Kerala High Court
The Cochin International Airport Ltd vs Abraham K.George on 14 August, 2025
RFA. No.835/2008
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IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR. JUSTICE C.PRATHEEP KUMAR
THURSDAY, THE 14TH DAY OF AUGUST 2025 / 23RD SRAVANA, 1947
RFA NO. 835 OF 2008
AGAINST THE JUDGMENT AND DECREE DATED 31.01.2008 IN OS
NO.306 OF 2004 OF ADDITIONAL SUB COURT, NORTH PARAVUR
APPELLANT/DEFENDANT:
THE COCHIN INTERNATIONAL AIRPORT LTD.,
KOCHI, AIRPORT.P.O., KOCHI, PIN-683 111,
REPRSENTED BY ITS MANAGING DIRECTOR.
BY ADVS.
SRI.E.K.NANDAKUMAR (SR.)
SHRI.ANIL D. NAIR (SR.)
SHRI.BENNY P. THOMAS (SR.)
SHRI.K.JOHN MATHAI
RESPONDENT/PLAINTIFF:
ABRAHAM K.GEORGE
AGED 53 YEARS, S/O. VARGHESE,
RESIDING AT 32/2015, NETAJI ROAD,
PALARIVATTOM, KOCHI, PIN-682 024.
BY ADVS.
SRI.K.T.THOMAS
SHRI.MATHEW BOB KURIAN
SRI.NIKHIL BERNY
THIS REGULAR FIRST APPEAL HAVING BEEN FINALLY HEARD ON
14.08.2025, THE COURT ON THE SAME DAY DELIVERED THE
FOLLOWING:
RFA. No.835/2008
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JUDGMENT
Dated this the 14th day of August, 2025 Cochin International Airport Limited, the defendant in OS. No.306 of 2004, on the file of the Additional Sub Court, North Paravur, is the appellant. (For the purpose of convenience, the parties are hereafter referred to, as per their rank before the trial court).
2. The plaintiff filed this suit for realisation of a sum of ₹5,00,000/- deposited with the defendant as earnest money. The defendant issued Exhibit A1 tender notification dated 24.02.2003 inviting tenders for grant of license for the management of the car park in front of Kochi Domestic and International Airport, for a period of three years. The plaintiff submitted his tender along with a demand draft for Rs.5,00,000/- drawn in favour of the defendant. Since the plaintiff was the highest bidder, his tender was accepted by the defendant and as per Exhibit A2 letter dated 19.03.2003, the plaintiff was further directed to deposit interest-free deposit equivalent to six month's license fee for the first year amounting to ₹90,18,000/- within a period of 30 days. As per Exhibit A3 letter dated 29.03.2003, the plaintiff intimated confirmation of acceptance of the award of work. When the plaintiff RFA. No.835/2008 3 2025:KER:61785 approached his bank for financial assistance to make the deposit, the bank pointed out condition No.4 in Exhibit A2 award letter dated 19.3.2003, which stipulates that in case of relinquishment of the contract by the plaintiff within 2 years from the date of effective date of commencement of the contract, a penalty of ₹1,00,000/- per month for the remaining period of the contract will be recovered from the security deposit. It was an additional condition imposed by the defendant after the acceptance of the tender. If the plaintiff was aware of such a condition, he would not have sent Exhibit A3 letter of acceptance. In the light of the above additional condition imposed by the defendant, the plaintiff's bankers refused to advance loan to him, and therefore, the plaintiff by Exhibit A4 letter dated 16.04.2003 intimated the defendant that in the light of the unilateral variation of the intended conditions, he is not willing to make the deposit and also demanded the defendant to refund the earnest money deposit of ₹5,00,000/-. The plaintiff would further contend that there was no breach of contract or lapse or default on his part and that the defendant has not sustained any loss in connection with the above contract. The contract did not materialise due to the unilateral alteration of the position by the defendant and therefore, the plaintiff is entitled to get back the earnest money deposited by him. RFA. No.835/2008 4
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3. In the written statement filed by the defendant, they have admitted that the plaintiff was the highest bidder and as such, his offer was accepted and also that, as directed by the defendant, the plaintiff deposited an amount of ₹5,00,000/- towards earnest money deposit. As per Exhibit A3 letter dated 29.03.2003, the plaintiff has confirmed his acceptance of the work and also intimated that he is in the process of arranging necessary security deposit from the bank. Since the plaintiff accepted the proposal without any objection, he is bound by the penalty clause including forfeiture of the earnest money deposit of ₹5,00,000/-. As per clause (21) of the tender notification, the defendant reserved the right to stipulate additional conditions before granting the licence. It was by invoking the above right, the penalty clause was included. The above