Delhi District Court
Nitin Gupta vs M/S Dcb Bank on 28 July, 2018
Nitin Gupta V. DCB Bank & Ors.
IN THE COURT OF SH. ARUN SUKHIJA,
ADDITIONAL DISTRICT JUDGE - 07, (CENTRAL DISTRICT)
TIS HAZARI COURTS, DELHI.
SUIT NO.: 273/2015
UNIQUE CASE ID NO.: 610825/16
IN THE MATTER OF :
Nitin Gupta
through its authorised representative
namely Rakesh Kumar having address
Y54, 1st Floor, Hauz Khas
Delhi. ....Plaintiff
VERSUS
1. M/s DCB Bank
having its registered office at :
6th floor, Tower A,
Peninsular Business Park,
Senapati Bapat Marg, Lower Parel,
Mumbai400013
2. Mr. Murli M. Natrajan (M.D. and (C.E.O.)
Having its registered offices at:
6th floor, Tower A,
Peninsular Business Park,
Senapati Bapat Marg, Lower Parel,
Mumbai400013
3. Mr. Praveen Kutty (Head Retail & SME Banking)
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Nitin Gupta V. DCB Bank & Ors.
Having its registered offices at:
6th floor, Tower A,
Peninsular Business Park,
Senapati Bapat Marg, Lower Parel,
Mumbai400013
4. Mr. R, Venkattesh (Head Operations Tech & HR)
Having its registered offices at:
6th floor, Tower A,
Peninsular Business Park,
Senapati Bapat Marg, Lower Parel,
Mumbai400013
5. Sh. Tarang Goel
Zonal Head,
3rd Floor, Aset house,
7/56, Desh Bandhu Gupta Road,
Karol Bagh, New Delhi110005. ...Defendants
SUIT FOR RECOVERY OF RS. 6,02,311/
(RS. SIX LAKHS TWO THOUSAND THREE
HUNDRED AND ELEVAN ONLY)
Date of institution of the Suit : 24/12/2014
Date on which Judgment was reserved : 04/07/2018
Date of Judgment : 28/07/2018
JUDGMENT
By way of present judgment, this court shall adjudicate upon suit for recovery of Rs.6,02,311/ (Rs. Six Lakhs Two Thousand Three Hundred Suit No. 273/2015 Page 2 of 47 Nitin Gupta V. DCB Bank & Ors.
and Elevan Only) filed by the plaintiff against the defendants. The plaintiff has prayed for a decree of Rs.6,02,311/ alongwith costs and pendentelite and future interest from the date of filing the suit till realization.
CASE OF THE PLAINTIFF AS PER PLAINT Succinctly the necessary facts for just adjudication of the present suit, as stated in the plaint, are as under:
(i) that the plaintiff is the law abiding and gullible citizen and he authorised Sh. Rakesh Kumar to appear and present the case on his behalf. The defendant is having corporate office in Mumbai and branch office in Karol Bagh, New Delhi.
(ii) In the year 2011, the defendant called the plaintiff for availing their services and defendant no. 4 assured the plaintiff to avail the credit facility of the defendant at the minimum rate of interest. The defendant no. 4 in connivance of other defendants assured the plaintiff that in the absence of other borrowers as required by defendant no. 1 loan agreement, Suit No. 273/2015 Page 3 of 47 Nitin Gupta V. DCB Bank & Ors.
defendant no. 4 incorporate B.G.S. Fashion Pvt. Ltd. as one of the borrower.
(iii) The defendant fully aware of the fact that plaintiff was paying the EMI monthly installments from his personal account accepted the same for the next three years. In June 2014, the plaintiff showed his willingness to foreclosure two loan accounts, the defendant no. 4 behaved to the plaintiff in harsh and rude manner and told him blatantly that the plaintiff is required to pay foreclosure charges as per DCB rule i.e. 4% not as the Reserve Bank of India guidelines which says that in individual loan no foreclosure charges to be levied. The plaintiff was unduly assured by the defendants to be paid foreclosure charges of Rs. 4,85,734.48 lately as there is urgency to transfer his loan account to other bank.
(iv) The plaintiff again approached the defendant after finishing the foreclosure process for refunding the aforesaid amount, the defendant made promise to the plaintiff to be refunded laterly.
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(v) A sum of Rs. 4,85,735/ is due and payable by the defendant along with interest @ 24% per annum from the respective due dates, which the defendant kept avoiding the same on one pretext. The plaintiff is entitled to an amount of Rs. 6,02,311/ from the defendants which they did not pay despite requests and legal notice dated 07/09/2014. CASE OF THE DEFENDANTS AS PER WRITTEN STATEMENT Summons for settlement of issues were issued to the defendants and the defendant no. 1 has filed his written statement in the present case and defendant nos. 2, 3 and 5 have adopted WS filed on behalf of defendant no. 1. Defendant no. 4 filed his separate written statement. Succinctly, the case of the defendant Nos. 1,2,3 and 5 are as under:
(i) The suit is improperly instituted on account of misjoinder of parties and ought to be rejected for filing the same against the necessary parties. Suit of the plaintiff does not disclose any cause of action and plaintiff has not sought claimed any relief against defendant nos. 2 to 5 and they have been arrayed as parties to the suit.
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(ii) The plaintiff has not affixed sufficient court fee and special power of attorney has not been sufficiently stamped. The plaintiff has not approached the court with clean hands and has concealed vital and material facts. The plaintiff had approached the defendant no. 1 for grant of two financial facilities for financing the purchase of two commercial properties. At the time of submission of loan application, the plaintiff was director of M/s BGS Fashions Pvt. Ltd. Accordingly loan application form was signed by plaintiff being the applicant and other persons being the coapplicants and financial documents of the last three years of M/s BGS Fashion Pvt. Ltd. were submitted to defendant no. 1.
(iii) Accordingly, thereafter, on the basis of the loan application and financial documents submitted by the plaintiff, two separate loan agreement was executed with defendant no. 1. The plaintiff had also submitted two resolutions passed by the Board of Directors. The said board resolutions contained the approval of the Board of Directors of the said company for Suit No. 273/2015 Page 6 of 47 Nitin Gupta V. DCB Bank & Ors.
availing the aforesaid two loans from defendant and said resolution also authorized the plaintiff to sign and execute the relevant documents. Thus, it is submitted that the board resolution clearly demolish the false and concocted story of the plaintiff that the loan were individual loan and the company had no connection with the same.
(iv) On merits, the parawise reply has been given by the defendant to the plaint of the plaintiff by denying the allegations / contentions of the plaintiff and the defendant has prayed for dismissal of the present suit with cost. Defendant no. 4 filed a separate written statement wherein mostly similar preliminary objections have been taken by the defendant no. 4 as taken by the defendant no. 1. Defendant no. 4 stated that presently he is working as the Head (Operation Tech & HR) with the defendant no. 1. He stated that he had no role in the sanction and disbursal of the two loans in question. He further submitted that during the term of the said loans, plaintiff did not engage in any correspondence or communication with the answering defendant. None of the documents as annexed to the plaint by the plaintiff bears the name and signature of defendant no. 4. Suit No. 273/2015 Page 7 of 47
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On merits, the parawise reply has been given by the defendant to the plaint of the plaintiff by denying the allegations / contentions of the plaintiff and the defendant has prayed for dismissal of the present suit with cost.
