SH. SUDESH KAKKAR vs. SH. SATISH MITTAL

* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ RFA No.216/2017

th
% 30 July, 2018

SH. SUDESH KAKKAR ..... Appellant
Through: Mr. S.K. Anand, Advocate.

versus

SH. SATISH MITTAL ..... Respondent
Through: Mr. Sameer Nandwani,
Advocate with Mr. Pankaj
Singh Thakur, Advocate.
CORAM:
HON’BLE MR. JUSTICE VALMIKI J.MEHTA
To be referred to the Reporter or not?

VALMIKI J. MEHTA, J (ORAL)
1. This Regular First Appeal under Section 96 of the Code
of Civil Procedure, 1908 (CPC) is filed by the plaintiff in the suit
impugning the Judgment of the Trial Court dated 28.11.2016 by which
trial court has dismissed the suit for recovery of money filed by the
appellant/plaintiff/proposed buyer against the
respondent/defendant/proposed seller. A money decree of
Rs.6,46,500/- was prayed by the appellant/plaintiff on the ground that
the amount of Rs.6 lacs was paid under the subject Agreement to Sell
RFA No.216/2017 Page 1 of 38



and this should be returned alongwith interest totaling to the amount
of Rs.6,46,500/-.
2. I need not narrate the facts in detail because admittedly
with respect to property no. D/E-53, Sector-3, DSIIDC Industrial Park,
Bawana, Delhi-39 on 17.12.2011 parties entered into an Agreement to
Sell for a total sale consideration of Rs.72.51 lacs and out of this total
amount, a sum of Rs.6 lacs has admittedly been received by the
respondent/defendant from the appellant/plaintiff. Pleading that it was
not the appellant/plaintiff, but it was the respondent/defendant who
was guilty of breach of contract, the subject suit was filed for recovery
by pleading the breach that necessary infrastructure and facilities to be
made by the respondent/defendant on the suit property were not built.
3. Respondent/defendant has contested the suit and pleaded
that it was the appellant/plaintiff who was guilty of breach of contract
because he had no moneys to complete the sale transaction. It was
also pleaded by the respondent/defendant that the appellant/plaintiff
had no moneys to complete the transaction and due to adverse market
conditions of fall in the property price and since the appellant/plaintiff
RFA No.216/2017 Page 2 of 38



who had to sell the property further could not do so, hence the
appellant/plaintiff failed to complete the sale transaction.
4. After pleadings were complete the trial court framed the
sole issue with respect to entitlement of the appellant/plaintiff to the
suit amount. Parties led evidence and these aspects are recorded in
paras 6 and 7 of the impugned judgment and these paras read as
under:-
―6. That, to prove the case, the plaintiff examined himself as PW
1 and Sh. Parima Berma as PW 2. The plaintiff has relied up on
the document:

7. That, in order to disprove the case of the plaintiff, the
defendant has examined himself as DW1 and relied upon the
following documents:

RFA No.216/2017 Page 3 of 38

5. Counsel for the appellant/plaintiff has argued before this
Court that even assuming that the appellant/plaintiff was guilty of
breach of contract, since the respondent/defendant has failed to prove
the loss caused to him, especially the exact amount of loss, even
assuming that the appellant/plaintiff was guilty of breach of contract,
yet in law the amount paid by the appellant/plaintiff to the
respondent/defendant had to be refunded. Reliance is placed upon the
judgment passed by this Court in the case of M.C. Luthra Vs. Ashok
Kumar Khanna 2018 (248) DLT 161 and against which an SLP was
filed in the Supreme Court, which was dismissed by the Supreme
Court vide order dated 15.5.2018 in SLP(C) No.11702/2018. In the
judgment in the case of M.C. Luthra (supra) it has been held by this
Court that mere breach of contract does not entitle a seller to forfeit
the moneys which come into in his hands from a buyer of the property,
RFA No.216/2017 Page 4 of 38



and that a seller of an immovable property under an agreement to sell
can forfeit the amount received by him only if loss is pleaded and
proved by him.
6. Learned counsel for the respondent/defendant has argued
that as per para 3 of the preliminary objections of the written
statement, the respondent/defendant has specifically pleaded that the
transaction was not completed by appellant/plaintiff due to fall in the
market price of the property and it is further argued that this aspect has
been reiterated by the respondent/defendant in his affidavit of
evidence, and therefore, since the respondent/defendant has pleaded
and proved loss, hence the respondent/defendant is entitled to forfeit
the amount paid by the appellant/plaintiff/buyer as the facts of the
present case are distinguishable from the judgment in the case of M.C.
Luthra (supra).
7. In my opinion, on vague pleadings and vague evidence
which exists of the respondent/defendant, it cannot be held by the
court that the respondent/defendant has discharged the onus of proof
of having suffered a loss, more so the specific amount of loss of Rs. 6
lacs for forfeiture of amount of Rs.6 lacs. In law, it is necessary that
RFA No.216/2017 Page 5 of 38



loss is quantified and proved to be the specific amount because
forfeiture is only to the specific amount of loss caused and therefore
general averments and pleading in evidence would not help the
respondent/defendant to contend that the respondent/defendant had
discharged his onus of proof in this regard of having suffered a
specific amount of loss. To make this issue clear as regards lack of
requisite pleadings and evidence, the relevant preliminary objection
no.3 of the written statement alongwith paras 4 and 5 of the affidavit
by way of evidence filed by the respondent/defendant are reproduced
hereunder:-
― Para 3 of the written statement
3. That it seems that since the plaintiff had no means to
complete the transaction and had entered into the said
transaction in order to make profit out of the same but failed
to do so in the adverse market conditions and fall of
property price and did not get a buyer who could have
purchased the said property on higher price, therefore, he
got issued a legal notice to the defendant demanding earnest
amount paid by him on flimsy excuses which was duly
replied by counsel for the defendant with 10 days time to get
the said property transferred in his name after paying the
balance sale consideration failing which the said earnest
money would be liable to be forfeited, but the plaintiff
thereafter chose to file the present suit and lost the said
opportunity again and, therefore, the defendant is within his
rights to forfeit the said amount as per the terms agreed
upon and is a general term which govern the sale of
property. Copies of the reply to the said legal notice and
RFA No.216/2017 Page 6 of 38



postal receipt are filed herewith for kind perusal of this
Hon‘ble Court.
Paras 4 and 5 of Affidavit by way of Evidence of
respondent/defendant
4. That the deponent states that the plaintiff had entered
into an agreement to sell with the defendant for property
bearing no.D/E-53, Sector 3, DSIIDC Industrial Park,
Bawana, Delhi-39 for a total sale consideration of
Rs.72,51,000/- and a sum of Rs.6,00,000/- was paid by the
plaintiff to the deponent towards earnest money. The
balance sale consideration was to be last paid by 20.01.2012
and the time was essence of the said contract. However, the
deponent time and again requested the plaintiff to pay the
balance sale consideration and get the said property
transferred in his name. But it seems that due to fall in the
market price of the said property the plaintiff failed to pay
the balance sale consideration to the deponent and did not
turn up to get the said property transferred in his name.
Further, the deponent offered the said property to the
plaintiff through various telephone calls and personal
meetings but it was the plaintiff himself who was delaying
the matter.
5. That the deponent states that it seems that since the
plaintiff had not means to complete the transaction and had
entered into the said transaction in order to make profit out
of the same but failed to fall in the market conditions and
fall of property price and did not get a buyer who could
have purchased the said property on such higher price,
therefore, he got issued a legal notice to the deponent
demanding earnest amount paid by him on filmsy excuses
which was duly replied by counsel for the deponent within
10 days time to get the said property transferred in his name
after paying the balance sale consideration failing which the
said earnest money would be liable to be forfeited. But the
plaintiff thereafter chose to file the present suit and lost the
said opportunity again and, therefore, the deponent is within
his rights to forfeit the said amount as per the terms agreed
RFA No.216/2017 Page 7 of 38



