Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 921 OF 2022
[Arising out of Special Leave Petition (C) No. 22191 of 2019]
| Desh Raj & Ors. | … Appellant(s) |
|---|---|
| VERSUS | |
| Rohtash Singh | … Respondent |
Surya Kant, J.
Leave Granted.
1.
The present appeal is directed against the judgment dated
2.
15.05.2019 passed by the High Court of Punjab and Haryana whereby
a second appeal preferred by the Appellants was dismissed and
judgment and decree of the Trial Court as well as the First Appellate
Court were affirmed. The decree entitled the Respondent for the
recovery of earnest money, which constituted of partly paid sale
consideration in lieu of the concerned agreements to sale along with
requisite interest. The factual matrix is succinctly discussed before
Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2022.12.14
16:29:19 IST
Reason:
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delving into the issue of law regarding breach of contractual terms
which requires adjudication before us.
ACTS
A. F
3. The subject matter of the original suit was a property measuring
23 Kanals 4 Marlas bearing Khewat No. 226, Khatoni No. 225, Rect.
No. 27, Kila No 3 min (29), 4 min (415), 7(80), 14(40) situated in
the revenue estate of Village Tigra, Tehsil and District Gurgaon
(hereinafter, ‘Concerned Property’) which the Appellants jointly owned
to the extent of their respective shares.
4. Two separate agreements to sell were entered between the
present parties for the Concerned Property on 17.02.2004 (hereinafter,
‘Sale Agreements’). In the first agreement, Appellant Nos. 1 to 4 agreed
th
to sell their share to the extent of 4/5 of the Concerned Property
while in the second agreement, Appellant No. 5 agreed to sell the
th
remaining 1/5 share to the Respondent which accrued to her and
her minor son. It must be noted that the material terms of both
agreements are identical except that in the second agreement,
Appellant No. 5 was contractually bound to secure the permission
under The Hindu Minority and Guardianship Act, 1956 to sell the
share of the minor.
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5. Under the Sale Agreements, the sale consideration was set at the
rate of Rs 79,00,000/ per acre. Accordingly, the Respondent is stated
to have paid Rs 22,90,000/ in total as part payment of the sale
consideration which was in the nature of earnest money. As per
Clause 4 of Sale Agreements, the earnest money could be confiscated
by the Appellants if the sale deed was not executed on prescribed date,
i.e. 16.08.2004 (hereinafter, ‘Date of Execution’). Furthermore, as per
Clause 8 of the Sale Agreements, the Respondent was also liable to
secure all the necessary No Objection Certificates (hereinafter, ‘NOC’).
Additionally, he had to also intimate the Appellants regarding the
grant of NOCs well before the Date of Execution, failing which the
agreement was deemed to be cancelled.
6. The Appellants state that as per the Sale Agreements, requisite
permission under The Hindu Minority and Guardianship Act, 1956
was obtained by them before the Date of Execution. The same was
communicated to the Respondent via notice dated 10.07.2004. Their
case is that in furtherance of the agreements, Appellants appeared
before the SubRegistrar, Gurgaon on the Date of Execution but the
Respondent failed to appear before the SubRegistrar for the purpose
of executing the sale deed and payment of balance sale consideration.
7. The Appellants served legal notices dated 18.08.2004 on the
Respondent giving an additional opportunity to him to appear before
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the SubRegistrar on 01.09.2004 to execute the sale deed as per the
terms of the Sale Agreements. It is pertinent to note that in the legal
notices, it was explicitly mentioned that time was the essence of the
contract. It was also clearly stated that as per the agreements, the
Appellants were bound to forfeit the earnest money and treat the
agreements as cancelled. Still, they were extending last opportunity to
the Respondent to perform his contractual obligations.
8. It appears that 01.09.2004 was declared a holiday, hence the
Appellants appeared before the SubRegistrar on 31.08.2004 as well
as on 02.09.2004. The Respondent, however, failed to appear for
execution and registration of the sale deed, because of which the
Appellants forfeited the earnest money and treated the Sale
Agreements as cancelled. All appearances of the Appellants before the
SubRegistrar were marked by way of their respective affidavits.