REPLICATION AND ISSUES Plaintiff has filed the replication controverting the allegations/ contentions in the written statements of the defendants and contents of the plaint have been reiterated and reaffirmed. From the pleadings of the parties, following issues were framed vide order dated 17/11/2015: (1) Whether plaintiff filed a suit for recovery of Rs. 6,02,311/ with pendent elite and future interest as per market rate? OPP. (2) Whether the notification dated 07/05/2014 issued by the RBI is not applicable to the case of the plaintiff as the loan was granted to a company one of whose Director was plaintiff and not to the plaintiff in his personal capacity? OPD.
(3) Relief.
The aforesaid issues were reframed vide order dated 18/07/2016:
(i) Whether the loan taken by the plaintiff from defendant was a individual loan? OPP.
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(ii) Whether M/s BG's Fashion Pvt. Ltd. stood as coborrower in the present loan account as well? OPD.
(iii) Whether the suit has been instituted by the duly authorised person? OPP.
(iv) Whether the defendant had charged the extra amount on the account of foreclosure charges as per the guidelines of the RBI dated 07/05/2014? OPP.
(v) Relief.
Vide order dated 23/10/2017 the following additional issues were added to the aforesaid issues: (iva) Whether the plaintiff is entitled for the recovery of suit amount, as prayed for? OPP (ivb) Whether the plaintiff is entitled for the interest? If so, at what rate and for which period? OPP EVIDENCE OF THE PLAINTIFF AND DEFENDANTS AND DOCUMENTS RELIED UPON BY THEM:
Plaintiff, in order to prove its case, led plaintiff evidence and got examined special attorney of the plaintiff company Sh. Santosh Kumar as PW1.
PW1 has filed his evidence by way of affidavit wherein he reiterated and reaffirmed the contents of the plaint. PW1 was crossexamined by Suit No. 273/2015 Page 9 of 47 Nitin Gupta V. DCB Bank & Ors.
counsel for the defendant. PW1 in his testimony has relied upon the documents:
(i) Ex.PW1/A Special power of attorney in favour Rakesh Kumar;
(ii) Ex.PW1/B Loan agreement pertaining to the two home loans;
(iii) Ex.PW1/C Copy of Circular dated 7.5.2014 issued by Reserve Bank of India;
(iv) Ex.PW1/D Copy of foreclosure charges as;
(v) Ex.PW1/E Copy of legal notice as; (vi) Ex. PW1/F Dispatch of legal notice via speed post receipts.
The documents which were confronted during the cross examination of PW1:
(i) Exhibit PW1/D1 (Colly.) the financial statement of last three years of M/s Bg's fashions Pvt. Ltd. as submitted by the plaintiff to defendant no.1 for the purposes of availing the two loan facilities.
(ii) Exhibit PW1/D2 and Exhibit PW1/D3. The copies of both the loan agreement which were executed between the parties.
(iii) Exhibit PW1/D4: The copies of the two board resolution which were passed by the Bg's Fashion Pvt. Ltd. in favour of plaintiff alongwith the affidavits.Suit No. 273/2015 Page 10 of 47
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The Defendant no. 1 has led defendant evidence and got examined Sh. Jyotirmay Mishra, its Authorized Representative as DW1. The DW1 has filed his evidence by way of affidavit wherein he reiterated and reaffirmed the contents of the written statements. DW1 was crossexamined by counsel for the plaintiff. DW1 in his testimony has relied upon the documents:
(i) Ex. DW1/1 General Power of Attorney and special power of attorney;
(ii) Ex DW1/2 Power of attorney of defendant no. 2, 3 and 5;
(iii) Ex. DW1/3 copy of disbursement request form;
(iv) Ex. DW1/4 copy of sanction letter;
(v) Copies of various emails as Ex. PW1/D5;
(vi) Mark XLetter dated 18/09/2014 which was sent to the
counsel for the plaintiff;
(vii) Ex. DW1/A Copy of power of attorney executed by
defendant no. 4.
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This court heard the final arguments as advanced by Ld. counsel for the plaintiff and defendants and perused the material available on record. ISSUE WISE FINDINGS
(i) Whether the loan taken by the plaintiff from defendant was a individual loan? OPP.
(ii) Whether M/s BG's Fashion Pvt. Ltd. stood as coborrower in the present loan account as well? OPD.
(iv) Whether the defendant had charged the extra amount on the account of foreclosure charges as per the guidelines of the RBI dated 07/05/2014? OPP.
(iva) Whether the plaintiff is entitled for the recovery of suit amount, as prayed for? OPP The aforesaid Issue nos.(i), (ii) and (iv) framed on 18.7.2016 and issue no. (iva) framed on 23.10.2017 are interrelated and interconnected to each other and accordingly they are decided together: ADMITTED FACTS:
The following facts are admitted by the parties either on pleadings or evidence:
a) The Plaintiff approached defendant no.1 for grant of two financial facilities for financing the purchase of two commercial properties.Suit No. 273/2015 Page 12 of 47
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b) The Loan Agreement bearing No.HHOMDEL000573 dated 10.1.2011, defendant no.1 sanctioned the loan facility of Rs.1,10,00,000/ (Rupees One Crore Ten Lakhs only) for purchase of property bearing Shop No. CSO102, First Floor, DLF City Centre, M.G. Road, Gurgaon, Haryana122001 (hereinafter referred to as Loan Agreement No.1). The Plaintiff stood as a borrower and the below mentioned persons/ entities stood as coborrowers:
(i) Ms. Aditi Gupta
(ii) Mr. Kuldeep Chand
(iii) BG's Fashion Pvt. Ltd.
c) The Loan Agreement bearing No.HHOMDEL000572 dated 10.1.2011, defendant no.1 sanctioned the loan facility of Rs.1,12,00,000/ (Rupees One Crore Twenty Lakhs only) for purchase of property bearing Shop No. CSO103, First Floor, DLF City Centre, M.G. Road, Gurgaon, Haryana122001 (hereinafter referred to as Loan Agreement No.2) was signed by the Plaintiff stood as borrower and the below mentioned persons/ entities stood as coborrowers:
(i) Ms. Aditi Gupta
(ii) BG's Fashion Pvt. Ltd.
The Loan Agreement No.1 is collectively exhibited as Exhibit PW1/B (colly.).The Loan Agreement No.1 is also collectively Suit No. 273/2015 Page 13 of 47 Nitin Gupta V. DCB Bank & Ors.
exhibited as Ex.PW1/D2 and Loan Agreement No.2 is also collectively exhibited as Ex. PW1/D3.
d) The tenure of Loan was 180 months from March, 2011 and since the Plaintiff has cleared the debts of defendant no.1 bank in the month of July,2014, therefore the defendant no.1 bank had levied the following foreclosure charges/prepayment charges: Loan Account No. Foreclosure/PrePayment Charges No.HHOMDEL000572 Rs.2,45,054.88 No.HHOMDEL000573 Rs.2,40,679.60 Total: Rs.4,85,734.48 (Rupees Four Lakh Eighty five thousand seven hundred thirty four and paise forty eight only) The moot question before this court is whether Foreclosure charges/Prepayment charges recovered by defendant no.1 from the Plaintiff were legally recoverable or not.
