  by  reason  of  the
default or failure of the purchaser.

(5) Unless there is anything to the contrary in the terms of  the  contract,
on default committed by the buyer, the seller is  entitled  to  forfeit  the
earnest" (At page 139)

"The learned Attorney General very strongly urged that the pleas covered  by
the second contention  of  the  appellant  had  never  been  raised  in  the
pleadings nor in the contentions urged before the High Court.  The  question
of the quantum of earnest deposit which was forfeited being unreasonable  or
the  forfeiture  being  by  way  of  penalty,  were  never  raised  by   the
appellants. The Attorney General also pointed out that as noted by the  High
Court the appellants led no  evidence  at  all  and,  after  abandoning  the
various pleas taken in the plaint, the  only  question  pressed  before  the
High Court was that the deposit was not by way  of  earnest  and  hence  the
amount could not  be  forfeited.  Unless  the  appellants  had  pleaded  and
established that there was unreasonableness attached to the amount  required
to be deposited under the contract or that the clause  regarding  forfeiture
amounted to a stipulation by way  of  a  penalty,  the  respondents  had  no
opportunity to satisfy the Court that no  question  of  unreasonableness  or
the stipulation being by way of penalty arises. He further  urged  that  the
question of unreasonableness or otherwise regarding earnest money  does  not
at all arise when it is forfeited according to the terms of the contract.

    In our opinion the learned Attorney  General  is  well  founded  in  his
contention that the appellants raised no such  contentions  covered  by  the
second point, noted above. It is therefore unnecessary for  us  to  go  into
the question as to whether the amount deposited by the appellants,  in  this
case, by way of earnest and forfeited as  such,  can  be  considered  to  be
reasonable or not. We express no opinion on the question as to  whether  the
element of unreasonableness can ever be considered regarding the  forfeiture
of an amount deposited by way of earnest and if so what  are  the  necessary
factors to be taken  into  account  in  considering  the  reasonableness  or
otherwise of the amount deposited by way of earnest. If the appellants  were
contesting the claim  on  any  such  grounds,  they  should  have  laid  the
foundation for the same by raising appropriate pleas  and  also  led  proper
evidence regarding the same, so that  the  respondents  would  have  had  an
opportunity of meeting such a claim."(At page 142)

37.   And finally in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705,  it  was

"64. It is apparent from the aforesaid reasoning recorded  by  the  Arbitral
Tribunal that it failed to  consider  Sections  73  and  74  of  the  Indian
Contract Act and the ratio laid down in Fateh Chand case [AIR 1963  SC  140:
(1964)  1  SCR  515  at  p.  526]  wherein  it  is  specifically  held  that
jurisdiction of the court  to  award  compensation  in  case  of  breach  of
contract  is  unqualified  except  as  to  the   maximum   stipulated;   and
compensation has to be reasonable. Under Section 73,  when  a  contract  has
been broken, the party who suffers by such breach  is  entitled  to  receive
compensation for any loss caused to him which the  parties  knew  when  they
made the contract to be likely  to  result  from  the  breach  of  it.  This
section is to be read with Section 74, which deals with  penalty  stipulated
in the contract, inter alia (relevant for the present  case)  provides  that
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, the party  complaining  of  breach
is entitled, whether or not actual 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. Section 74  emphasizes  that
in case of breach of contract,  the  party  complaining  of  the  breach  is
entitled to receive reasonable compensation whether or not  actual  loss  is
proved to have been caused by such breach. Therefore,  the  emphasis  is  on
reasonable compensation. If the compensation named in  the  contract  is  by
way of penalty, consideration would be  different  and  the  party  is  only
entitled to reasonable compensation  for  the  loss  suffered.  But  if  the
compensation named in the contract for such breach is  genuine  pre-estimate
of loss which the parties knew when they made the contract to be  likely  to
result from the breach of it, there is no question of proving such  loss  or
such party is not required to lead evidence to prove  actual  loss  suffered
by him.