penalty clause was there in Exhibit A2 and hence it is binding on the plaintiff. The plaintiff sent Exhibit A3 letter dated 29.03.2003 accepting the tender after knowing the said conditions and without raising any objection regarding the penalty clause. When the plaintiff intimated the defendant, his inability to take up the contract due to the above penalty clause, the defendant deleted the said clause and intimated the same as per Exhibit A5 letter dated 17.4.2003 and additional time was granted till 23.04.2003 to deposit the security deposit. Since the contract was concluded, RFA. No.835/2008 5 2025:KER:61785 the plaintiff is not entitled to get back the earnest money deposit. If the tenderer withdraws from the contract immediately, the defendant would be put to lots of delays by way of time and money. It was the plaintiff who had committed breach of contract and as such the defendant is entitled to forfeit the earnest money deposit of ₹5,00,000/-. Due to the breach of contract committed by the plaintiff, the defendant had to employ persons to collect fees, incur expenditure for printing tickets and all other incidental expenses for collecting the fees from the vehicles for a period of 5 months. The defendant had also spent amounts for publications for re-tender. As per the terms of the contract, the plaintiff had to deposit an interest free security deposit of ₹90,18,000/- and due to the withdrawal of the contract by the plaintiff, the defendant sustained loss by way of interest for the deposited amount also.
4. The trial Court framed four issues. The evidence in the case consists of the oral testimonies of PW1, DW1, Exhibits A1 to A8 and B1 to B7. After evaluating the evidence on record, the trial Court decreed the suit and directed the defendant to pay a sum of ₹5,00,000/- along with interest and rate of 6% per annum from the date of the suit till realisation. Being aggrieved by the above judgment decree of the trial court, the defendant RFA. No.835/2008 6 2025:KER:61785 preferred this appeal, raising various grounds.
5. Now the points that arise for consideration are the following:
1) Whether there was any concluded contract between the plaintiff and the defendant?
2) Who has committed breach of contract?
3) Whether the defendant is entitled to forfeit the earnest money deposit of ₹5,00,000/-, without sustaining any loss or damage?
6. Heard Sri. Chethan Krishna, the learned counsel for the appellant and Sri.K. John Mathai, the learned counsel for the respondent/plaintiff.
7. According to the learned counsel for the appellant, in this case, the breach of contract was committed by the plaintiff and as such, ₹5,00,000/- deposited as earnest money is liable to be forfeited by them. On the other hand, the learned counsel for the respondent would argue that in this case, it was the defendant who imposed additional condition after the tender was accepted and as such the terms of the contract were violated by the defendant. Further, he would argue that in this case there is no evidence to prove that because of the non-performance of the contract the defendant sustained any loss or damage. Therefore, the learned counsel for the respondent would argue that the defendant is not entitled to forfeit the earnest money deposit RFA. No.835/2008 7 2025:KER:61785 and they are liable to refund the same to the plaintiff.
8. Though in the written statement the defendant contended that in this case, there was already a concluded contract, at the time of arguments, the learned counsel for the appellant has taken an entirely different stand that no concluded contract was entered into between the parties. The reason stated by the learned counsel for such an argument is that, though as per Exhibit A2 letter dated 19.03.2003 the work was awarded to the plaintiff, as per the terms of the said letter, several conditions are to be complied and a formal written agreement also is to be executed between the parties and only thereafter a concluded contract will come into effect between them.
9. It is true that, as per Exhibit A2, the plaintiff had to deposit a total sum of ₹90,18,000/- as security deposit and a formal agreement was also to be executed thereafter. Those conditions were in tune with Exhibit A1 tender notification and hence with regard to those conditions the plaintiff has no objection. The objectionable clause is clause (4) in Exhibit A2 letter which reads that: 'in case you relinquish the contract within 2 years from the effective date of commencement of this contract, a penalty of ₹1,00,000/- per month for the remaining period of the contract will be recovered from the security deposits'.