9. The situation remained dormant until January 2006 when the
Respondent, the original plaintiff, initiated a suit seeking relief of
specific performance of Sale Agreements and other consequential
reliefs. However, during the pendency of the suit before the Trial
Court, State of Haryana initiated acquisition proceedings vide
notification dated 12.12.2008 issued under Section 4 of Land
Acquisition Act, 1894. Consequently, the subject land was acquired by
the State vide award dated 23.11.2011. Due to this subsequent event,
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the Respondent sought and was permitted by the trial court to amend
the plaint.
10. In the amended plaint, the Respondent took the stand that he
was always ready and willing to execute the Sale Agreements and that
the Appellants were the ones who did not furnish the required
documents for the necessary sanction and grant of NOCs. Apart from
the relief of specific performance, he additionally prayed that a decree
of permanent injunction be passed to the effect that the Concerned
Property cannot be sold to any third party, possession must be
granted to him along with a declaration that the Sale Agreements were
still binding. In the alternative, he sought that a money decree of Rs
2,29,10,000/ be passed in his favour on the estimated land value
along with requisite interest and costs.
In response, the defence set up by the Appellants was that it was
11.
the Respondent who was at fault for not executing the sale deed
within the agreed time period and that the suit must be dismissed for
his willful nonperformance. The Appellants specifically took the
stance that the suit was filed after inordinate delay and as a tactic to
grab the land because of the subsequent increase in its commercial
value.
12. After perusal of both the documentary as well as oral evidence,
the Trial Court concluded that both the parties were equally
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responsible for rendering the Sale Agreements as unenforceable. While
it hesitantly accepted the stance of both the parties in respect to the
contention that they were present before the SubRegistrar on the
Date of Execution, it held that the same was meaningless as the
Appellants were at fault for not taking effective steps in procuring the
NOC under Section 7A of Haryana Development and Regulation of
Urban Areas Act of 1975 (hereinafter, ‘HUDA Act’). However, the Trial
Court then went on to hold that the Sale Agreements were either way
rendered impossible to perform in view of the land acquisition
proceedings and proceeded to grant decree of recovery of earnest
money on the priciple of unjust enrichment. The First Appellate Court
upheld the decree granted by Trial Court on entirely identical reasons.
13. The High Court in its impugned judgment made two
observations which are pertinent to note – first that no evidence was
led by the parties to prove whether they took requisite steps to obtain
the NOC under Section 7A of HUDA Act and; second that presence of
Appellants before the SubRegistrar on 31.08.2004 or 01.09.2004
when last opportunity to execute the sale deed was granted to
Respondent, was doubtful as the evidence of marking their presence
was not proved and that legal notices dated 18.08.2004 were not
served on the Respondent. The High Court, thus, went on to uphold
the decree passed by the courts below, noting that in view of the
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acquisition proceedings, the alternate relief of recovery of earnest
money was legally correct.
14. The aggrieved Appellants are before this Court.
ONTENTIONS
B. C
15. We have heard learned counsel for parties and perused the
documents produced on record.
16. Mr. Siddharth Mittal, learned counsel for the Appellants,
contended Firstly , that all the courts below have failed to note that
time was the essence of contract as per the Sale Agreements under
Section 55 of The Indian Contract Act, 1872. (hereinafter, ‘Contract
Act’). He submitted that the contractual performance of Sale
Agreements needed to be mandatorily effectuated by the Respondent
on or before the Date of Execution. He stated that the Appellants
reiterated the same stance in their legal notices dated 18.08.2004.
Secondly, the High Court has completely overlooked the fact that at
the relevant period of time, i.e. Date of Execution, there was no
necessity to procure NOC under Section 7A of HUDA Act. He
submitted that the land was ‘agricultural land’ on the Date of
Execution of Agreements and was first time included within the limits
of Municipal Corporation, Gurugram through notification dated
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02.06.2008. Thirdly , under Clause 8 of the Sale Agreements, it was
the Respondent and not the Appellants, responsible to procure
relevant NOCs. Hence, the onus to prove that steps were taken to
obtain NOCs under Section 7A of HUDA Act was on the Respondent
which he miserably failed to discharge.