upon and is a general term which govern the sale of
property. The office copy of the reply to the said legal
notice and postal receipt are exhibited as Ex.DW1/A and
DW1/B respectively.‖
8. As already stated above, loss is of a particular specific
amount. The requirement to prove a specific amount of loss is
because only to that specific amount of loss caused, forfeiture can be
made. A reference to the aforesaid paras of pleadings of the
respondent/defendant, as also affidavit by way of evidence filed by
him, shows that no figure whatsoever is mentioned being the specific
amount of loss suffered by the respondent/defendant. Therefore in my
opinion it cannot be held that the respondent/defendant has pleaded
and proved the specific loss caused to him for forfeiture of the amount
of Rs.6 lacs paid by the appellant/plaintiff under the subject agreement
to sell. Also, it may be noted that there are only self-serving
statements of loss being caused to the respondent/defendant and in the
facts of the case such as the present, this Court is not inclined to even
accept as correct the self-serving statements of the loss being caused,
and thus respondent/defendant cannot be said to have discharged the
onus of proof upon him that loss was caused to him on account of
breach by the appellant/plaintiff.
RFA No.216/2017 Page 8 of 38



9. The relevant paras of the judgment in the case of M.C.
Luthra (supra) are paras 3 to 18(ii) of the judgment and these paras
read as under:-
―3. Today counsel for the appellant/defendant/counter-claimant has, in
spite of what is recorded in the order dated 12.9.2017 of
appellant/defendant restricting the claim of forfeiture to a reasonable
amount of Rs. 3 lacs out of Rs.9 lacs, argued by placing reliance upon the
judgment of the Supreme Court in the case of Satish Batra Vs. Sudhir
Rawal (2013) 1 SCC 345 that since the amount of Rs.9lacs was paid by
the respondent/plaintiff to the appellant/defendant as earnest money, hence
in accordance with the ratio in the case of Satish Batra (supra) the entire
amount of Rs. 9 lacs can be forfeited by the appellant/defendant as
permitted by Clause 8 of the agreement to sell. The impugned judgment
of the trial court is therefore prayed to be set aside and the counter-claim
of the appellant/defendant is prayed for being decreed for entitling the
appellant/defendant to forfeit the entire amount of Rs.9 lacs received by
the appellant/defendant from the respondent/plaintiff.
4. There is no dispute between the parties that parties had entered into
an agreement to sell dated 15.9.2005 for the appellant/defendant to sell the
subject suit property to the respondent/plaintiff. The total sale
consideration was Rs.31.50 lacs and it is not in dispute that at the time of
entering into the agreement to sell the appellant/defendant received an
amount of Rs.9 lacs with the amount of Rs.7 lacs being paid in terms of
demand drafts and a sum of Rs.2 lacs being paid in cash. Disputes and
differences arose between the parties as to who was guilty of breach of
contract in not performing the agreement to sell dated 15.9.2005.
Respondent/plaintiff filed the subject suit pleading that the
appellant/defendant was guilty of breach of contract and that therefore in
terms of Clause 8 of the subject agreement to sell dated 15.9.2005, the
respondent/plaintiff was entitled from the appellant/defendant to double
the amount of the money paid of Rs.9 lacs i.e an amount of Rs.18 lacs.
The appellant/defendant prayed for the suit to be dismissed and sought a
declaration that the appellant/defendant should be held entitled to forfeit
the amount paid of Rs.9 lacs received by appellant/defendant under the
agreement to sell, forfeiture being on account of breach of contract by the
respondent/plaintiff and as permitted by Clause 8 of the agreement to sell.
5. Trial court, after pleadings were complete, framed the following
issues:-
―1. Whether the defendant had discharged his all the liabilities raised
against him by the concerned authority i.e. MCD/Society, bank by
the stipulated dated i.e. 18.11.2005. If not its effect? OPD
RFA No.216/2017 Page 9 of 38



2. Whether there is a cause of action in filing the present suit in
favour of the plaintiff? OPD
3. Whether the plaintiff is entitled to double the amount of earnest
money as claimed in the plaint? OPP
4. Whether the plaintiff was having sufficient funds available with
him to perform the agreement? OPP
5. Whether the plaintiff is entitled to recover the suit amount from the
defendant? OPP
6. Whether the defendant is entitled to forfeit the earnest money as
claimed by defendant in the counter claim? OPD
7. Relief.‖
6. Trial court has by the impugned judgment held that none of the
parties are guilty of breach of contract. Trial court has held that besides
none of the parties being guilty of breach of contract, the
respondent/plaintiff is found to have filed the suit before the due date fixed
for performance as per the agreement to sell, and that therefore the
respondent/plaintiff cannot seek double the amount of earnest money paid
of Rs.9 lacs i.e the respondent/plaintiff‘s suit for the claim of Rs.18 lacs
will fail. Trial court however decreed the suit for a sum of Rs.9 lacs being
the amount paid under the agreement to sell by holding that there cannot
be forfeiture of the amount paid under an agreement to sell because the
amount of Rs.9 lacs paid under the agreement to sell could not be
categorized as earnest money. The relevant paras of the impugned
judgment also show that the trial court has held that the
appellant/defendant has failed to prove any loss on account of the breach
of contract and further that the amount received of Rs.9 lacs is not earnest
money under the contract because terms of the agreement to sell did not
indicate that this amount of Rs.9 lacs was given as guarantee for due
performance of the obligations. The relevant observations of the trial court
in this regard are contained in paras 34 to 42 of the impugned judgment
and these paras read as under:-
―34. So far as counter claim of defendant for claiming
that earnest amount of plaintiff is liable to be forfeited, law is well
settled. If we go through the terms of the agreement Ex.PW1/1,
stipulation in the shape of Clause 8 regarding forfeiture of earnest
money cannot be termed as a penalty. Consequences for breach of the
contract are provided in Chapter VI of the Contract Act which contains
three sections, namely, section 73 to section 75. As per Section 73 of
the Contract Act, the party who suffers by the breach of contract is
entitled to receive from the defaulting party, compensation for any loss
or damage caused to him by such breach, which naturally arose
in usual course of things from such breach, or which the two
parties knew when they make the contract to be likely the result of the
breach of contract. This provision makes it clear that such
compensation is not to be given for any remote or indirect loss or
RFA No.216/2017 Page 10 of 38



damage sustained by reason of the breach. The underlying
principle enshrined in this section is that a mere breach of contract
by a defaulting party would not entitle other side to claim damages
unless said party has in fact suffered damages because of such breach.
Loss or damage which is actually suffered as a result of breach has to
be proved and the plaintiff is to be compensated to the extent of actual
loss or damage suffered.
35. Section 74 of the Act entitles a party to claim
reasonable compensation from the party who has broken the contract
which compensation can be pre-determined compensation stipulated at
the time of entering into the contract itself. Thus, this section provides
for pre-estimate of the damage or loss which a party is likely to suffer
if the other party breaks the contract entered into between the two of
them. In Fateh Chand v. Balkishan Das , 1964 (1) SCR 515,
Supreme Court has held: ―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.
36. 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.‖
37. Thus, section 74 of Contract Act 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
RFA No.216/2017 Page 11 of 38



