Kailash Nath Associates v. Delhi Development Authority

The Delhi Development Authority (DDA) forfeited Rs 78 lakh of earnest money (a deposit given to bind a contract) after a bidder did not pay the balance price. DDA then re-sold the plot for Rs 11.78 crore. The Supreme Court held that DDA gave up the payment date, that no loss was shown, and that Section 74 of the Indian Contract Act covers forfeiture of earnest money after a contract exists.

Quick Revision

Read the full judgment: Indian Kanoon (unofficial copy)

Parties

M/s. Kailash Nath Associates — appellant; the highest bidder at the DDA auction for Plot No. 2-A, Bhikaji Cama Place, District Centre, New Delhi. It was the plaintiff in the suit.

Delhi Development Authority (DDA) — respondent No. 1; the public authority that held the auction, cancelled the allotment and forfeited the earnest money. It was defendant No. 1.

Union of India — named as defendant No. 2 in the Single Judge's quoted reasons. The Central Government was asked whether the Nazul Rules, 1981 (rules for government-owned Nazul land) could be relaxed. It said the land was not Nazul land (paras 8, 11).

Shri Paras Kuhad — senior advocate for the appellant (para 13).

Shri Amarendra Sharan — senior advocate for DDA (para 14).

Procedural History

1. The appellant filed Writ Petition No. 2395 of 1990 in the Delhi High Court. It said that similar bidders had been allowed to pay the balance 75 per cent and had been given other plots, and it pleaded Article 14 (para 8).
2. 2 September 1993. The Delhi High Court held that a dispute about an auction under its terms is a matter of contract and cannot be decided under Article 226. It also found no force in the discrimination argument (para 9).
3. 16 December 1993. The Supreme Court dismissed the appellant's SLP against that order. It said the appellant was at liberty to challenge the forfeiture of the earnest money, which had been done by the letter of 6 October 1993, by whatever steps the law allowed (para 9).
4. 17 February 1994. The appellant filed a suit for specific performance (a court order to carry out the contract). In the alternative it asked for damages and recovery of the earnest money of Rs 78,00,000 (para 10).
5. 10 September 2007. The Single Judge dismissed the claims for specific performance and damages. He ordered refund of the forfeited earnest money with 9 per cent per annum interest (para 11).
6. DDA appealed. The Division Bench of the Delhi High Court set aside the Single Judge's judgment and held that the forfeiture of earnest money was in order (para 12).
7. The appellant appealed to the Supreme Court. Leave was granted.
8. 9 January 2015. The Supreme Court allowed the appeal and restored the Single Judge's judgment (para 47).

Facts

1. DDA held a public auction for Plot No. 2-A, Bhikaji Cama Place, District Centre, New Delhi. The appellant was the highest bidder at Rs 3.12 crore (para 2).
2. As the highest bidder, the appellant deposited Rs 78,00,000, which is 25 per cent of the bid, as earnest money. The conditions of auction set the rules for this deposit (para 2).
3. Condition (ii) said the highest bidder must pay 25 per cent of the bid as earnest money at the fall of the hammer. If it was not paid, the auction for that plot would be cancelled (para 2).
4. Condition (iii) made the highest bid subject to acceptance by the Vice-Chairman, DDA or another authorised officer. The bid could be rejected without reasons (para 2).
5. Condition (iv) said the earnest money would be forfeited in case of default, breach or non-compliance with the auction terms, or misrepresentation by the bidder (para 2).
6. Condition (v) required the successful bidder to submit a filled-in application at the close of the auction (para 2).
7. Condition (vi) said that once the bid was accepted, the bidder must pay the balance 75 per cent within three months. If the bid was not accepted, the earnest money would be refunded without interest unless forfeited under condition (iv) (para 2).
8. 18 February 1982. DDA acknowledged the Rs 78,00,000, accepted the bid and told the appellant to deposit the balance by 17 May 1982 (para 3).
9. There was a general recession in the industry. The appellant and similar bidders asked in May 1982 for more time. DDA set up a High Powered Committee, which on 21 July 1982 recommended extension of time (para 3).
10. 11 August 1982. DDA extended the time for payment to 28 October 1982, with interest rates varying from 18 per cent to 36 per cent (para 3).
11. DDA set up a second High Powered Committee on whether to give still more time. It recommended extension and named the appellant specifically (paras 4, 5).
12. DDA accepted that recommendation on 14 May 1984. Nothing then happened till 1 December 1987, though the appellant wrote several letters from 1984 to 1987 (para 5).
13. 1 December 1987. DDA wrote a letter marked without prejudice asking the appellant to consent to pay the balance 75 per cent in the period to be fixed, with 18 per cent interest on the delayed payment. The letter said the schedule would follow directions of the Ministry of Urban Development, and that the letter carried no commitment. It asked for consent within 3 days (para 6).
14. The appellant replied the same day. It consented to pay the balance 75 per cent as the Ministry might fix, with 18 per cent interest, and asked for formal approval to pay in instalments (para 7).
15. 1 March 1990. The Central Government told DDA that the land was not Nazul land and it would have nothing further to do with the matter (para 8).
16. 6 October 1993. DDA's Deputy Director (CL) wrote that, because the appellant had failed to deposit the balance 75 per cent and its writ petition had been dismissed, the allotment was cancelled and the Rs 78,00,000 earnest money was forfeited (para 9).
17. 23 February 1994. Shortly after the suit was filed, DDA re-auctioned the plot. It fetched Rs 11.78 crore (para 10).
18. Other bidders had been offered refund of their earnest money in 1989 with 7 per cent interest, which they accepted (para 46).

