Delhi High Court
Rama Associates (P) Ltd. vs Delhi Development Authority And Anr. on 1 July, 1998
Equivalent citations: 74(1998)DLT653
Author: K. Ramamoorthy
Bench: K. Ramamoorthy
JUDGMENT K. Ramamoorthy, J.
1. The plaintiff has filed the suit for recovery of Rs. 60,79,8757- with interest @ 18% per annum from the date of suit till the date of realisation. The plaintiff claims the amount on the basis that a sum of Rs. 46.50 lakhs was paid to the DDA at the time of auction on 12.3.1982 of commercial plots in Asaf AliRoad, New Delhi. The DDA represented that the plot was within Slum Area and, therefore, the FAR was 400 and the plans to be submitted by the plaintiff would be approved. According to the plaintiff, as per the Master Plan, the plot was outside Slum Area and, therefore, the whole basis of the auction was contrary to law and consequently the plaintiff would be entitled to the return of the sum of Rs. 46.50 lakhs even though the bid amount of Rs. 1.86 crores was accepted by the DDA by its letter dated 13.3.1982.
2. The DDA put forth the plea that it had acted in accordance with the Rules and Regulations and the land was within Slum Area and there was no misrepresentation by the DDA and it was the plaintiff who committed the breach of the terms and conditions of the auction and therefore, by virtue of Clause 2(iv) the sum of Rs. 46.50 lakhs which was given as earnest by the plaintiff on the date of auction stood forfeited. In the above back drop, I propose to highlight the pleadings without extracting in detail the averments in the plaint, written statement and the replication. In paragraph 4 of the amended plaint, the plaintiff stated that the architectural control drawings were not exhibited at the time of auction. In paragraph 7A it is stated that the auction of the plot No. 9 was totally illegal. The plot did not fall under the Slum Area and, therefore, the auction was not authorised. The plaintiff was supplied with architectural control drawings on 15.10.1982 and the delay in supplying drawings had resulted in heavy loss to the plaintiff because the plaintiff could not deal with the intending purchasers with dispatch. The architectural control drawings were not in accordance with the Building Bye-Laws by Delhi Municipal Corporation. The plot was not auction able for commercial and office building as the space could be utilised only for common path and passage. The plaintiff had referred to in paragraph 12 dharna staged by certain persons in the locality and also a civil suit pending in the lower Court. In paragraph 17, it is stated that the plaintiff informed the DDA that the auction of the plot was not in accordance with the Master Plan for Delhi and the Bye-Laws of Delhi Municipal Corporation. The plaintiff no doubt, asked for extension of time to make payment. The plaintiff wrote on 14.5.1982 for extension because of the agitation by dharna by local residents the plaintiff could sell and there was no reply to this letter by the DDA. Eventually the plaintiff asked for return of the sum of Rs. 46.50 lakhs. According to the plaintiff when the auction itself was not authorised the DDA cannot seek to appropriate there in sum of Rs. 46.50 lakhs and it was the DDA who brought about the situation and, therefore, the plaintiff was entitled to the return of the money.
3. The DDA filed the written statement refuting the averments in the plaint. Briefly, the case of the DDA could be set out in the following terms.
The commercial set up of Asaf Ali Road was developed by Delhi Improvement Trust before 1956. That was developed as a part of Delhi Ajmari Gate Redevelopment Scheme in the year 1946. The strip of land 294.50 sq. mts. between Life Insurance Corporation Building and the Hoechst Building form part of Chunk No. 7 of the D.A-G, Scheme and the area could not be developed because already there was built up area and there was resistance to clearance operation. There was a notification on 10.4.1957 notifying this area as Slum under the slum Areas (Improvement & Clearance) Act, 1956. The area was cleared in the year 1976. A Redevelopment Plan for this pocket was prepared by the Slum Department under Section 11 of the Slum Areas (Improvement & Clearance) Act, 1956 and it was put into operation in the year 1977. Five out of ten plots were auctioned by the Slum Department, DDA on 12.3.1982. Detailed terms and conditions were furnished by the office of the Jr. Town Planner (Slum). The plaintiff bid at the auction, deposited 25% of the bid amount Rs. 46.50 lakhs and the same was accepted on 13.3.1982. The plaintiff wrote to the DD A about agitation and the DD A replied by stating that there was no agitation, and it had been withdrawn and the plaintiff was assured about the vacant possession on the plaintiff's paying bid money. The plaintiff on 14.5.1982 requested for extension of three months' time and that was granted by the DDA by letter dated 20.8.1982 upto 29.8.1982. The plaintiff did not pay the amount. The forfeiture of the earnest money was communicated to the plaintiff on 28.3.1983. The plaintiff is estopped by its own conduct to challenge validity of the auction when it had acted as per the terms and conditions with reference to plot No. 10. According to DDA, the architectural control drawings were exhibited at the time of auction. The contract provided for furnishing of architectural control drawings on payment of money to the successful bidder. The plaintiff did not apply for the supply of architectural control drawings for plot No. 9 while the plaintiff had taken architectural control drawings for plot No. 10. For reasons best known to it, the plaintiff did not apply for the drawings for plot No. 9. Regarding the plea that the drawings were contrary to the Master Plan and the Delhi Municipal Corporation Bye-Laws by the plaintiff, the answer by the DDA is that under Section 39 of the Slum Areas (Improvement & Clearance) Act, 1956 the DDA can act under Section 53 of the Delhi Development Authority Act has absolutely no application. It is stated "the commercial area of 10 plots in the Re-development Scheme was provided with open space/ parks in such a manner that the total sum of the FAR of 10 plots did not exceed 300. However, it is also reiterated that in view of the provisions of Section 53 of the Delhi Development Authority Act and Section 39 of the Slum Areas (Improvement & Clearance) Act, 1956 the Competent Authority under the Slum Act could permit construction of buildings even with higher FARs." DDA stated that it had not acted against the Scheme and the Master Plan. It is specifically stated in paragraph 11 of the written statement:
"The said area falls in Zone A-13 of the Master Plan in Municipal Ward No. VIII for which a redevelopment scheme had been prepared under Section 11 of the Slum Areas (Improvement & Clearance) Act, after clearing the area of the buildings in the year 1976. It is emphatically denied that the redevelopment plan prepared Competent Authority under the Slum Areas (Improvement & Clearance) Act, 1956 in any way infringed the Master Plan, Zonal Plan of Zone A-13 or the Municipal Building By-laws or any provisions made there under. The disputed land never formed a part of the green area shown in the Zonal development plan of Zone A-13 as already stated above. Therefore, the question of disposal of this green area by the Slum Department in violation of the Zonal Development Plan or any other plan did not arise."
4. On these averments, the case of the DDA is that the plaintiff committed breach of the terms and, therefore, it is not entitled to the return of the sum of Rs. 46.50 lakhs. It is also stated that the plaintiff is not entitled to any interest.
5. On the pleadings of the parties, the following issues were framed on 9.10.1985 for trial:
1. Whether the plaintiff is a Limited Company and M/s. Essels Properties and Industries is its security and Shri Lakshminarayan is its Director competent to sign, verify the plaint and to file the suit?
2. Whether the supply and exhibition of architectural control drawings to bidders prior to auction is an integral part of the sale by auction. If so, has the defendant violated it or the terms and conditions of auction regarding the sale of Plot No. 9?
3. Whether the architectural control drawings were not exhibited or furnished as per the terms and conditions of auction?
4. Whether the architectural control drawings were not in accordance with the Municipal Bye-laws, the master or the Zonal Plan as alleged? If so, its effect?
5. Whether plot No. 9 in question falls under the Slums Area (Improvement and Clearance) Act, 1965? If so, its effect?
6. Whether the said plot which was shown in the Master Plan as a main street/totlot, could not be auctioned by the defendant for commercial and official buildings without changing the land use from residential to commercial, as per Master Plan?