17. The composite essence of all the abovementioned arguments by
Mr. Mittal is that nonperformance of contractual obligations on the
part of Respondent by the stipulated time resulted in lawful exercise of
right of termination by the Appellants and the consequent forfeiture of
earnest money as stipulated under the Sale Agreements which was in
1
accordance with the settled law in .
Satish Batra v Sudhir Rawal
18. On the contrary, Ms. Sonali Karwasra Joon, learned counsel for
the Respondent, argued that – Firstly , the Appellants were unwilling
and they failed to perform their contractual obligations, especially
regarding securing NOC under Section 7A of HUDA Act. She forcefully
argued that Clause 8 of the Sale Agreements ought to be interpreted to
mean that only such sanction or NOCs which the Respondent could
obtain unilaterally, was his contractual obligation. In other words, she
argued that securing NOC under Section 7A of HUDA Act was solely
the responsibility of the Appellants, irrespective of the onus fastened
on the Respondent under Clause 8 of the Sale Agreements. She
1 Satish Batra v Sudhir Rawal (2013) 1 SCC 345.
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heavily relied upon the observations of the High Court regarding the
Appellant’s doubtful appearance before the SubRegistrar and non
effectuation of service of legal notices dated 18.08.2004, to support the
claim of willful nonperformance on behalf of the Appellants. Secondly,
she argued, that the Sale Agreements had been rendered impossible
as the State of Haryana lawfully acquired the suit land. Hence, all the
courts below have rightly directed the refund of the earnest money
with interest. Additionally, she argued that the amount in question
cannot be forfeited contrary to the settled principles enunciated by the
2
Constitution Bench of this Court in
Fateh Chand v Balkishan Dass
which bars forfeiture of earnest money when it is ‘penal’ in nature.
she highlighted that the second appeal, which confirmed the
Thirdly,
decree passed in favor of Respondent, was heard exparte. Finally, she
drew our attention to the fact that during the acquisition proceedings,
the Appellants were successful in obtaining release of land measuring
8 Marlas out of the acquired land as noted in the award dated
23.11.2011. She stated that as per the available revenue records, the
said property was still in possession of the Appellants who are guilty of
suppression of material facts. It must be noted that the Respondent
on coming to know about the factum of release, had directly
approached this Court against the First Appellate Court’s decision via
SLP (C) No 11901 of 2022 but the same was disposed of with liberty to
2 Fateh Chand v Balkishan Dass (1964) 1 SCR 515.
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approach the High Court in the second appeal under Section 100 of
3
the Code of Civil Procedure, 1908.
19. We now examine these contentions of both sides.
NALYSIS
C. A
HETHER IME WAS THE SSENCE OF THE ONTRACT
C.1 W T E C ?
20. Before venturing into the aforementioned issue, we must
highlight that throughout the entire dispute, Appellants have taken a
consistent stand of timebound performance being an essence of the
contract. They have maintained that sale deed was needed to be
executed necessarily on the Date of Execution as agreed between the
parties. It is unfortunate that all the courts below have failed to render
a finding on this aspect despite the fact that this was one of the key
defenses taken by the Appellants in respect of the prayer seeking
specific performance.
21. In this respect, we must now take note of Section 55 of Contract
Act which stipulates the aftermath in case of failure to perform
contractual obligations at fixed time. The provision states –
55. Effect of failure to perform at fixed time, in
contract in which time is essential.
When a party to a contract promises to do a certain
thing at or before a specified time, or certain things
at or before specified times, and fails to do any such
thing at or before the specified time, the contract, or
3 Rohatash Singh v Deshraj (SLP (Civil) No. 11901 of 2022, 11 July 2022).
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so much of it as has not been performed, becomes
voidable at the option of the promisee, if the
intention of the parties was that time should be of
the essence of the contract.
Effect of such failure when time is not essential.
If it was not the intention of the parties that time
should be of the essence of the contract, the contract
does not become voidable by the failure to do such
thing at or before the specified time; but the
promisee is entitled to compensation from the
promisor for any loss occasioned to him by such
failure.