RFA. No.835/20088
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10. After receiving Exhibit A2 letter, the plaintiff sent Exhibit A3 letter dated 29.03.2003 to the defendant, confirming the acceptance of the work awarded to him and further stating that he is in the process of arranging the necessary security deposit from his bank. Thereafter on 16.04.2003 the plaintiff sent Exhibit A4 letter to the defendant informing that in order to honour the financial commitments in terms of the contract, he had applied to his bank for financial assistance and that, taking into account the terms and conditions in Exhibit A1 tender form, the Bank considered his request for financial assistance. However, after seeing the conditions in Exhibit A2 letter, to the effect that in case he relinquishes the contract within 2 years from the effective date of commencement of the contract, a penalty of ₹1,00,000/- per month for the remaining period of the contract, will be recovered from the security deposit, the bank hesitated to grant financial facility to the plaintiff. The said additional condition imposed by the defendant was not acceptable to his bank and hence the bank refused to advance money to him. Therefore, as per Exhibit A4 letter, the plaintiff intimated the defendant that since the bank refused to finance him, he is unable to comply with the financial commitments within the stipulated time and that he is not interested in executing the contract, requested to relieve him and to refund the earnest RFA. No.835/2008 9 2025:KER:61785 money deposited by him.
11. Thereafter on 17.04.2003, the defendants sent Exhibit A5 reply to the plaintiff in which they deleted the offending penalty clause in Exhibit A2 and also extended the time for remitting the security deposit till 23.04.2003, 17.00 hours. However, in pursuance to Exhibit A5 letter, the plaintiff did not remit the security deposit and he insisted for withdrawing from the contract and requested for refund of the earnest money deposited by him.
12. Therefore, one of the questions to be considered is whether there was a concluded contract between the plaintiff and the defendant? Another crucial question to be considered is whether it was the plaintiff who had committed breach of contract or whether the breach was committed by the defendant? Admittedly, in Exhibit A1 tender notification, there was no penalty clause for deducting a sum of ₹1,00,000/- per month in case the tenderer relinquishes the contract within a period of 2 years. It is also admitted that, such an additional condition was imposed by the defendant for the first time through Exhibit A2 letter dated 19.03.2003.
13. Relying upon some of the clauses in Exhibit A1 tender notification, the learned counsel for the appellant would argue that the above clauses authorise the defendant to make additional conditions before the RFA. No.835/2008 10 2025:KER:61785 formal contract is entered into with the tenderer and as such the additional condition imposed was lawful and binding on the plaintiff. Clauses 13, 21 and 22 in Exhibit A1 tender notification relied upon by the learned counsel for the appellant are as follows:
"13) On acceptance of the Tender CIAL will issue a letter of Intent / Award by registered Post. (a )The tenderer shall within 10 days of receipt of Intent / Award shall inform CIAL the acceptance of the offer. (b) He shall deposit the interest free security deposit amount equivalent to 06 months of monthly licence fee quoted, for the first year, within 30 days from the date of Intent /Award. The EMD deposited could be adjusted in this security deposit. (c) He shall execute the licence agreement within 30 days from the date of Intent / Award. (d) The commencement of the facility would be within 30 days from the date-of Letter of Intent / Award and the monthly License fee would become payable in advance from this date.
21) CIAL shall have the right to stipulate additional conditions before granting licence.
22) This notice inviting tender shall form a part of the contract document."
14. He has also relied upon clauses 17 and 19 under the head Licensee's obligations in Exhibit A1, which states that :
"17) The tender shall remain open for acceptance for a period of ninety days from the date of opening of tenders. If any tenderer withdraws his tender before the said period or makes any modification in the terms and conditions of the tender, which are not acceptable to CIAL, RFA. No.835/2008 11 2025:KER:61785 then CIAL shall, without prejudice to any other right or remedy, be at liberty to forfeit the full amount of earnest money absolutely.
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19) The tenderer shall submit the tender which satisfies each
and every condition laid down in this notice, failing which, the tender is liable to be rejected."
15. With regard to the necessity of executing a formal agreement, the learned counsel has relied upon the stipulation in Exhibit A2 that:
"You are requested to remit the interest Free Security Deposit with CIAL as indicated in the Item No.2 of this letter, on or before April 17, 2003, during office hours. On remittance of the Interest Free Security Deposit, an agreement have to be executed by you and the License have to be commenced within 30 days from the date of this letter."