67........In our view, in such a contract, it would be  difficult  to  prove
exact loss or  damage  which  the  parties  suffer  because  of  the  breach
thereof. In such a situation, if the parties have  pre-estimated  such  loss
after clear understanding, it would be totally unjustified to arrive at  the
conclusion that the party who has committed breach of the  contract  is  not
liable to pay compensation. It would be against the specific  provisions  of
Sections 73 and 74 of the Indian Contract Act. There was nothing  on  record
that compensation contemplated by the parties was in any  way  unreasonable.
It has been specifically mentioned  that  it  was  an  agreed  genuine  pre-
estimate of damages duly agreed by the parties. It was also  mentioned  that
the liquidated damages are not by way of penalty. It was  also  provided  in
the contract that such damages are to be recovered  by  the  purchaser  from
the bills for payment of the cost of material submitted by  the  contractor.
No evidence is  led  by  the  claimant  to  establish  that  the  stipulated
condition was by way of penalty or the  compensation  contemplated  was,  in
any way, unreasonable. There was no reason for  the  Tribunal  not  to  rely
upon the clear and unambiguous terms of agreement  stipulating  pre-estimate
damages because of delay in supply of goods. Further,  while  extending  the
time for delivery of the goods, the respondent was informed  that  it  would
be required to pay stipulated damages.

68. From the aforesaid discussions, it can be held that:

(1) Terms of the contract  are  required  to  be  taken  into  consideration
before arriving at the conclusion whether  the  party  claiming  damages  is
entitled to the same.

(2) If the terms  are  clear  and  unambiguous  stipulating  the  liquidated
damages in case of the breach of the contract unless it is  held  that  such
estimate of damages/compensation is unreasonable or is by  way  of  penalty,
party who has committed the breach is required to pay such compensation  and
that is what is provided in Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and, therefore, in  every
case of breach of contract, the  person  aggrieved  by  the  breach  is  not
required to prove actual loss or damage suffered by him before he can  claim
a decree. The court is competent to award reasonable  compensation  in  case
of breach even if no actual damage  is  proved  to  have  been  suffered  in
consequence of the breach of a contract.

(4) In some contracts, it would be impossible for the court  to  assess  the
compensation arising from breach and if  the  compensation  contemplated  is
not by way of penalty or unreasonable, the court can award the  same  if  it
is genuine  pre-estimate  by  the  parties  as  the  measure  of  reasonable

38.   It will be seen that when it comes to forfeiture of earnest money,  in
Fateh Chand's case,  counsel  for  the  appellant  conceded  on  facts  that
Rs.1,000/- deposited as earnest money could be  forfeited.  (See:  1964  (1)
SCR Page 515 at 525 and 531).

39.   Shree Hanuman Cotton Mills & Another which was so  heavily  relied  by
the Division Bench again was a case where the appellants conceded that  they
committed breach of contract.  Further, the respondents  also  pleaded  that
the appellants had to pay them a sum of  Rs.42,499/-  for  loss  and  damage
sustained by them. (See: 1970 (3) SCR 127 at  Page  132).   This  being  the
fact situation, only two questions were argued  before  the  Supreme  Court:
(1) that the amount paid by the plaintiff is not earnest money and (2)  that
forfeiture of earnest money can be legal only if the  amount  is  considered
reasonable.  (at  page  133).  Both  questions  were  answered  against  the
appellant. In deciding question two against the appellant, this Court held:-

"But, as we have already mentioned, we do  not  propose  to  go  into  those
aspects in the case on hand. As  mentioned  earlier,  the  appellants  never
raised any contention that the  forfeiture  of  the  amount  amounted  to  a
penalty or that the amount forfeited is so large that the forfeiture is  bad
in law. Nor have they raised any contention that the amount  of  deposit  is
so unreasonable and  therefore  forfeiture  of  the  entire  amount  is  not
justified. The decision in Maula Bux's  [1970]1SCR928  had  no  occasion  to
consider the question of reasonableness or otherwise of the earnest  deposit
being forfeited. Because, from the said  judgment  it  is  clear  that  this
Court did not agree with the view of the High Court that the deposits  made,
and which were under consideration, were paid as earnest money. It is  under
those circumstances that this Court proceeded to consider the  applicability
of Section 74 of the Contract Act. (At page 143)"

40.   From the above, it is clear that this  Court  held  that  Maula  Bux's
case  was  not,  on  facts,  a  case  that   related   to   earnest   money.
Consequently, the observation in Maula Bux that forfeiture of earnest  money
under a contract if reasonable does not fall within Section  74,  and  would
fall within Section 74 only if earnest money is considered a penalty is  not
on a matter that directly arose for decision in that  case.   The  law  laid
down by a Bench of 5 Judges in Fateh Chand's case is that  all  stipulations
naming amounts to be paid in case of breach would be covered by Section  74.
This is because Section 74  cuts across the rules of the English Common  Law
by enacting a uniform principle that would apply to all amounts to  be  paid
in case of breach, whether they are in the nature of penalty  or  otherwise.
It must not be forgotten that  as  has  been  stated  above,  forfeiture  of
earnest money on the facts in Fateh  Chand's  case  was  conceded.   In  the
circumstances, it would therefore be correct to say that  as  earnest  money
is an amount to be paid in case of breach  of  contract  and  named  in  the
contract as such, it would necessarily be covered by Section 74.