7. Whether the said plot could not be auctioned with a declaration that permissible Floor Area Radio (FAR) is 400?
8. Whether the defendants had no right to confiscate/forfeit of earnest money of over Rs. 46.50 lakhs when there was an injunction against the plaintiff and the defendants for maintaining status-quo in Suit No. 89/82 filed before the Sub-judge?
9. Whether there is any practice of making payment of balance auction money dependent on plaintiff's negotiations with prospective purchasers and are the defendants bound by it?
10. Whether the plaintiff waived their right to sue, aquieres in the terms and conditions of auction and are estopped from challenging the validity of auction as per preliminary objections in the written-statement? If so, its effect?
11. Whether the defendants are liable to refund the earnest money as claimed?
12. Whether the plaintiffs are entitled to interest as claimed? If so, at what rate?
13. Relief.
6. The oral evidence adduced by the parties is very scanty. No doubt, the plaintiff did not examine anybody from the Company. Plaintiff had to establish the only fact that it had paid the amount. It is for the DDA to establish as the facts are within the knowledge of the DDA by producing necessary and cogent evidence that it had the authority to auction the plot as it had come within the Slum Area proposing the FAR at 400 and the strip could be auctioned and it was not earmarked for auction and the strip of land is not for common use like street, passage. Plaintiff exhibited Ex. P.1 to P.34. DDA exhibited Ex.D.1 to D.32 and D.33 to D.35 at the time of arguments on 29.11.1997.
7. Mr. Basant Sharma was examined as P.W.I by the plaintiff. He was an Accountant in the plaintiff Company from 1979 to April, 1990. He has spoken to the incorporation of the Company and the resolution of the Company authorising Laxmi Narain to institute the suit. Through him/ documents Ex. PW1/1, which is certificate of incorporation, Ex. PW1 /2 document showing that Essel Property is the security of the plaintiff Company and Ex. PW1 /3 resolution of the Company passed on 27.9.1983 giving authorisation to Mr. Laxmi Narain.
8. Mr. V.K. Bedi was examined as P.W.2, who is stated to be an Architect. According to him, he had passed National Diploma Course in Architecture in the year 1974. According to him, the architectural control drawings were not displayed at the time of auction. He would state that the notice of auction for 12.3.1982 (Ex. PW2/2) was seen by him before the auction.
9. Mr. R.M. Lal was examined as P.W.3. He was Dy. Director (Building) of Delhi Development Authority. I shall refer his evidence at the appropriate time.
10. P.W. 4 Mr. Manohar Lal Gosain is stated to be a property agent. According to him, "my interest was that if somebody bid at these auctions, then he would be a potential target for a flat booking." He would state that plot No. 9 could not be constructed upon because DDA did not give plans.
11. D.W. 1 Mr. Mahender Kumar was examined by DDA. He was a lower Division Clerk in March, 1982. His evidence is not at all helpful and he has not been able to give any facts relevant to the points at issue. Therefore, it is not necessary to dwell at length on the evidence of D.W.I. 12. Enough has been stated on facts. I have to now turn to the point of law raised by the parties on the construction and the affect of clause 2(iv) of the terms and conditions of Auction of Commercial Plots Ex. P.7. Clause 2 in Ex. P.7 reads as under:
"Bidding at Auction and Submission of Application.
(i) The officer conducting the auction, may without assigning any reason, withdraw all the plots or any one or more of them from the auction at any stage. The bid shall be for the amount of the premium for the perpetual leasehold rights for the plot. The bid shall not be revocable by the highest bidder for a period of 30 days from the date of auction.
(ii) The highest bidder shall, at the fall of the hammer, pay to the Delhi Development Authority (Slum Wing) through the officer conducting the auction, 25% of the bid amount as earnest money either in cash or by Bank Demand Draft in favour of Director (Slum), Delhi Development Authority. If the earnest money is not paid, the auction held in respect of that plot will be cancelled.
(iii) The highest bid shall be subject to the acceptance of Chairman, DDA or such other officer(s) as may be authorised by him on his behalf. The highest bid may be rejected without assigning any reason.
(a) The areas announced are only approximate and that persons whose bids are accepted should be prepared to accept a variation adjustment of cost in proportion to the land of the accepted bid.
(iv) In case of default, breach or non-compliance of any of the terms and conditions of the auction or failure to take over the possession of the plot when asked to do so or misrepresentation by the bidder and /or intending purchaser, the earnest money shall be forfeited.
Provided that if a request is made by the successful bidder/purchaser for the surrender of the plot purchased in auction, the earnest money shall be refundable subject to the following conditions:
(a) In the event of a request received after the expiry of 7 days from the date of the issue of demand letter, 5% of the premium or loss in reauction whichever is more.
All such applications are to be delivered personally to the Dy. Director (P&R), Slum Wing, D.D.A. or through Registered Post.
Provided further that the Lt. Governor may refund on compassionate grounds and, in exceptional circumstances as the death of the earning member, serious ailment or loss of job, a portion or whole of the earnest money with or without any condition. The successful bidder shall submit a duty filled-in application in the form attached immediately after the close of the auction of plot in question.
(v) When the bid is accepted by the D.D.A., the intending purchaser shall within three months from the date of acceptance of the bid or within 60 days from the date informing the intending purchaser of the acceptance of the bid by registered letter, whichever is earlier, pay to the Director (Slum), Delhi Development Authority. The balance 75% amount of the bid in cash or by Bank Draft.
If the bid is not accepted, the earnest money will be refund to the intending purchaser without any interest unless the earnest money is forfeited under para 2(iv) above.
(vi) Physical possession of the plot shall be handed over only after the full amount of the bid is paid by the intending purchaser."
13. The case of the plaintiff is that one lump sum payment of Rs. 46.50 lakhs had been paid and Clause (iv) is in the nature of penalty. If it is intended to be a pre-estimate of damages suffered by the defendant in the event of default by the plaintiff, the defendant cannot forfeit the entire sum of Rs. 46.50 lakhs. The defendant is bound to prove by letting in sufficient evidence to prove, it sustained damages. The plot is with the defendant and it can always bring it auction and having regard to the market conditions the defendant will always realise the correct market value of the property.
14. The case of the first defendant is that on a proper interpretation of Sub-clause (iv) in the event of default by the plaintiff the defendant is entitled to forfeit the earnest money deposit of Rs. 46.50 lakhs and in law the first defendant is not bound to prove any loss to claim damages from the plaintiff.
15. This question about the right of a party to a contract to forfeit the deposit or earnest money paid pursuing to contract for sale of land has been troubling Courts in England and in India. In early 18th Century the point was discussed by Courts in England and it had not taken crystalizing form which could be put in a comprehensive way. It was perhaps for the first time in England the Court of Appeal had to deal with the question in HOWE v. Smith, 1884 (27) Chancery Division 89. The auction was for specific purpose of a contract for sale of freehold land. The contract was on 24.3.1881. The plaintiff HOWE agreed to purchase the premises for 12,500 pounds. 500 pounds was paid on the date of the signing of the agreement as a deposit in part payment of the purchase money. The balance was to be paid on 24.4.1881. It was further agreed that if the purchaser failed to comply with the terms of the agreement, the vendor was at liberty to resell the property and if there was any deficiency on such sale the same should be made good by the purchaser and that will be recoverable as liquidated damages. The transaction was being delayed by the purchaser. The vendor on the 20th of June, 1881 agreed for extension of time by a month but at once warned the agreement vendee that unless the purchase money was paid he would resell the property. On the 25th of July, 1881 the vendor brought the action for specific performance. On the 31st of January, 1882 the vendor sold the property to a third party at the original price. The defense was that there was delay on the part of the purchaser.
