Fateh Chand v. Balkishan Dass

A buyer paid Rs 25,000 on a Delhi house and then failed to complete the sale. The contract said the whole sum would be forfeited. The Supreme Court held that Section 74 of the Indian Contract Act applies to forfeiture clauses and allowed the seller to keep only the Rs 1,000 earnest money.

Quick Revision

Read the full judgment: Supreme Court of India (sci.gov.in)

Parties

Fateh Chand — appellant; the defendant in the suit. He was the buyer under the agreement and took possession of the property.

Balkishan Das — respondent; the plaintiff in the suit. He was the seller of the leasehold rights in the land and building.

Murli Manohar Joshi — not a party; owner of the adjacent bungalow on the southern side of the plot. His garage and latrine broke the line of the southern boundary.

Procedural History

1. The plaintiff sued in the Court of the Subordinate Judge, Delhi. He claimed possession of the land and building and Rs 6,500 as compensation for use and occupation from 25 March 1949 to 24 January 1950. He also asked for an inquiry into compensation from the date of the suit until delivery of possession.
2. The trial Judge held that the plaintiff had failed to put the defendant in possession of the land agreed to be sold. He held the plaintiff could not retain the Rs 25,000.
3. The trial Judge directed that the defendant put the plaintiff in possession once the plaintiff deposited Rs 25,000 less Rs 1,400, the mesne profits before the suit.
4. The trial Judge awarded future mesne profits at Rs 140 per month from the date of the suit until delivery of possession, or three years from the decree, whichever came first.
5. On appeal, the High Court of Punjab (Circuit Bench at Delhi, Civil Regular First Appeal No. 37-D of 1960, judgment and decree dated 22 August 1957) modified the decree.
6. The High Court declared that the plaintiff could retain Rs 11,250 of the Rs 25,000 as compensation for his loss. It awarded compensation for use and occupation at Rs 265 per month.
7. The defendant appealed to the Supreme Court with a certificate under Article 133(1)(a) of the Constitution (Civil Appeal No. 287 of 1960).