Issues Raised

1. Was there a breach of contract by the appellant, given that DDA extended the time to pay the balance and never fixed a new date?
2. Does the Division Bench's reliance on Tilley v. Thomas and Anandram Mangturam hold, or does Webb v. Hughes apply?
3. Can DDA rely on Section 20 of the Contract Act, saying its letter of 1 December 1987 was written under a mistake of fact?
4. Does Article 14 apply to DDA's forfeiture of earnest money after the contract is made?
5. What is the effect of Section 74 on forfeiture of earnest money, and is proof of loss required?
6. Is the fact that DDA re-auctioned the plot for a much higher price relevant?
7. At what rate of interest should the earnest money be refunded?

Arguments Contended

For the appellant (Shri Paras Kuhad):

• Time may have been of the essence under the original auction terms. But time was extended on several occasions and ceased to be of the essence (para 13).
• The appellant promptly replied to the letter of 1 December 1987. It said it was willing to pay the entire 75 per cent with 18 per cent interest, so there was no breach (para 13).
• DDA sold the plot for Rs 11.78 crore, so DDA suffered no loss. Forfeiture of earnest money would not be in line with the agreement or with law (para 13).

For the respondent (Shri Amarendra Sharan):

• The case is covered by Shree Hanuman Cotton Mills & Anr. v. Tata Aircraft Ltd., 1970 (3) SCR 127 (para 14).
• The letter of 1 December 1987 was issued under a mistake of fact, so it is void under Section 20 of the Contract Act and should be ignored (para 14).
• If the letter is ignored, the termination and forfeiture are in order because the appellant was in breach (para 14).
• That DDA later sold the plot for a much larger sum is irrelevant. The agreed term allowed forfeiture of earnest money on breach without proof of actual loss (para 14).
• If the appellant wins, the refund should carry interest at 7 per cent, not 9 per cent (para 46).

Court's Reasoning

The judgment has numbered paragraphs and one opinion, delivered by Nariman, J. Both Judges signed it. Steps follow the order of the paragraphs.

Nariman, J. (judgment of the Bench)

