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REPORTABLE   

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 193 OF 2015 [ARISING OUT OF SLP (CIVIL) NO.32039 OF 2012]

M/s. Kailash Nath Associates                                         …Appellant  

Versus   

Delhi Development Authority & Anr.                  ...Respondents

J U D G M E N T

R.F. Nariman, J.

1. Leave granted.  

2. The present appeal arises out of a public auction conducted by  

the  Delhi  Development  Authority  (“DDA”)  wherein  the  appellant  

made the highest bid for Plot No.2-A, Bhikaji Cama Place, District  

Centre,  New Delhi  for  3.12  Crores  (Rupees  Three  Crores  Twelve  

Lakhs).  As per the terms and conditions of the auction, the appellant,  

being the highest bidder, deposited a sum of Rs.78,00,000/- (Rupees  

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Seventy Eight Lakhs), being 25% of the bid amount, with the DDA,  

this being earnest money under the terms of the conditions of auction.  

The relevant provisions in the conditions of auction read as follows:

“(ii) The highest bidder shall, at the fall of the hammer,  pay  to  the  Delhi  Development  Authority  through  the  officer conducting the auction, 25% of the bid amount as  earnest money either in cash or by Bank Draft in favour  of  the  Delhi  Development  Authority,  or  Cheque  guaranteed by a Scheduled Bank as “good for payment  for  three months” in favour of  the Delhi  Development  Authority. If the earnest money is not paid, the auction  held in respect of that plot will be cancelled.  

(iii) The highest bid shall be subject to the acceptance of  Vice-Chairman, DDA or such other officer(s) as may be  authorized by him on his behalf. The highest bid may be  rejected without assigning any reason.  

(iv) In case of default, breach or non-compliance of any  of  the  terms  and  conditions  of  the  auction  or  mis  -representation by the bidder and/or intending purchaser,  the earnest money shall be forfeited.  

(v)  The  successful  bidder  shall  submit  a  duly  filled-in  application  in  the  form attached  immediately  after  the  close of the auction of plot in question.  

(vi) When the bid is accepted by the DDA, the intending  purchaser shall be informed of such acceptance in writing  and  the  intending  purchaser  shall,  within  3  months  thereof,  pay  to  the  Delhi  Development  Authority,  the  balance 75% amount of the bid, in cash or by Bank Draft  in  favour  of  the  Delhi  Development  Authority  or  by  Cheque guaranteed by a Scheduled Bank as “good for  payment  for  three  months”  in  favour  of  the  Delhi  Development  Authority.  If  the  bid  is  not  accepted,  the  earnest  money  will  be  refunded  to  the  intending  

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purchaser without any interest unless the earnest money  is forfeited under para 2 (iv) above.”

3. On  18.2.1982,  the  DDA  acknowledged  the  receipt  of  

Rs.78,00,000/-  (Rupees  Seventy  Eight  Lakhs),  accepted  the  

appellant’s  bid  and directed  the  appellant  to  deposit  the  remaining  

75% by 17.5.1982.  However, as there was a general recession in the  

industry,  the  appellant  and  persons  similarly  placed  made  

representations  sometime  in  May,  1982 for  extending  the  time  for  

payment of the remaining amount.  The DDA set up a High Powered  

Committee  to  look  into  these  representations.   The  High  Powered  

Committee on 21.7.1982 recommended granting the extension of time  

to bidders for depositing the remaining amount of 75%.  Based on the  

High Powered Committee’s  report,  by a letter  dated 11.8.1982, the  

DDA extended time for payment upto 28.10.1982 with varying rates  

of interest starting from 18% and going upto 36%.

4. Another High Powered Committee was also set up by the DDA  

in  order  to  find  out  whether  further  time  should  be  given  to  the  

appellant and persons similarly situate to the appellant.  

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5. The second High Powered Committee recommended that  the  

time  for  payment  be  extended  and  specifically  mentioned  the  

appellant’s name as a person who should be given more time to pay  

the  balance  amount.   Despite  the  fact  that  on 14.5.1984 the DDA  

accepted  the  recommendations  of  the  second  High  Powered  

Committee, nothing happened till 1.12.1987.  Several letters had been  

written by the appellant to DDA from 1984 to 1987 but no answer was  

forthcoming by the DDA.  

6. Vide a letter dated 1.12.1987, which is an important letter on the  

basis of which the fate of this appeal largely depends, the DDA stated  

as follows:

“WITHOUT PREJUDICE’ DELHI DEVELOPMENT AUTHORITY  

VIKAS SADAN  I.N.A.