Facts

1. By a registered lease deed of 19 May 1927, renewed on 30 January 1947, the Delhi Improvement Trust granted 90-year leasehold rights in plot No. 3, E Block, Qarol Bagh, Delhi, to Dr. M.M. Joshi. The plot measured 2433 sq. yards.
2. Dr. Joshi built a building on the plot.
3. By a sale-deed of 21 April 1947, Dr. Joshi's widow Chandrawati, as guardian of her minor son Murli Manohar, sold the leasehold rights and the building to Balkishan Das for Rs 63,000.
4. By an agreement of 21 March 1949, Balkishan Das contracted to sell the rights in the land and building to Fateh Chand for Rs 1,12,500. The agreement recited the sale of the building with pattern rights in 2433 sq. yards.
5. The agreement recorded that Rs 1,000 was paid as earnest money on signing.
6. Condition (1) required the seller to give vacant possession of the kothi (bungalow) on 30 March 1949. The buyer was then to give a cheque for Rs 24,000 "out of the sale price".
7. Condition (2) required the buyer to get the sale deed registered by 1 June 1949. If he failed for any reason, the sum of Rs 25,000 would be deemed forfeited and the agreement cancelled. The buyer would also return vacant possession.
8. Condition (2) also said that if the seller delayed registration, he would pay a further Rs 25,000 as damages, besides the Rs 25,000 already paid, and the bargain would be cancelled.
9. The agreement described the southern boundary as the Bungalow of Murli Manohar Joshi.
10. On 25 March 1949 the seller received Rs 24,000 and delivered possession of the building and land in his occupation to the buyer.
11. The sale was not completed before the agreed period ended. Each party blamed the other.
12. The seller said the agreement was rescinded because the buyer defaulted and that the Rs 25,000 stood forfeited.
13. The buyer said the seller had broken the contract and could neither forfeit the Rs 25,000 nor claim compensation.
14. The seller's case was that the buyer had inspected the sale deed, the Improvement Trust lease and the sketch plan when the agreement was signed. He said he gave the buyer a copy of the plan and possession. He said the buyer, despite repeated requests, did not pay the balance or obtain the sale deed.
15. The buyer's case was that the seller agreed to sell according to the measurements and boundaries in the plan annexed to the lease. He said the seller promised to have the southern boundary demarcated and a boundary wall built.
16. The buyer said the seller did not show him the sale deed, the lease or the sketch plan at the time of the agreement. He said he got a copy of the plan three or four days after taking possession.
17. The buyer said he found a shortage on the southern side opposite to Rohtak Road. He said he repeatedly asked the seller to give him the land shown in the plan and to build the wall. He said the seller neglected to do so.
18. The trial Court, at the seller's request, appointed a Commissioner to measure the land delivered to the buyer. The Commissioner found it measured 141/142 feet by 157/158 feet.
19. The Commissioner found that a latrine and a garage on Murli Manohar Joshi's adjacent property broke the regular line of the southern boundary.
20. On 1 June 1949 the buyer telegraphed that the seller was responsible for damages because he had failed to complete the contract.
21. The seller telegraphed in reply that he was ready and willing to perform and called on the buyer to obtain a sale deed.
22. On 9 June 1949 the buyer wrote that the seller had to get the document executed and registered after giving clear title by 1 June 1949.
23. The seller replied that the buyer had inspected the title-deeds, was satisfied about the title and had never complained of any defect.
24. The buyer's Advocate replied by letter of 17 June 1949. It said the buyer paid Rs 25,000 and took possession on the understanding that the seller had clear title to the entire area. It said part of the kothi was under Murli Manohar Joshi's possession, with his garage and latrines.
25. The buyer's case about the encroachment was set up for the first time in that letter.

Issues Raised

1. Who committed breach of the contract?
2. Of the Rs 25,000, was the sum of Rs 24,000 earnest money, or was the stipulation for its forfeiture a stipulation by way of penalty?
3. Does Section 74 of the Indian Contract Act apply to a stipulation for forfeiture of an amount already paid under the contract?
4. If it does, what reasonable compensation could the plaintiff retain out of the Rs 25,000?
5. What was the correct measure of compensation (mesne profits) for the buyer's retention of possession after the bargain fell through?

Arguments Contended

The judgment records the arguments only in outline. Counsel for the respondent, Mohan Behari Lal, is named, but his submissions are not set out separately.

For the appellant (defendant, Fateh Chand):

• The seller, not the buyer, broke the contract. The seller offered land according to the Improvement Trust plan and promised to demarcate the southern boundary and build a boundary wall.
• The buyer said the clause forfeiting the Rs 25,000 was never intended to be acted upon. He said it was put into the agreement at the instance of the writer of the deed.
• The Attorney-General, M.C. Setalvad, did not challenge the seller's right to forfeit the Rs 1,000 named as earnest money.
• The covenant allowing forfeiture of Rs 24,000 is a stipulation in the nature of a penalty. The plaintiff can keep it, or part of it, only if he proves loss caused by the breach and the Court finds that amount reasonable compensation.
• The premises were governed by the Delhi and Ajmer-Merwara Rent Control Act XIX of 1947. Nothing more than the standard rent assessed under that Act could be awarded as damages.

For the respondent (plaintiff, Balkishan Das):

• The seller's pleading and evidence said the buyer inspected the title papers and plan, was given possession, and then did not pay the balance or take the sale deed despite repeated requests.
• The entire Rs 25,000 was to be regarded as earnest money and could be forfeited on the buyer's failure to perform.
• The judgment says it was urged, without naming the side, that Section 74 deals with the right to receive reasonable compensation from the party in breach. It does not deal with the right to forfeit what the aggrieved party has already received.
• The judgment names no authorities relied on by this side. It does discuss two High Court decisions that took the same view as this argument (see Authorities).