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 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.
38. 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 penalty.‖
39. In Shree Hanuman Cotton Mills and Others v. Tata Air
Craft Limited , 1969 (3) SCC 522, Apex Court elaborately discussed
the principles which emerged from the expression ―earnest money‖.
Apex Court, considering the scope of the term ―earnest‖, laid
down certain principles, which are as follows:
―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
RFA No.216/2017 Page 12 of 38



earnest.‖
40. In Delhi Development Authority v. Grihstrapana
Cooperative Group Housing Society Ltd ., 1995 (1) SCC (Suppl.)
751, Apex Court held that the forfeiture of the earnest money was
legal. In V. Lakshmanan v. B.R. Mangalgiri and Others , 1995 (2)
SCC (Suppl.) 33, Supreme Court held as follows:
―The question then is whether the respondents are entitled to forfeit
the entire amount. It is seen that a specific covenant under
the
contract was that respondents are entitled to forfeit the money paid
under the contract. So when the contract fell through by the default
committed by the appellant, as part of the contract, they are
entitled to forfeit the entire amount.‖
41. 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
non-performance, by the depositor. There can be converse situation
also that if the seller fails to perform the contract the purchaser can
also get the double the amount, if it is so stipulated. It is also the law
that part payment 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 part payment of consideration and
not intended as earnest money then the forfeiture clause will not apply.
42. In view of the legal proposition as discussed above, in facts
and circumstances of the case while I have already held that both the
parties cannot be held guilty for non compliance of terms of
agreement, therefore, defendant to my mind is also not entitled for
forfeiture of entire earnest amount. In peculiar facts and circumstances
of the case while I decide the issue no. 1 that defendant has
discharged all his liabilities, therefore, plaintiff is not entitled
for double of the amount as claimed. Therefore, plaintiff to my mind
is entitled for recovery of only Rs.9 lacs admittedly paid by him to
defendant as earnest money however, plaintiff is entitled for such
recovery of amount with interest @12 % from the date of filing of the
suit till realization. Above said issues are being accordingly
decided.‖ (underlining added)
7. Before this Court on behalf of the respondent/plaintiff it is argued
that even if respondent/plaintiff is held to be guilty of breach of contract,
but since no loss is pleaded and proved by the appellant/defendant to have
been suffered by him on account of the breach of contract by the
respondent/plaintiff, therefore the appellant/defendant cannot forfeit the
entire amount of Rs.9 lacs and that the appellant/defendant can forfeit only
a nominal amount or a reasonable amount out of the total amount received
RFA No.216/2017 Page 13 of 38



by the appellant/defendant of Rs.9 lacs. Reliance is placed by the counsel
for the respondent/plaintiff upon the Constitution Bench judgment of the
Supreme Court in the case of Fateh Chand Vs. Balkishan Dass AIR 1963
SC 1405. Reliance is also placed by the counsel for the
respondent/plaintiff upon a recent judgment of the Supreme Court in the
case of Kailash Nath Associates Vs. Delhi Development Authority and
Another (2015) 4 SCC 136 to argue that Supreme Court in this judgment
of Kailash Nath Associates (supra) has clarified with reference to the
ratio of Fateh Chand's case (supra) that when what is forfeited pursuant
to a clause in a contract being an agreement to sell then that act of
forfeiture is one falling under Section 74 of the Indian Contract Act, 1872
and that Section 74 of the Contract Act would only apply if the contract is
of such a nature that loss cannot be proved on account of breach of
contract but if the loss can be proved then it/loss must be proved failing
which earnest money cannot be forfeited. Putting it in other words it is
argued that it is held by the Supreme Court in the case of Kailash Nath
Associates (supra) that on forfeiture being effected of earnest moneys paid
under the contract, the said act of forfeiture is an act which falls under
Section 74 of the Contract Act because forfeiture is taking place of a
liquidated amount fixed as per the contract between the parties, but
eventuality of such a clause of forfeiture coming into application would
only be where contract is such by its nature that the loss cannot be proved;
unlike those contracts where it is possible to prove the loss caused; and
that breach of an agreement to sell/purchase of immovable property is a
type of contract where loss can be proved, and that once loss is not
pleaded and proved to be caused to the appellant/defendant, then earnest
money amount cannot be forfeited. It is also argued on behalf of the
respondent/plaintiff that amount of forfeiture if results in forfeiture taking
place then if the forfeited amount is in the nature of a penalty amount, then
the Courts will not allow forfeiture of the liquidated amount/earnest
money which is in the nature of penalty and that Courts will only grant
reasonable compensation lesser than the total amount of earnest money
which is a penalty amount.
8. The issue before this Court is that whether it is the ratio of the
judgment of the Supreme Court in the case of Satish Batra (supra) which
has to be applied or it is the ratio of the judgments of the Supreme Court in
the cases of Fateh Chand (supra) and Kailash Nath Associates (supra)
which have to be applied. Also, if the ratio in the case of Satish Batra
(supra) applies, then it is to be decided to what extent can the
appellant/defendant be held entitled to forfeit the amount i.e whether
appellant/defendant can forfeit the entire amount of Rs.9 lacs or only a
lesser amount can be allowed to be forfeited by the appellant/defendant,
and what is that lesser amount.
9. The facts of the judgment of the Supreme Court in the case of
Satish Batra (supra) are quite similar to the facts of the present case
RFA No.216/2017 Page 14 of 38