16. The plaintiff sought an amendment of the action introducing the claim of the claim of the return of the deposit. The Court declined to grant the relief of specific performance but with reference to the return of the deposit the Court had to consider the matter. The Court noticed that the contract contained no clause at all as to what was to be done with the deposit if the terms of the contracts were not adhered to by the purchaser. Cotton, L.J. observed:
"What are the facts here? The contract was to be performed accord ing to their arrangement on the 24th of April. It is not necessary now to enter into the question how far time would be considered as of the essence of the contract, because since the Judicature Acts, when the question whether time is of the essence of the contract arises, all contracts must be governed by the rules of Equity concerning that subject.
What took place was this. Not only was the contract not performed on that day, but there was a delay from time to time, the purchaser asking for, and at one time, under terms of payment of costs, obtaining an extension of the time. He obtained it knowing that the vendor considered it of importance, as it was of importance, that the contract should be performed, if not to the very day, at least within a reasonable time. It was not performed within a reasonable time, and from the conduct of the purchaser, as I read the letters and understand what took place, I come to the conclusion that he never was up to, and even at, the time when he brought this action, ready with the money to perform the contract. He was not ready with the money in order to purchase the estate, and at the time when the action was commenced if the vendor had said, "Where is your money? Produce it, and then I will make the conveyance," he would not have been able to produce the money.
In my opinion, without at all laying down that whenever the Court refuses specific performance it will allow the vendor to retain the deposit, in this case and under this contract the purchaser has so acted as to repudiate on his part the contract, and he cannot under those circumstances take advantage of his own default to recover this deposit from the vendor. Therefore on this point also the appeal fails."
Bowen, LJ. observed:
"The question as to the right of the purchaser to the return of the deposit money must, in each case, be a question of the conditions of the contract. In principle it ought to be so, because of course persons may make exactly what bargain they please as to what is to be done with the money deposited. We have to look to the documents to see what bargain was made. If any authority were wanted to prove that in each case it is a question of construction (I do not think it is wanted) it would be found in Palmer v. Temple (1), the case to which Lord justice Cotton has referred, and which--whatever may be the value of the case as an authority on the construction of the contract in that case, as to which I agree with everything that has fallen from Lord Justice Coitton adopts the principle that in each case we must consider what was the bargain. At page 520 there is this observation: "The ground on which we rest this opinion is, that in the absence of any specific provision, the question, whether the deposit is forfeited, depends on the intent of the parties to be collected from the whole instrument,"
In the present case we have in the first place, turning to the language of the instrument, a description of the manner in which the money is staked or deposited. It is a deposit, and it is to be both a deposit and in the nature of part payment, and there is further a special clause in the contract at which we ought to look to see if any light is thrown by it on the language of the provision that the money is deposited as a deposit.
We may however pass by that special clause, for I think it does not really deprive the deposit in this case of the character which it would bar if there were no special clause--because, in my opinion, that clause merely fixes the amount which the vendor is to receive in the event of his insisting on his rights under the special clause. We have therefore to consider what in ordinary parlance, and as used in an ordinary contract of sale, is the meaning which business persons would attach to the term "deposit". Without going at length into the history, or accepting all that has been said or will be said by the other members of the Court on that point, it comes shortly to this, that a deposit, if nothing more is said about it, is, according to the ordinary interpretation of business men, a security for the completion of the purchase? But in what sense is it a security for the completion of the purchase? It is quite certain that the purchaser cannot insist on abandoning his contract and yet recover the deposit, because that would be to enable him to take advantage of his own wrong."
he learned Judge further observed :
"It does not follow as a matter of law on principle that because specific performance is refused therefore the whole contract is at an end in law. We have to look to the conduct of the parties and to the contract itself, and, putting the two things together, to see whether the purchaser has acted not merely so as to break his contract, but to entitle the other side to say he has repudiated and no longer stands by it.
Now, looking to see whether the conduct of the purchaser has not in the present instance brought him within that definition, I think it is impossible, viewing the case from first to last, to doubt that he has so dealt with his bargain as to give the vendor a right to allege, if he chooses so to say, that the contract is at an end, that the purchaser has receded from the bargain, and that the deposit money is liable to be retained by the vendor. Therefore the appeal fails."
Fry, L.J. observed :
"On the other hand, in Coilms v. Stirsn (2), Baron Pollock said:
"According to the law of vendor and purchaser the inference is that such a deposit is paid as a guarantee for the performance of the contract, and where the contract go off by default of the purchaser, the vendor is entitled to retain the deposit."
These authorities appear to afford no certain light to answer the inquiry whether, in the absence of express stipulation, money paid as a depositon, the signing of a contract can be recovered by the payer if he has made such default in performance of his part as to have lost all right to performance by the other party to the contract or damages for his own non-performance.
Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.
The practice of giving something to signify the conclusion of the contract, sometimes a sum of money, sometimes a ring or other object, to be repaid or redelivered on the completion of the contract, appears to be one of great antiquity and very general prevalence."
The learned Judge further observed :
"Taking these early authorities into consideration, I think we may conclude that the deposit in the present case is the earnest or anha of our earlier writers; that the expression used in the present contract that the money is paid "as a deposit and in part payment of the purchase-money," relates to the two alternatives, and declares that in the event of the purchaser making default the money is to be forfeited, and that in the event of the purchase being completed the sum is to be taken in part payment."
The learned Judge posited ultimately:
"Such being my view of the nature of the deposit, it appears to me to be clear that the purchaser has lost all right to recover it if he has lost both his right to specific performance in equity and his right to sue for damages for its non-performance at law."
Therefore, the Court was concerned with a situation where in a contract there was no right in the vendor to forfeit the deposit in case of default by the purchaser.
17. In Commissioner of Public Works v. Hills, (1906) Appeal Cases 368, a judgment by the Privy Council, the Privy Council was dealing with an appeal from the Supreme Court of the Cape of Good Hope. There the Privy Council was concerned with the construction contract with the Government. There was a clause in the contract that 10% of the amount should be retained by the Government from the payments falling due and the Government was entitled to retain the money in case of any default on the part of the contract. What was argued on behalf of the Government was that the sum mentioned was in the form of liquidated damages for non completion of the work within the specified time. The Privy Council observed:
"Their Lordships have no doubt that the case of the non-completion of a railway would be a natural and proper case in which to make such a stimulation. But the question arises in each particular case whether such a stipulation has been made, and it is well settled law that the mere form of expression "penalty" or "liquidated damages" does not conclude the matter. Indeed, the form of expression here, "forfeited as and for liquidated damages," if literally taken, may be said to be self-contradictory, the word "forfeited" being peculiarly appropriate to penalty, and not to liquidated damages."
Reference was to Clydebank Engineering and Ship Building Co. v. Don Jose Ramos Yzuier do y Castaneda, (1) 1905 A.C. 6 and the Privy Council observed :
"The general principle to be deduced from that judgment seems to be this, that the criterion of whether a sum--be it called penalty or damages--is truly liquidated damages, and as such not to be interfered with by the Court, or is truly a penalty which covers the damage if proved, but does not assess it, is to be found in whether the sum stipulated for can or cannot be regarded as a "genuine pre-estimate of the creditor's probable or possible interest in the due performance of the principal obligation."
The Privy Council expressed the view in 1906 A.C. that when the word forfeited is used that would apply only to a penalty and not liquidated damages.
18. The House of Lord had to consider the question in 1889 in Soper (Pauper) v. Arnold and Another, 14 Appeal Cases 429. The appellant before the Court instituted an action for the recovery of 610 pounds paid as deposit to the Trustees of Will of late Arnold whereby the trustees agreed to sell property concerned in the action to the appellant for sum of 6100 pounds. As the appellant did not act in terms of the contract, the appellant sought to recover the sum paid as deposit. The Court dismissed the action. Lord Herschell referring to the six aspects of the matter observed :
"The deposit is given as a security for the performance of the contract. The appellant admittedly cannot recover that deposit if it was through his default that the transaction was not completed. And, under the circumstances which I have detailed, I cannot doubt that it must be regarded as a contract uncompleted through the default of the appellant. As I have said he took no exception to the title--he was willing to take that title--he had intimated his willingness to take it by accepting and approving of it, and the vendors were ready and willing to convey to him that title which he had so intimated his willingness to accept. But he, although he did not object to the title at all, was not prepared to carry out his contract, he had not the means, and that became known to the vendors. Thereupon they, after due notice, determined the contract as against him.