Court's Reasoning

The judgment has no numbered paragraphs and one opinion, delivered by Shah, J. for the Bench. Steps follow the order of the judgment and carry no paragraph citations.

Shah, J. (judgment of the Court)

1. Noted: The first question is who committed breach of the contract. The Court sets out the seller's case and the buyer's case.
2. Held: The Court, having been taken through the evidence, agreed with the High Court that the defendant, and not the plaintiff, committed breach of the contract.
3. Noted: The buyer's case rests on two pleas. First, the seller offered land according to the plan appended to the Improvement Trust lease, and the buyer accepted that offer. Second, the seller undertook to have the southern boundary demarcated and a wall built.
4. Why: Those covenants are not in the written agreement. They are not mentioned in any document before the date fixed for completion.
5. Why: The buyer paid Rs 24,000 on taking possession. If the seller had not put him in possession of the whole area, it is hard to believe he would have paid and would not have protested at once in writing.
6. Noted: The buyer's plea implies he knew the southern boundary was irregular. The Court asked why he did not insist that his terms be written into the agreement. It found "no rational answer".
7. Why: His story that he agreed to buy according to the plan without seeing it is impossible to accept.
8. Noted: It is common ground that the plan showed a rectangle of 140 by 160 feet, while the conveyance covers 2433 sq. yards. A rectangle of 140 by 160 feet is 248 sq. yards and 8 sq. feet, not 2433 sq. yards. The boundary lengths must therefore be inaccurate.
9. Noted: The seller bought 2433 sq. yards from his predecessor. By the express recital in the agreement, he agreed to sell that area. The Commissioner's measurement is recorded.
10. Why: The buyer must have noticed the irregular southern boundary at the agreement or soon after taking possession. For nearly three months he raised no objection. His story that he orally asked the seller repeatedly to put him in possession cannot be believed.
11. Noted: The claim that part of the land was in Murli Manohar Joshi's possession was first set up in the letter of 17 June 1949. The Court recounts the telegrams and letters of 1 June, 9 June and 17 June 1949.
12. Noted: The Court recorded one point in the letter of 17 June 1949. It says a sketch plan was attached to the agreement and that both parties knew a part of the land had been encroached upon before the agreement.
13. Why: If there had been such an understanding, the Court would have expected it in the earliest communication. It was held back until the plaintiff said the defendant had never complained about the title.
14. Noted: The agreement gave the area as 2433 sq. yards, bounded on the south by the Bungalow of Murli Manohar Joshi. It is common ground that the buyer was put in possession of more than 2433 sq. yards, within the four boundaries in the agreement.
15. Noted: The buyer said at the trial that he agreed to buy according to the Improvement Trust plan. That term is not in the agreement or the letter of 17 June 1949.
16. Noted: The buyer said the forfeiture term was never intended to be acted upon and was inserted at the writer's instance. This plea was not in the written statement, and the writer was not questioned about it.
17. Why: The buyer is trying to add oral terms to the written agreement, which he did not mention in correspondence at the first opportunity. His testimony cannot be relied on much.
18. Held: The plaintiff performed his part by putting the defendant in possession of the land agreed to be sold, and was willing to execute the sale-deed. The defendant failed to pay the balance of the price and to show willingness to obtain a conveyance.
19. Noted: The next question is the plaintiff's claim to forfeit Rs 25,000. It has two items. Rs 1,000 was received on 21 March 1949 as earnest money. Rs 24,000 was paid on 25 March 1949, as part of the sale price, when possession was delivered.
20. Noted: The plaintiff said the whole Rs 25,000 was earnest money. The defendant denied this.
21. Noted: The Attorney-General did not challenge forfeiture of the Rs 1,000. He argued that forfeiture of Rs 24,000 was a penalty stipulation. The plaintiff could keep it only by proving loss from the breach and showing the amount is reasonable compensation.