New Delhi-23……198… .  

No.F.32(2)/82/Impl.-I/4  

From: DIRECTOR (C.L)  

DELHI DEVELOPMENT AUTHORITY  

To,  

M/s. Kailash Nath & Associates, 1006, Kanchanjanga Building,  

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18, Bara Khamba Road,  New Delhi-110001.  

Sub: Regarding payment of balance premium in respect   of Plot No.2-A situated in Bhikaji Cama Place  

         Distt. Centre.  

Sir,  

With  reference  to  the  above  subject,  I  am directed  to  inform you that your case for relaxing the provisions of  Nazul Rules, 1981, to condone the delay for the payment  of balance premium in installments was referred to the  Govt. of India, Min. of Urban Development. Before the  case is further examined by the Govt. of India, Min. of  Urban  Development,  you  are  requested  to  give  your  consent for making payment of balance amount of 75%  premium within the period as may be fixed alongwith  18% interest charges p.a. on the belated payment. Further  the schedule of payment and conditions if any will be as  per  the  directions  issued  by  the  Ministry  of  Urban  Development, Govt. of India. It is, however, made clear  that this letter does not carry any commitment.

Your consent should reach to this office within 3 days  from the date of issue of this letter.  

Dated 1.12.87 Yours faithfully,  

Sd/ DIRECTOR (C.L)”  

7. The appellant replied to the said letter on the same day itself in  

the following terms:

“KAILASH NATH & ASSOCIATES  

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Tel.: 3312648, 3314269  1006, KANCHENJUNGA,  18, BARAKHAMBA ROAD,  NEW DELHI-II0001  

Regd. Ack. Due.  December 1, 1987.  

The Director (C.L.),  Delhi Development Authority,  Vikas Sadan, I.N.A.,  New Delhi-l 10023.  

Subject: Payment of balance premium in respect of  plot No.2-A Bhikaji Cama Place Distt.  Centre, New Delhi.  

Dear Sir,  

We are thankful to you for your letter No. F.30(2)/82- Impl.- I/4 dated nil received by us this afternoon, on the  above subject.  

We  hereby  give  our  consent  that  we  shall  make  the  payment of the balance amount of 75% premium within  the  period  as  may  be  fixed  as  per  the  schedule  of  payment  and  conditions,  if  any  imposed,  as  per  the  directions issued by the Ministry of Urban Development,  Govt.  of  India,  alongwith  18%  interest  charges  per  annum on the belated payment.  

We now request  you to  kindly convey us  your  formal  approval to our making the said payment in installments  as requested for.  

Thanking you,  

Yours faithfully  For KAILASH NATH & ASSOCIATES,  

Sd/

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Partner

Advance copy sent through Special Messenger.”

8. The Central Government informed the DDA vide a letter dated  

1.3.1990 that the land auctioned to the appellant was not Nazul land  

and, therefore, the Central Government would have nothing further to  

do  with  the  matter.  Meanwhile,  the  appellant  filed  Writ  Petition  

No.2395 of 1990 in the Delhi High Court in which it claimed that  

persons similar to the appellant,  namely, M/s. Ansal  Properties and  

Industries Private Limited and M/s Skipper Tower Private Limited had  

been  allowed  to  pay  the  balance  75%  premium  and  were  in  fact  

allotted other plots.  Pleading Article 14, the appellant stated that they  

were entitled to the same treatment.  

9. By a judgment and order dated 2.9.1993, the Delhi High Court  

held that as the auction was held as per terms and conditions of the  

auction,  a  dispute  regarding  the  same  is  a  matter  of  contract  and  

cannot  be  gone  into  in  proceedings  under  Article  226  of  the  

Constitution.  It was further observed that on facts, the Court found no  

force  in  the contention raised  on behalf  of  the appellant  regarding  

discrimination.   An  SLP against  this  order  was  also  dismissed  on  

16.12.1993  by  the  Supreme  Court  stating  that  the  appellant  is  at  

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liberty to take whatever steps are permitted to the appellant under law  

to challenge forfeiture of earnest money, which had been done by a  

letter  of  6.10.1993.   This  letter  is  also  important  for  the  correct  

determination of this appeal and is set out hereinbelow:-

“REGD.A.D.  

DELHI DEVELOPMENT AUTHORITY VIKAS SADAN

I.N.A.

New Delhi-23,    6.10.1993  

No.F.32(2)/82/CL/3816  

From: DY. DIRECTOR (CL).  