Now, my Lords, when an action is brought by the appellant to recover the deposit and the objection is taken that the vendors were not able to make out what is in law a complete and perfect title the answer seems to me to be this, that the vendors were perfectly ready and willing to convey to the appellant that title which he had accepted and approved and declared himself willing to take, and the contract only went off because he afterwards was not in a position or prepared to carry it out on his part."
Lord Macnaghten observed :
"The deposit serves two purposes--if the purchase is carried out it goes against the purchase--money-but its primary purpose is this, it is a guarantee that the purchaser means business; and if there is a case in which a deposit is rightly and properly forfeited it is, I think, when a man enters into a contract to buy real property without taking the trouble to consider whether he can pay for it or not."
The House of Lords upheld the right of the vendor to forfeit the deposit which was 10% of the sale price. The House of Lords proceeded on the basis that the contract provided for forfeiture the Court cannot do anything.
19. The Chancery Division had to consider the point in Halt v. Burnell, (1911) 2 Chancery Division,- 551. There the contract did not provide the vendor with a right to forfeit. The Court observed :
"The deposit paid upon a contract between vendor and purchaser is in the nature of an earnest or guarantee for the fulfillment of the contract as well as a part payment of the purchase-money, and a vendor obtaining rescission owing to default in completion by the purchaser is entitled to deposit, in the absence of any express stipulation to the contrary in the contract."
20. In Rowland Valentine Webster v. William David Bosanquet, (1912) Appeal Cases 394, the Privy Council had occasion to deal with the construction of a contract for supply of certain goods. The contract provided for payment of a particular amount by way of liquidated damages. The argument on behalf of the defendant resisting the recovery of the liquidated damages was what was stipulated in the contract was in the nature of a penalty and, therefore, the plaintiff cannot seek to recover the same. The Supreme Court of Colombo took the view that what was stated in the contract was in the nature of penalty. That was challenged before the Privy Council. The facts could be noticed in the following words:
"In 1891 the plaintiff and the defendant entered into partnership for the purpose of exporting and selling Ceylon tea, and particularly tea grown upon certain estates in the island belonging to the defendant and known as the Palamcotta and Marawilla estates. The part of the plaintiff in connection with the enterprise was to travel for the purpose of pushing the sale of the tea, and this he did so successfully that by the year 1895 he had established a valuable trade. In that year the partnership was dissolved, the plaintiff buying the defendant's interest in the goodwill for a sum of 35001 and taking over the assets at a valuation. The dissolution was effected by a deed dated February 14, 1895, which contained among other things a provision that the defendant should for a period of ten years after July 30, 1896, sell the whole or any part of the crops of the Marawiila and Palamcotta estates to the plaintiff at a valuation so long as the plaintiff should pay to the defendant yearly a sum of 751. for the use of the names of the two estates, and should express his intention of purchasing the whole or any part of the said crops. The deed then provided as follows: "And the said Bosanquet shall not be at liberty to sell during the period aforesaid the whole or any part of the tea crops of the Marawiila and / or Palamcotta estates to any person other than the said Webster without first offering to the said Webster the option of buying the same, so long as Webster shall pay to Bosanquet the yearly payment of 751.; and if the said Bosanquet shall fail, neglect, or refuse to sell the whole or any part of the crop of the Marawiila and/or Palamcotta estates as hereinbefore provided to the said Webster, he shall pay to Webster the sum of 5001. as liquidated damages and not as a penalty."
21. The plaintiff acted in accordance with the terms of the agreement. The defendant committed breach of the terms of the agreement and sold certain quantities of tea to third parties. Therefore, the plaintiff sought to claim the amount as liquidated damages on the ground that the defendant had committed breach. Before the matter came to the Privy Council there was a remittal order by the Supreme Court to assess the damages. The Privy Council observed :
"The cases in which the Courts have had to consider whether a stipulated payment in respect of the breach of a contract should be regarded as liquidated damages fixing once for all the sum to be paid, or merely as a penalty covering the damages though not assessing them, are innumerable and perhaps difficult to reconcile. But it is unnecessary to examine them, for their effect is sufficiently and very clearly stated in the case of Clydebank Engineering & Co. Ltd. v. Don Jose Castaneda, (1) 1905 A.C. 6. From that case it appears that whatever be the expression used in the contract in describing the payment, the question must always be whether the construction contended for renders the agreement unconscionable and vagant and one which no Court ought to allow to be enforced. After stating this principle Lord Halsbury proceeded as ' follows:
"It is impossible to lay down any abstract rule as to what it may or may not be extiavagant or unconscionable to insist upon, without reference to the particular facts and circumstances which are established in the individual case."
Ultimately, Privy Council held :
"For these reasons their Lordships are of opinion that the contract stipulates for what in words it says, namely, for a payment of money by way of liquidated damages and not by way of penalty."
The Privy Council, from the facts it is clear, went to the extent of holding even parties had submitted certain amount as liquidated damages the party claiming the amount must prove damage and it cannot claim the entire amount mentioned in the contract representing the loss and claim the sum as liquidated damages. The Privy Council expressed the view that when a particular amount is mentioned by way of liquidated damages the parties did not intend to be by way of penalty.
22. The House of Lords in Lord Elphinstone v. The Monkland Iron and Coal Company, Limited, and Liquidators in 1886 in 11 Appeal Cases 332 dealing with penalty and liquidated damages observed with reference to a clause in the agreement to pay 100 pounds per acre per ground un restored at a particular date was not in the nature of penalty. Lord Watson expressed his view:
"When a single slump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage, the presumption is that the parties intended the sum to be penal, and subject to modification."
On the construction of the contract, the learned Judge took the view that the parties never intended the payment to be a penalty. Lord Herschell observed:
"The agreement does not provide for the payment of a lump sum upon the non-performance of any one of many obligations differing in importance. It has reference to a single obligation, and the sum to be paid bears a strict proportion to the extent to which that obligation is left unfulfilled. There is nothing whatever to show that the compensation is ordinate or extravagant in relation to the damage sustained. And provision is made that the payment is to bear interest from the date when the obligation is unfulfilled. I know of no authority for holding that a payment agreed to be made under such conditions as these is to be regarded as a penalty only."
Lord Fitzgerald indulged in some detailed discussion observed:
"In the first instance the pursuer is, in case of a breach, entitled to recover the estimated sum as pact ional damages irrespective of the actual loss sustained. In the other, the penalty is to cover all the damages actually sustained, but it does not estimate them, and the amount of loss (not, however, exceeding the penalty) is to be ascertained in the ordinary way. In determining the character of these stipulations we endeavour to ascertain what the parties must reasonably be presumed to have intended, having regard to the subject-matter, and certain rules have been laid down as judicial aids. Thus, in Astley v. Weldon (2 Bos. & Pul. 353), Mr. Justice Hesath said: "Where articles of agreement contain covenants for the performance of several things, and then one large sum is stated at the end to be paid upon breach of performance, that must be considered as a penalty. But where it is agreed that if a party do" or (I may add) omit to do a particular thing, "such a sum shall be paid by him, there the sum stated may be treated as liquidated damages." Lord Eldon took part in the judgment in Astley v. Weldon, which has always been considered, so far, to state the rule correctly. There is an Irish case particularly applicable to the case before us: Huband V. Grattan. (2) In that case there was a covenant by the grantee with his grantor (who was also the owner of adjoining lands) that he would prostrate and remove a lime-kiln before a certain day, and if not prostrated and removed before that day then the grantee should pay to the plaintiff the sum of 100 pounds for each year during which the lime-kiln should remain, or a ratable sum for a shorter period. The action was for a breach in not removing the limekiln. Held to be liquidated and ascertained damages, and not a penalty.