22. Held: The Court agreed with the Attorney-General that Rs 24,000 was not earnest money.
23. Why: The agreement expressly named Rs 1,000 as earnest money. The Rs 24,000 was payable on delivery of vacant possession and was called part of the sale price. If it were also earnest money, the parties would have named it so.
24. Held: The Court could not agree with the High Court that the Rs 24,000 was paid as security for due performance. No such case was made in the plaint, and the High Court's finding rests on no evidence.
25. Noted: It cannot be assumed that a stipulation for forfeiture makes the amount paid a deposit for due performance.
26. Noted: The Court sets out Section 74 in full (see Provisions mentioned below). It says the aggrieved party may receive reasonable compensation "whether or not actual damage or loss is proved".
27. Noted: The section is an attempt to remove the elaborate refinements of the English common law between liquidated damages and penalty. At common law, a genuine pre-estimate of damages is binding as liquidated damages. A stipulation in terrorem (to frighten the other party) is a penalty, which the court refuses to enforce, awarding only reasonable compensation.
28. Held: The Indian Legislature cut across the English rules by enacting one principle for all stipulations naming amounts payable on breach and for stipulations by way of penalty.
29. Held: Clause 2 of the contract provides that the Rs 25,000 stands forfeited if the sale deed is not registered in time. The covenant to forfeit Rs 24,000 is manifestly a stipulation by way of penalty.
30. Noted: Section 74 deals with two classes of cases. In the first, the contract names a sum to be paid on breach. In the second, the contract contains any other stipulation by way of penalty.
31. Noted: The Court did not need to decide whether forfeiture of a deposit for due performance falls within the first class.
32. Held: For breach of a stipulation by way of penalty, the measure is reasonable compensation not exceeding the penalty stipulated. The Court has unqualified jurisdiction except as to the maximum, but the compensation must be reasonable and assessed on settled principles.
33. Held: Section 74 merely dispenses with proof of actual loss or damages. It does not justify compensation where the breach caused no legal injury at all.
34. Why: Compensation for breach can make good only loss which naturally arose in the usual course of things, or which the parties knew when they made the contract to be likely to result from the breach.
35. Noted: It was urged that Section 74 deals with the right to receive compensation and not with the right to forfeit what has been received.
36. Held: There is no warrant for the assumption of some High Courts that Section 74 applies only where the aggrieved party seeks to receive an amount, and not where an amount received is to be forfeited.
37. Held: The expression "the contract contains any other stipulation by way of penalty" applies comprehensively to every covenant involving a penalty. This covers payment of money on breach, delivery of property in future, and forfeiture of money or property already delivered.
38. Held: Section 74 imposes on courts a statutory duty not to enforce the penalty clause but only to award reasonable compensation.
39. Held: Where a stipulation in the nature of a penalty forfeits an amount deposited under a contract that expressly provides for forfeiture, the court has jurisdiction to award only such sum as it considers reasonable. It may not exceed the amount specified as liable to forfeiture.
40. Noted: In Abdul Gani & Co. v. Trustees of the Port of Bombay, the Bombay High Court said the sum named must be one to be paid on breach, not one already paid. It said the section clearly rules out an amount already received. The Court quotes this passage.
41. Noted: In Natesa Aiyar v. Appavu Padayachi, the Madras High Court seems to have held that Section 74 applies where a sum is named as penalty to be paid in future, and not where a sum already paid is liable to forfeiture.
42. Held: These High Courts concentrated on the first condition, which speaks of a sum to be paid on breach. They did not consider the second condition, which covers any other stipulation by way of penalty.
43. Held: The words about a sum to be paid do not qualify the second condition. The second condition widens the section to all stipulations by way of penalty, including forfeiture of money already paid.