ARGUMENTS OF PLAINTIFF The Plaintiff is strongly placing the reliance upon the document Exhibit PW1/C i.e. Circular dated 7.5.2014 issued by the Reserve Bank of India whereby it was advised by the RBI to the banks that they are not permitted to charge foreclosure charges/prepayment Suit No. 273/2015 Page 14 of 47 Nitin Gupta V. DCB Bank & Ors.
penalties on all floating rate terms loans sanctioned to individual borrowers, with immediate effect. The Ld. Counsel for the Plaintiff has strenuously argued that in the teeth of the said Circular, the Defendant Bank was/is not authorized to levy the foreclosure/pre payment charges from the Plaintiff.
It is admitted case of the parties that the aforesaid Loans which were disbursed to the Plaintiff were on account of purchase of the properties and the same were Home Loans. The purchase of property may be commercial shops does not change or convert the nature of loan from Home Loan to Business Loan. The perusal of the Loan Agreements [(Exhibits PW1/B (Colly.), PW1/D2 and PW 1/D3) clearly depicts that they were Home Equity Agreement. The Plaintiff has not taken any Business loan at any point of time. The joining of Bg's Fashion Pvt. Ltd. as coborrower in the Loan Agreements does not in any way convert the Home Loan as Business Loan.
It is also admitted case of the parties that the respective property as mentioned above was kept for the security of the loan. The defendant no.1 Bank has failed to prove any loss or damages on account of pre payment of loan by the Plaintiff. The pre payment/Foreclosure charges are also against the Public Policy. ARGUMENTS OF DEFENDANTBANK The Ld. Counsel for defendants has strenuously and with forensic tenacity has argued that the loan disbursed to the Plaintiff is not Suit No. 273/2015 Page 15 of 47 Nitin Gupta V. DCB Bank & Ors.
the individual loan but the same was business loan thus the said circular of RBI is not binding upon the Bank. In order to buttress the argument the defendants have relied upon the aforesaid Loan Agreements Exhibit PW1/B (Colly.) whereby the company i.e. BG's Fashion Pvt. Ltd. was made as coborrower of the aforesaid Loan Agreements. The defendant no.1 also relies upon the following documents:
(a) Exhibit PW1/D1 (Colly.) the financial statement of last three years of M/s Bg's fashions Pvt. Ltd. as submitted by the plaintiff to defendant no.1 for the purposes of availing the two loan facilities.
(b) Exhibit PW1/D2 and Exhibit PW1/D3. The copies of both the loan agreement which were executed between the parties.
(c) Exhibit PW1/D4: The copies of the two board resolution which were passed by the Bg's Fashion Pvt. Ltd. in favour of plaintiff alongwith the affidavits.
(d) Exhibit Dw1/5 (Colly.): the copies of various Emails which were exchanged between the plaintiff and defendant. It is assiduously argued that all the documents which were filed by the defendants shows that the present loan was granted to the Company and on the request of the company after verifying the financial status or income generated by the company i.e. Bg's Fashion Ltd. It is further argued that PW1 Shri Santosh Kumar has admitted in the cross examination that the plaintiff and other Suit No. 273/2015 Page 16 of 47 Nitin Gupta V. DCB Bank & Ors.
co borrowers had signed the loan agreement. The PW1 has also admitted that he had given the financial documents of the last three years to the defendants for the grant of loan and the loan was taken only on the basis of the income generated by the bg's fashion Pvt. Ltd. PW1 has admitted the Board resolution and financial statements of Bg's fashion Pvt. Ltd. It is also argued that the Bank after considering the status of assets of the company has advanced the aforesaid loans and the company has also passed the resolution to become coborrower vide resolution dated 04.1.2011 [which document is the part of Ex. PW1/D4(colly.)]. The said resolution was signed by Nitin Gupta and Aditi Gupta as director of the Company.
FINDINGS OF THE COURT APPLICABILITY OF RBI CIRCULAR EXHIBIT PW1/C The arguments advanced by the Ld. counsel for the defendant bank to the effect that the loan was not the individual loan and/or Home Loan but the same was business loan/corporate loan sansmerit and the same is hereby rejected on the following grounds:
(a)The Perusal of loan agreements no. 1 & 2 clearly depicts that Plaintiff was borrower and rest of the persons/entities were co Suit No. 273/2015 Page 17 of 47 Nitin Gupta V. DCB Bank & Ors.
borrowers. The said factum is also admitted by the parties. The clause 2.11 of the loan agreement is reproduced as under: "Liability of Borrower to be joint and several "Where the Loan is provided to more than one Borrower or where the payment obligations are secured by any guarantee, notwithstanding anything herein stated, the liability of the Borrower/s to repay Loan together with interest, and all other amounts and to observe these Terms and Conditions and terms and conditions of any other Agreement/s, document/s that may be executed by the Borrower with DCB in respect of the Loan or any other loan or loans is joint and several."
The aforesaid clause clearly disseminates that the liability of the each borrower is joint and several. The plaintiff being borrower of the loan and rest of the persons/entities were coborrower. The liability of the plaintiff as per the agreement is not only joint but several also. In these conditions, it can be safely inferred that defendant bank has absolute right to recover the loan even from single borrower i.e. Plaintiff. Each and every borrower is single individual in terms of the said agreement.
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(b) The Loan Agreements [(Exhibits PW1/B (Colly.), PW1/D2 and PW1/D3)] clearly depict that they were Home Equity Agreements. Further, the aforesaid loan agreements do not, in any way, reflect that the loan amounts were advanced for any business purpose. The mere joining of M/s BG's Fashion Pvt. Ltd. as a coborrower along with the plaintiff does not convert the home loan to the business loan.
(c) The purchase of the property whether it be a commercial property or a residential property by use of the loan amount by defendant bank does not in any manner converts the loan to business loan. Admittedly, the loan amounts were advanced for the purchase of the property and the same were not for any business purpose.
(d) It is also undisputed that the properties in question which were purchased from the advanced loan amounts were also secured by the Plaintiff bank and the loan amounts were not only advance on the strength of the financial status of the Bg's Pvt. Limited Company.
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The arguments of the Ld. counsel for the defendant bank that circular of the RBI Ex. PW1/C is not applicable in the present case sansmerit and the same is hereby rejected. The circular of the RBIExhibit PW 1/C squarely applies to the present case and in terms of the said circular, the defendant Bank is not entitled to levy prepayment charges.
WHAT LOSS/DAMAGE CAN BE SAID TO HAVE SUFFERED OR SUSTAINED BY DEFENDANT NO.1 BANK The counsel for the plaintiff has argued that the defendant bank has failed to show how the defendant bank has suffered any loss or damages on account of prepayment of the loan amount.