41.   It must, however, be pointed out that in cases where a public  auction
is held,  forfeiture  of  earnest  money  may  take  place  even  before  an
agreement is reached, as DDA is to accept the bid  only  after  the  earnest
money is paid.  In the present case,  under  the  terms  and  conditions  of
auction, the highest bid (along with which earnest money  has  to  be  paid)
may well have been  rejected.    In  such  cases,  Section  74  may  not  be
attracted on its plain language because it applies  only  "when  a  contract
has been broken".

42.   In the present case, forfeiture  of  earnest  money  took  place  long
after an agreement had been reached.  It is obvious that the  amount  sought
to be forfeited on the facts of the present case is sought to  be  forfeited
without any loss being shown.  In fact it  has  been  shown  that  far  from
suffering any loss, DDA has received a much higher amount on  re-auction  of
the same plot of land.

43.   On a conspectus of the above authorities, the law on compensation  for
breach of contract under Section 74 can be stated to be as follows:-
Where a sum is named in a contract as a liquidated amount payable by way  of
damages, the party  complaining  of  a  breach  can  receive  as  reasonable
compensation such liquidated amount only if it is a genuine pre-estimate  of
damages fixed by both parties and found to be such by the  Court.  In  other
cases, where a sum is named in a contract as a liquidated amount payable  by
way of damages, only reasonable compensation can be  awarded  not  exceeding
the amount so stated. Similarly, in cases where the amount fixed is  in  the
nature  of  penalty,  only  reasonable  compensation  can  be  awarded   not
exceeding the penalty so stated.  In both cases, the  liquidated  amount  or
penalty is the upper limit beyond which the Court  cannot  grant  reasonable
Reasonable compensation will be fixed on  well  known  principles  that  are
applicable to the law of contract, which are  to  be  found  inter  alia  in
Section 73 of the Contract Act.
Since Section 74 awards reasonable compensation for damage  or  loss  caused
by a breach of contract, damage or loss caused is a sine  qua  non  for  the
applicability of the Section.
The Section applies whether a person is a plaintiff  or  a  defendant  in  a
The sum spoken of may already be paid or be payable in future.

The expression "whether or not actual damage or loss is proved to have  been
caused thereby" means that where it is possible to prove  actual  damage  or
loss, such proof is not dispensed with.  It is only in  cases  where  damage
or loss is difficult or impossible  to  prove  that  the  liquidated  amount
named in the contract, if a genuine pre-estimate of damage or loss,  can  be
Section 74 will apply to cases  of  forfeiture  of  earnest  money  under  a
contract. Where,  however,  forfeiture  takes  place  under  the  terms  and
conditions of a public auction  before  agreement  is  reached,  Section  74
would have no application.

44.   The Division Bench has gone wrong in principle.  As has  been  pointed
out above, there has been no breach of contract by the  appellant.  Further,
we cannot accept the view of the Division Bench that the fact that  the  DDA
made a profit from re-auction is irrelevant, as that would fly in  the  face
of the most  basic  principle  on  the  award  of  damages  -  namely,  that
compensation can only be given for damage or loss suffered.   If  damage  or
loss is not suffered, the law does not provide for a windfall.

45.   A great deal of the argument before us  turned  on  notings  in  files
that were produced during cross-examination of various witnesses.   We  have
not referred to any of these notings and,  consequently,  to  any  case  law
cited by both parties as we find it unnecessary for  the  decision  of  this

46.   Mr. Sharan submitted that in case we were  against  him,  the  earnest
money that should be refunded should only be refunded with 7% per annum  and
not 9% per annum interest as was done in other cases.  We are afraid we  are
not able to agree as others were offered the refund  of  earnest  money  way
back in 1989 with 7% per annum interest which they accepted. The DDA  having
chosen to fight the present appellant tooth  and  nail  even  on  refund  of
earnest money, when there was no breach of contract or loss  caused  to  it,
stands on a different footing. We, therefore, turn down this plea as well.

47.   In the result, the appeal is allowed.  The judgment and order  of  the
Single Judge is restored.  Parties will bear their own costs.

                                        (Ranjan Gogoi)

                                        (R.F. Nariman)
New Delhi;
January 09, 2015.

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