In Rolfe v. Peterson, (1772) (3), no reasons are given, but there Lord Camden's decision was reversed. It was a covenant by a lessee not to plough up ancient pasture, and if he does to pay an additional yearly rent of 5 pounds an acre. Breach, ploughing up ten acres. Held, that it was not to be considered as a penalty, but as liquidated satisfaction fixed and agreed upon by the parties, notwithstanding that it was alleged "that the penalty of 5 pounds per acre reserved during the remainder of the term for once ploughing amounted to more than thirty times the value of the inheritance of the ten acres before they were put into a state of cultivation by the respondents"; and although the parties use the words "liquidated damages" or "penalty", though such words ' are not to be disregarded they are by no means conclusive. Thus, in Belts v. Burch (4), Bramwell, B., correctly lays it down, "For if the whole agreement is such that the Court can see the sum is a penal sum, it must be so treated; on the other hand, if it is not a penal sum, it would be incorrect to treat it as a penalty merely because the parties have so called it in the agreement." And so in Kemble v. Farren, 6 Bing. at p. 148; 3 M & P. at p. 441, where the sum of 1,000 pounds, the subject of the action, was declared by the agreement to be liquidated damages, and not a penalty or in the nature thereof, it was held to be a penalty; but Tindal, C.J., in the course of his judgment, observes: "We see nothing illegal or unreasonable in the parties, by their mutual agreement, settling the amount of damages, uncertain in their nature at any sum they may agree."
There would be some difficulty in criticising some of the English decisions, and it would not be very profitable. Bramwell, L.J., in Newman's case 4 Ch.D. at p. 734, says: "It seems to me, as I said in Belts v. Burch, H & N at p. 511, that by some good fortune the Courts have, in the majority of cases, gone right without knowing why they did so." There could be no more competent judge. I leave it in his hands.
I am clearly of opinion with my noble and learned friend that the sum of 100 founds per imperial acre for all ground not restored, though described in one part of the 12th Article as "the penalty therein stipulated," is not a penalty, and represents stipulated or estimated damages. It is satisfactory also to be able to make out from the uncontroverted evidence that the sum is not exorbitant or unreasonable."
23. The House of Lords took the view that whenever a lump sum is paid as deposit that is always to be treated as penalty.
24. In Dunlop Pneumatic Tyre Company Limited v. New Garage and Motor Company Limited, (1915) Appeal Cases 79, the House of Lords had to again consider a point. The appellants before the Privy Council, Dunlop Pneumatic Tyre Company Limited entered into a contract with the respondent for supply of goods of the appellant which were mainly motor tyre covers and tubes. The respondents had agreed not to sell to any private customer or Cooperative Society at prices less than the current price list issued by the appellant Company, not to supply the articles to persons, whose supplies the appellant Company had decided to suspend, not to exhibit or export without the consent of the appellants not to exhibit or to export without the appellant's consent. The respondents agreed :
"We agree to pay to the Dunlop Pneumatic Tyre Company Ltd. the sum of 5 I. for each and every tyre, cover or tube sold or offered in breach of this agreement, as and by way of liquidated damages and not as a penalty."
The appellant Company sought to mention the amount as per the terms of the clause on the ground of breach on the part of the respondents, representing damages. The Court took the view that the respondents were guilty of breach of contract. The Master of the Court was directed to enquire into the quantum of damages. The Master expressed his view :
"I find that it was left open to me to decide whether the 5 1. fixed in the agreement was penalty or liquidated damages. I find that it was liquidated damages."
The respondents appealed to the Court of Appeal. The Court of Appeal rejected the case of the plaintiff holding that the sum fixed in the contract was a penalty. However, the Court of Appeal granted as a lesser amount as a nominal damages. Hence the appeal by the Dunlop Pneumatic Tyre Company to the House of Lords. Lord Dunedin, the learned Judge speaking on behalf of the House and delivering the judgment on behalf of the House of Lords formulated the propositions of law. The learned Judge observed:
"In view of that fact, and of the number of the authorities available, I do not think it advisable to attempt any detailed review of the various cases, but I shall content myself with stating succinctly the various propositions which I think are deducible from the decisions which rank as authoritative:
1. Though the parties to a contract who use the words "penalty" or "liquidated damages" may prima fade be supposed to mean what I they say, yet the expression, used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage (Clydebank Engineering and Ship building Co. v. Don Jose Ramos Y zqnierdoy Castaneda, (1) [1905] A.C. 6.
3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach (Public Works Commissioner v. Hills, [1906] A.C. 368, and Webster v. Bostanquet, [1912] A.C. 394.
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will beheld to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in Clydebank case. ([1905] A.C 6.).
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid (Kemble v. Farren, 6 Bing. 141. This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A promised to pay B a sum of money on a certain day and did not do so, B could only recover the sum with, in certain cases, interest, but could never recover further damages for non-time outs payment, or whether it was a survival of die time when equity reformed unconscionable bargains merely because they were unconscionable,-a subject which much exercised Jessel M.R. in Wallis v. Smith (21 Ch. D. 243)--is probably more interesting than material.
(c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage" (Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co., 11 App. Cas. 332.
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties (Clydebank case, Lord Halsbury ( [1905] A.C. at p.11); Webster v. Bosanquet, Lord Mersey, [1912] A.C. at p. 398."
The learned Judge proceeded to observe:
"Turning now to the facts of the case, it is evident that the damage apprehended by the appellants owing to the breaking of the agreement was an indirect and not a direct damage. So long as they got their price from the respondents for each article sold, it could not matter to them directly what the respondents d id with it. Indirectly it did. Accordingly, the agreement is headed "Price Maintenance Agreement," and the way in which the appellants would be damaged if prices were cut is clearly explained in evidence by Mr. Baisley, and no successful attempt is made to controvert that evidence. But though damage as a whole from such a practice would be certain, yet damage from any one sale would be impossible to forecast. It is just, therefore, one of those cases where it seems quite reasonable for parties to contract that they should estimate that damage at a certain figure, and provided that figure is not extra vagant there would seem no reason to suspect that it is not truly a bargain to assess damages, but rather a penalty to be held in terrorem."
Referring to the judgment in Willson's case (1896) 1 Q.B. 626, the learned Judge observed :
"As regards Willson's case, I do not think it material to consider whether it was well decided on the facts. For it was decided on the view of the facts that the manorial value of straw and of hay were known ascertainable quantities as at the time of the bargain, and radically different, so that the damage resulting from the want of one could never be the same as the damage resulting from the want of the other.
Added to that, the parties there had said "penalty," and the effort was to make out that that really meant liquidated damages; and lastly, if my view of the facts in the present case is correct, then Rigby, L.J. would have agreed with me, for the last words of his judgment are as follows: "On the other hand it is stated that, when the damages caused by a breach of contract are incapable of being ascertained, the sum made by the contract payable on such a breach is to be regarded as liquidated damages. The question arises, What is meant in this statement by the expression 'incapable of being ascertained'? In their proper sense the words appear to refer to a case where no rule or measure of damages is available for the guidance of a Jury as to the amount of the damages, and a Judge would have to tell them they must fix the amount as best they can." To arrive at the indirect damage in this case, supposing no sum had been stipulated, that is just what a Judge would, in my opinion, have had to do."