16. It is true that as per clause 21 of Exhibit A1 the defendant reserved the right to stipulate additional conditions before granting licence. However, presence of such a clause in Exhibit A1 does not mean that such additional condition does not require the ratification of the plaintiff. Further, as per Exhibits A1 and A2, after the deposit of the security amount, a formal agreement has to be executed between the parties and it was in the above context it was argued that in this case no concluded contract was entered into between the parties. Further, according to the learned counsel, when the objection was raised by the plaintiff about the penalty clause, the said penalty RFA. No.835/2008 12 2025:KER:61785 clause was deleted by them and more time was granted and hence they cannot be accused of adding any new condition, which is no longer in existence.
17. On the other hand, according to the learned counsel for the plaintiff, initially the bank agreed to advance the loan on the basis of the terms and conditions in Exhibit A1 tender and it is because of the additional condition imposed as per Exhibit A2 letter, the bank withdrew from the proposal to advance money and it was in the above context the plaintiff was forced to withdraw from the contract. Further according to him, when the additional condition was imposed, the circumstances as well as the original proposal itself changed and then the plaintiff will get a fresh option either to accept or reject the revised proposal and simply because the additional condition is deleted, the plaintiff will not lose that right. According to the learned counsel, the plaintiff has opted not to accept the revised proposal with the additional condition imposed by the defendant by way of penalty, as it was because of the above additional condition the bank refused to advance money to him and as such according to him, the defendant alone is to be blamed for the non-fulfillment of the contract.
18. As I have already noted above, in the instant case, the case set up by the appellant in the written statement is that there was already a concluded RFA. No.835/2008 13 2025:KER:61785 contract between the parties. It is true that as per the terms of Exhibits A1 and A2, even after Exhibit A3 confirmation, security amount was to be deposited by the plaintiff and a formal contract also was to be executed between them. Even then, the fact remains that, as per Exhibit A3 confirmation letter dated 29.3.2003 the plaintiff had accepted Exhibit A2, which contained the additional penalty clause. Only as per Exhibit A4 dated 16.4.2003 the plaintiff objected to the penalty clause in Exhibit A2 and revoked his acceptance. Now the question to be considered is whether Ext.A4 is a valid revocation of acceptance.
19. Sections 3, 4 and 5 of the Indian Contract Act, which deals with communication, acceptance and revocation of proposals and acceptances are extracted below for easy reference:
"3. Communication, acceptance and revocation of proposals.--The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.
4. Communication when complete.--The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.
The communication of an acceptance is complete,--RFA. No.835/2008 14
2025:KER:61785 as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the proposer.
The communication of a revocation is complete,--
as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;
as against the person to whom it is made, when it comes to his knowledge.
5. Revocation of proposals and acceptances.--A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards."
20. In this case, the plaintiff sent Exhibit A3 acceptance to the defendant on 29.3.2003. Thereafter he had sent Exhibit A4 revocation only on 16.4.2003. Here, as against the plaintiff, the communication of acceptance is complete when Exhibit A3 comes to the knowledge of the defendant. As against the defendant, the communication of acceptance is complete when Exhibit A3 is despatched to the defendant. The plaintiff could revoke Exhibit A3 at any time before or at the moment when Exhibit A3 reaches the defendant and not afterwards. In this case, nobody has a case that Exhibit A3 RFA. No.835/2008 15 2025:KER:61785 was revoked at any time before or at the moment when Exhibit A3 reached the defendant. Therefore, Exhibit A4 revocation sent to the defendant after the communication of acceptance is complete as against the plaintiff, is ineffective. Therefore, when Exhibit A3 reached the defendant, it became a concluded contract between the parties.