because in the said case the Hon'ble Supreme Court was dealing with a
fact situation as to whether when a contract being an agreement to sell
contains a clause of forfeiture then in such cases the seller on breach by
the buyer under an agreement to sell is entitled to forfeit the amount of
earnest money simply because a clause of forfeiture is so provided under
the agreement to sell. Supreme Court in the case of Satish Batra (supra)
on account of a clause of forfeiture existing in the agreement to sell in that
case allowed forfeiture of an amount of Rs.7 lacs out of the total sale
consideration of Rs.70 lacs i.e 10% of the amount received under the
agreement to sell was held to be in the nature of earnest money being
capable of forfeiture by the seller because the clause in the agreement to
sell so provided for. Supreme Court in the case of Satish Batra (supra)
distinguished the judgment of the Constitution Bench of the Supreme
Court in the case of Fateh Chand (supra) and relied upon the subsequent
judgments of the Supreme Court in the cases of Shree Hanuman Cotton
Mills and Others Vs. Tata Air Craft Limited (1969) 3 SCC 522 and
Videocon Properties Ltd. Vs. Dr. Bhalchandra Laboratories and Others
(2004) 3 SCC 711 for holding that the earnest money in an agreement to
sell can always be forfeited without pleading and proving any requirement
of the seller having suffered any loss. The relevant paras of the judgment
of the Supreme Court in the case of Satish Batra (supra) are paras 5 and 8
to 17 and these paras read as under:-
―5. We have heard the learned Counsel on either side at length. Facts
are undisputed. The only question is whether the seller is entitled to
retain the entire amount of Rs. 7,00,000/- received towards earnest
money or not. The fact that the purchaser was at fault in not paying the
balance consideration of Rs. 63,00,000/- is also not disputed. The
question whether the seller can retain the entire amount of earnest
money depends upon the terms of the agreement. Relevant clause of
the Agreement for Sale dated 29.11.2005 is extracted hereunder for
easy reference:
"e) If the prospective purchaser fail to fulfill the above condition.
The transaction shall stand cancelled and earnest money will be
forfeited. In case I fail to complete the transaction as stipulated
above. The purchaser will get the DOUBLE amount of the earnest
money. In the both condition, DEALER will get 4% Commission
from the faulting party."
The clause, therefore, stipulates that if the purchaser fails to fulfill the
conditions mentioned in the agreement, the transaction shall stand
cancelled and earnest money will be forfeited. On the other hand, if the
seller fails to complete the transaction, the purchaser would get double
the amount of earnest money. Undisputedly the purchaser failed to
perform his part of the contract, then the question is whether the seller
can forfeit the entire earnest money.
xxxxx xxxxx xxxxx
RFA No.216/2017 Page 15 of 38



8. We are of the view that the High Court has completely
misunderstood the dictum laid down in the above mentioned judgment
in Fateh Chand Case and came to a wrong conclusion of law for more
than one reason, which will be more evident when we scan through the
subsequent judgments of this Court.
9. In Shree Hanuman Cotton Mills v. Tata Air Craft Limited , this
Court elaborately discussed the principles which emerged from the
expression "earnest money". That was a case where the Appellant
therein entered into a contract with the Respondent for purchase of
aero scrap. According to the contract, the buyer had to deposit with the
company 25% of the total amount and that deposit was to remain with
the company as the earnest money to be adjusted in the final bills.
Buyer was bound to pay the full value less the deposit before taking
delivery of the stores. In case of default by the buyer, the company
was entitled to forfeit unconditionally the earnest money paid by the
buyer and cancel the contract. The Appellant advanced a sum of Rs.
25,000/- (being 25% of the total amount) agreeing to pay the balance
in two installments. On Appellant's failure to pay any further amount,
Respondent forfeited the sum of Rs. 25,000/-, which according to it,
was earnest money and cancelled the contract. Appellant filed a suit
for recovery of the said amount.
―The trial Court held that the sum was paid by way of deposit or
earnest money which was primarily a security for the performance
of the contract and that the Respondent was entitled to forfeit the
deposit amount when the Appellant committed a breach of the
contract and dismissed the suit." ( Shree Hanuman Cotton Mills
case)
The High Court confirmed the decision taken by the trial Court.
This Court, considering the scope of the term "earnest", laid down
certain principles, which are as follows: (Shree Hanuman Cotton
Mills case)
―21. 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.‖
RFA No.216/2017 Page 16 of 38



10. In Delhi Development Authority v. Grihstrapana Cooperative
Group Housing Society Ltd. , this Court following the judgment of the
Privy Council in Har Swaroop and Shree Hanuman Cotton Mills , held
that the forfeiture of the earnest money was legal. In V. Lakshmanan
v. B.R. Mangalgiri , this Court held as follows:
―5.The question then is whether the Respondents are entitled to forfeit
the entire amount. It is seen that a specific covenant under the contract
was that Respondents are entitled to forfeit the money paid under the
contract. So when the contract fell through by the default committed
by the Appellant, as part of the contract, they are entitled to forfeit the
entire amount.
11. In HUDA v. Kewal Krishan Goel , the question that came up for
consideration before this Court was, where a land is allotted, the
allottee deposited some installments but thereafter intimated the
authority about his incapacity to pay up the balance installments and
requested for refund of the money paid, was the allotting authority
entitled to forfeit the earnest money deposited by the allottee or could
be only entitled to forfeit 10% of the total amount deposited by the
allottee till the request is made? Following the judgment in Shree
Hanuman Cotton Mills , this Court held that‖ ( Huda case )
―12. ... the allottee having accepted the allotment and having made
some payment on installments basis, then made a request to
surrender the land, has committed default on his part and,
therefore, the competent authority would be fully justified in
forfeiting the earnest money which had been deposited and not the
10% of the amount deposited, as held by the High Court."
In that case, this Court took the view that the earnest money
represented the guarantee that the contract would be fulfilled.
12. This Court, again, in Videocon Properties Ltd. v. Bhalchandra
Laboratories , dealt with a case of sale of immovable property. It was a
case where the Plaintiff-Appellants had entered into an agreement with
the Respondents-Defendants on 13.5.1994 to sell the landed property
owned by the Respondents and a sum of Rs. 38,00,000/- was paid by
the Appellants as deposit or earnest money on the execution of the
agreement. In that case, this Court examined the nature and character
of the earnest money deposit and took the view that the words used in
the agreement alone would not be determinative of the character of the
"earnest money" but really the intention of the parties and surrounding
circumstances. The Court held that the earnest money serves two
purposes of being part-payment of the purchase money and security
for the performance of the contract by the party concerned.
13. In that case, on facts, after interpreting various clauses of the
agreement, the Court held as follows:( Bhalchandra case)
―15. Coming to the facts of the case, it is seen from the agreement
dated 13.5.1994 entered into between parties - particularly Clause
RFA No.216/2017 Page 17 of 38



1, which specifies more than one enumerated categories of
payment to be made by the purchaser in the manner and at stages
indicated therein, as consideration for the ultimate sale to be made
and completed. The further fact that the sum of Rs. 38 lakhs had to
be paid on the date of execution of the agreement itself, with the
other remaining categories of sums being stipulated for payment at
different and subsequent stages as well as execution of the sale
deed by the Vendors taken together with the contents of the
stipulation made in Clause 2.3, providing for the return of it, if for
any reason the Vendors fail to fulfill their obligations under Clause
2, strongly supports and strengthens the claim of the Appellants
that the intention of the parties in the case on hand is in effect to
treat the sum of Rs. 38 lakhs to be part of the prepaid purchase-
money and not pure and simple earnest money deposit of the
restricted sense and tenor, wholly unrelated to the purchase price
as such in any manner. The mention made in the agreement or
description of the same otherwise as "deposit or earnest money"
and not merely as earnest money, inevitably leads to the
inescapable conclusion that the same has to and was really meant
to serve both purposes as envisaged in the decision noticed supra.
In substance, it is, therefore, really a deposit or payment of
advance as well and for that matter actually part payment of
purchase price, only. In the teeth of the further fact situation that
the sale could not be completed by execution of the sale deed in
this case only due to lapses and inabilities on the part of the
Respondents - irrespective of bonafides or otherwise involved in
such delay and lapses, the amount of rupees 38 lakhs becomes
refundable by the Vendors to the purchasers as of the prepaid
purchase price deposited with the Vendors. Consequently, the sum
of rupees 38 lakhs to be refunded would attract the first limb or
part of Section 55(6)(b) of the Transfer of Property Act itself and
therefore necessarily, as held by the learned Single Judge, the
Defendants prima facie became liable to refund the same with
interest due thereon, in terms of Clause 2.3 of the agreement
Therefore, the statutory charge envisaged therein would get
attracted to and encompass the whole of the sum of rupees 38 lakhs
and the interest due thereon.‖
14. In the above mentioned case, the Court also held as follows:
( Bhalchandra case)
―14. ...Further, it is not the description by words used in the
agreement only that would be determinative of the character of the
sum but really the intention of parties and surrounding
circumstances as well, that have to be baked into and what may be
called an advance may really be a deposit or earnest money and
what is termed as 'a deposit or earnest money' may ultimately turn
RFA No.216/2017 Page 18 of 38



