* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Order : 27.11.2008
+ RFA 786/2005
KING KAKKAR ..... Appellant
Through: Mr. Raman Kapur, Advocate
versus
OMESH RAI PAHUJA ..... Respondent
Through: Mr. Sujan Singh, Advocate
CORAM:
HON'BLE MR. JUSTICE PRADEEP NANDRAJOG
HON'BLE MR. JUSTICE J.R.MIDHA
1. Whether reporters of local papers may be allowed
to see the judgment?
2. To be referred to the Reporter or not?
3. Whether judgment should be reported in Digest?
PRADEEP NANDRAJOG, J. (Oral)
1. Heard learned counsel for the parties.
2. The appellant was a buyer and the respondent was a
seller. They entered into an agreement to sell, Ex.PW-1/3, on
2.8.1999. Appellant was referred to as the second party in the
agreement. The respondent was referred to as the first party in
the agreement.
3. Clause 8 of the agreement stipulated as under:-
“That if second party infringes the terms and
conditions of this agreement and will not make balance
payment within stipulated period then the first party
have the right to recover the balance money and get
the transaction enforced through court of law by filing
the suit for specific performance in the court or first
party shall recover double the amount of the earnest
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money.”
4. Appellant did not pay the balance sale consideration
and did not get executed the sale deed in his favour. Not only
did he forfeit Rs.5,00,000/- received by way of earnest money,
respondent filed a suit to recover a further sum of Rs.5,00,000/-
alleging that the right emanated in his favour by virtue of clause
8 of the agreement to sell in question.
5. The respondent has succeeded.
6. A short submission is urged by the appellant.
Challenging the impugned judgment and decree dated 4.8.2005
which has awarded Rs.5,00,000/- in favour of the respondent
and against the appellant with interest @ 6% per annum from
1.4.2000 till the money is realized, counsel urges that it is
settled law that an amount stipulated by way of penalty and not
a reasonable pre-estimate of liquidated damages cannot be
enforced and damages have to be awarded on proof of loss.
7. Learned counsel for the respondent states that as
held in the decision reported as AIR 2003 SC 2629 ONGC Vs.
SAW Pipes Ltd., when an amount is stipulated in a contract
requiring to be paid by the party in breach to the opposite party
the said amount has to be paid by the party in breach.
8. Law is clear. Even this was the ratio in the decision
in SAW Pipes’ case (supra). Where a sum is stipulated by way of
penalty the same cannot be enforced except on proof of actual
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damages. But where the amount is a reasonable pre-estimate
of the damages which would be suffered on account of breach,
the same can be enforced. In para 65 of the decision in SAW
Pipes’s case law was crystallized as under:-
“65. It is apparent from the aforesaid reasoning
recorded by the arbitral tribunal that it failed to
consider Sections 73 and 74 of the Indian Contract Act
and the ratio laid down in Fateh Chand’s case (supra)
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
stipulated; 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 [relevant 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
compensation not exceeding the amount so named.
Section 74 emphasizes 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. Therefore, the emphasis is on reasonable
compensation. If the compensation named in the
contract is by way of penalty, consideration would be
different and the party is only entitled to reasonable
compensation for the loss suffered. But if the
compensation named in the contract for such breach is
genuine pre-estimate of loss which the parties knew
when they made the contract to be likely to result from
the breach of it, there is no question of proving such
loss or such party is not required to lead evidence to
prove actual loss suffered by him. Burden is on the
other party to lead evidence for proving that no loss is
likely to occur by such breach. Take for illustration: if
the parties have agreed to purchase cotton bales andPage 3 of 4
the same were only to be kept as a stock-in-trade. Such
bales are not delivered on the due date and thereafter
the bales are delivered beyond the stipulated time,
hence there is breach of the contract. Question which
would arise for consideration is – whether by such
breach party has suffered any loss. If the price of
cotton bales fluctuated during that time, loss or gain
could easily be proved. But if cotton bales are to be
purchased for manufacturing yarn, consideration would
be different.”
9. Learned counsel for the respondent admits that there
is no evidence on record that on account of price of property
falling his client suffered a loss. Counsel further concedes that
there is no proof of the value of the property of the respondent
diminishing.
10. The clause in question is ex-facie by way of penalty.
11. Noting that the respondent has already enriched
himself by Rs.5,00,000/- we allow the appeal and set aside the
impugned judgment and decree dated 4.8.2005. Suit filed by
the respondent is dismissed with cost throughout against the
respondent and in favour of the appellant.
12. Money deposited by the appellant and kept in a fixed
deposit be returned to the appellant with accrued interest.
PRADEEP NANDRAJOG, J.
J.R.MIDHA, J.
NOVEMBER 27, 2008
mm
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