To,  

M/s. Kailash Nath & Associates,  1006, Kanchanjanga Building,  18, Bara Khamba Road,  New Delhi-l10001.  

Subject: Plot No.2-A in Bhikaji Cama Place Distt. Centre.  

Sir,

Consequent upon your failure to deposit the balance 75%  premium of the aforesaid plot and dismissal of C.W.P. No.  2395 of  1990 by the Hon’ble  High Court,  Delhi,  I  am  directed to inform you that the bid/ allotment of the said  plot in your favour has been cancelled and earnest money  amounting to Rs.78,00,000/- deposited by you at the time  of auction has been forfeited.  

Yours faithfully,  

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Sd/ (JAGDISH CHANDER)  

DEPUTY DIRECTOR (CL)”

10. The  appellant  then  filed  a  suit  for  specific  performance  on  

17.2.1994 and in the alternative for recovery of damages and recovery  

of  the  earnest  amount  of  Rs.78,00,000/-  (Rupees  Seventy  Eight  

Lakhs).  Shortly after the suit was filed, on 23.2.1994, the DDA re-

auctioned  the  premises  which  fetched  a  sum  of  Rs.11.78  Crores  

(Rupees Eleven Crores Seventy Eight Lakhs).  

11. The  learned  Single  Judge  by  a  judgment  and  order  dated  

10.9.2007 dismissed the appellant’s suit for specific performance and  

damages but ordered refund of the earnest money forfeited together  

with 9% per annum interest.  The learned Single Judge held:-

“65. Defendant No.1 instead of following the aforesaid   course,  found merit  in the representations received not   only from the plaintiff but such similar situated parties.   It is in view thereof that the matter went as far as setting   up of two committees to repeatedly examine the matter   and to come to a conclusion.  The case of defendant no.1   was that the material produced by the plaintiff and such   similar persons gave rise to a cause to extend the time   for  making  the  payment  subject  to  certain  terms  and   conditions.   However,  in  view  of  the  perception  of   defendant no.1 that the consent of UOI, defendant no.2,   would be required,  the land being Nazul  land,  the file   was forwarded to defendant no.2.  The matter did not rest   at this since thereafter UOI did grant such consent but   

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sent back the file of the plaintiff only on account of the   fact that the land in question was not Nazul land. The net   effect  of  this  is  that  there was no permission required   from the UOI and the decision taken by defendant no.1 to   extend  the  time  period  for  making  the  payment,  thus,   stood as it is.  

66. In my considered view, it is not open for defendant   no.1 to state that while it recommended the case of other   similarly  situated parties  in  case of  Nazul  land to  the   Government  and  obtained  permission  for  grant  of   extension of time, in case of non-Nazul land where such   permission was not required, a different parameter was   required to be followed.  It may be mentioned at the cost   of  repetition  that  the  plaintiff  was  a  party  which   volunteered  to  pay  interest  @18%  per  annum  unlike   some  of  the  other  parties.   There  is  merit  in  the   contention  of  learned  Counsel  for  the  plaintiff  that   defendant no.1 after treating the contract as subsistent   having  extended  time  for  making  the  payment  was  at   least required to give a notice to the plaintiff to perform   the  agreement  prior  to  terminating the  agreement  and   could  not  straightaway  terminate  the  same.   This   conclusion can draw strength from the observations in   Halsbury Laws of England (supra) referred to aforesaid   as also in Webb v. Hughes (supra).  It is clearly a case   where there has been waiver of the time being essence of   the  contract  by  conduct  of  the  parties  and,  thus,   defendant no.1 was required to give notice on the day   appointed for completion of  the contract  failing which   only termination could take place.  

67. There were numerous communications exchanged   between the parties.   The recommendations of  the two   high-powered committees constituted by defendant no.1   made  its  recommendations  which  were  accepted  by   defendant no.1 vide its resolution dated 14.5.1984 (Ex.   DW2/P-4).   Having accepted the recommendations, in   the case of the plaintiff defendant no.1 was required to   do nothing further  but  mistakenly  referred the  case  to   