Effect of acceptance of performance at time other
than that agreed upon.If, in case of a contract
voidable on account of the promisor’s failure to
perform his promise at the time agreed, the promisee
accepts performance of such promise at any time
other than that agreed, the promisee cannot claim
compensation for any loss occasioned by the non
performance of the promise at the time agreed,
unless, at the time of such acceptance, he gives
notice to the promisor of his intention to do so.
22. The Sale Agreements in the present case clearly indicate the
intention of the parties to treat timebound performance as an
essential condition. They stipulate that in case the sale deed was not
executed on the Date of Execution, the Sale Agreements were liable to
be treated as cancelled, and the earnest money was to be forfeited.
Even in the legal notices dated 18.08.2004, through which last
opportunity was extended to Respondent to execute the sale deed, the
factum of time being an essential condition for performance was
reiterated. On the other hand, no evidence or communication has
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been brought on record by the Respondent to contradict the defense of
timebound performance taken by the Appellants.
23. At this juncture, we must note the decision of this Court in
Citadel Fine Pharmaceuticals v Ramaniyam Real Estates Private
4 5
Ltd and Saradamani Kandappan v S. Rajalakshmi wherein it
was held that defense under Section 55 of Contract Act is valid against
anyone who is seeking the relief of specific performance. The facts of
6
the instant case make the observations in
Saradamini Kandappan
even more pertinent, which are to the following effect
“36. The principle that time is not of the essence of
contracts relating to immovable properties took
shape in an era when market values of immovable
properties were stable and did not undergo any
marked change even over a few years (followed
mechanically, even when value ceased to be stable).
As a consequence, time for performance, stipulated in
the agreement was assumed to be not material, or at
all events considered as merely indicating the
reasonable period within which contract should be
performed. The assumption was that grant of specific
performance would not prejudice the vendor
defendant financially as there would not be much
difference in the market value of the property even if
the contract was performed after a few months. This
principle made sense during the first half of the
twentieth century, when there was comparatively
very little inflation, in India. The third quarter of the
twentieth century saw a very slow but steady increase
in prices. But a drastic change occurred from the
4
Citadel Fine Pharmaceuticals v Ramaniyam Real Estates Private Ltd (2011) 9 SCC 147,
para 53.
5 Saradamani Kandappan v S. Rajalakshmi (2011) 12 SCC 18.
6 ibid.
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beginning of the last quarter of the twentieth
century. There has been a galloping inflation and
prices of immovable properties have increased
steeply, by leaps and bounds. Market values of
properties are no longer stable or steady. We can take
judicial notice of the comparative purchase power of
a rupee in the year 1975 and now, as also the steep
increase in the value of the immovable properties
between then and now. It is no exaggeration to say
that properties in cities, worth a lakh or so in or
about 1975 to 1980, may cost a crore or more now.
xxxx
43. Till the issue is considered in an appropriate case,
we can only reiterate what has been suggested in K.S.
Vidyanadam [(1997) 3 SCC 1] :
(i) The courts, while exercising discretion in
suits for specific performance, should bear in mind
that when the parties prescribe a time/period, for
taking certain steps or for completion of the
transaction, that must have some significance and
therefore time/period prescribed cannot be ignored.
(ii) The courts will apply greater scrutiny and
strictness when considering whether the purchaser
was “ready and willing” to perform his part of the
contract.
(iii) Every suit for specific performance need not
be decreed merely because it is filed within the period
of limitation by ignoring the timelimits stipulated in
the agreement. The courts will also “frown” upon
suits which are not filed immediately after the
breach/refusal. The fact that limitation is three years
does not mean that a purchaser can wait for 1 or 2
years to file a suit and obtain specific performance.
The threeyear period is intended to assist the
purchasers in special cases, as for example, where the
major part of the consideration has been paid to the
vendor and possession has been delivered in part
performance, where equity shifts in favour of the
purchaser.”
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(Emphasis Applied)
24. Hence on the dual factual premise that it was the clear intention
of the parties to treat time as the essence of the contract and that
there was an undue delay on behalf of the Respondent to institute the
suit, the relief of specific performance cannot be granted. We must
clarify that this finding also holds true for the land subsequently
released in favor of the Appellants.