1. Noted: The appeal arises out of a public auction by DDA. The appellant was the highest bidder for Plot No. 2-A, Bhikaji Cama Place at Rs 3.12 crore and deposited Rs 78,00,000 as earnest money. The judgment sets out conditions (ii) to (vi) of the auction (para 2).
2. Noted: DDA accepted the bid on 18 February 1982 and asked for the balance by 17 May 1982. Industry recession led to requests for more time. A High Powered Committee recommended extension, and DDA extended time to 28 October 1982 with interest from 18 per cent to 36 per cent (para 3).
3. Noted: A second High Powered Committee recommended more time and named the appellant. DDA accepted this on 14 May 1984. Nothing happened till 1 December 1987 despite the appellant's letters (paras 4, 5).
4. Noted: The letter of 1 December 1987 is important to the appeal. DDA asked for consent to pay the balance 75 per cent with 18 per cent interest. The appellant replied the same day. The letter said it carried no commitment (paras 6, 7).
5. Noted: The Central Government told DDA on 1 March 1990 that the land was not Nazul land. The appellant's writ petition and the SLP did not succeed, but the SLP order left the appellant free to challenge the forfeiture (paras 8, 9).
6. Noted: DDA cancelled the allotment and forfeited the earnest money by its letter of 6 October 1993. The appellant sued on 17 February 1994. DDA re-auctioned the plot on 23 February 1994 for Rs 11.78 crore (paras 9, 10).
7. Noted: The Single Judge on 10 September 2007 dismissed the suit but ordered refund of the earnest money with 9 per cent interest. His reasoning, summarised from items 65 to 69 of his judgment (para 11):
   • DDA set up two committees and found merit in the representations. Its decision to extend time stood, because no Union permission was needed for non-Nazul land.
   • It was not open to DDA to follow one yardstick for Nazul land and another for non-Nazul land. The plaintiff volunteered 18 per cent interest.
   • After treating the contract as alive and extending time, DDA had to give notice to perform before terminating. Time as the essence of the contract had been waived by conduct.
   • The plaintiff sent repeated reminders. DDA sought consent on 1 December 1987, got it the same day and made no further offer. It cancelled without notice.
   • DDA had not even suffered a loss. The plot was to be sold at Rs 3.12 crore and was sold for Rs 11.78 crore, nearly three and a half times, while DDA held the Rs 78 lakh.
   • Given the long time, the exchanges and DDA's slow decision making, the plaintiff was entitled to refund of the Rs 78 lakh but nothing more.
8. Noted: The Division Bench set aside the Single Judge's judgment and held the forfeiture was in order (para 12).
9. Noted: The Court records the arguments of Shri Paras Kuhad for the appellant (para 13) and Shri Amarendra Sharan for DDA (para 14).
10. Held: Earnest money can be forfeited under condition (iv) only for default, breach or non-compliance with auction terms, or misrepresentation by the bidder (para 15).
11. Why: DDA did not insist on payment of the balance 75 per cent within three months. After two High Powered Committees it extended time at least twice. The three-month period was specifically waived. No one alleged misrepresentation. So there was no breach of the auction terms, and condition (iv) could not by itself allow forfeiture (para 15).
12. Noted: DDA asked the appellant to consent to pay the balance with 18 per cent interest. The letter was marked without prejudice and said it carried no commitment because the Central Government might not relax the Nazul Rules. If it did relax them, DDA would take 75 per cent with 18 per cent interest (para 16).
13. Held: DDA's plea of mistake of fact under Section 20 is not accepted. DDA cancelled the allotment on 6 October 1993, long after the Central Government's letter of 1 March 1990. This shows DDA's understanding that what mattered was payment of the balance 75 per cent. The appellant agreed to that at once (para 17).
14. Held: The plea that the without-prejudice letter bound DDA to nothing also fails. If the Central Government had relaxed the Nazul Rules, DDA could not have cancelled anyway. DDA is a public authority bound by Article 14 and cannot behave arbitrarily (para 17).
15. Noted: The Court turns to the Division Bench judgment. The Division Bench followed Tilley v. Thomas, distinguished Webb v. Hughes and followed Anandram Mangturam v. Bholaram Tanumal. It held that time made of the essence cannot be waived by one party's act, absent consensus ad idem (agreement on the same thing in the same sense) on a new date (paras 18, 19).