I have profit to refer the latest Judgment of Hon'ble High Court of Delhi passed in RFA No.231/2018 titled as Kamal Jeet Versus Sneh Lata Chaturvedi (Since deceased through her LR Babita). The part of para No.3 and complete para no. 4 are reproduced hereunder: "...14. At this stage this Court would like to observe with all humil ity that there are apparently two views which the Supreme Court has taken in its line of cases as regards entitlement to forfeit earnest moneys. Whereas one view is the view which is the view taken by no less than a Constitution Bench judgment of the Supreme Court in the case of Fateh Chand Vs.Balkishan Dass AIR 1963 SC 1405 that forfeiture of earnest money can only be of Suit No. 273/2015 Page 20 of 47 Nitin Gupta V. DCB Bank & Ors.
a nominal amount, and which was a sum of Rs. 1,000/ out of the total sale price of Rs. 1,12,500/ in Fateh Chand's case (supra), and that Supreme Court in this judgment has laid down the ratio that whenever a seller forfeits an amount paid by a buyer under an agreement to sell then the source of right of forfeiture arises only because of Section 74 of the Contract Act. It is held in Fateh Chand's case (supra) that where a seller pleads that there is a breach of contract by the buyer and the seller seeks to forfeit an amount as paid by the buyer for being appropriated as designated liquidated loss amount of damages as per contractual clause, then the act of forfeiture is one which falls under Section 74 of the Con tract Act. Forfeiture of an amount paid under the agreement is by a seller who already has with him moneys in his pocket and therefore there is no requirement to file a suit to recover any amount from the buyer, however the law with respect to entitlement of forfeiture arises only because the forfeited amount is liquidated damages un der Section 74 of the Contract Act. That the forfeiture of earnest money is nothing but forfeiture of liquidated damages is clearly so clarified by the recent judgment of the Supreme Court in the case of Kailash Nath Associates Vs. Delhi Development Authority and Another, (2015) 4 SCC 136 and relevant paras of this judgment are paras 30 to 44 which read as under: "30. We now come to the reasoning which involves Section 74 of the Contract Act. The Division Bench held: "38. The learned Single Judge has held that the property was ultimately auctioned in the year 1994 at a price which fetched DDA a handsome return of Rupees 11.78 crores and there be ing no damages suffered by DDA, it could not forfeit the earnest money
39. The said view runs in the teeth of the decision of the Supreme Court reported as AIR 1970 SC 1986 Shree Hanuman Cotton Mills & Anr. V. Tata Aircraft Ltd. which holds that as against an amount tendered by way of security, amount Suit No. 273/2015 Page 21 of 47 Nitin Gupta V. DCB Bank & Ors.
tendered as earnest money could be forfeited as per terms of the contract.
40. We may additionally observe that original time to pay the balance bid consideration, as per Ex.PI was May 18, 1982 and as extended by Ex. P8 was October 28, 1982. That DDA could auction the plot in the year 1994 in the sum of Rupees 11.78 crore was immaterial and not relevant evidence for the reason damages with respect to the price of property have to be com puted with reference to the date of the breach of the contract."
"31. Section 74 as it originally stood read thus: "When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, the party complain ing of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named."
"32. By an amendment made in 1899, the Section was amended to read: ―74. Compensation for breach of contract where penalty stipulated for.-- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Explanation.--A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
Exception.--When any person enters into any bailbond, recogni zance or other instrument of the same nature, or, under the provi sions of any law, or under the orders of the Central Government or Suit No. 273/2015 Page 22 of 47 Nitin Gupta V. DCB Bank & Ors.
of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be li able, upon breach of any condition of any such instrument, to pay the whole sum mentioned therein.
Explanation.--A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.
"33. Section 74 occurs in Chapter 6 of the Indian Contract Act, 1872 which reads ―Of the consequences of breach of contract ‖. It is in fact sandwiched between Sections 73 and 75 which deal with compensation for loss or damage caused by breach of contract and compensation for damage which a party may sustain through non fulfillment of a contract after such party rightfully rescinds such contract. It is important to note that like Sections 73 and 75, com pensation is payable for breach of contract under Section 74 only where damage or loss is caused by such breach.
"34. In Fateh Chand v. Balkishan Das, 1964 SCR (1) 515, this Court held: "The section is clearly an attempt to eliminate the somewhat elabo rate refinements made under the English common law in distinguish ing between stipulations providing for payment of liquidated dam ages and stipulations in the nature of penalty. Under the common law a genuine preestimate of damages by mutual agreement is re garded as a stipulation naming liquidated damages and binding be tween the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English com mon law, by enacting a uniform principle applicable to all stipula tions naming amounts to be paid in case of breach, and stipulations by way of penalty. ....Suit No. 273/2015 Page 23 of 47
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"Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The mea sure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such com pensation as it deems reasonable having regard to all the circum stances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled prin ciples. The section undoubtedly says that the aggrieved party is enti tled to receive compensation from the party who has broken the con tract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages"; it does not justify the award of com pensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of con tract can be awarded to make good loss or damage which nat urally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach."(At page 526, 527) Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special bene fit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for for feiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the Suit No. 273/2015 Page 24 of 47 Nitin Gupta V. DCB Bank & Ors.
amount named or penalty stipulated. The jurisdiction of the court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression "to receive from the party who has broken the contract" does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exer cised in dealing with the claim of the party complaining of breach of contract. The court has to adjudge in every case reason able compensation to which the plaintiff is entitled from the defen dant on breach of the contract. Such compensation has to be ascer tained having regard to the conditions existing on the date of the breach."(At page 530).
"35. Similarly, in Maula Bux v. Union of India (UOI), 1970 (1) SCR 928, it was held: "Forfeiture of earnest money under a contract for sale of property movable or immovableif the amount is reasonable, does not fall within Section 74. That has been decided in several cases :Kunwar Chiranjit Singh v. Har Swarup, A.I.R.1926 P.C.1; Roshan Lal v. The Delhi Cloth and General Mills Company Ltd., Delhi, I.L.R. All.166; Muhammad Habibullah v. Muhammad Shafi, I.L.R. All. 324; Bishan Chand v. Radha Kishan Das, I.D. 19 All. 49. These cases are easily explained, for forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty. Counsel for the Union, however, urged that in the present case Rs.10,000/ in respect of the potato contract and Rs. 8,500 in respect of the poultry contract were genuine preesti mates of damages which the Union was likely to suffer as a result of breach of contract, and the plaintiff was not entitled to any relief Suit No. 273/2015 Page 25 of 47 Nitin Gupta V. DCB Bank & Ors.
against forfeiture. Reliance in support of this contention was placed upon the expression (used in Section 74 of the Contract Act), "the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensa tion". It is true that in every case of breach of contract the person ag grieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree, and the Court is com petent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases com pensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine preestimate may be taken into consideration as the measure of reasonable compensa tion, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming com pensation must prove the loss suffered by him. In the present case, it was possible for the Government of India to lead evidence to prove the rates at which potatoes, poultry, eggs and fish were purchased by them when the plaintiff failed to deliver "regularly and fully" the quantities stipulated under the terms of the contracts and after the contracts were terminated. They could have proved the rates at which they had to be purchased and also the other incidental charges incurred by them in procuring the goods contracted for. But no such attempt was made."(At page 933,934) "36. In Shree Hanuman Cotton Mills and Anr. v. Tata Aircraft Limited, 1970 (3) SCR 127 it was held: Suit No. 273/2015 Page 26 of 47 Nitin Gupta V. DCB Bank & Ors.