21. Relying upon the decision of the Hon'ble Supreme Court in M/s. PSA Mumbai Investments PTE Ltd. v. The Board of Trustees of the Jawaharlal Nehru Port Trust and another [(2018) 10 SCC 525](Civil Appeal No.9352 of 2018. Arising out of SLP(C). No.8166 of 2018), the learned counsel for the appellant would argue that when 2 or 3 very important steps have to be undergone before there could be said to be an agreement which would be enforceable in law as a contract between the parties, it cannot be held that there was a concluded contact. In the above decision, the appellant and respondent No.2 formed a consortium and they participated as bidders in a development project bid invited by respondent No.1. In the request for proposal, they clearly stated that it could not be construed as an agreement between the parties, though there was a draft concession agreement along with the request for proposal. In the above decision there was only a draft concession agreement under the request for proposal and it RFA. No.835/2008 16 2025:KER:61785 also contained a disclaimer that it is not in any manner an agreement between the parties. It was in the above context the court held that there was no concluded contact between the parties. In the instant case, as per Exhibit A3 letter, the plaintiff unequivocally confirmed acceptance of Exhibit A2 and the acceptance was communicated to the defendant and only thereafter he sent Exhibit A4 letter revoking the consent. Since the facts are entirely different, the dictum laid down in the said decision is not applicable to the facts of the present case. In other words, in the present case, there is a concluded contract between the plaintiff and the defendant.
22. In order to substantiate the argument that the defendant is entitled to forfeit earnest money deposited by the plaintiff, the learned counsel has relied upon the decisions of the Hon'ble Supreme Court in State of Haryana and Others v. Malik Traders [(2011) 13 SCC 200] and National Thermal Power Corporation Ltd. v. Ashok Kumar Singh and Others [2015 (4) SCC 252]. In Malik Traders (supra), the appellant/State of Haryana invited tenders from interested persons for appointment as entrepreneur/agent for collection of toll at a toll bridge. The respondent, who quoted ₹8,83,30,000/- was the highest bidder and the 2nd respondent M/s. Malik Traders, who quoted ₹7,97,66,180/- was the 2nd highest bidder. All the RFA. No.835/2008 17 2025:KER:61785 bidders deposited the bid security of ₹20,00,000/- in the form of Bank guarantee. As per the terms and conditions of the bid, the respondent agreed to keep the bid open for acceptance up to 90 days after the last date of receipt of bid and agreed to forfeit the bid security in case they withdraw its bid/offer after the last date and time for receipt of bids, during the period of bid validity (90 days) or extended validity period. Since the highest bidder failed to deposit the security amount, the amount deposited by him was forfeited and letter of acceptance was issued to M/s Malik Traders, the 2nd highest bidder, calling upon him to deposit the security amount and the 1 st instalment within 21 days from the date of receipt of the acceptance. Since they failed to deposit the security amount and the first instalment, as required by the letter of acceptance, the letter of acceptance was cancelled and the bid security of ₹20 lakhs was forfeited.
23. When the bids were re-invited for collection of toll, the respondent, M/s.Malik Traders again participated in the bid, offered ₹4,94,91,810/-, which was the highest bid and it was much less than the amount offered in the first bid. After the second letter of acceptance was issued to the respondent, he moved the High Court for quashing the 1st letter of acceptance, for cancelling the said letter of acceptance and forfeiting the RFA. No.835/2008 18 2025:KER:61785 security of ₹20,00,000/-. A Division Bench of the High Court allowed the writ petition quashing the letter of acceptance and directed refund of the bid security amount of ₹20,00,000/-. Reversing the judgment of the High Court, the Apex Court in paragraph 12 held as follows:
"12. The right to withdraw an offer before its acceptance cannot nullify the agreement to suffer any penalty for the withdrawal of the offer against the terms of agreement. A person may have a right to withdraw his offer, but if he has made his offer on a condition that the Bid Security amount can be forfeited in case he withdraws the offer during the period of bid validity, he has no right to claim that the Bid Security should not be forfeited and it should be returned to him. Forfeiture of such Bid Security amount does not, in any way, affect any statutory right under Section 5 of the Act. The Bid Security was given by the respondent and taken by the appellants to ensure that the offer is not withdrawn during the bid validity period of 90 days and a contract comes into existence. Such conditions are included to ensure that only genuine parties make the bids. In the absence of such conditions, persons who do not have the capacity or have no intention of entering into the contract will make bids. The very purpose of such a condition in the offer/bid will be defeated, if forfeiture is not permitted when the offer is withdrawn in violation of the agreement. "
24. Referring to various other decisions, the Apex Court reiterated that particularly in Government contracts, such a default clause is included in order to ensure that only a genuine party makes a bid. If such a term was not there, even a person, who does not have the capacity or a person, who has no RFA. No.835/2008 19 2025:KER:61785 intention of entering into contract will make a bid. It was further made clear that the whole purpose of such a clause i.e. to see that only genuine bids are received, would be lost if forfeiture was not permitted.