44. Held: Nothing in the expression requires the stipulation to be for rendering something after the contract is broken. It is not limited to agreements to pay money or deliver property on breach, and it covers amounts or property liable to be forfeited under the contract expressly or by clear implication.
45. Held: Section 74 declares the law where compensation is pre-determined by agreement or there is a penalty stipulation. It is not limited to cases where the aggrieved party claims as a plaintiff.
46. Held: The section confers no special benefit on any party. Despite any term predetermining damages or forfeiting property by way of penalty, the court awards the aggrieved party only reasonable compensation not exceeding the amount named or penalty stipulated.
47. Held: The court's jurisdiction does not depend on whether the party in default is a plaintiff or a defendant. The words about receiving compensation from the party who has broken the contract do not stop the court from adjusting amounts paid by the party in default.
48. Held: The court must decide in every case the reasonable compensation due to the plaintiff on breach. This is ascertained by the conditions existing on the date of the breach.
49. Noted: There is no evidence of any loss to the plaintiff from the default, except the loss of being kept out of possession. There is no evidence that the property depreciated in value after the contract, or that any special damage resulted.
50. Noted: The contract forfeited Rs 25,000, made up of Rs 1,000 earnest money and Rs 24,000 part of the price. The defendant conceded the plaintiff may forfeit the Rs 1,000.
51. Held: The Court could not agree with the High Court that ten per cent of the price is reasonable compensation. That figure rests on an arbitrary assumption. The plaintiff failed to prove the loss from the breach, and no principle supports compensation of ten per cent of the agreed price.
52. Held: With no proof of damage from the breach, the Rs 1,000 earnest money forfeited, together with the advantage the plaintiff must have derived from the remaining Rs 24,000 throughout the period, is sufficient compensation.
53. Noted: The plaintiff separately claimed mesne profits for being kept out of possession and got a decree for them. His being out of possession cannot also be counted in fixing damages here.
54. Held: The High Court's decree awarding Rs 11,250 as damages must be set aside.
55. Noted: The remaining question is the amount of mesne profits. It is common ground the defendant must pay compensation for retaining possession from 1 June 1949 until the date of the suit. After that, Order 20 Rule 12(1)(c) of the Code of Civil Procedure applies until possession is delivered. The trial Court assessed Rs 140 per month. The High Court awarded Rs 265 per month.
56. Noted: The High Court used a "highly artificial method". It took the plaintiff's 1947 purchase price of Rs 63,000 as the property's value. It computed damages at five per cent of that value and arrived at Rs 3,150 a year, and so Rs 265 per month.
57. Noted: The Court sets out the definition of mesne profits in Section 2(12) of the Code of Civil Procedure. The normal measure is the value of the user of the land to the person in wrongful possession.
58. Held: The High Court's assessment, at five per cent of what it regarded as the fair value, is based on an estimated return on value and not on the value of the user. It cannot be sustained.
59. Noted: The Attorney-General argued that the premises were governed by the Delhi and Ajmer-Merwara Rent Control Act XIX of 1947, so only standard rent could be awarded.
60. Held: The Court did not need to decide whether mesne profits above the standard rent may be awarded. There is no evidence of the standard rent of the house.
61. Noted: The evidence shows that a tenant lived in the house and another house for Rs 150 per month before 1947. After the sale, the plaintiff received Rs 80 per month from that tenant, and the plaintiff's vendor received Rs 106 per month. This is not evidence of standard rent under the Act.
62. Held: The Court would not interfere with the Subordinate Judge's rate of Rs 140 per month unless the defendant showed it was excessive.
63. Held: One modification is needed. The plaintiff is also entitled to interest on the mesne profits under Section 2(12) of the Code of Civil Procedure.