16. Held: Webb's case applies directly. Time that is of the essence may be waived by conduct. Once time passes and the parties keep negotiating, time is no longer of the essence. A purchaser is not bound to wait forever. He may give reasonable notice fixing a time to end the business (para 20).
17. Held: The Single Judge was right. The letter of cancellation of 6 October 1993 forfeited the earnest money without telling the appellant to deposit the balance within a stated time. Without such notice there was no breach by the appellant, so the earnest money could not be forfeited (para 21).
18. Held: Tilley v. Thomas does not apply. The words without prejudice were used only because the Central Government might not relax the Nazul Rules (para 22).
19. Noted: In Anandram Mangturam, Stone C.J. said the correspondence never became an agreement to extend time. Mere forbearance (holding back) from suing or from giving notice of rescission (cancelling the contract) is not an extension of time under Section 63 (para 23).
20. Noted: Chagla J. said Section 55 gives the promisee an option to avoid the contract when the promisor does not perform on time. Not using that option does not change the date of performance. Under Section 63 an extension of time cannot be unilateral and arises only by agreement (para 23).
21. Noted: That reasoning applies where a promisee agrees to a promisor's request to extend a time fixed for the promisee's own benefit. So in Keshavlal Lallubhai Patel and Ors. v. Lalbhai Trikumlal Mills Ltd this Court held that the promisee cannot, by a unilateral act, extend time for his own benefit (para 24).
22. Held: Here the appellant is the promisor and DDA is the promisee. DDA can extend time for payment unilaterally under Section 63, because the time for payment benefits the appellant, not DDA (para 25).
23. Noted: Two Supreme Court judgments cover the case. Citi Bank N.A. v. Standard Chartered Bank says that under Section 63, unlike Section 62, a promisee may act unilaterally to dispense with, remit, extend time for or accept substitute performance (para 25).
24. Noted: S. Brahmanand v. K.R. Muthugopal says that time for performance can be extended even if the agreement fixed a date. Section 63 lets every promisee extend time. Such an agreement need not be in writing and may be proved by oral evidence or conduct, including forbearance. The quoted passage also refers to Article 54 and Article 113 of the Limitation Act (para 26).
25. Noted: On Article 14, the Division Bench said that reasonableness in State action is a facet of Article 14. It said such reasonableness has play mainly at the pre-contract stage. After a contract, parties are bound, subject to good faith as in T.P. Daver v. Lodge Victoria (para 27).
26. Held: T.P. Daver is not an authority on Article 14. It deals with clubs and strict adherence to club rules (para 28).
27. Noted: The Court relies instead on ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd. There, quoting Kumari Shrilekha Vidyarthi v. State of U.P., the Court said the State's nature as State characterises all its acts, even in contract. Once the State or its instrumentality is a party, it must act fairly, justly and reasonably. The passage also notes that VST Industries was not a State or instrumentality under Article 12 (para 28).
28. Held: It would be arbitrary for DDA to forfeit the earnest money on two grounds. First, there was no breach by the appellant. Second, DDA suffered no loss. It would be arbitrary to allow a public authority to keep Rs 78,00,000 with no loss caused (para 29).
29. Held: Article 14 applies in the field of contract in this case. The Division Bench's finding on this is reversed (para 29).
30. Noted: The Division Bench held that the Single Judge's view ran against Shree Hanuman Cotton Mills, under which an amount tendered as earnest money can be forfeited as per the contract. It also said that the profit from the 1994 re-auction was irrelevant, since damages are computed at the date of breach (para 30).
31. Noted: The Court sets out Section 74 as it first stood. It allowed reasonable compensation not exceeding the sum named, whether or not actual loss was proved (para 31).
32. Noted: A 1899 amendment extended Section 74 to any other stipulation by way of penalty (a stipulation that is not a genuine pre-estimate of loss). It added an Explanation on increased interest from default and an Exception for bail-bonds and bonds for public duty (para 32).
33. Noted: Section 74 sits in Chapter 6, between Section 73 (compensation for loss or damage caused by breach) and Section 75. Like Sections 73 and 75, compensation under Section 74 is payable only where damage or loss is caused by the breach (para 33).
34. Noted: Fateh Chand v. Balkishan Das (para 34):
    • Section 74 cuts across the English rules that distinguish liquidated damages (a sum fixed in advance as compensation) from penalties. It enacts one uniform principle.