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UOI  for  its  approval  assuming  the  case  to  be  one  of   Nazul land.  Plaintiff sent repeated reminders vide letters   dated  9-12-1985  (Ex.P-11),  20-10-1986  (Ex.P-12),  10- 12-1986(Ex.P-13),  10-02-1987  (Ex.P-14),  11-04- 1987(Ex.P-16),  10-08-1987(Ex.P-17)  and  10-10-1987  (Ex.P-18) calling upon defendant no.1 to give an offer of   deposit of balance 25% of the premium so as to bring the   total  payment  equivalent  to  50% of  the  total  premium   and  for  release  of  the  possession  of  the  land  to  the   plaintiff  for  purpose  of  construction.   Defendant  no.1   vide  its  letter  received  on  1.12.1987  by  the  plaintiff   (Ex.P-19) sought the consent of the plaintiff to abide by   the recommendations of the high-powered committee and   the consent was duly given on the even date (Ex.P-20).   Thereafter no offer was made to the plaintiff and without   any  notice  of  compliance  for  payment,  the  letter  of   cancellation dated 6.10.1993 (Ex.P-26) was issued.   It   appears that defendant no.1 itself was not aware of the   land being non-Nazul  land as  the  first  communication   was addressed to the plaintiff only on 1.3.1990.  

68. The present case is one where defendant no.1 has   not even suffered a loss.  The plot was to be purchased by   the plaintiff at Rs.3.12 crores and it was finally sold to a   third party at Rs.11.78 crores, i.e. almost three and a half   times  the  price.   During  this  period  defendant  no.1   continued to enjoy the earnest money of the plaintiff of   Rs.78.00 lacs.

69. In  view  of  the  prolonged  period,  exchange  of   communications, the plaintiff making various offers but   not  complying  with  the  initial  terms,  defendant  no.1   taking its own time in the decision making process, I am   of the considered view that the plaintiff is entitled to the   refund  of  the  earnest  money  of  Rs.78.00  lacs  but  no   further amount is liable to be paid to the plaintiff.”  

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12. DDA  appealed  against  the  Single  Judge’s  judgment  to  a  

Division Bench of  the Delhi  High Court.   The Division Bench set  

aside the judgment of the Single Judge holding that the forfeiture of  

the earnest money by the DDA was in order.  

13. Shri Paras Kuhad, learned Senior Advocate appearing on behalf  

of the appellant, urged that time may have been of the essence under  

the original terms and conditions of the auction.  However, time had  

been extended on several occasions and, therefore, ceased to be of the  

essence.   In  answer  to  the  letter  dated  1.12.1987,  the  appellant  

promptly replied and said it would be willing to pay the entire 75%  

with 18% interest and, therefore, there was no breach of contract on  

the part  of  the appellant.  Further,  since the DDA sold the plot  for  

11.78 Crores (Rupees Eleven Crores Seventy Eight Lakhs), there was  

no loss caused to the DDA and, hence forfeiture of earnest money  

would not be in accordance with the agreement or in accordance with  

law.  

14. Shri Amarendra Sharan, learned Senior Advocate appearing on  

behalf of the DDA, rebutted these contentions and added that the case  

was covered by the judgment in  Shree Hanuman Cotton Mills &  

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Anr. v. Tata Aircraft Ltd., 1970 (3) SCR 127.    He argued further  

that since the letter of 1.12.1987 had been issued under a mistake of  

fact, it would be void under Section 20 of the Contract Act and the  

said letter should, therefore, be ignored.    If it is ignored, then the  

termination of the contract and the forfeiture of  earnest  money are  

completely in order as the appellant was in breach.    The fact that the  

DDA ultimately sold the plot  for  a  much larger  sum, according to  

learned counsel, would be irrelevant inasmuch as the contractual term  

agreed  upon  between  parties  would  entitle  him  to  forfeit  earnest  

money on breach without any necessity of proving actual loss.  

15. Having heard learned counsel for the parties, it is important at  

the very outset to notice that earnest money can be forfeited under  

sub-clause (iv) set out hereinabove, only in the case of default, breach,  

or non-compliance of any of the terms and conditions of the auction,  

or on misrepresentation by the bidder. It may be noted that the balance  

75% which had to be paid within three months of the acceptance of  

the bid, was not insisted upon by the DDA.  On the contrary, after  

setting up two High Powered Committees which were instructed to  

look into the grievances of the appellant, the DDA extended time at  

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least twice. It is, therefore, very difficult to say that there was a breach  

of  any terms and conditions  of  the  auction,  as  the  period of  three  

months  which  the  DDA could  have  insisted  upon  had  specifically  

been waived.  It is nobody’s case that there is any misrepresentation  

here by the bidder.  Therefore, under sub-clause (iv), without more,  

earnest money could not have been forfeited.  

16. The other noticeable feature of this case on facts is that DDA  

specifically requested the appellant to give their consent to make the  

balance payable along with 18% interest charges on belated payment.  