"From a review of the decisions cited above, the following principles emerge regarding "earnest":
(1) It must be given at the moment at which the contract is concluded (2) It represents a guarantee that the contract will be fulfilled or, in other words, 'earnest' is given to bind the contract. (3) It is part of the purchase price when the transaction is carried out. (4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the con tract, on default committed by the buyer, the seller is entitled to for feit the earnest" (At page 139) "The learned Attorney General very strongly urged that the pleas cov ered by the second contention of the appellant had never been raised in the pleadings nor in the contentions urged before the High Court.
The question of the quantum of earnest deposit which was forfeited being unreasonable or the forfeiture being by way of penalty, were never raised by the appellants. The Attorney General also pointed out that as noted by the High Court the appellants led no evidence at all and, after abandoning the various pleas taken in the plaint, the only question pressed before the High Court was that the deposit was not by way of earnest and hence the amount could not be for feited. Unless the appellants had pleaded and established that there was unreasonableness attached to the amount required to be de posited under the contract or that the clause regarding forfeiture amounted to a stipulation by way of a penalty, the respondents had no opportunity to satisfy the Court that no question of unreasonable ness or the stipulation being by way of penalty arises. He further urged that the question of unreasonableness or otherwise regarding earnest money does not at all arise when it is forfeited according to the terms of the contract. In our opinion the learned Attorney General is well founded in his contention that the appellants raised no such contentions covered by the second point, noted above. It is therefore unnecessary for us to go into the question as to whether the amount deposited by the appellants, in this case, by way of earnest and for feited as such, can be considered to be reasonable or not. We ex press no opinion on the question as to whether the element of unrea Suit No. 273/2015 Page 27 of 47 Nitin Gupta V. DCB Bank & Ors.
sonableness can ever be considered regarding the forfeiture of an amount deposited by way of earnest and if so what are the neces sary factors to be taken into account in considering the reasonable ness or otherwise of the amount deposited by way of earnest. If the appellants were contesting the claim on any such grounds, they should have laid the foundation for the same by raising appropriate pleas and also led proper evidence regarding the same, so that the respondents would have had an opportunity of meeting such a claim."(At page142) "37. And finally in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, it was held:
"64. It is apparent from the aforesaid reasoning recorded by the Arbi tral Tribunal that it failed to consider Sections 73 and 74 of the In dian Contract Act and the ratio laid down in Fateh Chand case [AIR 1963 SC 140: (1964) 1 SCR 515 at p. 526] wherein it is specifically held that jurisdiction of the court to award compensation in case of breach of contract is unqualified except as to the maximum stipu lated; and compensation has to be reasonable. Under Section 73, when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which the parties knew when they made the contract to be likely to result from the breach of it. This section is to be read with Section 74, which deals with penalty stipulated in the contract, inter alia (rele vant for the present case) provides that when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable com pensation not exceeding the amount so named. Section 74 empha sizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. There fore, the emphasis is on reasonable compensation. If the compensa Suit No. 273/2015 Page 28 of 47 Nitin Gupta V. DCB Bank & Ors.
tion named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensa tion for the loss suffered. But if the compensation named in the con tract for such breach is genuine preestimate of loss which the par ties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him.
"67........In our view, in such a contract, it would be difficult to prove exact loss or damage which the parties suffer because of the breach thereof. In such a situation, if the parties have preestimated such loss after clear understanding, it would be totally unjustified to arrive at the conclusion that the party who has committed breach of the contract is not liable to pay compensation. It would be against the specific provisions of Sections 73 and 74 of the Indian Contract Act. There was nothing on record that compensation contemplated by the parties was in any way unreasonable. It has been specifically men tioned that it was an agreed genuine preestimate of damages duly agreed by the parties. It was also mentioned that the liquidated dam ages are not by way of penalty. It was also provided in the contract that such damages are to be recovered by the purchaser from the bills for payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that the stipulated condition was by way of penalty or the compensation contemplated was, in any way, unreasonable. There was no reason for the Tri bunal not to rely upon the clear and unambiguous terms of agree ment stipulating preestimate damages because of delay in supply of goods. Further, while extending the time for delivery of the goods, the respondent was informed that it would be required to pay stipulated damages.
"68. From the aforesaid discussions, it can be held that:
(1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same.Suit No. 273/2015 Page 29 of 47
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(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act.
(3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him be fore he can claim a decree. The court is competent to award reason able compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of a con tract.
(4) In some contracts, it would be impossible for the court to assess the compensation arising from breach and if the compen sation contemplated is not by way of penalty or unreasonable, the court can award the same if it is genuine preestimate by the parties as the measure of reasonable compensation."
"38. It will be seen that when it comes to forfeiture of earnest money, in Fateh Chand's case, counsel for the appellant conceded on facts that Rs.1,000/ deposited as earnest money could be for feited. (See: 1964 (1) SCR Page 515 at 525 and 531). "39. Shree Hanuman Cotton Mills & Another which was so heav ily relied by the Division Bench again was a case where the appel lants conceded that they committed breach of contract. Further, the respondents also pleaded that the appellants had to pay them a sum of Rs.42,499/ for loss and damage sustained by them. (See: 1970 (3) SCR 127 at Page 132). This being the fact situation, only two questions were argued before the Supreme Court: (1) that the amount paid by the plaintiff is not earnest money and (2) that for feiture of earnest money can be legal only if the amount is consid ered reasonable. (at page 133). Both questions were answered Suit No. 273/2015 Page 30 of 47 Nitin Gupta V. DCB Bank & Ors.
against the appellant. In deciding question two against the appel lant, this Court held: "But, as we have already mentioned, we do not propose to go into those aspects in the case on hand. As mentioned earlier, the appel lants never raised any contention that the forfeiture of the amount amounted to a penalty or that the amount forfeited is so large that the forfeiture is bad in law. Nor have they raised any contention that the amount of deposit is so unreasonable and therefore forfeiture of the entire amount is not justified. The decision in Maula Bux's [1970]1SCR928 had no occasion to consider the question of reason ableness or otherwise of the earnest deposit being forfeited. Because, from the said judgment it is clear that this Court did not agree with the view of the High Court that the deposits made, and which were under consideration, were paid as earnest money. It is under those circumstances that this Court proceeded to consider the applicability of Section 74 of the Contract Act. (At page 143)" "40. From the above, it is clear that this Court held that Maula Bux's case was not, on facts, a case that related to earnest money. Consequently, the observation in Maula Bux that forfeiture of earnest money under a contract if reasonable does not fall within Section 74, and would fall within Section 74 only if earnest money is considered a penalty is not on a matter that directly arose for de cision in that case. The law laid down by a Bench of 5 Judges in Fateh Chand's case is that all stipulations naming amounts to be paid in case of breach would be covered by Section 74. This is be cause Section 74 cuts across the rules of the English Common Law by enacting a uniform principle that would apply to all amounts to be paid in case of breach, whether they are in the nature of penalty or otherwise. It must not be forgotten that as has been stated above, forfeiture of earnest money on the facts in Fateh Chand's case was conceded. In the circumstances, it would therefore be correct to say that as earnest money is an amount to be paid in case of breach of contract and named in the contract as such, it would necessarily be covered by Section 74.