25. In the decision in Ashok Kumar Singh (Supra), the tenders were in two parts, one technical and the other commercial. After the technical bids were opened and before the financial bids were yet to be opened, the respondent moved an application for withdrawing the bid submitted by it and asking for exclusion from consideration besides praying for refund of earnest money deposited with the bids. However, the appellant corporation rejected the above prayer and forfeited the earnest money. The High Court directed refund of earnest money deposited by the respondent. However, reversing the order of the High Court, the Apex Court held in paragraphs 7 and 13 as follows:
"7. A plain reading of the above would show that one of the Special Conditions of Contract, subject to which the intending bidders could submit their bids, was that the earnest money accompanying the bid shall be forfeited in any one of the three contingencies referred to in Condition No. 2 (supra). One of these contingencies was revocation of the tender, which would in the context in which the special provision is made imply any withdrawal of the bid/tender by the bidder concerned. The High Court appears to have confused revocation of the tender with revocation of the tender notice. The expression "revocation of tender"RFA. No.835/2008 20
2025:KER:61785 does not obviously refer to revocation by the appellant-corporation, who had issued the tender notice. There is a clear difference between revocation of a 'tender' and revocation of the 'tender notice'. While revocation of the tender notice is the prerogative of the appellant- corporation, revocation of the 'tender' could be only by the bidder/tenderer concerned. The expression "revocation" may have been loosely used by the corporation, but, in the context in which the same appears in the Special Conditions of Contract only means withdrawal/cancellation/ recall of the bid or tender submitted by the bidder. In any such event, the earnest money deposited by the bidder would be liable to the forfeited is the plain and the simple meaning of the Condition No. 2 extracted above. The High Court was in manifest error in holding that the forfeiture did not fall within the purview of Condition No. 2. "
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13. The upshot of the above discussion is that it is no longer possible for the respondents to contend that the right to withdraw the bid in terms of Section 5 of the Contract Act, 1872 would entitle them to withdraw without suffering forfeiture of the earnest money even in cases where the submission and receipt of bids is itself subject to the condition that in the event of a withdrawal of the bid the earnest money stand forfeited. Inasmuch as the High Court remained totally oblivious of the true legal position while directing refund of the earnest money, it committed an error."
26. In the above two decisions, no concluded contract was entered into between the parties. It was in the above context the Apex court held that Sections 73 and 74 of the Contract Act have no application in such cases, RFA. No.835/2008 21 2025:KER:61785 where there is no concluded contract. It appears that, it was in the above context the learned counsel has argued that in this case there was no concluded contract between the parties. However, I have already found that, in this case there was a concluded contract between the parties and as such sections 73 and 74 of the Contract Act applies to the facts of this case. In the above circumstances, it is to be further held that the decisions in Malik Traders and Ashok Kumar Singh (supra) do not apply to the facts of this case, as in the instant case, there was a concluded contract between the parties.
27. In the decision in Kailash Nath Associates v. Delhi Development Authority and Another [(2015) 4 SCC 136], relied upon by the learned counsel for the plaintiff, in paragraph 43, the Apex Court has summarised the law of compensation for breach of contract under Section 74 as follows:
"43. On a conspectus of the above authorities, the law on compensation for breach of contract under Section 74 can be stated to be as follows:-
43.1 Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount RFA. No.835/2008 22 2025:KER:61785 so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
43.2 Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act. 43.3 Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section. 43.4 The Section applies whether a person is a plaintiff or a defendant in a suit.
43.5 The sum spoken of may already be paid or be payable in future. 43.6 The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre- estimate of damage or loss, can be awarded.
43.7 Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application."
28. Relying upon the decision of the Hon'ble Supreme Court in Desh Raj & Ors. v. Rohtash Singh [(2023) 3 SCC 714], the learned counsel would argue that whether or not actual loss is not proved to have been caused, RFA. No.835/2008 23 2025:KER:61785 the party complaining of breach is entitled to get the pre-estimated amount mentioned in the contract.