This  was  on  the  footing  that  the  Nazul  Rules  of  1981  would  be  

relaxed by the  Central  Government.   The  reason  why the  letter  is  

marked “without prejudice”  and the DDA made it clear that the letter  

does  not  carry  any  commitment,  is  obviously  because  the  Central  

Government may not relax the provision of the Nazul Rules, in which  

case nothing further  could be done by the DDA.  If,  however,  the  

Central Government was willing to condone the delay, DDA would be  

willing  to  take  75%  of  the  outstanding  amount  along  with  18%  

interest.  

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17. Mr. Sharan argued that since the Central Government ultimately  

found that this was not a Nazul land, the letter was obviously based on  

a mistake of fact and would be void under Section 20 of the Contract  

Act.  We are afraid we are not able to accept this plea.  Long after the  

Central Government informed DDA (on 1.3.1990) that the property  

involved in the present case is not Nazul land, the DDA by its letter of  

6.10.1993 cancelled the allotment of the plot because the appellant  

had  failed  to  deposit  the  balance  75%.   DDA’s  understanding,  

therefore, was that what was important was payment of the balance  

75% which was insisted upon by the letter dated 1.12.1987 and which  

was  acceded  to  by  the  respondent  immediately  on  the  same  date.  

Further,  Mr.  Sharan’s  argument  that  since  the  letter  was  “without  

prejudice” and since no commitment had been made, they were not  

bound by the terms of the letter also fails to impress us.  The letter  

was without prejudice and no commitment could have been given by  

the  DDA because  the  Central  Government  may well  not  relax  the  

Nazul Rules.  On the other hand, if the Central Government had, later  

on,  relaxed the  Nazul  Rules,  DDA could  not  be  heard  to  say  that  

despite this having been done, DDA would yet cancel the allotment of  

the plot.  That this could not have been done is clear because of the  

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aforesaid construction of the letter dated 1.12.1987 and also because  

DDA is a public authority bound by Article 14 and cannot behave  

arbitrarily.  

18. It  now remains  to  deal  with  the  impugned  judgment  of  the  

Division Bench.  

19. The  Division  Bench  followed  the  judgment  of  Tilley v.  

Thomas, (1867 3 Ch.A 61) and distinguished the judgment in Webb  

v. Hughes, V.C.M. 1870.  It  further went on to follow  Anandram  

Mangturam v. Bholaram Tanumal, ILR 1946 Bom 218 and held:

“The  decision  holds  that  the  principle  of  law  is  that   where, by agreement, time is made of the essence of the   contract,  it  cannot  be waived by a unilateral  act  of  a   party and unless there is consensus ad-idem between the   parties and a new date is agreed to, merely because a   party  to  a  contract  agrees  to  consider  time  being   extended for the opposite party to complete the contract,   but ultimately refuses to accord concurrence would not   mean  that  the  party  has  by  conduct  waived  the  date   originally  agreed  as  being  of  the  essence  of  the   contract.” (At para 32)

20. In our judgment, Webb’s case would directly apply to the facts  

here.  In that case, it was held:

 “But if time be made the essence of the contract, that   may be waived by the conduct of the purchaser; and if   the time is once allowed to pass, and the parties go on   negotiating for completion of the purchase, then time is   

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no longer of  the essence of  the contract.   But,  on the   other hand, it must be borne in mind that a purchaser is   not  bound  to  wait  an  indefinite  time;  and if  he  finds,   while the negotiations are going on, that a long time will   elapse before the contract can be completed, he may in a   reasonable manner give notice to the vendor, and fix a   period at which the business is to be terminated.”  

21. Based on the facts of this case, the Single Judge was correct in  

observing  that  the  letter  of  cancellation  dated  6.10.1993  and  

consequent forfeiture of earnest money was made without putting the  

appellant on notice that it has to deposit the balance 75% premium of  

the plot within a certain stated time.  In the absence of such notice,  

there  is  no  breach  of  contract  on  the  part  of  the  appellant  and  

consequently earnest money cannot be forfeited.  

22.    Tilley v. Thomas, (1867 3 Ch.A 61)  would not apply for the  

reason that the expression “without prejudice” was only used as stated  

above  because  the  Central  Government  may  not  relax  the  Nazul  

Rules.  