out to be really an advance or part of purchase price. Earnest
money or deposit also, thus, serves two purposes of being part
payment of the purchase money and security for the performances
of the contract by the party concerned, who paid it.‖
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 non-performance, by the
depositor. There can be converse situation also that if the seller fails to
perform the contract the purchaser can also get the double the amount,
if it is so stipulated. It is also the law that part payment 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 part payment of consideration and not intended as earnest
money then the forfeiture clause will not apply.
16. When we examine the clauses in the instant case, it is amply clear
that the clause extracted hereinabove was included in the contract at
the moment at which the contract was entered into. It represents the
guarantee that the contract would be fulfilled. In other words, 'earnest'
is given to bind the contract, which is a part of the purchase price
when the transaction is carried out and it will be forfeited when the
transaction falls through by reason of the default or failure of the
purchaser. There is no other clause militates against the clauses
extracted in the agreement dated 29.11.2011.
17. We are, therefore, of the view that the seller was justified in
forfeiting the amount of Rs. 7,00,000/- as per the relevant clause, since
the earnest money was primarily a security for the due performance of
the agreement and, consequently, the seller is entitled to forfeit the
entire deposit. The High Court has, therefore, committed an error in
reversing the judgment of the trial court.‖
10. A reference to aforesaid paras of the judgment of the Supreme
Court in the case of Satish Batra (supra) shows that there was a clause in
the agreement to sell which was held by the Supreme Court to entitle
forfeiture of earnest money, and this clause was as is reproduced in Para 5
of the judgment of the Supreme Court in the case of Satish Batra (supra),
and therefore in the case of Satish Batra (supra) it was held that earnest
money paid under an agreement to sell can be forfeited without complying
with the requirement of the seller pleading and proving that he has
suffered a loss on account of breach of the agreement to sell by the buyer.
It also needs to be noted that in Para 14 of the case of Satish Batra (supra)
reference is made to the ratio of the judgment of the Supreme Court in the
case of Videocon Properties Ltd.’s (supra) that words used in an
agreement are not determinative of the character of the sum (received by a
seller under an agreement to sell) and what is the character of the amount
RFA No.216/2017 Page 19 of 38



paid depends upon the intentions of the parties and the surrounding
circumstances. The Supreme Court therefore held that whether or not an
amount called as earnest money under the contract is or is not earnest
money will have to be decided as per the facts and circumstances of each
individual case.
11. In the present case, the Agreement to Sell (Ex.PW1/1) entered into
between the parties reads as under:-
― AGREEMENT TO SELL AND PURCHASE
This agreement is executed at Delhi, on this 15/09/2005
BETWEEN
Sh. M.C. Luthra s/o Sh. Mangal Das Luthra R/o H. No.691, Sector-V
R.K. Puram, New Delhi
(hereinafter called the PARTY NO.1)
AND
Sh. Ashok Kumar Khanna S/o Sh. Sant Ram Khanna R/o D-32, Fateh
Nagar, New Delhi
(hereinafter called the PARTY NO.2)
The expression of both the Parties wherever they occur in the body
of this agreement shall means, and include their respective heirs, legal
representative, administrators, executors, successors, and assigns.
Whereas the Party No.1 is the exclusive owner of Flat No.D-504
Chankaya Cooperative Group Housing Society, Sector-4, Plot No.23
Dwarka, New Delhi.
The aforesaid property is free from all kind encumbrances such as
prior sale gifts, mortgage, litigation, disputes, stay orders, attachments,
notifications, acquisitions, charges liens, sureties etc.
Whereas the party No.1 for his bonafide needs and requirements
has agreed to sell the aforesaid property for a total sale consideration
of Rs.31,50,000/- (Rupees Thirty one lakhs & Fifty Thousands only)
and Party No.2 has agreed to purchase the same on the following terms
and conditions of this agreement:-
NOW THIS AGREEMENT WITNESSETH AS UNDER:-
1. That the Party No.2 has paid an amount of Rs.7,00,000/- (Rupees
Seven Lakhs on 15.9.2005) as earnest money and balance amount of
Rs. 2,00,000/- (Rs. Two lakhs only) will be paid by 23.9.2005.
2. The balance sale consideration amount of Rs.22,50,000/- (Rupees
Twenty two lakhs and fifty thousands only) will be paid latest by
th
18/11/2005 (18 November 2005)
3. All liabilities up to the date of finalization of deal will be paid by
Party No.1 and the same will be paid by Party No.2 after finalization
of the deal.
4. That the Party No.1 shall not create any charges over the said
property after the execution of this agreement and Party No.1 has no
right to sell it to anybody else after the signing of this agreement.
RFA No.216/2017 Page 20 of 38



5. That all the expenditure regarding registration shall be borne by the
Party No.2.
7. That the Party No.1 will deliver the vacant physical possession of
the said property at the time of full and final payment and registration
of concerned documents in favour of the purchaser.
8. If the Party No.1 could not execute this agreement to sell then the
Party No.1 will pay the double amount of the earnest money to Party
No.2 and if Party No.2 fails to pay the balance consideration amount
within the due date then the amount of earnest money will be forfeited
by Party No.1.
9. That Party No.1 has given his/her/their consent to the above
condition without any reservation.
10. That Party No.2 hereby, further confirms and declares that this
agreement is IRREVOCABLE and shall be final and binding on them,
their heirs, executors, administrators and assigns.
11. That both the parties will pay a commission of NIL% each to M/s
xxx
IN WITNESS WHEREOF BOTH THE PARTIES HAVE PUT
THEIR RESPECTIVE HANDS ON THIS AGREEMENT IN
PRESENCE OF THE FOLLOWING WITNESSES:-
WITNESSES:- sd/-
1. sd/- PartyNo.1 (SELLER)
2. sd/- sd/-
(PURCHASER)‖ PartyNo.2
(emphasis added)
12.(i) Clause 8 of the agreement to sell in the present case entitling
forfeiture of earnest money is no doubt similar to the clause which existed
in Satish Batra’s case (supra), however a reference to Clause 1 of the
agreement to sell shows that earnest money is only Rs.7,00,000/- and not
Rs.9,00,000/-. It is only Rs.7,00,000/- which is stated as earnest money in
Clause 1 of the agreement to sell and with respect to the other amount of
Rs.2,00,000/- it is stated that this is the 'balance amount'. Clause 2 of the
agreement to sell then states that the 'balance sale consideration' amount
would be Rs.22,50,000/- i.e parties understood that in case the agreement
to sell goes through then what has been paid in terms of Clause 1 of the
agreement to sell of Rs.7,00,000/- as earnest money will become part of
the price to be paid under the agreement to sell.
(ii) Therefore in my opinion in the facts of the present case
appellant/defendant cannot contend that earnest money amount was
Rs.9,00,000/- and therefore this Court holds that the earnest amount is
Rs.7,00,000/-.
13.(i) The issue to be decided then is that how much amount should the
appellant/defendant be held entitled to forfeit. As already stated above in
Satish Batra’s case (supra) besides holding that what is earnest money
depends on facts and circumstances of each case, and in Satish Batra’s
RFA No.216/2017 Page 21 of 38



