# FATEH CHAND v. BALKlSHAN DAS

- **Citation:** [1964] 1 S.C.R. 515
- **Court:** Supreme Court of India
- **Decided:** 1964
- **Bench:** B. p; SINHA, P. B. GAJENDRAGADXAJ't, K. N. Wanchoo, K. C. Das Gupta, J. C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/fateh-chand-v-balklshan-das-2918
- **Pages:** 20

## Headnote

Contract-Compen•ation fur /,reach of contract where penalty
stipulated for-"tlte contract contains nny other stipulation by
way of penalty", if applicable tu all stipulat;on by way of
penalty-Indian Contract Act, W/2 (Act IX of 1111'2), s. UCode of Civil Proadure, JVOS (Act 5 uf 1908), s . . ~ (U) tti1td
0. 20 r. 12(1)(c).
By agreement dated March 21, 1949, the plaintiff con·
tracted to •ell lea•ehold rights in a piece of land and in the
building constructed thereon to the defendant. The plaintil!'
re.:eived Rs. 25,000/- under the agreement and delivered possession of the building and the land in his occupation to the
defendant, but the sale was not completed before the expiry of
the period stipulated in the agreement, and for this default
each party blamed the other. The plaintifT instituted a suit
in the court of the Subordinate Judge claiming to forfeit the
amount of Rs. 25,000/· received by hi'll, and praying for ~
decree for possession of the land and building and for compen·
sation for use and occupation of the building from the date of
delivery of possession to the defendant of the property. The
defendant contended that the plaintifT having broken the con·
tract could not forfeit the amount of Rs. 25,000/· received by
him nor claim any compensation. The trial Judge held that
the plair.tifT had failed to put the defendant in possession and
could not therefore retain Rs. 25,000/· and accordingly directed
that on the plaintifT depositing Rs. 25,000/- less Rs. 1,400/- the
defendant do put the plaintifT in possession "{ld awarded to the
plaintiff future mesne profits at the rate of Rs. 140/· per
mcnscm from the date of the suit until delivery of possession.
On appeal the High Court modified the decree of the trial
court and declared "that the p!aintifT was entitled to retain
out of Rs. 25,000/- paid by the defendant under the sale
agreement, a sum of Rs. 11,250/·" and directed that the plain·
tiff do get from the defendant compensation for use at the rate
of Rs. 265/· per mensem.
Held, that the High Court was right in holding lhat the
defendant had committed breach of the contract,
1163
January, 15.
1963
/.'ateh Chand
v.
Balkis!iOJ1 Dos
016 SUPREME COURT REPORTS-[1904] VOL.
Held, further, cnat the expression "the ,contract contains
any .other stipulation by way of penalty" comprehen.•ively
applies to every covenant involving a penalty-\vhether it is
fOr payment on breach of' contract of money, or delivery of
property in future, or for" forfeiture of right to money or other
property already dclivci·ed. Duty not to enforce the penalty
clause ·~but ,only to, award reasonable compensation is statu ..
torily imposed upon courts by s. 14 of the Indian Contract
Act.
In ·aQ casCs, therefore, whei·e there is· a stipulation iu the
nature of penalty for forfi;:iture of an amount deposited pursuant to the terms of a contract which expressly p!'ovides for
forfeiture, ~he COl!rt has jurisdiction to awt1-rd such sum only as
it considers ll::aso'nable, but not exceeding the amount specified
in the contract as Ijable to forfeiture.
'
/
In the present case in the absence of any iJl'OOf of damage
arising from the breach of .. contract, the amount ~o(.Rs. 1,000/-
which had been forfeited and liability to foiteiture whereof
was not challenged and the advantage. that the plaintilf derived
·by retaining the sum of Rs. 24,000/- wai sufficient. compensation to the plaintiff for loss suffered by him. In the absence
of evidence to show that the value of th~ property had depreciated, since the <lite of the contract, the decree passed by thr:
High Cr.urt awar dini 10% of the contract price to the plaintiff
as co1npensatio11 C'JU l l not be sustained.
Abdul <Jani & Co. v. Trustees oj 1/1.e Purl of Bombay,
I. L. R. 1952 Born'., 747
and NaleAa
Aiyar v. Appav"
Padayaclii, (1913) I. L. R. 38 Mad. 178, distinguished.
Held, further, that the plaintiff was not only entitled to
111esnc profits at the rate fixed by the trial court, but \Vas also
entitled to inte

## Text

1 S.C.R.
SUPREME COURT REPORTS
515
FATEH CHAND
v.
BALKlSHAN DAS
(B. p; SINHA, c. J., P. B. GAJENDRAGADXAJ't,
K. N. WANCHOO, K. C. DAS GUPTA and
J. C. SHAH, JJ.)
Contract-Compen•ation fur /,reach of contract where penalty
stipulated for-"tlte contract contains nny other stipulation by
way of penalty", if applicable tu all stipulat;on by way of
penalty-Indian Contract Act, W/2 (Act IX of 1111'2), s. UCode of Civil Proadure, JVOS (Act 5 uf 1908), s . . ~ (U) tti1td
0. 20 r. 12(1)(c).