This is necessary to show that the Court in that case had to deal with the term in the agreement mentioning the amount as penalty but the Queen Bench Division treated it as liquidated damages and Lord Dunedin had in order to explain the case had extracted what the learned Judge had observed in the Queen's Bench Division case. The propositions laid down by the learned Judge still hold the field and the Courts in England have treated the penalty and liquidated damages on the same footing depending upon the terms of the contract and the subject matter of the contract. Lord Atkinson observed :
"The appellants, like the respondents, are most probably good business men. Neither of them contemplated, presumably, the black-listing of these agents without adequate trade reasons. Nothing was more natural than that the appellants should seek to preying the supply of their goods indirectly to persons to whom they would not supply them directly. Considerable injury to their trade interests might obviously be done by putting such persons in a position to undercut their prices, and derange their supply organization, and nothing conceivable could be more difficult than to prove by evidence, or to estimate precisely in money, the exact amount of damages which might be caused by such an injury. The passage in the judgment of Tindal, C.J., above quoted/applies directly to such state of things.
I entirely concur with Kennedy, LJ. in his criticism of the agreement to be found at p.134 of the appendix. I agree with him that on the face of it, on this point of liquidated damages, it contains nothing unreasonable, unconscionable, or extravagant. And I further think that the same may be said of the real transaction between the parties if its substance be reasonably regarded.
For these reasons I think that the judgment of Kennedy, L.J. was right, that the judgment appealed from was wrong and should be reversed, and the judgment of Phillimore, J. be restored, and the appeal allowed with costs."
Lord Parker of Wadding on prefaced his judgment by observing:
"My Lords, where the damages which may arise out a breach of contract are in their nature uncertain, the law permits the parties to agree before hand the amount to be paid on such breach. Whether the parties have so agreed or whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each particular case. There are, however, certain general considerations which have to be borne in mind in determining the question. If, for example, the sum agreed to be paid is in excess of any actual damage which an possibly, or even probably, arise from the breach, the possibility of the parties having made a bonafide pre-estimate of damage has always been held to be excluded, and it is the same if they have stipulated for the payment of a larger sum in the event of breach of an agreement for the payment of a smaller sum."
The learned Judge proceeded to give his reasons in the following terms :
"The question becomes still more complicated where a single sum is agreed to be paid on, the breach of a number of stipulations of varying importance. It is said that in such a case there arises an inference or presumption, against the sum in question being in the nature of agreed damages, even though the parties have referred to it as such. My Lords, in this respect I think a distinction should be drawn between cases in which the damage likely to accrue from each stipulation is the same in kind and cases in which the damage likely to accrue varies in kind with each stipulation. Cases of the former class seem to me to be completely analogous to those of a single stipulation, which can be broken in various ways and with varying damage; but probably it would be difficult for the Court to hold that the parties had pre-estimated the damage if they have referred to the sum payable as a penalty.
In cases, however, of the latter class, I am inclined to think that the prima facie presumption or inference is against the parties having pre-estimated the damage, even though the sum payable is referred to as agreed or liquidated damages. The damage likely to accrue from breaches of the various stipulations being in kind different, a separate pre-estimate in the case of each stipulation would be necessary, and it would not be very likely that the same result would be arrived at in respect of each kind of damage. In my opinion, however, any such presumption or inference would be prima facie only and capable of being displaced by other considerations. Supposing it were recited in the agreement that the parties had estimated the probable damage from a breach of one stipulation at from 51. to 151., and the probable damage from a breach of another stipulation at from 21. to 121., and had agreed on a sum of 81. as a reasonable sum to be paid on the breach of either stipulation, I cannot think that the Court would refuse to give effect to the bargain between the parties.
My Lords, in the present case, even accepting the construction of the contract which makes Clause 5 apply not only to a sale or offer contrary to the provisions of Clause 2, but also to one contrary to the provisions of Clause 3, I think it is reasonably clear that the damage likely to accrue from the breach of every stipulation to which Clause 5 applies is the same in kind. Such damage will in every case consist in the disturbance or derangement of the system of distribution by means of which the appellants' goods reach the ultimate consumer. The parties by their contract agree that the sum payable on breach of any such stipulation is to be paid by way of damages and not by way of penalty, and I can see nothing to justify the Court in refusing to give effect to this bargain."
Lord Parmoor observed :
"The agreed sum, though described in the contract as liquidated damages, is held to be a penalty if it is extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made. No abstract rule can be laid down without reference to the special facts of the particular case, but when competent parties by free contract are purporting to agree a sum as liquidated damages there is no reason for refusing a wide limit of discretion. To justify interference there must be an extravagant disproportion between the agreed sum and the amount of any damage capable of pre-estimate."
The learned Judge put the position in clear terms with reference to interference by Courts in the bargain between the parties:
"The Courts have sanctioned interferences in the case of a covenant for a fixed sum, or for a sum define utely ascertainable, and where a larger sum is inserted by arrangement between the parties, payable as liquidated damages in default of payment. Since the damage for the breach of covenant is in such cases by English law capable of exact definition, the substitution of a larger sum as liquidated damages is regarded, not as a pre-estimate of damage, but as a penalty in the nature of a penal payment."
In winding up the judgment, the learned Judge observed:
"The parties adopted a wise and prudent course having regard to the nature of the contract and the practical impossibility of an accurate ascertainment of damages."
25. I pause here to mention that the first defendant DDA perhaps thought by inserting a clause empowering the DDA to forfeit 25% of the price cannot be interfered by the Courts. It is not stated in the agreement that the 25% of the purchase money is a genuine pre-estimate of damages that may be suffered by the DDA nor does the clause mentions the amount is collected by way of penalty.
26. In (Kunwar) Chiranjit Singh v. Mar Swarup AIR 1926 P.C. 1, the Privy Council observed:
"Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee."
27. For the first time, the Supreme Court of India had to deal with the question of penalty and damages in the light of Section 74 of the Indian Contract Act, 1872 in Fateh Chand v. Balkishan Doss, . This is a judgment by a Constitution Bench of the Supreme Court. The judgment was delivered by His Lordship Mr. Justice J.C. Shah (as His Lordship then was) on behalf of the Constitution Bench. There the earnest money was Rs. 1,000/- and Rs. 24,000/- was forfeited by the vendor on the ground that the purchaser had committed breach. Having regard to the fact that a very small amount was mentioned as earnest, the whole discussion was with reference to the forfeiture of Rs. 24,000/- in the light of Section 74 of the Contract Act, 1872. The Supreme Court held that in the absence of any proof of loss by the vendor, it was held that there can be no right in the vendor to appropriate the sum of Rs. 24,000/-. Their Lordships held :
"The second clause of the contract provides that if for any reason the vendee fails to get the sale-deed registered by the date stipulated, the amount of Rs. 25,000/- (Rs. 1,000/- paid as earnest money and Rs. 24,000/- paid out of the price on delivery of possession) shall stand forfeited and the agreement shall be deemed cancelled. The covenant for forfeiture of Rs. 24,000/ - is manifestly a stipulation by way of penalty."
28. The learned Judges of the Supreme Court had to deal with a situation similar to the one in Fateh Chand's case in Maula Bux v. Union of India, . There the plaintiff was the appellant before the Supreme Court, entered into a contract for supply of potatoes to Military Headquarter, U.P. area, had deposited a sum of Rs. 10,000/- as security for due performance of the contract. There was another contract for the supply of poultry and fish and he deposited Rs. 85,000/-for due performance of the contract. Clause 8 of the contract, which is the relevant, reads as under:
"The officer sanctioning the contract may rescind his contract by notice to me/ us in writing:
(i) .............
(ii) .............
(iii) .............
(iv) If I/we decline, neglect or delay to comply with any demand or requisition or in any other way fail to perform or observe any condition of the contract.
(v) ............. (vi) ..........,
In case of such rescission, my/our security deposit (or such portion thereof as the officer sanctioning the contract shall fit or adequate) shall stand forfeited and be absolutely at the disposal of Government, without prejudice to any other remedy or action that the Government may have to take :
In the case of such rescission, the Government shall be entitled to recover from me/us on demand any extra expense the Government may be put to in obtaining supplies/services hereby agreed to be supplied, from elsewhere in any manner mentioned in Clause 7(ii) hereof, for the remainder of the period for which this contract was entered into, without prejudice to any other remedy the Government may have."