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"41. It must, however, be pointed out that in cases where a public auction is held, forfeiture of earnest money may take place even be fore an agreement is reached, as DDA is to accept the bid only after the earnest money is paid. In the present case, under the terms and conditions of auction, the highest bid (along with which earnest money has to be paid) may well have been rejected. In such cases, Section 74 may not be attracted on its plain language because it applies only ―when a contract has been broken.
"42. In the present case, forfeiture of earnest money took place long after an agreement had been reached. It is obvious that the amount sought to be forfeited on the facts of the present case is sought to be forfeited without any loss being shown. In fact it has been shown that far from suffering any loss, DDA has received a much higher amount on reauction of the same plot of land. "43. On a conspectus of the above authorities, the law on compen sation for breach of contract under Section 74 can be stated to be as follows:
1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine preestimate 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 dam ages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liq uidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
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2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found in ter alia in Section 73 of the Contract Act
3. Since Section 74 awards reasonable compensation for dam age or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.
4. The Section applies whether a person is a plaintiff or a defendant in a suit.
5. The sum spoken of may already be paid or be payable in future.
6. The expression ―whether or not actual damage or loss is proved to have been caused thereby‖ means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a gen uine preestimate of damage or loss, can be awarded.
7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application.
"44. The Division Bench has gone wrong in principle. As has been pointed out above, there has been no breach of contract by the ap pellant. Further, we cannot accept the view of the Division Bench that the fact that the DDA made a profit from reauction is irrele vant, as that would fly in the face of the most basic principle on the award of damages - namely, that compensation can only be given for damage or loss suffered. If damage or loss is not suffered, the law does not provide for a windfall." (emphasis added) "15. In sum and substance what is held by the Constitution Bench of the Supreme Court in the cases of Fateh Chand (supra) and the recent judgment in Kailash Nath Associates (supra) is that whenever there is Suit No. 273/2015 Page 33 of 47 Nitin Gupta V. DCB Bank & Ors.
a breach of contract then earnest money which is forfeited because of the breach, whether by a plaintiff or a defendant in a contract, the forfeiture is of that amount which are in fact liquidated damages specified under a contract and that for claiming damages under a contract, whether liqui dated under Section 74 of the Contract Act or unliquidated under Section 73 of the Contract Act, existence of loss is a sine qua non. In other words, if no loss is caused to a seller who has in his pocket monies of buyer, then the seller can only forfeit a nominal amount unless the seller has pleaded and proved that losses have been caused to him on account of the breach of contract by the buyer. Once there is no pleading of loss suf fered by a seller under an agreement to sell, then large amounts cannot be forfeited though so entitled to a seller under a clause of an agreement to sell/contract entitling forfeiture of 'earnest money' because what is for feited is towards loss caused, and that except a nominal amount being al lowed to be forfeited as earnest money, any forfeiture of any amount, which is not a nominal amount, can only be towards loss if suffered by the seller. Thus if there is no loss which is suffered by a seller then there cannot be forfeiture of large amounts which is not a nominal amount, simply because a clause in a contract provides so. The following has been held in the judgment in the case of Kailash Nath Associates (supra):
(i) As per the facts existing in the case of Kailash Nath Associates (supra) the Single Judge of the High Court had held that since no dam ages were suffered by DDA therefore DDA could not forfeit the earnest money. (Para 30 of Kailash Nath Associates's case (supra)).
(ii) The Division Bench of the High Court however set aside the judgment of the Single Judge by holding that amount tendered as earnest money can be forfeited because and simply forfeiture of amount called as earnest money can be forfeited in terms of the contract. (Para 30 of Kailash Nath Associates's case (supra) reproducing Para 39 of the Division Bench judgment of the High Court).
(iii) Supreme Court in the case of Kailash Nath Associates (supra) as per Para 44 of its judgment holds that the Division Bench of the High Court had gone wrong in principle because compensation can be awarded (where there is breach of contract) only if loss or damage is suf Suit No. 273/2015 Page 34 of 47 Nitin Gupta V. DCB Bank & Ors.
fered i.e where there is no loss or damage suffered as a result of breach of contract no compensation can be awarded as law does not provide for a windfall i.e large amounts though called contractually as earnest money cannot be forfeited unless loss is pleaded and proved to have been suf fered. These observations have crossreference to Para 34 of the judgment of Kailash Nath Associates's case (supra) where with reference to the para of Fateh Chand's case (supra) it is held that the language of Sec tion 74 of the Contract Act that 'whether or not damage or loss is proved to have been caused by breach' is the language that such language only discharges proof of actual loss but that does not justify award of compen sation where in consequence of breach no injury/loss has at all resulted.
(iv) Earnest money is an amount to be paid in case of breach of contract, and named in contract as such, and that forfeiture of earnest money is covered under the entitlement to liquidated damages under Section 74 of the Contract Act vide Para 40 in the case of Kailash Nath Associates (supra).
(v) The language of Section 74 of the Contract Act that "whether or not actual loss or damage is proved to have been caused thereby" means only that where it is difficult or impossible to prove loss caused by the breach of contract then the liquidated damages/amount (being the amount of earnest money) can be awarded vide Para 43(6) of Kailash Nath Asso ciates's case (supra) but where nature of contract is such that loss caused because of breach can be assessed and so proved then in such cases loss suffered must be proved to claim the liquidated damages of earnest money. This finding has cross reference to Para 37 of judgment in Kailash Nath Associates's case (supra) where the observations of Supreme Court in Para 67 of the case of ONGC Ltd. Vs. Saw Pipes Ltd. (2003) 5 SCC 705 are quoted that liquidated damages are awarded where it is difficult to prove exact loss or damage caused as a result of breach of contract.
(vi) Even where liquidated damages can be awarded under Section 74 of the Contract Act because loss or damages cannot be proved in a contrac tual breach yet if the liquidated damages (earnest money) are a penalty amount by its nature i.e prescribed liquidated damages figure is unrea sonable, then for the liquidated damages amount or earnest money Suit No. 273/2015 Page 35 of 47 Nitin Gupta V. DCB Bank & Ors.
amount forfeiture cannot be granted/allowed and that only reasonable amount is allowed as damages with the figure of liquidated damages be ing the upper limit vide Para 43(1) of Kailash Nath Associates's case (supra).