Authorities

• Abdul Gani & Co. v. Trustees of the Port of Bombay, I.L.R. 1952 Bom. 747 — Bombay High Court view that Section 74 does not reach an amount already paid. The Court quoted it and did not accept it. The headnote says it was distinguished.
• Natesa Aiyar v. Appavu Padayachi, (1913) I.L.R. 38 Mad. 178 — Madras High Court view that Section 74 applies to a penalty payable in future, not to money already paid and liable to forfeiture. The Court did not accept it. The headnote says it was distinguished.

Provisions mentioned

• Section 74, Indian Contract Act, 1872 — when a contract is broken and it names a sum payable on breach, or has any other stipulation by way of penalty, the aggrieved party gets reasonable compensation not exceeding the amount named or the penalty stipulated. Actual loss need not be proved.
• Section 2(12), Code of Civil Procedure, 1908 — mesne profits are the profits the person in wrongful possession actually received or might with ordinary diligence have received, with interest, excluding profits due to his improvements.
• Order 20 Rule 12(1)(c), Code of Civil Procedure, 1908 — governs the inquiry into mesne profits from the date of the suit until possession is delivered. The decree restricts the period to three years from the decree.
• Article 133(1)(a), Constitution of India — the certificate under which the appeal came to the Supreme Court.
• Delhi and Ajmer-Merwara Rent Control Act XIX of 1947 — raised by the Attorney-General on standard rent. The Court did not decide its effect, for want of evidence.

Judgement

1. The decree of the High Court is modified.
2. The plaintiff, Balkishan Das, is entitled to retain out of the Rs 25,000 only Rs 1,000, which he received as earnest money.
3. The plaintiff is entitled to compensation (mesne profits) at Rs 140 per month from 1 June 1949 until the date possession was delivered to him. The period must not exceed three years from the date of the decree.
4. The plaintiff is entitled to interest at six per cent on that amount as it accrues due month after month, subject to Order 20 Rule 12(1)(c) of the Code of Civil Procedure.
5. Subject to these changes, the appeal is dismissed.
6. Because of divided success, the parties bear their own costs in the Supreme Court.

Legal Principle / Ratio

Section 74 applies to every stipulation by way of penalty, including a clause forfeiting money already paid. The court may award only reasonable compensation, not above the amount named. Proof of actual loss is not needed, but a breach that caused no legal injury gives no compensation.

Key holding: "The section does not confer a special benefit upon any party".

Critical Analysis

Analysis based on the judgment text.

• The Court left open whether forfeiture of a deposit for due performance falls within the first class of Section 74. It decided only the second class.
• The test of reasonable compensation has no formula. The Court tied it to the date of breach, proof of loss and the advantage the plaintiff derived from money held.
• The Court treated Rs 1,000 and the use of Rs 24,000 as enough, so it did not say how larger or special losses should be proved.
• The Court did not decide whether mesne profits can exceed standard rent under the Rent Control Act. It cited lack of evidence.

Significance

• The judgment treats penalty and liquidated damages alike under Section 74. It rejects the High Court view that forfeiture of money already paid is outside the section.
• It is used in the Notes on Kinds of Damages to show that a named sum only caps compensation.
• The citator list in the report shows later Supreme Court decisions of 1970 and 1971 referring to it. The judgment itself does not discuss them.

Exam-Important Points

• Buyer and seller: in the judgment the plaintiff (seller) is Balkishan Das and the defendant-appellant (buyer) is Fateh Chand.
• Rule: Section 74 covers forfeiture of money already paid. The Court may award only reasonable compensation up to the amount named.
• Earnest money: only the Rs 1,000 named as earnest money was forfeitable. The Rs 24,000 was part of the sale price.
• Trap: Section 74 removes the need to prove actual loss. It does not award compensation where no legal injury resulted.
• Trap: the High Court's ten per cent of the price (Rs 11,250) was set aside as an arbitrary assumption.
• Mesne profits: Rs 140 per month from 1 June 1949, with six per cent interest, not the High Court's Rs 265.
• Costs: each side bore its own costs.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so no paragraph numbers are cited. The citation is not in the judgment text as a full report reference.