By agreement dated March 21, 1949, the plaintiff con·
tracted to •ell lea•ehold rights in a piece of land and in the
building constructed thereon to the defendant. The plaintil!'
re.:eived Rs. 25,000/- under the agreement and delivered possession of the building and the land in his occupation to the
defendant, but the sale was not completed before the expiry of
the period stipulated in the agreement, and for this default
each party blamed the other. The plaintifT instituted a suit
in the court of the Subordinate Judge claiming to forfeit the
amount of Rs. 25,000/· received by hi'll, and praying for ~
decree for possession of the land and building and for compen·
sation for use and occupation of the building from the date of
delivery of possession to the defendant of the property. The
defendant contended that the plaintifT having broken the con·
tract could not forfeit the amount of Rs. 25,000/· received by
him nor claim any compensation. The trial Judge held that
the plair.tifT had failed to put the defendant in possession and
could not therefore retain Rs. 25,000/· and accordingly directed
that on the plaintifT depositing Rs. 25,000/- less Rs. 1,400/- the
defendant do put the plaintifT in possession "{ld awarded to the
plaintiff future mesne profits at the rate of Rs. 140/· per
mcnscm from the date of the suit until delivery of possession.
On appeal the High Court modified the decree of the trial
court and declared "that the p!aintifT was entitled to retain
out of Rs. 25,000/- paid by the defendant under the sale
agreement, a sum of Rs. 11,250/·" and directed that the plain·
tiff do get from the defendant compensation for use at the rate
of Rs. 265/· per mensem.
Held, that the High Court was right in holding lhat the
defendant had committed breach of the contract,
1163
January, 15.
1963
/.'ateh Chand
v.
Balkis!iOJ1 Dos
016 SUPREME COURT REPORTS-[1904] VOL.
Held, further, cnat the expression "the ,contract contains
any .other stipulation by way of penalty" comprehen.•ively
applies to every covenant involving a penalty-\vhether it is
fOr payment on breach of' contract of money, or delivery of
property in future, or for" forfeiture of right to money or other
property already dclivci·ed. Duty not to enforce the penalty
clause ·~but ,only to, award reasonable compensation is statu ..
torily imposed upon courts by s. 14 of the Indian Contract
Act.
In ·aQ casCs, therefore, whei·e there is· a stipulation iu the
nature of penalty for forfi;:iture of an amount deposited pursuant to the terms of a contract which expressly p!'ovides for
forfeiture, ~he COl!rt has jurisdiction to awt1-rd such sum only as
it considers ll::aso'nable, but not exceeding the amount specified
in the contract as Ijable to forfeiture.
'
/
In the present case in the absence of any iJl'OOf of damage
arising from the breach of .. contract, the amount ~o(.Rs. 1,000/-
which had been forfeited and liability to foiteiture whereof
was not challenged and the advantage. that the plaintilf derived
·by retaining the sum of Rs. 24,000/- wai sufficient. compensation to the plaintiff for loss suffered by him. In the absence
of evidence to show that the value of th~ property had depreciated, since the <lite of the contract, the decree passed by thr:
High Cr.urt awar dini 10% of the contract price to the plaintiff
as co1npensatio11 C'JU l l not be sustained.
Abdul <Jani & Co. v. Trustees oj 1/1.e Purl of Bombay,
I. L. R. 1952 Born'., 747
and NaleAa
Aiyar v. Appav"
Padayaclii, (1913) I. L. R. 38 Mad. 178, distinguished.
Held, further, that the plaintiff was not only entitled to
111esnc profits at the rate fixed by the trial court, but \Vas also
entitled to interest on such profits : vidc s. 2(12) of the Code of
Civil Procedure.
CrYIL At·l'~lLf,A'J'B JutUSlJI<J'.l'WN : C:::ivil Appeal
No. 287 of HJ60.
Appeal from the judgment and decree dated
August 22, 1957 of the Punjab High Court in
(Circuit Bench) at Delh'i in Civil Regular First Appeal
No. 37-D of 1900.
M. 0. Setalvarl, Attorney General of India,
M. L. Ba(!ai, /:J. f(. Mehtu and K. L. Mehta, for the
appellant.
,
111 ohan Behari Lal, for the respondent.
1 S.C.R.
SUPREME COURT REPORT~
517
1963. January 15. The Judgment
of the
Court was delivered by
SnAH, J.-By a registered deed of lease dated
l'vfay HJ, I 027, which was renewed on January 30,
1947, the Delhi Improvement Trust granted leasehold right~ for 90 years to one Dr. M. 1\1. Joshi in
respect of a plot of land No. 3, 'E' .Block, Qarol
Bagh, Delhi, arlmeasuring 2433 sq. yards: Dr. Joshi
constructed a building on the land demised to him.