In paragraph 4, the Supreme Court observed :
"Under the terms of the agreements the amounts deposited by the plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The High Court observed that the deposits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in "The Dictionary of English Law" at p.689. "Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like by giving to the vendor a nominal sum (e.g. a shilling) as a token that the parties are in earnest or have made up their minds." As observed by the Judicial Committee in Chiranjit Singh v. Har Swarup, AIR 1926 P.C 1:
"Earnest-money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee."
In the present case the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be regarded as earnest-money."
In paragraph 7 the Supreme Court expressed the view referring to the judgments of the Allahabad High Court where it was held that the forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. Paragraph 7 reads as under:
"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: AIR 1926 P.C. 1; Roshan lal v. Delhi Cloth and General Mills Co. Ltd., Delhi, (1911) ILR 33 All 166; Muhammad Habibullah v. Muhammad Shafi ILR 41 All 324:(AIR 1919 All 265); Bishan Chand v. Radha Kishan Das (1897) ILR 19 All 489. 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, Section74 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."
29. In Shree Hanuman Cotton Mills and Another v. Tata Air Craft Ltd., three learned Judges of the Supreme Court dealt with a contract where the amount deposited at the time of the agreement was mentioned as earnest which was 25% of the total price of the movable properties involved. Having regard to the nature of the subject matter of the contract, Their Lordships of the Supreme Court, after referring to the judgment of the Constitution Bench, accepted the right of the vendor to appropriate the earnest money, the Supreme Court that the entire amount as evidenced by the contract and as held earlier was the earnest money and, therefore, above decision did not apply
30. The numerous authorities were cited at the Bar :
1. , Meenakshinada Deikshtar v. Murugesa Nadar and Anr.
2. , Jaswant Rai v. Ahnash Kaur
3. AIR 1967 Delhi 91, Ram Lal Puri v. Gokalnagar Sugar Mills Co, Ltd.
The learned Senior Counsel for the DDA referred to Ramagya Prasad Gupta and Others v. Murli Prasad and Ors., and Kujn Collieries Ltd. v. jhakhand Mines Ltd. and Ors., which deal with scope of 65 of the Contract Act, 1872.
31.I have gone through the cases and in the ultimate analysis in the light of the judgment of the Constitution Bench of the Supreme Court of India Fatch Chand (supra) the law laid down by the Constitution Bench could be deduced to be that if a reasonable amount is fixed as earnest money and there is breach on the part of the person who had deposited the earnest money that could be subject matter of forfeiture by the other party. There are other decisions by High Courts in India:
1. ,ShibdasGopaljiPatelv.Ram Chandra Mookerjee.
2. AIR 1983 Calcutta 186, American Pipe Company v. State of Uttar Pradesh.
3. , Gaon Sabha v. Kushal Pal Smgh.
4. , Satya Sindhu Pandey v. Mohammad Shuai Islam and Ors.
5. , Nagpur Nagarik Sahakari Bank Ltd. & Anr.v. Union of India & Anr.
6. , Mohammad Sultan Rowther v. Naina Mohammad and Ors.
7. , S.K. Panchaksharam Mudaliar (died) & Ors. v. TV. Kanniah Naidu & Ors.
8. , A.M. Panlraj v. The Speaker; Tamil Nadu Legislative Assembly, Madras and Anr.
9. , Mrs. Sabina D'Costa v Joseph Antony Noronha.
10. , State of Orissa & Ors. v. Calcutta Company Ltd.
11. , Hameed v.
Credit & Investment Co, Ltd. and Ors.
And it is not necessary to deal with each of these cases in view of the pronouncement of the judgment of the Constitution Bench of the Supreme Court of India in Patch Chand's case.
32. The point had been the subject matter of the decision by the Privy Council in Lingi Plantation v. Jagdisham, 1972 (1) Malasian Law journal page 89. The judgment was rendered by learned Helshaw, L.C. In England in 1975 the Law Commission had also dealt with this aspect and the same is found in Law Commission's Working Paper No. 61 page 1975 paragraphs 49 to 67.
33. In Chitty on Contracts, 27th Edn. 1994 the latest trend in England is stated to be that forfeiture of money held by a party must be subject to law on penalties i.e. in accord with the dictum laid down by the Supreme Court in Fateh Chand's case.
34. Having regard to the position of law, harking back to the facts of the present case I am of the view that the plaintiff having bid at the auction on 12.3,1982 and having accepted the acceptance letter issued by DDA on 13.3.1982 had committed breach of the terms of Ex. P.7. The DDA, a public authority, while issuing advertisement inviting offers for the commercial plots did not act in accordance with law. The DDA had not proved, when the matter was in issue, whether plans had been prepared prior to the date of auction OP. 12.3.1982, when it was contended by the plaintiff that plot No. 9 did not fall within slum area, the DDA relied upon Ex. D.I the notification dated 10.4.1957 and a true copy of the plan, which is marked as Ex. D.31, and yet another true copy of a plan, which is marked as Ex. D.32, and resolution by the Committee of the Delhi Municipal Corporation in 1970, which is marked as Ex. D.35. The contention by the learned Senior Counsel for the plaintiff Mr. P.N. Lekhi was that the DDA had not established the core issue that the commercial plot No, 9 or plot No. 10 or for that matter the entire strip came within slum area. It is for the DDA to produce relevant materials because it is within the peculiar knowledge of DDA. Under Section 106 of the Indian Evidence Act, 1872 the burden is on the DDA to prove that fact and that is the law laid down by the Supreme Court on the interpretation of Section 106 of the Indian Evidence Act, 1872 in Narayan Govind Cavate etc. v. State of Maharashtra and Ors., .
35. The learned Senior Counsel for the DDA Dr. K.S. Sidhu submitted that the documents filed by the DDA are themselves prove all the facts pleaded by the DDA and nothing more was required under law for the DDA to place before the Court.
36. Ex. D.I is notification dated 10.4.1957. It reads as under:
" NOTIFICATION NEW DELHI, 10th April, 1957.
S.R.O. 1252. Whereas I, G. Mukharjee, Secretary, Delhi Development (Provisional) Authority and Competent Authority under the Slum Areas (Improvement and Clearance) Act, 1956, am satisfied that the buildings in the areas mentioned in the Schedule below are unfit for human habitation or are detrimental to safety, health or morals. Now, therefore, I, under the powers vested in me under section 3 or the said Act declare the areas mentioned in the Schedule below to be Slum Areas.
SCHEDULE Areas within the limits of the Delhi Municipal Committee.
(a) Wards Nos. I to VI (b) Ward Nos. VII to X, excluding the areas described below: (i) G.B. Road Road from Khari Baoli to North Kutab Road. West Boundaries of the Arabic College and Railway. South Ajmeri Gate. East Gali Ghosian and a street in its continuation. (ii) Delhi-Ajmeri Gate scheme between Asaf Ali Road and Zer-e-Fasil Road North Zer-e-Fasil Road. West Road to Ajmeri Gate. South Asaf Ali Road. East Road along the Delhi Gate."
It is the obligation of the DDA to prove that in the light of the notification the position on ground is that the area covered by the notification would take in the strip with which we are concerned which would take in plot No. 9. Dr. Sidhu, the learned Senior Counsel for the DDA was at pain to establish that Exs. D.31 and D.32 would prove the fact.
37. A perusal of Ex. D.31 the plan does not throw any light on the question. It is stated to be a certified true copy and that true copy was prepared on 2.3.1984, two years after the auction on 12.3.1982. The original plan, as per the notification, has not been produced. P.W. 3 Mr. R.M. Lal, who was working as Dy. Director (Bldg.) could not throw any light on the question. At the end of the cross-examination, he would say:
"I have map of only plot No. 10 and not the total area. From the file I gather that plot No. 10 does not fall within the slum area. (After having checked the file the witness again said that he was not sure whether plot No. 10 falls within the slum area or not."