23. In Anandram Mangturam v. Bholaram Tanumal, ILR 1946  

Bom  218,  two  separate  judgments  were  delivered,  one   by  Chief  

Justice Stone and the other by Chagla,J. as he then was.  Stone C.J.  

held:-

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“In my judgment,  reading the correspondence  as  a   whole,  it  at  no  stage  passed  from  the  melting  pot  of   negotiations to crystallize as an agreement to extend the   time for the performance of the contract. The attitude of   the  purchaser  throughout  the  correspondence  was:   “Satisfy  us that  you are doing your best  to obtain the   goods  from  your  suppliers  and  we  will  then  consider   fixing a new date for delivery of the goods to us”. On the   other  hand  the  attitude  of  the  vendors  throughout  the   correspondence  was  to  avoid  the  purchaser's  demand  and  to  simply  say:  “You  know  that  we  cannot  effect   delivery from our suppliers and until we do so we cannot   deliver  the  goods  to  you”.  There  was  never  in  my   judgment any consensus ad-idem, no agreement, express   or implied,  to extend the time either to any particular   date  or  to  the  happening  of  some  future  event.  Mere   forbearance in my opinion to institute proceedings or to   give notice of rescission cannot be an extension of the   time  for  the  performance  of  a  contract  within  the   meaning of s. 63 of the Contract Act.” (at 226 & 227)

Chagla, J. in a separate judgment held:-

“Under s. 55 of the Indian Contract Act, the promisee   is  given  the  option  to  avoid  the  contract  where  the   promisor fails to perform the contract at the time fixed in   the contract. It is open to the promisee not to exercise the   option or to exercise the option at any time, but it is clear   to my mind that the promisee cannot by the mere fact of   not  exercising  the  option  change  or  alter  the  date  of   performance fixed under the contract itself. Under s. 63   of  the  Indian  Contract  Act,  the  promisee  may  make   certain  concessions  to  the  promisor  which  are   advantageous to the promisor, and one of them is that he   may extend the time for such performance. But it is clear   again  that  such  an  extension  of  time  cannot  be  a   unilateral extension on the part of the promisee. It is only   at  the  request  of  the  promisor  that  the  promisee  may   agree  to  extend  the  time  of  performance  and  thereby   bring  about  an  agreement  for  extension  of  time.   

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Therefore it is only as a result of the operation of s. 63 of   the Indian Contract Act that the time for the performance   of the contract can be extended and that time can only be   extended  by  an  agreement  arrived  at  between  the   promisor and the promisee.” (at 229)

24. The  aforesaid  judgment  would  apply  in  a  situation  where  a  

promisee accedes to the request of the promisor to extend time that is  

fixed for his own benefit.  Thus, in  Keshavlal Lallubhai Patel and  

Ors.  v.  Lalbhai  Trikumlal  Mills  Ltd 1959  SCR  213,  this  Court  

held:-

“The true  legal  position  in  regard  to  the  extension  of   time  for  the  performance  of  a  contract  is  quite  clear   under s. 63 of the Indian Contract Act. Every promisee,   as  the  section  provides,  may  extend  time  for  the   performance  of  the  contract.  The  question  as  to  how   extension of time may be agreed upon by the parties has   been the subject-matter of some argument at the Bar in   the present appeal. There can be no doubt, we think, that   both the buyer and the seller must agree to extend time   for the delivery of  goods.  It  would not  be open to the   promisee  by  his  unilateral  act  to  extend  the  time  for   performance of his own accord for his own benefit.”

25. However, such is not the position here.  In the present case, the  

appellant  is  the  promisor  and  DDA is  the  promisee.   In  such  a  

situation, DDA can certainly unilaterally extend the time for payment  

under Section 63 of the Contract Act as the time for payment is not for  

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DDA’s own benefit but for the benefit of the appellant.  The present  

case would be covered by two judgments of the Supreme Court. In  

Citi Bank N.A. v.  Standard Chartered Bank, (2004) 1 SCC Page  

12, this Court held:

“50. Under Section 63, unlike Section 62, a promisee   can act unilaterally and may

(i) dispense with wholly or in part, or

(ii) remit wholly or in part,

the performance of the promise made to him, or (iii) may extend the time for such performance, or

(iv) may accept instead of it any satisfaction which he   thinks fit.”