Chandrawati. widow of Dr . .Joshi,' as guardian of her
minor son Murli Manohar, by sale-deed dated
April 21, l!J47, sold the leasehold rights in the land
together with the building to Lala Balkishan Daswho will hereinafter be referred to as '.the plaintiff'-
for Rs. G3,000/-.
By an agreement dated March 21,
l!J49 the plaintiff contracted to sell his rights in the
land and the building to Seth Fateh Chand-hereinafter called 'the defendant'. It was recited in the
agreement that the plaintiff agreed to sell the building together with 'pattridari' rights appertaining to
the
land
admeasuring
2433
sq.
yards
for
Rs. 1,12,500/-, and that Rs. 1,000/- were paid to him
as earnest money at the time of the execution of the
agreement. The conditions of the agreement were :
"(1) I, the executant, shall deliver the actual
possession, i. e. complete vacant possession of
kothi (bungalow) to the; vendee on 1\farch 30,
1949 .. and the vendee shall have to give another
cheque for Rs. 24,000/- to me, out of the sale
price,
(2) Then the vendee shall have to get the sale
(deed) registered by the 1st of June, 1949. If,
on account of any reason, the vendee fails to
get the said sale-deed registered by1June, 1,
1949, then this sum of Rs. 25,000/- (twenty.
five thousand) mentioned above shall be deemed to be forfeited and the agreement cancelled.
1963
Fateh Chand
v.
Ralkis/um Das
Sha\, J.
I
1963
F.Uh Chan1
v.
M.Uisltirn Da1
SM!i, J.
518
SUPREME COURT REPORTS [1964]VOL.
Moreover, the vendee shall have to deliver
back the complete vacant possession of the
kothi (bungalow) to me, the executant. lf due
to certain reason, any delay takes place on my
part in the registration of the sale-deed, by
!st June 194\l, tht'.n I, the executant, shall be
liable to pay a further sum of Rs. 25,000/· as
damages, apart from the aforesaid sum of
Rs. 25,000/ · to the vendee, and the bargain
shall be deemed to be cancelled."
The southern boundary of the land was described
in the agreement "Bungalow of Murli Manohar
Joshi."
On March 25, 1949,
the plaintiff received
Rs. 24,000/· and delivered possession of the building
and the land in his occupation to the defendant, but
the sale of the property was not completed before the
expiry of the period stipulated in the agreement. Each
party blamed the other for failing to complete the
sale according to the terms of the
agreement.
Alleging that the agreement was rescinded because
the defendant had committed default in performing
the agreement and the sum of Rs. 25,000/· paid by
the defendant stood forfeited, the plaintiff in an
action filed in the Court of the Subordinate Judge,
Delhi, claimed a decree for possession of the land and
building described in the plaint and a decree for
Rs. 6,500/ · as compensation for use and occupation
of the building from ~larch 25, mm, to January 24,
1950, and for an order directing enquiry as to com·
pensation for
U5C and occupation of the land and
building from the date of the institution of the suit
until delivery of possession to
the plaintiff. The
defendant resisted the claim contending inter alia
that the plaintiff having committed breach of the
contract could not forfeit the amount of l\s. 2!l,OOO/·
received by him nor claim any compensation. The
trial Judge held that the plaintiff had failed to put
1 S.C.R. SUPREME COURT REPORTS
519
the defendant in possession of the land agreed to be
sold and could not therefore retain Rs.
25,000/-
received.by him under the contract. He accordingly
directed that on the plaintiff depositing Rs. 25,000/-
less Rs. 1,400/- (being the amount of mesne profits
prior to the date of the suit) the defendant do put
the plaintiff in possession of the land and the building, and awarded to the plaintiff future mesne profits at the rate of Rs. l40f- per mensem from the
date of the suit until delivery of possession or until
expiration of three years from the date of the decree
whichever event first occurred. In appeal the High
Court of Punjab modified the decree passed by the
trial Court and declared "that the plaintiff was
eutitled to retain out of Rs. 25,000{- paid by the
defendant under the sale . agreement, a sum ·of
Rs. 11,250/-" being compensation for loss Sl!lffered by
him and directed that the plaintiff do get from .the
defendant compensation ·for. use and occupation at
the rate of Rs. 265/- per mensem. The defendant
has appealed to this Court with certificate under
Art. Ul3( l )(a) of the Constitution,
The first question which falls to be determined
in this appeal is as to who committed breach of the
contract. The plaintiff's case as disclosed in his
pleading and evidence was that he had agreed to
sell to the defendant the leasehold rights in the land
and building thereon purchased by him from Murli
Manohar Joshi by sale-deed dated April 21, 1947,
that at the time of execution of the agreement the
defendant had inspected the sale deed and the lease
executed
by
the
Improvement
Trust
dated
January 3(), 1947 and the sketch plan annexed to
the lease, that the plaintiff had handed over to the
defendant a copy of that plan and had put the
defendant in possession of the property agreed to be
sold, but the defendant despite repeated requests
failed and neglected to pay the balance remaining
due by him and to obtain the sale deed in his favour.