HETHER IT WAS ROVED THAT PPELLANTS WERE ILLFULLY
C.2 W P A W
VOIDING ERFORMANCE OF HEIR ONTRACTUAL BLIGATIONS
A P T C O ?
The courts below have harped on the inability of the Appellants
25.
to procure the necessary NOC under Section 7A of HUDA Act, to hold
that they were noncooperative and willfully avoiding the performance
of their contractual obligation. However, as the learned counsel for
Appellants rightfully pointed out, the evidence on record clearly
indicates that they gave duly signed blank proformas and relevant
documents to the Respondent in order to obtain any necessary
sanction or NOCs. This was done in order to fulfil the obligation under
Clause 8 of the Sale Agreements which stated –
“8. That the Second Party will be liable to secure all
the necessary NOC and the said NOC will be intimated
to the First Party by way of Registered Post before
the date 16.08.2004 fixed for registration of sale
deed. If the Second Party fails to secure the required
NOC then this agreement to sell will be deemed to be
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cancelled. The cost incurred for securing the NOC will
7
be borne by the Second Party.”
(Emphasis Applied)
A bare reading of this clause, in our opinion, clearly spells out
26.
the intention of the parties in respect of Respondent’s liability for
obtaining the required NOC. We are bound to interpret the contractual
terms in their literal sense and hence, we expressly reject the
Respondent’s contention that this clause should be interpreted to
construe that his obligation was limited to NOCs which he could
obtain unilaterally. Additionally, since Respondent has led no evidence
to indicate that he took any proactive steps to obtain the purported
NOC necessary to execute the sale deed, we must hold that the plea of
noncooperation against the Appellants in respect of obtaining the
NOC are not made out by the Respondent.
27. However, even assuming in arguendo, that Respondent had
fulfilled his contractual obligation under under Clause 8 of the Sale
Agreements by taking all necessary steps necessary to obtain NOC
under Section 7A of HUDA Act, we find merit in the Appellants’
contention that no such NOC was required in the first place as the
Concerned Property was agricultural land on the Date of Execution. In
this respect, learned counsel for the Appellants correctly pointed out
7 Under the Sale Agreements, ‘First Party’ refers to the present Appellants while ‘Second
Party’ refers to the present Respondent.
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that the Concerned Property was brought under the Municipal
Corporation of Gurugram vide notification dated 02.06.2008 only.
28. The Respondent in his counter affidavit has taken a stance that
the Concerned Property was an ‘urban area’ as per Section 2(o) of the
HUDA Act, which includes lands situated within five kilometres of a
notified municipal area. However, this stand cannot sustain for the
reason that neither he raised such plea before the courts below nor
adduced any evidence to suggest that on the Date of Execution, the
Concerned Property was within the five kilometre radius of Municipal
Area as specified under Section 2(o) of the HUDA Act.
Finally, we must shift our attention to the High Court’s
29.
observation that the presence of Appellants before the SubRegistrar
was doubtful on 31.08.2004 and 02.09.2004 as the affidavits of their
presence were not proved in the evidence. In contrast, the Trial Court
has found that these affidavits were duly proved in the cross
examination of the Appellants and the said finding of fact was affirmed
by the First Appellate Court. The High Court, therefore, ought not to
have made any fact based observations especially when the records of
the courts below were not requisitioned to reach an independent
conclusion to hold that the said finding of fact by the two courts was
contrary to the record. The reappreciation of evidence is ordinarily
impermissible and beyond the scope of a second appeal. Even
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otherwise, the presence of Appellants before the SubRegistrar on the
Date of Execution is not disputed. In this backdrop where time was
the essence of the contract, we conclude that the Respondent has
failed to prove that the Appellants were willfully avoiding the
performance of their contractual obligations.
HETHER ESPONDENT WAS NTITLED TO RECOVERY OF EARNEST
C.3 W R E
MONEY
?