26. Similarly in S. Brahmanand v. K.R. Muthugopal, (2005) 12  

SCC 764 the Supreme Court held:

“34. Thus,  this  was  a  situation  where  the  original   agreement  of  10-3-1989  had  a  “fixed  date”  for   performance, but by the subsequent letter of 18-6-1992   the  defendants  made  a  request  for  postponing  the   performance to a future date without fixing any further   date for performance. This was accepted by the plaintiffs   by  their  act  of  forbearance  and  not  insisting  on   performance forthwith. There is nothing strange in time   for performance being extended, even though originally   the  agreement  had  a  fixed  date.  Section  63  of  the   Contract  Act,  1872  provides  that  every  promisee  may   extend time for the performance of the contract. Such an   agreement  to  extend  time  need  not  necessarily  be   reduced to writing, but may be proved by oral evidence   

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or, in some cases, even by evidence of conduct including   forbearance on the part of the other party. [See in this   connection  the observations  of  this  Court  in Keshavlal   Lallubhai  Patel v. Lalbhai  Trikumlal  Mills  Ltd.,  1959  SCR 213 : AIR 1958 SC 512, para 8. See also in this   connection Saraswathamma v. H.  Sharad  Shrikhande,   AIR  2005  Kant  292  and K.  Venkoji  Rao v. M.  Abdul   Khuddur  Kureshi,  AIR  1991  Kant  119,  following  the   judgment in Keshavlal Lallubhai Patel (supra).] Thus, in   this  case  there  was  a  variation  in  the  date  of   performance by express representation by the defendants,   agreed to by the act of forbearance on the part of the   plaintiffs. What was originally covered by the first part of   Article 54, now fell within the purview of the second part   of  the  article. Pazhaniappa  Chettiyar v. South  Indian  Planting and Industrial Co. Ltd. [AIR 1953 Trav Co 161]   was a similar instance where the contract when initially   made  had  a  date  fixed  for  the  performance  of  the   contract but the Court was of the view that “in the events   that  happened  in  this  case,  the  agreement  in  question   though  started  with  fixation  of  a  period  for  the   completion of the transaction became one without such   period  on  account  of  the  peculiar  facts  and   circumstances  already  explained  and  the  contract,   therefore, became one in which no time was fixed for its   performance” and held that what was originally covered   by the first part of Article 113 of the Limitation Act, 1908   would  fall  under  the  second  part  of  the  said  article   because  of  the  supervening  circumstances  of  the   case.”(at Page 777)

27. Coming to the application of Article 14, the Division Bench in  

paragraph 37 stated:-

“37. Now, in India, reasonableness in State action is a   facet of Article 14 of the Constitution of India and in the   field of contract would have a considerable play at the   precontract  stage.  Once  parties  have  entered  into  a   

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contractual  obligation,  they  would  be  bound  by  the   contract  and the  only  reasonableness  would  be  of  the   kind  envisaged  by  the  Supreme  Court  in  the  decision   reported  as  AIR  1963  SC  1144  T.P.  Daver  v.  Lodge   Victoria No.363 SC Belgaum & Ors. On the subject of a   member of  a club being expelled,  and the relationship   being a contract as per the rules and regulations of the   club,  adherence  whereto  was  agreed  to  by  he  who   became a member of the club and the management of the   club,  the Supreme Court  observed that  in such private   affairs, it would be good faith in taking an action which   is rooted in the minds of modern men and women i.e. in a   modern democratic  society  and no more.  The decision   guides that where a private affair i.e.  a contract  is  so   perverted by a party that it offends the concept of a fair- play in a modern society, alone then can the action be   questioned as not in good faith and suffice would it be to   state  that  anything  done  not  in  good  faith  would  be   unreasonably done.”

28. It will be noticed at once that T.P. Daver v. Lodge Victoria No.  

363, S.C. Belgaum, 1964 (1) SCR 1, is not an authority on Article 14  

at all.  It deals with clubs and the fact that rules or bye-laws which  

bind members of such clubs have to be strictly adhered to.  On the  

other hand in ABL International Ltd. v. Export Credit Guarantee  

Corpn.  of  India Ltd., (2004) 3 SCC 553 at  paras 22 and 23,  the  

Supreme Court held:

“22. We  do  not  think  the  above  judgment  in VST  Industries  Ltd. [(2001)  1 SCC 298 :  2001 SCC (L&S)   227] supports the argument of the learned counsel on the   question of maintainability of the present writ petition. It   is  to  be  noted  that VST Industries  Ltd.[(2001)  1  SCC  