1963
Fateh Chand
v.
Balkislian Das
Shah, J.
1963
Fauh Chuoi
v.
'ia/kis""' Da.
~hah, J.
520
SUPREME COURT REPORTS [1964) VOL.
The defendant's case on the other hand was that the
plaintiff had agreed to sell the area according to the
measurement and boundaries in the plan annexed to
the lease granted by the Improvement Trust and had
promised to have the southern boundary demarcated
and to have a boundary wall built, that at the time
of the execution of the agreement of sale the plaintilT
rlid not show him the sale deed by which he h.id
purchased the property, nor the lease obtained from
ti1e Improvement Trust in favour of Dr. Joshi nor
even the 'sketch plan,' that the plaintiff had given
him a copy of the 'sketch plan' not at the time of the
execution of the agreement, hut three or four days
after he was put in possession of the premises and
that on measuring the site in the light of the plan he
discovered that there was a "shortage on the southern
side opposite to Rohtak Road", that thereupon he
approached the plaintiff and repeatedly called upon
him to put him in possession of the land as shown in
the plan and to get the boundary wall built in his
presence but the plaintiff neglected to do so.
We
have been taken
throu~h the relevant evidence by
counsel and we agree with the conclusion of the High
Court that the defendant and not
the plaintiff
committed breach of the contract.
The i.:~fendant's case is founded primarily on
two pleas:
1i) that the plaintiff offered to sell land not
according to the dcscri pt ion in the written
agreement, hut according to the plan
appended to the I mprovemcnt Trust lease,
and, that he --the defendant-accepted
that offer, ;rnd
(ii) The plain,ifI had undertaken to have the
southern boundary de1t1arcated and a boun·
dary wall built thereon,
If the case of the defendant he true, it is a singular
I S.C.R
SUPREME COURT REPORTS
52l
circumstance
that
those
covenants
are
no
found incorporated in the written agreement nor are
they referred to in any document prior to the date
fixed for completion of the sale.
The defendant was
put in possession on March 25, 19±9 and he paid
Rs. 24,000/- as agreed. If the plaintiff did not put
the defendant in possession of the entire area which
the latter had agreed to buy, it is difficult to believe
that the defendant wm1ld part with a large sum of
money which admittedly was to be paid by him at
the time of obtaining possession of tl:.~ premises, and
in any event h~ wuuld have immediately raised a
protest in writing that the plaintiff had not put him
in possession of the area agreed to be delivered. It
is implicit in the pica of the defendant that he knew
that the southern boundary was irregular and that
the plaintiff was not in possession of the area a~reed
to b-e sold under the agreement.
Why then did the
defendant not insist that the terms pleaded by him
be incorporated in the agreement ? We find no
rational answer to that question ; and none has been
furnished.
The story of the defendant that he agreed
to purchase the land according to 'the measurement
and boundaries' in the Improvement Trust Plan
without even seeing that plan, is impossible of
acceptance.
It is common ground that according to this
plan the land demised was rectangular in shape
admeasuring 140' x 160' thottgh the conveyance was
in respect of 24:3:1 sq. yards only.
Manifestly if the
land conveyed to the predecessor-in-interest of the
plaintiff was a perfect rectangle the length of the
boundaries must be inaccurate, for the area of a
rectangular plot of Ian::! 1-10' x lUO' would be 2488
sq. yards and 8 sq. feet and nJt 2-t:l3 sq. yards. The
plaintiff had purchased from his
predecessor-ininterest land admeasuri11g 2J33 sq. yards and by the
express recital in the agreement the plaintiff agreed
to sell that area to the defendant.
At the request
1963
Fat rh Clu10d
v.
BalkishQn Das
Shah, /,
1963 .
~ Fa 11h Clumd
v.
lJalkisha11 Das
S.\ali; J.
522 SUPRE1IE COURT REPORTS (1964J VOL.
•-·-,--·~L---· • -~-~
J
of the plaintiff the trial Court appointed a Commissioner for measuring the land of which possession
was delivered to the defendant, and according to the.
Commissioner the land "admeasured 141/142' feet
by 157/158 feet". The Commissioner found that two.
constructions-a latrine and a garage-on the ad-
. jacent property belonging to 1furli 1fanohar Joshi
"broke the regular line of the southern· boundary".
The fact that the southern boundary was irregular
· must have been noticed by the defendant at the time
. of the agreement of sale, and in any event soon after
he ·obtained possession of the ·property. But for
nearly three months after he obtained possession the
. defendant did not raise any objections in that behalf.
·His story that he had orally -called upon the plaintiff
repeatedly to put him in possession of the land as
shown in the Improvement ·Trust Plan cannot be
believed.
The defendant's case that a part of the
land agreed to be conveyed was in the possession of
1Iurli Manohar Joshi was set up for the first time
by the defendant in his letter dated June 17, 1949.