29. In the decision in Desh Raj (supra) the contract was for sale of immovable property. As per the terms of the contract, the parties agreed that time is the essence of the contract. It was further stipulated in the agreement that the contract is to be performed by 16.08.2004. As per the terms of the contract, if the contract was not performed as agreed, it is to be treated as cancelled. The court found that the purchaser filed the suit for specific performance only in January 2006, after a long delay. Moreover, there was no prayer for return of the advance money. After referring to various decisions of the Hon'ble Supreme Court, including the decision in Kailash Nath Associates (supra), the Apex Court held that if the compensation named in the contract for such breach is a genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach.
30. In the decision in K.M. Basheer Moulavi & Ors v. K.S.I.D.C. RFA. No.835/2008 24 2025:KER:61785 [2011 (3) KLJ 581] of this Court, relied upon by the learned counsel for the appellant, the K.S.I.D.C. invited tenders for sale of certain properties of a private limited company. As per the notice, a sum of ₹10,00,000/- was to be given by way of Demand Draft as earnest money deposit and the selected bidder has to remit the full consideration within 45 days of confirmation of sale. The appellant was the highest bidder, who offered ₹15 Crores for the property. However, the K.S.I.D.C directed him to deposit ₹5 Crores by Demand Draft within seven days, another ₹5 Crores within 30 days and the balance amount in 45 days. The learned counsel has cited the above decision to hold that even though the tender condition was subsequently modified by the K.S.I.D.C., forfeiture of the earnest money was upheld by the High Court. However, it appears from the facts of the above case that at the request of the appellant, he was not only given more than 45 days for remitting the bid amount and in spite of that he failed to remit the bid amount and as such the dictum in the above decision cannot be applied to the facts of this case.
31. In the decision in Soji Peter v. K.B.Vijayan and Others, 2017 (4) KHC 456, a Division Bench of this court while dealing with the concept of earnest money held in paragraph 27 as follows :-
"The concept of earnest money has been thus distilled by the Hon'ble RFA. No.835/2008 25 2025:KER:61785 Supreme Court in various judgments above, can only be accepted to be that sum of money, which is a pre-estimate of the actual damage that may be caused to a party in event of breach of the agreement and which is fixed by both the parties even at the time when the agreement was entered into. Even this pre-quantification, has to be found to be reasonable and to be a genuine pre-estimate of the damages by the court. It is only in the event that the court feels that what is fixed in the contract represents the actual damages that is pre-estimated by the parties that the court will allow it to be completely forfeited."
32. In the above decision, in an agreement for sale there was a clause to the effect that if the respondent commits default in honouring the terms of the agreement, the amount accepted by the appellant as advance will be forfeited towards his loss. In the above context the appellant claimed that he is entitled to forfeit the advance amount paid by the respondents. While rejecting the above claim advanced by the appellant, the court held in paragraph 29 as follows :-
"We are afraid, on the foundation of law as declared by the Hon'ble Supreme Court and by this Court as afore recorded, the contention of the appellant cannot find forensic approval. This is because, the appellant has not pleaded or proved the actual damage caused to him nor has he even made an attempt to show the nature of the damage that he claims. It is merely a statement in the pleadings that since he did not obtain the sale consideration in time, he was not able to invest it in his business and that he was forced to take further loans. These submissions have not been proved or established by cogent evidence and the court below was, RFA. No.835/2008 26 2025:KER:61785 therefore, justified in refusing to accept these contentions and in ordering return of the money paid by the respondent. We are aware that the court below has concluded that rescission of the contract at the hands of the respondent was not on account of any factors that were attributable to the appellant. However, this by itself will not entitle the appellant to forfeit the advance amount received by him. His contention that the amount is earnest money deposit also cannot be sustained, since as is obvious from the agreement itself, the said amounts were not accepted by the appellant as a bona fide pre-estimate of the damages or loss that he would have suffered on the agreement being breached by the respondent."
33. After evaluating various judgment on the topic, in paragraph 36, the Division bench concluded that :
"The compendium of all that we have seen above, especially with respect to the various judgments that we have noticed in the earlier portion of this judgment, makes our opinion firm that where a sum is named in a contract as the liquidated amount payable by way of damages, the party complaining breach, will be entitled to receive as compensation such amounts only if it is found to be genuine and fixed as a pre-estimate of the damages by the parties and found to be reasonable by the court. In all other cases, the sum shown as liquidated amount payable as damages would not be liable to be forfeited by the party complaining of breach, unless he/she shows to have faced a detriment by way of actual loss or damages and the courts will be justified in awarding only reasonable compensation, but not exceeding the amount so stated. This is the same position when an amount is shown as penalty. This is the law that has now been crystalised by the various judgments of the Hon'ble Supreme Court and we are, therefore, obviously, bound by the binding precedents."RFA. No.835/2008 27
2025:KER:61785
34. In the decision in Afro Asisan Agro Products (Singapore) v. Lekshmi Enterprises and Others, 2023 KHC 109, in a similar case a Division Bench of this Court while dealing with the scope of Section 74 of the Indian Contract Act, also held that the Court has to ascertain the reasonable compensation payable to the plaintiff, having regard to the conditions existing on the date of the breach.