The final aspect of this dispute is with respect to the relief
30.
granted by the courts below to the Respondent in the form of recovery
of earnest money with requisite interest. However, before inquesting
into this issue we must take note of the following relevant clauses of
the Sale Agreements
“1. That it has been decided that date of execution of
this agreement to sell is 16.08.2004 [Sixteen August
Two Thousand Four].
xxx
4. That if the Second Party is not able to execute the
sale deed on the prescribed date then the First Party
will be entitled to confiscate the earnest money”
[Emphasis Applied]
31. Firstly, we may refer to Section 22 of the Specific Relief Act of
1963 (hereinafter, ‘SRA Act’) which provides that any person suing for
the specific performance of the contract for the transfer of property
may ask for (a) possession or partition and separate possession of
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the property in addition of such performance OR (b) such person may
seek any other relief to which he is entitled to “including the refund of
any earnest money or deposit paid or made by him” in case his claim
for specific performance is refused. However, subSection (2) thereof
puts a caveat that the abovementioned reliefs shall not be granted by
the court unless “it has been specifically claimed”. The proviso to sub
Section (2) further says that even if such relief was not specifically
claimed in the plaint, it is the discretion of the Court to permit the
plaintiff to amend the plaint “at any stage of the proceedings” and
allow him to include the claim for refund of the earnest money or
deposit paid. The relevant part of the provision of SRA Act reads as
follows
22. Power to grant relief for possession, partition,
refund of earnest money, etc.—
(1) Notwithstanding anything to the contrary
contained in the Code of Civil Procedure,1908 (5 of
1908), any person suing for the specific performance
of a contract for the transfer of immovable property
may, in an appropriate case, ask for
(a) possession, or partition and separate possession,
of the property in addition to such performance; or
(b) any other relief to which he may be entitled,
including the refund of any earnest money or deposit
paid or made by him, in case his claim for specific
performance is refused.
(2) No relief under clause (a) or clause (b) of sub
section (1) shall be granted by the Court unless it has
been specifically claimed:
Provided that where the plaintiff has not claimed
any such relief in the plaint, the Court shall, at any
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stage of the proceeding, allow him to amend the
plaint on such terms as may be just for including a
claim for such relief.
(Emphasis Applied)
On a plain reading of the above reproduced provision, we have
no reason to doubt that the plaintiff in his suit for specific
performance of a contact is not only entitled to seek specific
performance of the contract for the transfer of immovable property but
he can also seek alternative relief(s) including the refund of any
earnest money, provided that such a relief has been specifically
incorporated in the plaint. The court, however, has been vested with
wide judicial discretion to permit the plaintiff to amend the plaint even
at a later stage of the proceedings and seek the alternative relief of
refund of the earnest money. The litmus test appears to be that unless
a plaintiff specifically seeks the refund of the earnest money at the
time of filing of the suit or by way of amendment, no such relief can be
granted to him. The prayer clause is a sine qua non for grant of decree
of refund of earnest money.
Applying these principles to the facts of the case in hand, we find
that the Respondent has neither prayed for the relief of refund of
earnest money in the original plaint nor he sought any amendment at
a subsequent stage. In the absence of such a prayer, it is difficult to
accept that the courts would suomoto grant the refund of earnest
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money irrespective of the fact as to whether Section 22(2) of SRA Act is
to be construed directory or mandatory in nature.
32. We may now advert to the contention raised on behalf of the
Respondent that even if the respondent is held responsible for breach
of contract, the forfeited amount was ‘penal’ in nature and was hit by
Section 74 of The Contract Act as has been interpreted by the
8
Constitution Bench in Fateh Chand . Section 74 of the Contract Act
says that
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.
(Emphasis Applied)
33. Learned Counsel for the respondent submitted that merely
because an amount is stipulated as earnest money would not justify
9
its forfeiture. Instead, reliance was placed on Fateh Chand to state
that the courts were duty bound to ascertain reasonable
compensation in each case. In this respect, it would be prudent for
8 Fateh Chand (n 2).
9 Fateh Chand (n 2).
Page | 20
10
our analysis to extract the following paragraphs from
Fateh Chand
which are relied upon by the respondent
“11. …. 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….
xxx
15. Section 74 declares the law as to liability upon
breach of contract where compensation is by
agreement of the parties predetermined, 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
10 Fateh Chand (n 2).
Page | 21
ascertained having regard to the conditions existing
on the date of the breach.”