On June 1, 1!149, the defendant informed the
plaintiff by a telegram that the latter was responsible for damages as he had failed. to complete the
contract. ·The plaintiff by a telegram replied that
he was ready and willing to· perform his part of the
contract and called upon the defendant· to. obtain a
sale deed. The defendant then addressed a letter -on
June 9,
1~49, to the plaintiff informing him that
the latter had to· get the document executed. and
registered after giving clear title by June l, 1949.
To that letter the plaintiff replied that the defendant
had inspected the title-deeds before he agreed to·
purchase the property and had satisfied himself
regarding the plaintiff's title thereto and that the
defendant had never raised any complaint about any
defect in the title 'of the plaintiff. The defendant's
·· - · Advocate replied by letter dated June 17, 1949 : . .
"This is true that my client paid Rs. 25,000/-
and got possession of the Kathi on the clear
I S.C.R.
SUPREME COURT REPORTS
523
understanding that your client has clear title
of the entire area mentioned in the agreement
of sale and sketch map attached to it.
Long
before 1st June, my client noticed that a certain area of the Kothi under sale is under the
possession of Shri Murli Manohar Joshi on
which his garage stands.
Again on the same
side Shri Murli Manohar Joshi has got latrines
and there is clear encroachment on the land
included in the sale. It was clearly understood
at the time of bargain that vacant possession
of the entire area under sale will be given by
your client.
My client was anxious to put a
wall on the side of Shri Murli Manohar Joshi
and when he was actually starting the work
this difficulty of garage and latrine came in.
Your client was approached
x
x
x."
One ~thing is noticeable in this letter : according to
the defendant, there was a sketch-plan attached to the
agreement of sale, and that it was known to the
parties at the time of the agreement that a part of
the land agreed to be sold had been encroached upon
befor~ the agreement by Murli Manohar Joshi. If
there had been an "understanding" as suggested by
the defendant . and if the plaintiff had, in spite of
demands made in that behalf by the defendant, failed
to carry out the agreement or understanding, we
would have expected this version to be set up in the
earliest communication and not reserved to be set up
as a reply to the plaintiff's assertion that the defendant had never complained about any defect in the
title of the plaintiff.
Acccrding to the written
agreement the area agreed to be conveyed was 2433
sq. yards and the land was on the south bounded by
the Bungalow of
Murli Manohar Joshi.
It is
common ground that the defendant was put in possession of an area exceeding 2433 sq. yards, and the
land is within the four boundaries set out in the
agreement. But the defendant sought to make out
1963
Faleh Clllmll
v.
Balkishan D01
Shah, /.
1963
F111,J, Clk.nd
v.
BaWslwi Das
Slilli, J
524 SUPREME COURT REPORTS [1964] VOL
the case at the trial that he had agreed to purchase
land according to the Improvement Trusr plan -a
fact which is not incorporated in the agreement, and
which has 11ot be.:n
mentioned rven in the letter
dated June l i, l!H!I.
The a;scni ins made bv the
defendant in his testimony before the Court, show
that not much reliance can be placed upon his word.
He stated that the terms of the contract rrlating to
forfeiture of Rs. 2ri,OOO/- paid by him in the event
of failure to carrv out the terms of the contract were
never intended ·to be acted upon and wrre incorporated in the agreement at the inst,mcc of the writer
who wrote the deed.
!'his plea was never raised in
the written statement and the writer of the deed was
not question.-d about it.
The defendant is manifestly seeking to add oral terms to the written agreement which have not been referred to in the correspondence at the earliest opportunitv. We therefore
agree with the High Court that the plaintiff carried
out his part of the contr;ict to put the defendant in
possession of the land agreed to be sold, and was
willing to execute the sale-deed, but the defendant
failed to pay the balance of the price, and otherwise
to show his willingne.ss to obtain .a conveyance.
The claim made by the plaintiff to forfeit the
sum of Rs. 25,000/- received by him from the defrndant must next
be considered.
This sum of
R5. 25,000/- consists of two items-Rs.1,000/- received
on l\farch 21, HJ~!) and referred to in the agreement
as 'earnest money'
and Rs. 24,0llO!- agreed to be
paid by the defendant to plaintiff as "out of the sale
price" against delivery of possession and paid by
the defendant to the plaintiff on March 2;"\, l!l4!l
when possession of the land
and building was
delivered to the defendant. The plaintiff submitted
that the entire amount of Rs. 2°3,000/- was to be
regarded as earnest money. and he claimed to forfeit
it on the defendant's failure to carry out his part of
1 S.C.R.
SUPREME COURT REPORTS
525
the contract.
This part of the case of the plaintiff
was denied by the defendant ..
The Attorney-General appearing oa behalf of
the defendant has not challenged the plaintiff's right
to forfeit Rs. 1,000/- which were expressly named and
paid as earnest money.
He has, however, contended
that the covenant which gave to the plaintiff the
right to forfeit Rs. 24,000/- out of the amount paid
by the defendant was stipulation in the nature of
penalty, and che plaintiff can retain that amount or
part thereof only if he establishes that in consequence
of the breach by the defendant, he suffered Joss, and
in the view of the Court the amount or part thereof
is reasonable compensation for that loss. ·We agree
with the Attorney-General that the amount of
Rs. 24,000/- was not of the nature of earnest money.