35. In the decision in Dr. Mathew Jo and Others v. Lijo Jose [2025 KHC OnLine 815], this Court also held that only if a party sustains actual loss or damage, reasonable compensation can be awarded under Section 74 of the Indian Contract Act, not exceeding the amount specified in the contract.
36. In the instant case, in the written statement, the defendants contended that because of the breach of contract committed by the plaintiff, the defendant had to engage labourers for collecting the car parking fees and re-tender and thereby sustained huge loss. Though, on behalf of the defendant, DW1 was examined, the defendant could not produce any documents to prove the amount offered by the successful bidder in re-tender. DW1 could not state whether the amount offered in the re-tender was less than the amount offered by the plaintiff. If the defendant has sustained any loss or damage on account of the non-performance of the contract, they could RFA. No.835/2008 28 2025:KER:61785 have proved the same easily, by producing the relevant documents available in their custody. Since they have not produced any such documents without offering any explanation, it is to be presumed that they have not suffered any loss or damage on account of the non-performance of the contract. In other words, in this case the defendant has not sustained any loss because of the re- tender or because of the non-performance of the contract entered into with the plaintiff.
37. According to the plaintiff, only because of the additional penalty clause imposed by the plaintiff in Exhibit A2, the bank refused to advance loan to him and that is the reason why he had to withdraw from the contract. The learned counsel has argued that the bank officials were not examined to prove the denial of loan by the bank and no document is produced in that respect. However, from the evidence of PW1, it is revealed that he approached the Federal Bank for a loan and initially they agreed to advance the amount and after seeing the additional penalty clause imposed by the defendant in Exhibit A2, they refused to grant loan to him. The above evidence of PW1 was not seriously challenged during the cross examination. Therefore, I do not find any grounds to disbelieve the evidence of PW1 that it was because of the additional penalty clause imposed by the defendant, the RFA. No.835/2008 29 2025:KER:61785 Bank refused to advance the loan to him. It was in the above context the plaintiff had withdrawn from the contract and as such the entire blame could not be put on the shoulders of the plaintiff, for the non-performance of the contract in this case. In other words, the defendant also had some contribution in the non-performance of the contract. In the above circumstance, it cannot also be held that the plaintiff was not a bonafide tenderer, when he submitted the bid and when he sent Ext.A3 accepting the contract.
38. The learned counsel for the appellant would argue that the financial implications of the penalty clause is much less when compared to the total amount involved in the contract and as such the ground raised by the plaintiff to withdraw from the contract is flimsy and has been raised only for the purpose of avoiding the contract. As per the penalty clause, the defendant wanted to deduct a sum of ₹1,00,000/- per month for the remaining period of the contract. As argued by the learned counsel for the plaintiff, a sum of ₹1,00,000/- per month during the year 2003 is not a nominal amount but a considerable one, as far as the plaintiff is concerned.
39. As I have already noted above, it was because of the additional penalty clause imposed by the defendant, the Bank refused to advance the loan to the plaintiff and it was the reason for him to withdraw from the RFA. No.835/2008 30 2025:KER:61785 contract. Therefore, the defendant also had some contribution in the non- performance of the contract. Moreover, in this case the defendant had not sustained any loss or damage because of the non-performance of the contract by the plaintiff. In the above circumstance, the trial court was justified in decreeing the suit and ordering return of the earnest money to the plaintiff. I do not find any irregularity or illegality in the impugned judgment and decree of the trial court so as to call for any interference. Points answered accordingly.
40. In the result, the appeal is dismissed. Considering the facts, I order no costs.
All pending interlocutory applications shall stand dismissed.
Sd/-
C. PRATHEEP KUMAR, JUDGE sou.