"16. Similar ratio as has been laid down by the Supreme Court in Kailash Nath Associates's case (supra) was also the ratio of the judg ment of the Supreme Court in the case of V.K. Ashokan Vs. Assistant Excise Commissioner and Others (2009) 14 SCC 85 and paras 66 to 71 of this judgment reads as under: "66. There is another aspect of the matter which cannot be lost sight of. If damages cannot be calculated and the terms of the con tract provides therefor only for penalty by way of liquidated dam ages, having regard to the provisions contained in Section 74 of the Indian Contract Act a reasonable sum only could be recovered which need not in all situations even be the sum specified in the contract. (See Maula Bux vs. Union of India and Shree Hanuman Cotton Mills vs. Tata Air Craft Ltd.)
67. Section 74 of the Contract Act reads as under:
"74. Compensation for breach of contract where penalty stipulated forWhen a contract has been broken, if a sum is named in the con tract as the amount to be paid in case of such breach, or if the con tract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."
68. There are authorities, no doubt coloured by the view which was taken in English cases, that Section 74of the Contract Act would have no application to cases of deposit for due performance of a contract which is stipulated to be forfeited for breach, e.g.,. Natesa Aiyar v. Appavu Padayachi, Singer Manufacturing Company v. Raja Prosad; Manian Patter v. The Madras Railway Company, but Suit No. 273/2015 Page 36 of 47 Nitin Gupta V. DCB Bank & Ors.
this view no longer is good law in view of the judgment of this Court in Fateh Chand vs. Balkishan Das.
69. This Court in Fateh Chand case observed at pp. 52627 (of SCR):
―10. Section 74 of the Contract Act deals with the measure of dam ages in two classes of cases (i) where the contract names a sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty. ... The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for.‖ The Court also observed: (AIR p. 1411, para 11) ―11. It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been re ceived by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that Section 74 applies only to cases where the aggrieved party is seeking to re ceive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. In our judgment the expression the contract contains any other stipulation by way of penalty'comprehensively applies to every covenant involving a penalty whether it is for pay ment on breach of contract of money or delivery of property in fu ture, or for forfeiture of right to money or other property already de livered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by Section 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pur suant to the terms of contract which expressly provides for forfei ture, the court has jurisdiction to award such sum only as it con siders reasonable, but not exceeding the amount specified in the contract as liable to forfeiture.‖ and that, Suit No. 273/2015 Page 37 of 47 Nitin Gupta V. DCB Bank & Ors.
―14. ... There is no ground for holding that the expression contract contains any other stipulation by way of penalty' is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited.‖ (AIR p. 1412, para 14)
70. Forfeiture of earnest money under a contract for sale of property whether movable or immovable, if the amount is reasonable, would not fall within Section 74. That has been opined in several cases. (See Kunwar Chiranjit Singh v. Har Swarup; Roshan Lal v. Delhi Cloth and General Mills Co. Ltd.; Mohd. Habibullah v. Mohd. Shafi ; Bishan Chand v. Radha Kishan Das.) These cases have ex plained that forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, Section 74 applies.
71. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty. (See Maula Bux and Saurabh Prakash v. DLF Universal Ltd. )" (emphasis added) "17. All the judgments of the Supreme Court which have been relied upon in Satish Batra's case (supra) are of a Bench strength lesser than the Constitution Bench strength of the Supreme Court in Fateh Chand's case (supra) and the law is well settled that it is the judgment of the larger Bench of the Supreme Court which will pre vail over the judgment of a Bench strength of lesser number of judges. Also, as already stated above, in the recent judgment in Kailash Nath Associates's case (supra) Supreme Court has now clarified that a forfeiture of an earnest money necessarily falls un der Section 74 of the Contract Act i.e before forfeiture can take place it must be necessary that loss must be caused. Also, Supreme Court has further clarified in Kailash Nath Associates's case (supra) that it is very much possible that forfeiture of an amount Suit No. 273/2015 Page 38 of 47 Nitin Gupta V. DCB Bank & Ors.
can be in the nature of penalty and if the amount which is allowed to be forfeited under the contract is in the nature of penalty then Courts are empowered to treat the amount of liquidated damages (earnest money) as one in the nature of penalty clause and that earnest money amount only represents the upper limit of damages which are allowed to be forfeited in terms of the forfeiture clause, and actual forfeiture only of a lesser and a reasonable amount should be allowed instead of the large amount/penalty as stated under a contract as being entitled to be forfeited and that too merely because a contractual clause allows such a forfeiture.
"4. Accordingly, in view of the facts of the present case that the re spondent/defendant has admittedly received Rs. 12,50,000/ from the appellant/plaintiff under the subject agreement to sell with re spect to which suit for specific performance has been dismissed, and in this suit there is no loss which is pleaded and proved by the re spondent/defendant to be caused on account of alleged breach of the agreement to sell by the appellant/plaintiff, and thus by applying the ratio in the case of M.C. Luthra (supra), a money decree for a sum of Rs.12,50,000/ is passed in favour of the appellant/plaintiff and against the respondent/defendant along with interest at 7½ % per an num simple pendente lite and future till realization. Decree sheet be accordingly drawn up. Appeal is allowed and disposed of to the extent as stated above."
The dictums of the Hon'ble Supreme Court, which were consistently followed by the Hon'ble High Court of Delhi, vividly expound the law that sufferance of damages is sinequa non for forfeiting the earnest money in case of breach of the contract. The aforesaid dictums were although in the context where the breach has occurred and after the breach the seller of the immovable property is required to demonstrate before the court Suit No. 273/2015 Page 39 of 47 Nitin Gupta V. DCB Bank & Ors.
that he has suffered loss/damages on account of such breach. The letter, scheme and spirit of Indian Contract Act and more particularly Sections 73 and 74 of the Contract Act laydown the compensation in case of breach of the contract. The party even in the case of the breach of contract is not entitled to forfeit the money unless and until the parties show that on account of said breach, the parties have suffered a loss/damages. Thus, loss/damages are sine qua non for claiming the damages and the same are not only to be pleaded but the same are also liable to be proved by the Seller. The seller cannot forfeit the amount until and unless the loss is proved by the seller. Interestingly, in the present case, there is no violation/breach of the contract in repayment of the loan amount by the plaintiff/borrower and on the contrary, the plaintiff was being penalized by the defendant bank on account of prepayment of the loan amount. In my considered opinion, the present case is much superior on account of the fact that there is no breach of any contractual term i.e. payment of the installments of the loan amount. On the contrary, the plaintiff has paid and cleared the entire loan amount within three years of granting the loan, although, through cyclical payment but he was penalized only on account of the Suit No. 273/2015 Page 40 of 47 Nitin Gupta V. DCB Bank & Ors.