The agreement expressly provided for . payment of
Rs. 1,000/- as earnest money, and that amount was
paid by the defendant. The amount of Rs·. 24,000/-
was to be paid when vacant possession of the land
and building was delivered, and it was expressly
referred to as
"out of the sale price." If this
amount was
also to be regarded as earnest money,
there was no reason why the parties would not have
so named it in the agreement of sale. We are unable
to agree with the High Court that this amount was
paid as security for due performance of the contract.
No such case appears to have been made out in the
plaint and the finding of the High Court on that
point is based on no evidence. It cannot be assumed
·that because there is a stipulation for forfeiture the
amount paid must bear the character of a deposit for
due performance of the contract.
The claim made by the plaintiff to forfeit the
amount of Rs. 24,000/- may be adjudged irt the
light of s. 74 of the Indian Contract Act, which in
its material part provides :-
"When a contract has been broken, , if a sum is
1963
••
Ba/kislwn Da.s
Shali, J.
1963
Fat1h Ch4rsr/
v.
Bal.AUh(UI f)OJ
Sh.Ii, J.
526 SUPREME COURT REPORTS [1964] VOL.
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."·
The section is clearly an attempt to eliminate the
somewhat elaborate refinements
made under the
English common law in distinguishing between stipulations providing for payment of liquidated damages
and stipulations in the nature of penalty.
Under the
common law a genuine pre-estimate of damages by
·mutual agreement is regarded as a stipulation naming
liquidated damages and binding between the parties:
a stipulation in a contract in terrorcm 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 acrμss the web of
rules and presumptions under the English common
law, by enacting a uniform principle applicable to all
stipulations naming amounts to be paid in case of
breach, and stipulations by way of penaltyThe second clause of the contract provides that
if for any reason the vcndee fails to get the sale-deed
registered by the date stipulated, the amount of
Rs. 25,000/- (Rs. 1,000/- paid as earnest money and
Rs. 24,000/- paid out of the price on delivery of
possession) shall stand forfeited and the agreement
shall be deemed cancelled. The covenant for for-
.feiture of Rs. 21,000/- is manifestly a stipulation by
way of penalty.
Section 74 of the Indian Contract Act deals
with the measure of damages in two classes of cases
1 S.C.R.
SUPREME COURT REPORTS
527
•
(i) where the contract names a ~um 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 concrrned to decide whether a
covenant of forfeitnre of deposit for due performance
of a contract falls within the first cla~s. The measure
of damages in the case of breach of a stipulation
by way of penalty is bys. 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
compensation as it deems reasonalile 11aving regard to
all
tl"~ circumstances 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 t\ie Court duty to award
compensation according 10 settled principles. The
section undoubtedly says that the aggrieved party is
entitled to receive compensation from the party who
has broken the contract, 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 comp"nsation when in consequence of the breach
no legal injury at all has resulted, because compensation for breach of contract can be awarded to make
good loss or damage 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.
Before turning to the question about the compensation which may be awarded to the plaintiff, it
is necessary to consider whether s. 74 applies to
stipulations for forfeiture of amounts deposited or
paid under the contract. 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
1963
Fai.h Clran4
••
Balkisha DIU
Shah, J.
1963
F111h Clwiui
••
&Ins,... Dai
S1.a1i, J.
528 SUPREME COURT REPORTS [1964] VOL.
already been received by the party aggrieved.
There
b however no warrant for the assumption made by
some of the High Courts in India, thats. 74 applies
only to cases where the aggrieved party is seeking to
receive 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 pena]Jy'· comprehensively applies to every covenant involving a penalty
whether it is for payment on breach of contract of
money or delivery of property in future, or for forfeiture of right to money or other property already
delivered. Duty not to enforce the penalty clause but
only to award reasonabie compensation is statutorily
imposed upon courts bys. H. In all cases, therefore,
where there is a stipulation in the nature of penalty
for forfeiture of an amount deposited pursuant to the
terms of contract which expressly provides for forfei·
ture, the court has jurisdiction to award such sum
only as it considers reasonable, but not exceeding the
amount specified in the contract as liable to forfeiture.
We may briefly refer to certain illustrative cases
decided by the High Courts in India which have
expressed a different view.
In Abdul Gani ,(; Co. v. Truster;s of the Port
of Bombay (1), the Bombay High Court observed as
as follows :-
"lt will be noticed that the sum which
is
named in the contract either as penalty or as
liquidated damages is a sum which has not
already been paid but is to be paid in case of a
breach of the contract. With regard to the
stipulation by way of P.enalty. the Legislature
has chosen
to qualify 'stipulation' as 'any
other stipulation', indicating that the stipulation must be of the nature of an
amount
to
be paid and not an amount already
(I) l,L.R, 1952 llom. 7i7,
1 S.C.R.
SUPREME COURT REPORTS
5211
paid. prior to the entering into of the contract.