38. D.W.1 Mahender Kumar, who was working as LDC in March, 1982, has not been able to give any details with reference to the point at issue. He would say:
"While the building was under construction on plot No. 10, some building material was put on plot No. 9 by the plaintiff. Some constructions were made in 'the shape of jhuggis for labours also. When the building was under construction on plot No. 10, Essel properties, the plaintiff, had not taken possession of plot No. 9. Full payment had not been made for plot No. 9 when the building material was placed on plot No. 9 by the plaintiff.
There was some litigation regarding plot No. 9 by the plaintiff.
In 1987, plot No. 9 was put to auction again. Probably the date of auction was 10.7.1987. No bid was received on 10.7.1987 because of the litigation.
Q. Can you give the particulars of the litigation because of which plot No. 9 could not be auctioned on 10.7.1997?
Ans. I can tell the name of the parties after looking at the records. A writ petition bearing No. 1989 of 1987 was filed in this Court by Mr.Pradip Pankaj, as President of Citizen's Action Group against the Delhi Development Authority.
(Note: I have seen the record referred to by the witness. This writ petition was withdrawn on 10.7.1987).
Raj Narain and few others have filed a suit in 1982 against Essel Properties. The Delhi Development Authority was not a party in the suit originally. It was made party at a later stage. Essel Properties had made an application under Order 39, Rule 2A, C.P.C. in connection with the alleged disobedience of the order of the Court by the D.D.A. I come to the conclusion on the basis of the application under Order 39 Rule 2A that Essel Properties were behind the suit."
The DDA had not examined any Engineer or Architect/Planning Officer (Slum) to explain the position to the Court. In Ex. D.31 plot No. 9 is not shown. In between plot Nos. 8 and 10 it is mentioned jhuggies. It is not explained why plot No. 9 has not been shown in Ex. D.31. Therefore, the contents of Ex. D.31 have not been proved and Ex. D.31 cannot be taken to be an authenticated record representing the position on ground in the context of the notification dated 10.4.1957 which is marked as Ex.D.1. Ex. D.32 is also stated to be attested true copy. It is not explained by anybody on behalf of the DDA, what is the nature of the original document from which this copy was taken, what was the date of the preparation of the original plan and what was the date on which this attested copy was prepared. What is the nature of this plan Ex. D.32 is itself would remain a mystery. No one from DDA has stated that plot No. 9 marked in red ir. .ne plan Ex. D.32 was prepared in accordance with the requirements of law. Therefore, Ex. D.32 also cannot be taken to be an authenticated record showing that mis strip of land falls within slum area. Ex. D.35 was marked at the time of arguments on 29.11.1997. As I had noticed above this is copy of the resolution No. 354 dated 14.5.1970 of the Standing Committee of the Delhi Municipal Corporation. It was submitted by Dr. Sidhu, the learned Senior Counsel for the DDA, this was the proposal by the Standing Committee regarding utilisation of Mukherjee property in Ward No. 8 in Delhi Ajmeri Gate area. For the purpose of developing area and the chunks of land were earmarked for the re-development. This strip of land, according to Dr. Sidhu, the learned Senior Counsel for the DDA, would come within Chunk No. 7 mentioned in the resolution. There has been no evidence co-relating Chunk No.7 with the actual position on ground, with reference to Exs. D.31 and D.32 plans. The resolution by itself is no proof that the strip of land had come within the slum area. The DDA has failed to establish the crucial fact which alone would enable the DDA to the property on auction fixing FAR at 400. The arguments of Dr. Sidhu, the learned Senior Counsel for the DDA, was that the plaintiff was successful bidder for plot No. 10 and it had deposited the entire purchase money and, therefore, it was not open to the plaintiff to say that plot No. 9 did not fall within the slum area. When a particular fact is to be proved by DDA it is no answer to say that the plaintiff had purchased plot No. 10 and, therefore, is bound to act in accordance with the terms and conditions with reference to plot No. 9 also. The fact that there was agitation at the relevant time is not in dispute. The DDA had written to the plaintiff mat at a particular stage the persons who were indulging in dharna had withdrawn and the property was free from any agitation. When Ex. D.31 itself mentions the particular portion of 'jhuggies'. It has not been shown by DDA that the DDA was in a position to hand over possession of the plot-to the plaintiff. It was argued by Dr. Sidhu, the learned Counsel for the DDA, that the architectural control drawings were taken by the plaintiff for plot No. 10 and for plot No. 9 the plaintiff did not do anything. The case of the plaintiff is that it was only in October, 1982 architectural drawings were given for plot No. 9 and as the drawings were not in accordance with the Building Bye-laws as the property was outside slum area, the plaintiff could not act. This averment was simply denied by the DDA in the written statement. The fact that architectural control drawings were taken by the plaintiff in October, 1982 has not been specifically denied by the DDA. The DDA being a public authority is expected to place all the materials before Court and is expected to examine the concerned responsible officer to speak to the relevant facts. The DDA has not acted as it is expected to act. The documents filed by the DDA not establish the crucial fact in issue and, therefore, the DDA cannot put the entire blame on the plaintiff and seek to forfeit the entire earnest money of Rs. 46.50 lakhs, I am of the view that the genesis of the present dispute was the action of the DDA in not acting conforming to the requirements of law. If the DDA had proved that the strip of land which takes in plot No- 9 was within the slum area and there would be no impediment for the plaintiff to build up, the plea of the plaintiff would have been rejected. The DDA having fixed the earnest money at 25% of the total price ought to have taken all steps to ensure that there was no doubt in respect of the compliance with law. Therefore, the action of the defendant in forfeiting the entire earnest money cannot at all be accepted in law, having regard to the fact that the plaintiff did not confirm to the terms and conditions and the DDA did not prove that the plot was within the slum area. Besides this, the very locality shown in the Master Plan as a street and that has not been explained by the DDA. The Master Plan for Delhi Perspective 2001 which was issued in 1990 by the DDA was produced at the time of hearing by Mr. Lekhi, the learned Counsel for the plaintiff. Dr. Sidhu, the learned Counsel for the DDA, submitted that that cannot be shown at the time of the arguments. It is a document emanating from DDA and it is a document for public use and, therefore, Court can take judicial notice of it and can look into the contents of the Master Plan. The Master Plan with reference to this area runs counter to the case set up by the DDA. I am disposed to apportion the earnest money between the plaintiff and the DDA. The DDA can retain 10% of the purchase money, namely Rs. 18.60 lakhs out of Rs. 46.50 lakhs, which is normally fixed as earnest money by the DDA under the disposal of nazul land. The balance of Rs. 27.90 lakhs shall be paid over by the DDA to the plaintiff.
39. It is not necessary to refer to Suit No. 89/92 and other matters and it is also not necessary to answer each of the issues either way except Issue No. 1.
40. Or Issue No. 1, I find that the plaintiff was the owner of Essel Properties and Industries and the correspondence between the parties prior to the filing of the suit would show that DDA was aware of the position. Therefore, the suit filed by Rama Associates (P) Ltd. is competent and Rama Associates (P) Ltd. is represented by authorised person of the Company. The issue is answered in favour of the plaintiff and against the DDA.
41. Another issue to be considered is the claim of interest by the plaintiff. The plaintiff is now held to be entitled to Rs. 27.90 lakhs. The plaintiff and the defendant had not acted in accordance with the terms of the contract and both parties had been responsible for the dispute. Therefore, I am not inclined to grant any interest to the plaintiff. For the same reasons, I am of the view that the parties have to bear their own respective costs. This issue is answered against the plaintiff.
42. Accordingly, there shall be a decree :
(i) directing the DDA to pay a sum of Rs. 27.90 lakhs to the plaintiff; (ii) directing the DDA to retain a sum of Rs. 18.60 lakhs; (iii) dismissing the claim of the plaintiff for interest; (iv) directing the parties to bear their costs.