fact that he has made prepayment of the loan amount. The defendant has not pleaded or proved any loss/damages, which the defendant suffered on account of prepayment of the loan amount. The foreclosure charges/ prepayment charges are in the form of penalty and the defendant bank was bound to prove in order to lay its claim before the court. The bank was liable to prove that in what manner it has suffered and sustained loss on account of prepayment. However, the defendant bank has failed to prove on record that in what manner it has suffered any loss/damages on account of prepayment of the loan amount. On the contrary, the defendant Bank has not even pleaded that it has suffered loss and damage on account of prepayment/foreclosure charges. The letter and spirit of the judgment of the Hon'ble Supreme Court as well as Hon'ble High Court is that the parties shall not be entitled to enrich themselves from the enriches of others i.e. there should not be unjust enrichment. In my considered opinion, there is not even a scintilla of evidence on record to show that the defendant has suffered any loss or damages on account of such prepayment of the loan amount. Suit No. 273/2015 Page 41 of 47
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It is notorious fact that person usually borrows the loan when he is under the financial constraints. The person having lack of finance resources approaches the bank for loan. The moment the person regains his financial resources usually he wants to repay the loan as he does not want to keep the burden on his shoulder. The innocent borrowers are punished for prepayment of the loan. The Constitution of India, which is a Bible of the country, clearly postulates that India is a welfare State. The welfare State is established for the upliftment of the common people of India. The penalization of a person for prepayment of the loan without pleading and proving the damages cannot, in any circumstances, be considered as Public Policy of welfare State. On the contrary, the same is considered to be against the public policy. The provisions of Section 23 of the Contract Act clearly postulates and envisages that agreement which is opposed to the public policy is void in the eyes of law. The contractual obligation of the nature incorporated in respect of prepayment charges unless it is pleaded and proved that the bank has suffered the loss/damages, in my considered opinion, the same is also against the public policy.
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From the discussion as adumbrated hereinabove, it is held that prepayment/foreclosure charges charged by the defendant bank in the present case are not legal and the plaintiff is entitled to the refund of said charges. Accordingly, issue nos.(i), (ii) and (iv) framed on 18.7.2016 and issue no.(iva) framed on 23.10.2017 are decided in the aforesaid terms. FINDINGS ON ISSUE NO. (iii)
(iii) Whether the suit has been instituted by the duly authorised person? OPP.
The Ld. Counsel for the defendant has vehemently argued that Shri Rakesh Kumar (Power of attorney holder of the plaintiff) was not authorized to institute and prosecute the present suit as the signature of Sh. Rakesh Kumar is not appended at the place of attorney in Ex. PW 1/A. The suit has been filed by Sh. Rakesh Kumar on behalf of the plaintiff. The defendants do not dispute the signature of plaintiff Nitin Gupta on Ex. PW1/A. The only argument, which is advanced by the Ld. Counsel for the defendant, is that the signature of Shri Rakesh Kumar is not appended at the place of attorney in Ex. PW1/A. The perusal of Ex. PW1/A clearly reflects that at the bottom of name of Sh. Rakesh Kumar, the signature of Sh. Rakesh Kumar is appended. Perusal of the plaint Suit No. 273/2015 Page 43 of 47 Nitin Gupta V. DCB Bank & Ors.
also reflects that the said signature matches with the signature of the attorney. However, power of attorney is a unilateral document and it is not a bilateral document. It is not necessary that there must be signature by the power of attorney holder in the power of attorney. The Ld. Counsel for the defendants further argues that there is no proper authorization in favour of witness Sh. Santosh Kumar (who was substituted in place of Sh. Rakesh Kumar). The Power of Attorney in favour of Santosh Kumar reflects that proprietorship firm namely M/s Bg's. Fashion Pvt. Ltd. has authorized Sh. Santosh Kumar. The counsel for the defendant submits that there is no proprietorship firm with the name of M/s Bg's Fashion Pvt. Ltd. and this fact is also admitted by the witness Santosh Kumar, during his crossexamination. The special power of attorney dated 17/11/2015 was confronted to the witness Sh. Santosh Kumar. However, the said document is not exhibited document. The defendant, however, has confronted the said document to the witness and the same is required to be considered. The perusal of special power of attorney reflects that Nitin Gupta has empowered Shri Santosh Kumar as special power of attorney for self as well as his proprietorship firm M/s Bg's. Fashion Pvt. Ltd. It is admitted case of the parties that M/s Bg's. Suit No. 273/2015 Page 44 of 47
Nitin Gupta V. DCB Bank & Ors.
Fashion Pvt. Ltd. is a company i.e. artificial juristic person and the same is not the proprietorship concern. The present case has been filed by Sh. Nitin Gupta alone and the same is not filed by M/s Bg's. Fashion Pvt. Ltd. The Ld. counsel for the plaintiff has argued that the name of M/s Bg's. Fashion Pvt. Ltd. being proprietorship firm in the said power of attorney was by mistake and it was also argued that if the name of M/s Bg's Fashion Pvt. Ltd. is ignored, still the power of attorney is valid qua Nitin Gupta.
In my considered opinion, the special power of attorney can be read only qua Nitin Gupta and not on behalf of M/s Bg's Fashion Pvt. Ltd. and the present case is instituted on behalf of Sh. Nitin Gupta and not on behalf of the said company. Accordingly, the special power of attorney dated 17/11/2015 is valid qua Nitin Gupta i.e. the plaintiff himself. Otherwise also, the issue is with respect to whether the suit has been instituted by duly authorized person and as discussed above, there is no dispute about Ex. PW1/A, which is power of attorney in favour of Sh. Rakesh Kumar who has signed and instituted the suit on behalf of the plaintiff. Accordingly, this issue is decided in favour of the plaintiff and against the defendants.
Suit No. 273/2015 Page 45 of 47
Nitin Gupta V. DCB Bank & Ors.
FINDINGS ON ISSUE NO. (ivb) (ivb) Whether the plaintiff is entitled for the interest? If so, at what rate and for which period? OPP Section 34 CPC postulates and envisages the pendentelite interest at any rate not exceeding 6% and future interest at any rate not exceeding the rate at which nationalized banks advanced loan. Keeping in mind the mandate of the said proposition, interest of justice would be served if plaintiff is granted simple rate of interest @ 6% per annum from the date of cause of action i.e. 30.07.2014 till decision of the suit and future rate of interest @ 9% per annum till its realization. RELIEF The defendant nos.2 to 5 are the officials of defendant no.1 bank and they are not personally liable for the acts of defendant no.1 Bank. The foreclosure/prepayment charges were recovered by defendant no.1 bank. Accordingly, the defendant no.1 bank only is held liable in the present case and in these circumstances, I hereby pass the following : FINAL ORDER
(i) The suit of the plaintiff is decreed in favour of the plaintiff and against the defendant no.1 for a sum of Rs.4,85,734.48p along with Suit No. 273/2015 Page 46 of 47 Nitin Gupta V. DCB Bank & Ors.
simple interest @ 6% per annum from the date of cause of action i.e. 30.07.2014 till the decision of the suit and future rate of interest @ 9% per annum till its realization of the decreetal amount.
(ii) The cost of the suit is also awarded in favour of the plaintiff and against the defendant no.1.
Decree sheet be prepared accordingly.
File be consigned to Record Room after due compliance.
Announced in the open court (ARUN SUKHIJA)
on 28/07/2018 ADJ07 (Central)
Tis Hazari Courts, Delhi
Suit No. 273/2015 Page 47 of 47