The section further provides that a party complaining of a breach is entitled to receive from
the party who has broken the contract reasonable compensation not exceeding the amount
so named or the peμalty stipulated for.
Therefore, the section clearly contemplates that the
party aggrieved has to receive from the party
in default some amount or something in the
nature of a penalty : it clearly rules out the
possibility of the amount which has already
been received or the penalty which has already
been provided for."
In Natesa Aiyar v. Appavu Padayschi (1), the
Madras High Court seems to have held thats. 74
applies where a sum is named as penalty to be paid
in future in case of breach, and not to cases where-a
sum is already paid and by a covenant in the contract
it is liable to forfeiture.
In these cases the High Courts appear to have
concentrated upon the words "to be paid in case of
such breach" in the first condition in s. 74 and did
not consider the import of the expression "the contract contains any other stipulation by way of penalty",
which is the second condition mentioned in the section.
The words "to be paid" ·which appear in· the first
condition do not qualify the second condition relating
to stipulatidn by way of penalty. The expression "if
the contract contains any other stipulation by way of
penalty" widens the operation of the section so as to
make it applicable to all stipulations by way of
penalty, whether the stipulation is to pay ·an amount
of money, or is of another character, as, for example,
providing for forfeiture of money already paid.
There is nothing in the expression which implies that
the stipulation must be one for rendering something
after the contract is broken.-
There is no ground for
holding that the expression "contract contains any
(I) (1913) I.L.R. 38 Mad. 178.
1'63
Fateh Ch>nd
v.
Bslkislum B•s
Sh.,\, J.
'". 1953
. Fa1,h Chand
v.
Ba!K.ishan Das
Shah, J.
";-, '_,,--· ·-...
530 SUPREME coI.JR.i' REPORTS [1964] ·Vot.
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.
Section 74 declares the law as to liability upon
breach of contract where compensation is by agreement of the parties pre-determined, or wher.e there is
a stipulation by way of penalty. But the application.
of the enactment is not restricted to cases where the
aggrieved p;:irty claims relief as a plaintiff. The
~ection does not confer a special benefit upon any
party; it merely declares the law that notwithstanding
any term in ·the' contract predetermining ··damages
or providing for fprfeiture of any property by way
of penalty, the . court will· award to . the party ag~
grieved only rcascicc able compensation not exceeding
·the amount namd or penalty stipulated. The juris:
diction 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 exercised in dealing with
the claim of the party complaining of breach of contract. The. court has to adjudge in every case reasonable compensation to which the plaintiff . is
entitled from the defendant on breach of the contract •.
Such compensation has to" be ascertained having re-
~ard to the conditions existing on the date of the
breach.
·
There is no evidence that any loss was suffered
by the plaintiff in consequence of the default by
· the defendant save as to the loss suffered by him
by being kept out of possession of the property. ·
1 S.C.R.
SUPREME COUkT REPORTS
531
There is no evidence that the property had depreciated in value since the date of the contract; nor was
there evidence that any other special damage
had resulted. The contract provided for forfeiture of
Rs. 25,000/- consisting of Rs. 1000/-paid as earnest
money and Rs. 24,000/- paid as part of the purchase
price. The defendant has conceded that the plaintiff
was entitled to forfeit the amount of Rs. 1,000/-which
was paid as earnest money. We cannot however
agree with the High Court that 10 per cent of the
price may be regarded as reasonable compensation in relation to the value of the contract as a
whole, as that in our opinion is assessed on arbitrary
assumption.
The plaintiff failed to prove the loss
suffered by him in consequence of the breach of the
contract committed by the defendant, and we are
unable to find any principle on which compensation
equal to ten i: ercent of the agreed price could be
awarded to the plaintiff. The plaintiff has been
allowed Rs. 1,000/-which was the earnest money as
part of the damages.
Besides he had use of the
remaining sum of Rs. 24,000/-, and we can rightly
presume that he must have been deriving advantage
from that amount throughout this period. In the
absence therefore of any proof of damave arising
from the breach of the contract we are of opinion
that the amount of Rs. 1,000/-
(earnest money)
which has been forfeited, and the advantage that the
plaintiff must have derived from the possession of the
remaining sum of Rs. 24,000/-during all this period
would be sufficient compensation to him. It may be
added that the plaintiff has separately claimed mesne
profits for being kept out of possession for which he
has got a decree and therefore the fact that the
plaintiff was out of possession cannot be taken into
account in determining damages for this purpose.
The decree passed by the High Court
awarding
Rs. 11,250/- as damages to the plaintiff must therefore be set aside.
1963
Ji'«teh Chvii
••
Ballcishan D«S
Shah, J.
'. 1963
. Fo!eh Clumd
••
Blllkisltari Du
SJ..o, J.