(Emphasis Applied)
Per contra, the Appellants have heavily relied on the following
34.
11
passage of the decision of this Court in to justify the
Satish Batra
forfeiture of earnest money
“15. The law is, therefore, clear that to justify the
forfeiture of advance money being part of “earnest
money” the terms of the contract should be clear and
explicit. Earnest money is paid or given at the time
when the contract is entered into and, as a pledge for
its due performance by the depositor to be forfeited
in case of nonperformance by the depositor. There
can be converse situation also that if the seller fails
to perform the contract the purchaser can also get
double the amount, if it is so stipulated. It is also the
law that partpayment of purchase price cannot be
forfeited unless it is a guarantee for the due
performance of the contract. In other words, if the
payment is made only towards partpayment of
consideration and not intended as earnest money
then the forfeiture clause will not apply.”
In sum and substance, the Appellants contend that forfeiture of
sum is justified when it is (a) clearly stipulated as earnest money; (b)
forms part of sale consideration and intended to be in the nature of
(c)
‘guarantee for the due performance of the contract’, and (d) the
binding agreement between the parties provides its forfeiture in the
event of breach of contract.
11 Satish Batra (n 1).
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35. In our considered opinion, Section 74 of Contract Act primarily
pertains to the grant of compensation or damages when a contract has
been broken and the amount of such compensation or damages
payable in the event of breach of contract, is stipulated in the contract
itself. In other words, all preestimated amounts which are specified to
be paid on account of breach by any party under a contract are
covered by Section 74 of Contract Act as noted by this court in
12 13
. In the
Kailash Nath Associates v DDA Fateh Chand ,
Constitution Bench ruled that Section 74 dispenses with proof of
“actual loss or damage” and attracts intervention by Courts where the
preestimated amount is ‘penal’ in nature. We may at this juncture
also note the following observations made by this court in ONGC Ltd.
14
v. Saw Pipes Ltd.
“64. …. 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 preestimate 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
12 (2015) 4 SCC 136, para 43.7.
Kailash Nath Associates v DDA
13 Fateh Chand (n 2).
14 ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705.
Page | 23
evidence to prove actual loss suffered by him. Burden
is on the other party to lead evidence for proving that
no loss is likely to occur by such breach….”
(Emphasis Applied)
Hence, in a scenario where the contractual terms clearly provide the
factum of the pre estimate amount being in the nature of ‘earnest
money’, the onus to prove that the same was ‘penal’ in nature squarely
lies on the party seeking refund of the same. Failure to discharge such
burden would treat any preestimated amount stipulated in the
contract as a ‘genuine preestimate of loss’.
36. The Respondent in the instant case has neither pleaded for
refund of the earnest money nor has he claimed any damages or
penalty from the Appellants. From the perusal of the records, it is
conspicuous that Respondent never raised any concern that the pre
estimated amount was ‘penal’ in nature and instead his sole objective
was to gain titular rights over the Concerned Property on the strength
of Sale Agreements.
D. C ONCLUSION
37. In light of the above discussion, we must conclude that the
decree granted by the courts below was hinged on a logical fallacy
wherein the Appellants were held to be unjustly enriched on the
premise that the contract was rendered impossible to perform due to
Page | 24
acquisition proceedings. On the contrary, the contract automatically
stood terminated as per the stipulated contractual terms. The Sale
Agreements should have been rightly held to be terminated instead of
being declared impossible to perform.
38. Furthermore, we deem it appropriate to hold that the forfeiture
was justified and within the confines of reasonable compensation as
per Section 74 of Contract Act in light of the fact that during the
entirety of proceedings – the nature of forfeiture was never
firstly
contested by the Respondent and secondly the Respondent never
prayed for the refund of earnest money. Consequently, the judgments
rendered by the Courts below deserve to be set aside and the suit is
liable to be dismissed. Ordered accordingly.
39. The appeal stands allowed along with any pending applications
in the above terms. No order as to costs.
………..………………… J.
(SURYA KANT)
…………………………...J.
(BELA M. TRIVEDI)
NEW DELHI
DATED: 14.12.2022
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