case (supra) ten percent of the total sale consideration being Rs.7 lacs was
held in terms of the contractual clause to be entitled for being forfeited as
earnest money as in Satish Batra’s case (supra) the sale consideration was
Rs.70,00,000/-. When we see the facts of the present case it is seen that
the total sale consideration is Rs.31,50,000/- and ten percent of which
amount would therefore come to Rs.3,15,000/-. As already observed in
Satish Batra’s case (supra) by referring to the ratio of Videocon
Properties Ltd.’s case (supra) that merely because the amount is called as
earnest money it will not automatically become earnest money and what is
to be taken as the earnest money amount will depend upon the facts and
circumstances of each case with the intentions of the parties.
(ii) With respect to the amount being called as earnest money and
whether merely by that itself that the amount is called as earnest money it
will become earnest money, it is seen that what is material is not label of
the amount but the substance which has to be seen in view of the
observations made in Para 14 of the judgment of the Supreme Court in
Videocon Properties Ltd.’s case (supra) , which has been reproduced
above. I have also in the judgment in the case of Shri Sunil Sehgal vs.
Shri Chander Batra and Others , CS(OS) No. 1250/2006 decided on
23.9.2015 similarly held and have observed as under:-
"9. In the present case, defendants have led no evidence of any loss
caused to them, and therefore, assuming that plaintiff is guilty of
breach of contract, yet, the defendants cannot forfeit the amount of
Rs.15 lacs lying with them. A huge amount of Rs.15 lacs out of the
total sale consideration of Rs.79,50,000/- cannot in law be called
earnest money. By giving a stamp of ‗earnest money‘ to advance
price, the latter cannot become the former. What is to be seen is the
substance and not the label. Only a nominal amount can be said to be
earnest money and not an amount of Rs.15 lacs out of Rs.79.50 lacs,
by noting that if suppose an amount of Rs. 30 lacs or 40 lacs would be
called as earnest money by the parties, that would not take away the
fact that such amount cannot be earnest money but would in fact be
part of the price to be paid for sale." (underlining added)
(iii) I have also similarly held in the judgment passed in the case of
Bhuley Singh Vs. Khazan Singh & Ors. in RFA No. 422/2011 decided on
9.11.2011 and the relevant Para 5 of the judgment reads as under:-
"5. In my opinion, the appeal deserves to be allowed as the
appellant/plaintiff has rightly claimed a lesser relief of Rs.5,00,000/-
instead of a sum of Rs.10,00,000/- as claimed in the plaint and which
he is surely entitled to under Order 7(7) CPC. The Trial Court had
framed a specific issue being issue no.2 as to whether plaintiff was
entitled to recover Rs.5,00,000/- from the respondents/defendants paid
against the receipt dated 5.1.2007 and therefore the argument of the
counsel for the respondents/defendants that no issue was framed has
no force. Once there was a specific issue, this issue could well have
RFA No.216/2017 Page 22 of 38



been urged so that the appellant/plaintiff could claim a sum of
Rs.5,00,000/- from the respondents/defendants which was paid under
the agreement to sell as an earnest amount on the basis of the
undisputed position that the respondents/defendants did not plead or
prove that loss had been caused to them so as to entitle them to forfeit
the amount paid to them under the Agreement to Sell. The
Constitution Bench of the Supreme Court in the case of Fateh Chand
(supra) makes it more than clear that a mere breach of contract by a
buyer does not entitle the seller to forfeit the amount as received,
unless, loss is proved to have been caused to the prospective
sellers/defendants/respondents. The Supreme Court in the judgment of
Fateh Chand (supra) allowed forfeiture of amount of Rs.1,000/- out
of the amount paid of Rs.25,000/-. I may also note that nomenclature
of a payment is not important and what is important is really the
quantum of price which is paid. In the present case, the total price
payable for the suit property is Rs.20,00,000/- and therefore 25% of
the payment made s tricto sensu cannot be an earnest money, though it
has been called so. Only a nominal amount can be an earnest money,
inasmuch as, the object of such a clause is to allow forfeiture of that
amount to a nominal extent as held in the case of Fateh Chand
(supra). For example can it be said that 100% of the price or
75%/80% of the price or 50% of the price is earnest money so that it
can be forfeited. The answer surely is in the negative. Such high
amounts called earnest money will be in the nature of penalty and thus
hit by Section 74 of the Indian Contract Act, 1872 in view of Fateh
Chand’s case. The principles laid down in Fateh Chand’s case; that
forfeiture of a reasonable amount is not penalty but if forfeiture is of a
large amount the same is in the nature of penalty attracting the
applicability of Section 74; have been recently reiterated by the
Supreme Court in the case of V.K.Ashokan vs. CCE, 2009 (14) SCC
85 ." (underlining added)
I therefore hold that the appellant/defendant can at best seek to forfeit, in
accordance with the ratio in Satish Batra's case (supra), a sum of Rs. 3
lacs, and not a sum of Rs. 9 lacs as is claimed by the appellant/defendant,
but even this amount of Rs. 3 lacs cannot be allowed to be forfeited and
the reasons are given hereinafter.
14. At this stage this Court would like to observe with all humility that
there are apparently two views which the Supreme Court has taken in its
line of cases as regards entitlement to forfeit earnest moneys. Whereas
one view is the view which is the view taken by no less than a Constitution
Bench judgment of the Supreme Court in the case of Fateh Chand Vs.
Balkishan Dass AIR 1963 SC 1405 that forfeiture of earnest money can
only be of a nominal amount, and which was a sum of Rs. 1,000/- out of
the total sale price of Rs. 1,12,500/- in Fateh Chand’s case (supra) , and
that Supreme Court in this judgment has laid down the ratio that whenever
RFA No.216/2017 Page 23 of 38



a seller forfeits an amount paid by a buyer under an agreement to sell then
the source of right of forfeiture arises only because of Section 74 of the
Contract Act. It is held in Fateh Chand’s case (supra) that where a seller
pleads that there is a breach of contract by the buyer and the seller seeks to
forfeit an amount as paid by the buyer for being appropriated as designated
liquidated loss amount of damages as per contractual clause, then the act
of forfeiture is one which falls under Section 74 of the Contract Act.
Forfeiture of an amount paid under the agreement is by a seller who
already has with him moneys in his pocket and therefore there is no
requirement to file a suit to recover any amount from the buyer, however
the law with respect to entitlement of forfeiture arises only because the
forfeited amount is liquidated damages under Section 74 of the Contract
Act. That the forfeiture of earnest money is nothing but forfeiture of
liquidated damages is clearly so clarified by the recent judgment of the
Supreme Court in the case of Kailash Nath Associates Vs. Delhi
Development Authority and Another, (2015) 4 SCC 136 and relevant
paras of this judgment are paras 30 to 44 which read as under:-
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:
RFA No.216/2017 Page 24 of 38



