1. The challenge by means of this Regular First Appeal filed under Section 96 of the Code of Civil Procedure (CPC), 1908 is to the impugned judgment of the Trial Court dated 16.5.2011. By the impugned judgment, the Trial Court dismissed the suit of the appellant/plaintiff/proposed buyer for recovery of `10,00,000/- paid under an agreement to sell dated 4.11.2006 with respect to property bearing no. WZ-49B (admeasuring 300 square yards), Khasra No.144-145 , Village Palam, Delhi.
2. Learned counsel for the appellant/plaintiff has argued the appeal with reference to the Constitution Bench judgment of the Supreme Court reported as Fateh Chand Vs Balkishan Dass, (1964) 1 SCR 515; AIR 1963 SC 1405, wherein the Supreme Court has said that even if the buyer is guilty of breach of performance of an agreement to sell, however, seller cannot forfeit the earnest money received under the agreement to sell, as the forfeiture is hit by Section 74 of the Indian Contract Act, 1872 being in the nature of the penalty and forfeiture cannot take place unless loss is pleaded and proved by the seller. Paragraphs 8, 10, 15 and 16 of the judgment in the case of Fateh Chand (supra) are relevant and read as under:
8. The claim made by the plaintiff to forfeit the amount of Rs 24,000 may be adjusted in the light of Section 74 of the Indian Contract Act, which in its material part provides:- “When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be, the penalty stipulated for.”
The section is clearly an attempt to eliminate the sometime elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.
10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of “actual loss or damage”; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
15. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties pre- determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression “to receive from the party who has broken the contract” does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract. The court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of the breach.
16. There is no evidence that any loss was suffered by the plaintiff in consequence of the default by the defendant, save as to the loss suffered by him by being kept out of possession of the property. There is no evidence that the property had depreciated in value since the date of the contract provided; nor was there evidence that any other special damage had resulted. The contact provided for forfeiture of Rs 25,000 consisting of Rs, 1039 paid as earnest money and Rs 24,000 paid as part of the purchase price. The defendant has conceded that the plaintiff was entitled to forfeit the amount of Rs 1000 which was paid as earnest money. We cannot however agree with the High Court that 13 percent of the price may be regarded as reasonable compensation in relation to the value of the contract as a whole, as that in our opinion is assessed on an arbitrary assumption. The plaintiff failed to prove the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to find any principle on which compensation equal to ten percent of the agreed price could be awarded to the plaintiff. The plaintiff has been allowed Rs 1000 which was the earnest money as part of the damages. Besides he had use of the remaining sum of Rs 24,000, and we can rightly presume that he must have been deriving advantage from that amount throughout this period. In the absence therefore of any proof of damage arising from the breach of the contract, we are of opinion that the amount of Rs 1000 (earnest money) which has been forfeited, and the advantage that the plaintiff must have derived from the possession of the remaining sum of Rs 24,000 during all this period would be sufficient compensation to him. It may be added that the plaintiff has separately claimed mesne profits for being kept out possession for which he has got a decree and therefore the fact that the plaintiff was out of possession cannot be taken, into account in determining damages for this purpose. The decree passed by the High Court awarding Rs.11,250 as damages to the plaintiff must therefore be set aside. (Underlining added)
3. It is therefore clear that a seller under an agreement to sell, when he has received monies under the agreement to sell, cannot forfeit such amount, unless loss is pleaded and proved by him. It is the respondents/defendants who have to plead and prove entitlement to forfeiture on account of loss having been caused on account of breach of contract by the appellant/plaintiff/proposed buyer. Thus, even assuming the appellant/plaintiff/proposed buyer is guilty of breach of contract, yet, the respondents/defendants will have to raise appropriate pleadings with respect to loss, get an issue framed, and thereafter lead evidence on such issue to show that losses have been caused to them on account of breach of the agreement to sell by the appellant/plaintiff/proposed buyer, entitling the forfeiture of the amount.
4. The case of the appellant/plaintiff was that the total sale consideration for the property was `60,00,000/-, out of which a sum of `10,00,000/- was paid. Though, initially certain cheques, which were issued by the appellant/plaintiff, bounced however, subsequently the appellant/plaintiff paid the amount of `7,00,000/- in cash, making a total payment of `10,00,000/- under the agreement to sell.
5. It is urged on behalf of the respondents/defendants, by their counsel in this Court, that the respondents/defendants only received a sum of `7,00,000/- and not a sum of `10,00,000/-. It is urged that even this amount of `7,00,000/- is entitled to be forfeited by the respondents/defendants on account of breach of contract by the appellant/plaintiff.
6. Indubitable position which has emerged from the record is that there is no pleading of the respondents/defendants of any loss having been caused on account of breach of contract by the appellant/plaintiff. There is also no issue framed on this aspect. There is also obviously no evidence led on behalf of the respondents/defendants as to how the breach of contract by the appellant/plaintiff has caused loss to the respondents/defendants entitling them to forfeit the amount. In my opinion, therefore, in view of the ratio of the Constitution Bench judgment of the Supreme Court in the case of Fateh Chand (supra), the respondents/defendants are not entitled to forfeit the huge amount of `10,00,000/-.
7. Learned counsel for the respondents/defendants sought to argue that the liability should only be fixed on the respondents/defendants for a sum of `7,00,000/- as an amount of `3,00,000/- was paid to the property broker for entering into the subject transaction. Besides the fact that one of the property broker is none else than the maternal uncle of the respondents/defendants, however, this issue is immaterial, inasmuch as, in the Trial Court it has been proved by the appellant/plaintiff that a sum of `10,00,000/- was received by the respondents/defendants under the agreement to sell and if the respondents/defendants made some payment to a broker the same is a matter between the respondents/defendants and their broker, and that cannot mean that `10,00,000/- is not received by the respondents/defendants. The payment of `10,00,000/- to the respondents/defendants is proved on behalf of the appellant/plaintiff, inter alia, by the admission of the respondents/defendants in the notice dated 24.2.2007, Ex.DW1/P4 sent by the respondents/defendants, and in which notice, the respondents/defendants have claimed balance payment of `50,00,000/-. Since the total consideration is admittedly `60,00,000/-, claiming of balance payment of `50,00,000/- is a clear cut pointer to the respondents/defendants having received `10,00,000/-. An admission by a person is the best proof of a disputed fact. I therefore do not find any error in the impugned judgment holding that the respondents/defendants had, in fact, received a sum of `10,00,000/-.
8. The argument of the learned counsel for the respondents/defendants that the present case does not fall under Section 74 of the Indian Contract Act, 1872 is quite clearly misconceived inasmuch as a claim to forfeit the amount is clearly a claim in the nature of liquidated damages falling under Section 74 of the Indian Contract Act, 1872. This issue is no longer res integra, in view of the decision in the case of Fateh Chand (supra). However, since the judgment in the case of Fateh Chand (supra) allows for forfeiting of a nominal amount, I would therefore hold that the respondents/defendants are entitled to forfeit a sum of `50,000/-, out of the total payment of `10,00,000/- received by the respondents/defendants.
9. In view of the above, the appeal is allowed. The impugned judgment and decree is set aside. The suit of the appellant/plaintiff will stand decreed against the respondents/defendants for a sum of `9,50,000/- along with interest at 12% per annum simple from 24.2.2007 till payment. Parties are left to bear their own costs. Decree sheet be prepared. Trial Court record be sent back.
VALMIKI J. MEHTA,J NOVEMBER 28, 2011 ak
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