I
\
532 SUPREME.COURT REPORTS £1964] VOL.
The other ·question which ~~mains to be deter·
mined relates to the . amount of mesne profits which
the plaintiff is entitled to\ receive from the defendant
who kept the plaintiff. out of the property after the
bargain had fallen through. It · is common ground .
that the defendant is liable · for retaining possession
_to pay compensation' from June 1, 1949 tilI the date
of the suit . and thereafter under 0. 20, r. 12 (c)
C. P. Code till the date on which the possession was
delivered.'- The trial Court assessed compensation at
the rate of Rs. 140/- per mensem.
The High Court
awarded compensation at the rate of Rs. 265/-per
mensem. In an:iving at this rate the High Court ·
adopted a highly artificial method. The High Court
, observed that even though the agreement for sale of
the property was for a consideration ofRs.1,12,500/-
the plaintiff had purchased the property in l!J47 for
Rs. 63,000/- and that at the· date of the suit that
amount could be regarded as "the value for which
the property could be ~()[d at any time." The High
Court then thought thanhe proper rate of compen·
sation for use and occupation of the house by the
defendant when he rufused to give ·up possession
after failing to complete the contract should· have
some relation to the value of the property and not to
the price agreed as sale price between the parties,
and computing damages at 'the . rate of five per cent
on the value of the
property they held that
·_Rs. 3,150/- was the annual loss . suffered by the
plaintiff by being kept out of. possession, and on that
footing awarded mesne profits
at the rate of
Rs. 265/-per mensem prior to the date of the suit and
thereafter. The plainiiff is undoubtedly entitled to
· mesne proliu from the defendant and 'mesne profits~
as defined in s. 2 (12) of the Code of Civil Procedure
are profits which the person in wrongful possession of
property . actually received or might with ordinary
diligence have received therefrom,
together with ·
interest on such profits, but do not include profits
due to improvements made by_ the person in wrongful
...
1 S.C.R.
SUPREME COURT REPORTS
533
-~
,
~·~--~--·- --·-·-
'possession. The normal measure of mesne profits is
·.therefore the value of the user of land to the person·
_in wrongful possession. The assessment made by the
High Court of compensation at the rate of five per
cent of what they regarded as the fair value of the
property is based not cin the value of the user, but on
an estimated .. return on the value of the property,
cannot be sustained: The Attorney-General contended that the premises ~ere governed by the Delhi &
Ajmer-Merwara Rent ,Control Act XIX of 1947 and
nothi,ng more than the 'standard reu.t' of the property
assessed under that Act could be awarded to the
plaintiff as damages. Normally a person in wrongful
possession of immovable property ha·s to pay compensation corpputed on the basis of profits he_ actually
received or with ordinary diligence mighf have
received.· It is not necessary to consider in the present case whether riiesne profits at a rate exceeding
. the rate of standard rent of the house may be awarded, for there is no evidence as to what the ~standard
rent' of the house was.
From the evidence on' the
record it appears that a tenant \vas in occupation for
a long time before 1!14 7 of the house in dispute in
this appeal and another house for an aggregate rent
of Rs. ·180/- per mensem, and that after .the house
in dispute was sold, the plaintiff I"eceived rent from·
that tenant at the rate' of Rs. 80/- per mensem, and to
the· vendor of the plaintiff at the rate of Rs. 106/,
per mensem. But this is.· not evidence. of standard
rent within the meaning· of the Delhi and Ajmer1\ferwara Rent_ Control Act, XIX of 1!)4 7.
The SubordinateJudge· awarded mesne profits
at the rate of Rs. 140/- per mensem and,unless it is
shown by the defendant that that was excessive we
would not be justified in interfering with tJie amount
awarded by the Subordinate Judge .. A slight modification, however, needs to be made. The plaintiff
is not only entitled to mesne profits at the monthly·
rate fixed by the Trial Court, but is alsq entitled to ·
;
1953
Fat1h Chand
v.
Balkishan Du
SW., J.
196~
Faleh Chand
v.
l11l!ishaJJ Da.s
~w.. J,
534 SUPREME COURT REPORTS (1964] VOL.
interest on such profits vidc s. 2( I~) of the Code of
Civil
Procedure.
We, therefore, direct that the
mesne profits be computed at the rate of Rs. 140/-
pcr mensem from .J unc 1, 1949 till the date .on which
possession was deli\·ered to the plaintiff (such period
not exceeding three years from the date of decree)
together with interest at the rate of six percent on
the amount accruing due month after month.
The ·decree passed by the High Court will
therefore be modified. It is ordered that the plaintiff
is entitled to retain out of Rs. 25,000/- only Rs.1,000/-
received by him as earnest money, and that he is entitled to compensation at the rate of Rs. 140/- per
mensem and interest on that sum at the rat~ of six
percent as it accrues due month after month from
June I, )!JIU, till the date of delivery of possession,
subject to the restriction prescribed by 0.20 r. 12 (i)
(c) of the Code of Civil Procedure. Subject to these
modifications, thi> appeal will be dismissed.
In view
of the divided success, we direct that the parties will
bear their own costs in this Court.
Decree m.odified.
Appeal dismissed.