    • For breach of a penalty stipulation, the measure is reasonable compensation not exceeding the penalty stipulated.
    • Section 74 dispenses only with proof of actual loss. It does not justify compensation where no legal injury at all resulted from the breach.
    • The section does not give a special benefit to any party. It applies whether the party in default is plaintiff or defendant.
    • Reasonable compensation is fixed on the conditions at the date of breach.
35. Noted: Maula Bux v. Union of India had said that forfeiture of a reasonable earnest money does not fall within Section 74, but forfeiture in the nature of a penalty does. It also said that where loss can be proved, the claimant must prove it (para 35).
36. Noted: Shree Hanuman Cotton Mills set out five principles on earnest. It is given when the contract is concluded, guarantees performance, is part of the price when the deal is carried out, is forfeited when the buyer defaults, and absent contrary terms can be forfeited on default (para 36).
37. Noted: Shree Hanuman also said the appellants had not pleaded unreasonableness or penalty. The Court there expressed no opinion on whether unreasonableness can ever be considered for earnest money (para 36).
38. Noted: In ONGC Ltd. v. Saw Pipes Ltd., the Court read Sections 73 and 74 together. Section 74 emphasises reasonable compensation, whether or not actual loss is proved. If the sum named is a genuine pre-estimate of loss, proof of loss is not needed. If it is a penalty, only reasonable compensation for the loss suffered is due (para 37).
39. Noted: In Fateh Chand, counsel conceded that Rs 1,000 of earnest money could be forfeited. So the forfeiture of earnest money there was not argued (para 38).
40. Noted: In Shree Hanuman, the appellants conceded breach. Only two questions were argued: whether the amount was earnest money, and whether forfeiture is legal only if the amount is reasonable. Both were answered against the appellant (para 39).
41. Held: Maula Bux was not, on its facts, a case about earnest money. Its observation on forfeiture of earnest money did not directly arise for decision (para 40).
42. Held: Fateh Chand, a 5-Judge decision, held that all stipulations naming amounts to be paid in case of breach are covered by Section 74, whether penalty or not. Earnest money is an amount to be paid in case of breach and named in the contract, so it is necessarily covered by Section 74 (para 40).
43. Held: In a public auction, forfeiture of earnest money may take place before an agreement is reached, because the bid can be rejected. In such cases Section 74 may not apply, as its plain words apply only once a contract has been broken (para 41).
44. Held: Here forfeiture took place long after the agreement. The sum was forfeited without any loss shown. DDA received a much higher amount on re-auction (para 42).
45. Held: The Court states the law on Section 74 (para 43):
    • Where a sum is named as liquidated damages, the injured party gets that sum as reasonable compensation only if it is a genuine pre-estimate fixed by both parties and found so by the Court.
    • In other cases, including a penalty, only reasonable compensation can be awarded, not exceeding the amount stated. That amount is the upper limit.
    • Reasonable compensation is fixed on well-known contract principles, including Section 73.
    • damage or loss caused is a sine qua non for the applicability of the Section.
    • The section applies whether a person is a plaintiff or a defendant. The sum may already be paid or be payable in future.
    • Where actual loss can be proved, proof is not dispensed with. The liquidated amount helps only where loss is difficult or impossible to prove and the sum is a genuine pre-estimate.
    • Section 74 will apply to cases of forfeiture of earnest money under a contract. Where forfeiture takes place under public auction terms before agreement is reached, Section 74 has no application.
46. Held: The Division Bench went wrong in principle. There was no breach by the appellant. DDA's profit from the re-auction cannot be called irrelevant. 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 (para 44).
47. Noted: Much of the argument turned on notings in files produced in cross-examination. The Court did not refer to the notings or to the case law cited on them, as it was unnecessary (para 45).
48. Held: Shri Sharan's request for 7 per cent interest is refused. Other bidders were offered refund in 1989 with 7 per cent and accepted. DDA chose to fight this appellant tooth and nail, even on refund of earnest money, though no breach or loss existed (para 46).
49. Held: The appeal is allowed. The Single Judge's judgment and order is restored. The parties bear their own costs (para 47).