―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
nonfulfillment 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 penalty. ….
RFA No.216/2017 Page 25 of 38



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
RFA No.216/2017 Page 26 of 38



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 penalty.
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
RFA No.216/2017 Page 27 of 38



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.
RFA No.216/2017 Page 28 of 38



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 held:
“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
RFA No.216/2017 Page 29 of 38



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.
RFA No.216/2017 Page 30 of 38



(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
compensation.”
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
RFA No.216/2017 Page 31 of 38



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:-
1. 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
compensation.
2. 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
3. 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.
4. The Section applies whether a person is a plaintiff or a defendant in
a suit.
RFA No.216/2017 Page 32 of 38



5. The sum spoken of may already be paid or be payable in future.
6. 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 awarded.
7 . 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." (emphasis added)
15. In sum and substance what is held by the Constitution Bench of the
Supreme Court in the cases of Fateh Chand (supra) and the recent
judgment in Kailash Nath Associates (supra) is that whenever there is a
breach of contract then earnest money which is forfeited because of the
breach, whether by a plaintiff or a defendant in a contract, the forfeiture is
of that amount which are in fact liquidated damages specified under a
contract and that for claiming damages under a contract, whether
liquidated under Section 74 of the Contract Act or unliquidated under
Section 73 of the Contract Act, existence of loss is a sine qua non . In
other words, if no loss is caused to a seller who has in his pocket monies
of buyer, then the seller can only forfeit a nominal amount unless the seller
has pleaded and proved that losses have been caused to him on account of
the breach of contract by the buyer. Once there is no pleading of loss
suffered by a seller under an agreement to sell, then large amounts cannot
be forfeited though so entitled to a seller under a clause of an agreement to
sell/contract entitling forfeiture of 'earnest money' because what is
forfeited is towards loss caused, and that except a nominal amount being
allowed to be forfeited as earnest money, any forfeiture of any amount,
which is not a nominal amount, can only be towards loss if suffered by the
seller. Thus if there is no loss which is suffered by a seller then there
cannot be forfeiture of large amounts which is not a nominal amount,
simply because a clause in a contract provides so. The following has been
held in the judgment in the case of Kailash Nath Associates (supra ):-
(i) As per the facts existing in the case of Kailash Nath Associates
(supra) the Single Judge of the High Court had held that since no
RFA No.216/2017 Page 33 of 38



damages were suffered by DDA therefore DDA could not forfeit the
earnest money. (Para 30 of Kailash Nath Associates's case (supra )).
(ii) The Division Bench of the High Court however set aside the
judgment of the Single Judge by holding that amount tendered as earnest
money can be forfeited because and simply forfeiture of amount called as
earnest money can be forfeited in terms of the contract. (Para 30 of
Kailash Nath Associates's case (supra) reproducing Para 39 of the
Division Bench judgment of the High Court).
(iii) Supreme Court in the case of Kailash Nath Associates (supra) as
per Para 44 of its judgment holds that the Division Bench of the High
Court had gone wrong in principle because compensation can be awarded
(where there is breach of contract) only if loss or damage is suffered i.e
where there is no loss or damage suffered as a result of breach of contract
no compensation can be awarded as law does not provide for a windfall i.e
large amounts though called contractually as earnest money cannot be
forfeited unless loss is pleaded and proved to have been suffered. These
observations have cross-reference to Para 34 of the judgment of Kailash
Nath Associates's case (supra) where with reference to the para of Fateh
Chand's case (supra) it is held that the language of Section 74 of the
Contract Act that 'whether or not damage or loss is proved to have been
caused by breach' is the language that such language only discharges proof
of actual loss but that does not justify award of compensation where in
consequence of breach no injury/loss has at all resulted.
(iv) Earnest money is an amount to be paid in case of breach of
contract, and named in contract as such, and that forfeiture of earnest
money is covered under the entitlement to liquidated damages under
Section 74 of the Contract Act vide Para 40 in the case of Kailash Nath
Associates (supra).
(v) The language of Section 74 of the Contract Act that "whether or
not actual loss or damage is proved to have been caused thereby" means
only that where it is difficult or impossible to prove loss caused by the
breach of contract then the liquidated damages/amount (being the amount
of earnest money) can be awarded vide Para 43(6) of Kailash Nath
Associates's case (supra) but where nature of contract is such that loss
caused because of breach can be assessed and so proved then in such cases
loss suffered must be proved to claim the liquidated damages of earnest
money. This finding has cross reference to Para 37 of judgment in
Kailash Nath Associates's case (supra) where the observations of
Supreme Court in Para 67 of the case of ONGC Ltd. Vs. Saw Pipes Ltd.
(2003) 5 SCC 705 are quoted that liquidated damages are awarded where
it is difficult to prove exact loss or damage caused as a result of breach of
contract.
(vi) Even where liquidated damages can be awarded under Section 74
of the Contract Act because loss or damages cannot be proved in a
contractual breach yet if the liquidated damages (earnest money) are a
RFA No.216/2017 Page 34 of 38



penalty amount by its nature i.e prescribed liquidated damages figure is
unreasonable, then for the liquidated damages amount or earnest money
amount forfeiture cannot be granted/allowed and that only reasonable
amount is allowed as damages with the figure of liquidated damages being
the upper limit vide Para 43(1) of Kailash Nath Associates's case (supra).
16. Similar ratio as has been laid down by the Supreme Court in
Kailash Nath Associates's case (supra) was also the ratio of the judgment
of the Supreme Court in the case of V.K. Ashokan Vs. Assistant Excise
Commissioner and Others (2009) 14 SCC 85 and paras 66 to 71 of this
judgment reads as under:-
"66. There is another aspect of the matter which cannot be lost
sight of. If damages cannot be calculated and the terms of the contract
provides therefor only for penalty by way of liquidated damages,
having regard to the provisions contained in Section 74 of the Indian
Contract Act a reasonable sum only could be recovered which need
not in all situations even be the sum specified in the contract. (See
Maula Bux vs. Union of India and Shree Hanuman Cotton Mills vs.
Tata Air Craft Ltd .)
67. Section 74 of the Contract Act reads as under:
" 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."
68. There are authorities, no doubt coloured by the view which was
taken in English cases, that Section 74of the Contract Act would have
no application to cases of deposit for due performance of a contract
which is stipulated to be forfeited for breach , e.g.,. Natesa Aiyar v.
Appavu Padayachi, Singer Manufacturing Company v. Raja
Prosad; Manian Patter v. The Madras Railway Company , but this
view no longer is good law in view of the judgment of this Court
in Fateh Chand vs. Balkishan Das .
69. This Court in Fateh Chand case observed at pp. 526-27 (of SCR):
― 10 . Section 74 of the Contract Act deals with the measure of
damages in two classes of cases ( i ) where the contract names a sum
to be paid in case of breach, and ( ii ) where the contract contains
any other stipulation by way of penalty. … The measure of
damages in the case of breach of a stipulation by way of penalty is
by Section 74 reasonable compensation not exceeding the penalty
stipulated for.‖
The Court also observed: (AIR p. 1411, para 11)
RFA No.216/2017 Page 35 of 38