Authorities

• Shree Hanuman Cotton Mills & Anr. v. Tata Aircraft Ltd., 1970 (3) SCR 127. Relied on by DDA and the Division Bench. The Court read it as a case where breach was conceded and the pleas on penalty were not raised. It set out the principles on earnest (paras 14, 30, 36, 39).
• Tilley v. Thomas, (1867) 3 Ch.A 61. Followed by the Division Bench. Held not to apply (paras 19, 22).
• Webb v. Hughes, V.C.M. 1870. Distinguished by the Division Bench. The Court held it applies directly: time that is of the essence can be waived by conduct (paras 11, 19, 20).
• Anandram Mangturam v. Bholaram Tanumal, ILR 1946 Bom 218. Followed by the Division Bench. The Court read it as applying where a promisee extends time fixed for his own benefit (paras 19, 23, 24).
• Keshavlal Lallubhai Patel and Ors. v. Lalbhai Trikumlal Mills Ltd, 1959 SCR 213. Cited: a promisee cannot unilaterally extend time fixed for his own benefit (para 24).
• Citi Bank N.A. v. Standard Chartered Bank, (2004) 1 SCC 12. Followed: under Section 63 a promisee can act unilaterally, unlike Section 62 (para 25).
• S. Brahmanand v. K.R. Muthugopal, (2005) 12 SCC 764. Followed: time for performance can be extended, even by conduct such as forbearance (para 26).
• T.P. Daver v. Lodge Victoria No. 363, S.C. Belgaum, 1964 (1) SCR 1 (also cited as AIR 1963 SC 1144). Relied on by the Division Bench. The Court said it is not an authority on Article 14 (paras 27, 28).
• ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd., (2004) 3 SCC 553. Followed: the State must act fairly, justly and reasonably even in contract (para 28). It discusses VST Industries Ltd., (2001) 1 SCC 298, and quotes Kumari Shrilekha Vidyarthi v. State of U.P., (1991) 1 SCC 212.
• Fateh Chand v. Balkishan Das, 1964 SCR (1) 515. Followed. Section 74 is a uniform principle for named sums and penalties. Compensation is reasonable and needs a legal injury (paras 34, 38, 40).
• Maula Bux v. Union of India (UOI), 1970 (1) SCR 928. Its remark on earnest money was held not to have directly arisen (paras 35, 40). The quoted passage cites Kunwar Chiranjit Singh v. Har Swarup, A.I.R. 1926 P.C. 1; Roshan Lal v. The Delhi Cloth and General Mills Company Ltd., I.L.R. All. 166; Muhammad Habibullah v. Muhammad Shafi, I.L.R. All. 324; and Bishan Chand v. Radha Kishan Das, I.D. 19 All. 49.
• ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. Followed: Sections 73 and 74 are read together (para 37).
• Halsbury's Laws of England. Referred to by the Single Judge on waiver of time as the essence (para 11).

The judgment has no footnotes. Cases named only inside passages it quotes in para 26: Saraswathamma v. H. Sharad Shrikhande, AIR 2005 Kant 292; K. Venkoji Rao v. M. Abdul Khuddur Kureshi, AIR 1991 Kant 119; and Pazhaniappa Chettiyar v. South Indian Planting and Industrial Co. Ltd., AIR 1953 Trav Co 161.

Provisions

• Section 20, Indian Contract Act: an agreement is void where both parties are under a mistake about a fact essential to it. DDA argued its letter of 1 December 1987 was void on this ground (paras 14, 17).
• Section 55: when a party fails to perform at the fixed time, the other party may choose to avoid the contract (Chagla J., para 23).
• Section 62: parties may agree to substitute or cancel the contract. It needs agreement of both sides, unlike Section 63 (para 25).
• Section 63: a promisee may dispense with or remit performance, extend the time for it, or accept other satisfaction. The Court held DDA could extend time unilaterally here (paras 23-26).
• Section 73: compensation for loss or damage caused by breach (paras 33, 37, 43).
• Section 74: compensation where a sum or penalty is named for breach. It gives reasonable compensation not above the named amount. The Court set out its original and 1899 text, and held it covers earnest money after a contract exists (paras 31-33, 40-43).
• Section 75: compensation for damage a party suffers when the other party rightly rescinds a contract (para 33).
• Article 12: defines the State. The quoted ABL passage notes VST Industries was not a State or instrumentality under it (para 28).
• Article 14: equality before the law. The Court held a public authority cannot act arbitrarily in contract (paras 17, 27-29).
• Article 226: writ jurisdiction of the High Court. The High Court said an auction dispute is a contract matter outside it (para 9).
• Articles 54 and 113 of the Limitation Act: time-limit provisions referred to in the quoted Brahmanand passage (para 26).
• Nazul Rules, 1981: rules on government Nazul land. DDA asked the Central Government to relax them to allow late payment (paras 6, 16).

Judgement

1. The appeal is allowed (para 47).
2. The judgment and order of the Single Judge is restored (para 47). It ordered refund of the forfeited earnest money of Rs 78,00,000 with interest at 9 per cent per annum, and dismissed the claims for specific performance and damages (para 11).
3. The plea that the interest be 7 per cent is refused (para 46).
4. The parties bear their own costs (para 47).

Legal Principle / Ratio

Section 74 covers forfeiture of earnest money under a contract. There must be a breach, and compensation is limited to damage or loss actually caused. The key holding: damage or loss caused is a sine qua non for the applicability of the Section. A public authority that keeps earnest money without any loss acts arbitrarily and violates Article 14.

Subsequent Treatment

Analysis from the later judgments' own text. Both later files name this case.