― 11 . It was urged that the section deals in terms with the right to
receive from the party who has broken the contract reasonable
compensation and not the right to forfeit what has already been
received by the party aggrieved. There is however no warrant for
the assumption made by some of the High Courts in India, that
Section 74 applies only to cases where the aggrieved party is
seeking to receive some amount on breach of contract and not to
cases where upon breach of contract an amount received under the
contract is sought to be forfeited. In our judgment the expression
‗the contract contains any other stipulation by way of penalty‘
comprehensively applies to every covenant involving a penalty
whether it is for payment on breach of contract of money or
delivery of property in future, or for forfeiture of right to money or
other property already delivered. Duty not to enforce the penalty
clause but only to award reasonable compensation is statutorily
imposed upon courts by Section 74. In all cases, therefore, where
there is a stipulation in the nature of penalty for forfeiture of an
amount deposited pursuant to the terms of contract which
expressly provides for forfeiture, the court has jurisdiction to
award such sum only as it considers reasonable, but not exceeding
the amount specified in the contract as liable to forfeiture.‖
and that,
― 14 . … There is no ground for holding that the expression
‗contract contains any other stipulation by way of penalty‘ is
limited to cases of stipulation in the nature of an agreement to pay
money or deliver property on breach and does not comprehend
covenants under which amounts paid or property delivered under
the contract, which by the terms of the contract expressly or by
clear implication are liable to be forfeited.‖ (AIR p. 1412, para 14)
70. Forfeiture of earnest money under a contract for sale of property
whether movable or immovable, if the amount is reasonable , would
not fall within Section 74. That has been opined in several cases.
(See Kunwar Chiranjit Singh v. Har Swarup ; Roshan Lal v. Delhi
Cloth and General Mills Co. Ltd. ; Mohd. Habib-ullah v. Mohd.
Shafi ; Bishan Chand v. Radha Kishan Das .) These cases have
explained that 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.
71. 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 penalty. (See Maula
Bux and Saurabh Prakash v. DLF Universal Ltd. )"
(emphasis added)
RFA No.216/2017 Page 36 of 38



17. All the judgments of the Supreme Court which have been relied upon
in Satish Batra’s case (supra) are of a Bench strength lesser than the
Constitution Bench strength of the Supreme Court in Fateh Chand's case
(supra) and the law is well settled that it is the judgment of the larger Bench
of the Supreme Court which will prevail over the judgment of a Bench
strength of lesser number of judges. Also, as already stated above, in the
recent judgment in Kailash Nath Associates's case (supra) Supreme Court
has now clarified that a forfeiture of an earnest money necessarily falls under
Section 74 of the Contract Act i.e before forfeiture can take place it must be
necessary that loss must be caused. Also, Supreme Court has further clarified
in Kailash Nath Associates's case (supra) that it is very much possible that
forfeiture of an amount can be in the nature of penalty and if the amount
which is allowed to be forfeited under the contract is in the nature of penalty
then Courts are empowered to treat the amount of liquidated damages (earnest
money) as one in the nature of penalty clause and that earnest money amount
only represents the upper limit of damages which are allowed to be forfeited
in terms of the forfeiture clause, and actual forfeiture only of a lesser and a
reasonable amount should be allowed instead of the large amount/penalty as
stated under a contract as being entitled to be forfeited and that too merely
because a contractual clause allows such a forfeiture.
18.(i) In view of the aforesaid discussion, this appeal is allowed to a
limited extent that the appellant/defendant is held entitled to forfeit only a
nominal sum of Rs.50,000/- and not a sum of Rs.9,00,000/- as claimed by the
appellant/defendant inasmuch as no loss is pleaded and proved to be caused to
the appellant/defendant on account of the breach of the agreement to sell by
the respondent/plaintiff. The impugned judgment of the trial court therefore is
partly modified in that the judgment and decree in favour of the
respondent/plaintiff will be only of an amount of Rs.8,50,000/- and not
Rs.9,00,000/-. Also, in exercise of powers under Order XLI Rule 33 CPC,
and as prayed before this Court on behalf of the respondent/plaintiff, since the
trial court has not granted pre-suit interest, I hold that the impugned judgment
and decree which only grants pendente lite and future interest will be
modified in view of the judgment of the Supreme Court in South Eastern
Coalfileds Ltd. Vs. State of M.P. and Others (2003) 8 SCC 648 (as per paras
21 and 22 thereof) that the respondent/plaintiff will be entitled to interest at
the rate granted by trial court of 12% per annum from the date of the
agreement to sell being 15.9.2005 till the filing of the suit also i.e
respondent/plaintiff will be entitled to interest at 12% per annum on the
amount of Rs.8,50,000/- from 15.9.2005 till the filing of the suit, and
thereafter pendente lite and future till payment. Decree sheet be drawn
accordingly.
(ii) Amount deposited by the appellant/defendant in this Court in terms of
the order dated 12.9.2017 be paid to the respondent/plaintiff by the Registry of
this Court in appropriate satisfaction of the present judgment and since the
amount deposited in this case by the appellant/defendant is not sufficient for
satisfaction of the judgment and decree passed today in favour of the
respondent/plaintiff, the respondent/plaintiff is always at liberty to initiate
RFA No.216/2017 Page 37 of 38



execution proceedings for recovery of the balance amount against the
appellant/defendant.‖
10. Therefore the respondent/defendant can at best forfeit a
reasonable and nominal amount only, and not the complete amount of
Rs.6 lacs especially as observed in para 18(i) of the judgment in the case
of M.C. Luthra (supra), and therefore it is held that the
respondent/defendant can only forfeit a sum of Rs.50,000/- out of the
total sum of Rs.6 lacs, and the appellant/plaintiff thus is held to be
entitled to a money decree for a sum of Rs.5.50 lacs. In accordance with
the ratio of the judgment of the Supreme Court in the case of South
Eastern Coalfileds Ltd. Vs. State of M.P. and Others (2003) 8 SCC 648,
as referred to in para 18(i) of the judgment in the case of M.C. Luthra
(supra), the appellant is also entitled to interest @ 12% per annum
simple.
11. In view of the aforesaid discussion, this appeal is allowed.
Appellant/plaintiff is granted a money decree against the
respondent/defendant for a sum of Rs.5.50 lacs alongwith interest @
12% per annum pendente lite and future till realization of the decretal
amount. Parties are left to bear their own costs. Decree sheet be
prepared.
JULY 30, 2018/ NE VALMIKI J. MEHTA, J
RFA No.216/2017 Page 38 of 38