Mahanagar Telephone Nigam v. Tata Communications — Civil Appeal No. 1766 of 2019, Supreme Court of India, Nariman and Vineet Saran, JJ., decided 27 February 2019. The Court quoted para 43 of Kailash Nath Associates, with its points 43.1 to 43.6, as the law on compensation under Section 74 after considering the case law (¶ 11). It then read the contract's liquidated damages clauses, which capped damages at 12 per cent, or INR 25 lakh. The Court held that the appellant could claim only that sum and dismissed the appeal (¶¶ 12-14).

K.R. Suresh v. R. Poornima — 2025 INSC 617, Civil Appeal No. 5822 of 2025 (arising out of SLP (Civil) No. 5630 of 2023), Supreme Court of India, J.B. Pardiwala and R. Mahadevan, JJ., decided 2 May 2025. The Court described Kailash Nath Associates as taking a different view from the earlier cases it had discussed, including Fateh Chand and Maula Bux, which it read as holding that forfeiture of earnest money is not a penal clause. It recorded that Kailash Nath held Section 74 applies to forfeiture of earnest money deposit and that proof of actual damage or loss is a sine qua non (¶ 48). It set out points 43.2, 43.3, 43.5, 43.6 and 43.7 of Kailash Nath (¶ 48).

The 2025 Court then held that a clause for forfeiture of earnest money is not penal in the ordinary sense, so Section 74 cannot apply to an earnest money deposit. It also held that the forfeiture clause in that case was fair and not one-sided (¶ 51). It added that, even if the Section 74 principle applied in line with Kailash Nath, the forfeiture of the whole advance would still be justified. The reason it gave was breach of contract by the appellant and proved financial losses that far exceeded the amount forfeited (¶ 52).

The paragraphs of the 2025 judgment that name Kailash Nath do not say that it is overruled.

Other later cases (not summarized): none.

Comparative Analysis

Analysis from the supplementary judgments only.

• On whether Section 74 covers earnest money, the two Supreme Court benches reach different results. Kailash Nath (2015) held that Section 74 applies to forfeiture of earnest money under a contract. K.R. Suresh (2025) held that forfeiture of earnest money is not penal in the ordinary sense, so Section 74 cannot apply to it (K.R. Suresh, ¶ 51).
• On proof of loss, K.R. Suresh records Kailash Nath's holding that actual damage or loss is a sine qua non for Section 74 (K.R. Suresh, ¶ 48). It then applies Kailash Nath only in the alternative and finds proved losses that exceeded the forfeited amount (K.R. Suresh, ¶ 52).
• Mahanagar Telephone Nigam (2019) follows Kailash Nath in setting out Section 74 principles. It applies a contractual cap on liquidated damages and does not decide the earnest money question (Mahanagar, ¶¶ 11-13).

Critical Analysis

Analysis based on the judgment text.

• The Court decided the case on two grounds: no breach, and no loss. It did not say what would happen if there had been a breach but no loss.
• The Court said Maula Bux's remark on earnest money was not needed for that decision. It did not say that Maula Bux was wrongly decided.
• The Court left Section 74 aside for public-auction forfeitures before an agreement is reached. It said Section 74 may not apply there, without a firm ruling.
• The Court did not use the notings in the files, nor the cases cited on them.

Significance

• The case states in one place the law on Section 74, in a list of points.
• It applies Section 74 to forfeiture of earnest money after a contract exists.
• It links Section 74 to the rule that compensation needs actual damage or loss.
• It applies Article 14 to a public authority's conduct in a contract.

Exam-Important Points

• Rule first: Section 74 applies to forfeiture of earnest money under a contract. Trap: it does not apply to forfeiture under public auction terms before agreement is reached.
• Where actual loss can be proved, proof is not dispensed with. The named sum helps only where loss is difficult or impossible to prove and the sum is a genuine pre-estimate.
• Damage or loss is a sine qua non for Section 74. The section does not give a windfall.
• Time can be waived by conduct. A promisor's time for payment can be extended unilaterally by the promisee under Section 63 if it is for the promisor's benefit.
• Cancelling without notice to pay by a stated date means no breach. Webb v. Hughes applied.
• A public authority is bound by Article 14 even after entering a contract. Keeping Rs 78 lakh with no loss is arbitrary.
• Maula Bux's remark on earnest money did not directly arise. Fateh Chand (5 Judges) governs.

Prepared from the full text of the judgment. Paragraph numbers follow the official Supreme Court judgment text; law reports may number the same paragraph differently.