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298  :  2001  SCC  (L&S)  227]  against  whom  the  writ   petition was filed was not a State or an instrumentality of   a  State  as  contemplated  under  Article  12  of  the   Constitution, hence, in the normal course, no writ could   have been issued against the said industry. But it was the   contention of the writ petitioner in that case that the said   industry  was  obligated  under  the  statute  concerned to   perform certain public functions; failure to do so would   give  rise  to  a  complaint  under  Article  226  against  a   private  body.  While  considering  such  argument,  this   Court  held  that  when  an  authority  has  to  perform  a   public function or a public duty, if there is a failure a   writ  petition  under  Article  226  of  the  Constitution  is   maintainable. In the instant case, as to the fact that the   respondent is an instrumentality of a State, there is no   dispute  but  the  question  is:  was  the  first  respondent   discharging  a  public  duty  or  a  public  function  while   repudiating the claim of the appellants arising out of a   contract?  Answer  to  this  question,  in  our  opinion,  is   found in the judgment of this Court in the case of Kumari   Shrilekha Vidyarthi v. State of U.P. [(1991) 1 SCC 212 :   1991 SCC (L&S) 742] wherein this Court held: (SCC pp.   236-37, paras 22 & 24)

“The impact of every State action is also on   public interest. … It is really the nature of its   personality  as  State  which is  significant  and   must characterize all its actions, in whatever   field,  and  not  the  nature  of  function,   contractual or otherwise, which is decisive of   the nature of scrutiny permitted for examining   the  validity  of  its  act.  The  requirement  of   Article 14 being the duty to act fairly,  justly   and  reasonably,  there  is  nothing  which   militates against the concept of requiring the   State  always  to  so  act,  even  in  contractual   matters.”

23. It is clear from the above observations of this Court,   once  the  State  or  an  instrumentality  of  the  State  is  a   party of the contract, it has an obligation in law to act   

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fairly, justly and reasonably which is the requirement of   Article 14 of the Constitution of India. Therefore, if by   the impugned repudiation of the claim of the appellants   the first respondent as an instrumentality of the State has   acted in contravention of the abovesaid requirement of   Article 14, then we have no hesitation in holding that a   writ court can issue suitable directions to set right the   arbitrary actions of the first respondent.”  

29. Based on the facts of this case,  it  would be arbitrary for the  

DDA to forfeit the earnest money on two fundamental grounds.  First,  

there is no breach of contract on the part of the appellant as has been  

held above. And second, DDA not having been put to any loss, even if  

DDA could insist on a contractual stipulation in its favour, it would be  

arbitrary  to  allow  DDA  as  a  public  authority  to  appropriate  

Rs.78,00,000/- (Rupees Seventy Eight Lakhs) without any loss being  

caused. It is clear, therefore, that Article 14 would apply in the field of  

contract in this case and the finding of the Division Bench on this  

aspect is hereby reversed.  

30. We now come to the reasoning which involves Section 74 of  

the Contract Act.  The Division Bench held:

“38. The learned Single Judge has held that the property   was  ultimately  auctioned  in  the  year  1994  at  a  price   which fetched DDA a handsome return of Rupees 11.78   crores and there being no damages suffered by DDA, it   could not forfeit the earnest money.

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 39. The said view runs in the teeth of the decision of the   Supreme  Court  reported  as  AIR  1970  SC 1986  Shree   Hanuman Cotton Mills & Anr. V. Tata Aircraft Ltd. which   holds  that  as  against  an  amount  tendered  by  way  of   security,  amount  tendered  as  earnest  money  could  be   forfeited as per terms of the contract.  

40. We may additionally observe that original time to pay   the balance bid consideration,  as per Ex.P-I was May   18, 1982 and as extended by Ex. P-8 was October 28,   1982. That DDA could auction the plot in the year 1994   in the sum of Rupees 11.78 crore was immaterial and not   relevant evidence for the reason damages with respect to   the price of property have to be computed with reference   to the date of the breach of the contract.”

31. Section 74 as it originally stood read thus:

“When a contract has been broken, if a sum is named in   the contract  as the amount to be paid in case of  such   breach, the party 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.”

32. By an amendment made in 1899, the Section was amended to  

read:

“74. Compensation for breach of contract where penalty   stipulated for.— When a contract has been broken, if a   sum is named in the contract as the amount to be paid in   case of such breach, or if the contract contains any other   stipulation by way of penalty, the party complaining of   the breach is entitled, whether or not actual damage or   loss is proved to have been caused thereby,  to receive   from the party who has broken the contract reasonable   

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compensation not exceeding the amount so named or, as   the case may be, the penalty stipulated for.

Explanation.—A stipulation for  increased interest  from   the  date  of  default  may  be  a  stipulation  by  way  of   penalty.

Exception.—When any person enters into any bail-bond,   recognizance or other instrument of the same nature, or,   under the provisions of any law, or under the orders of   the  Central  Government  or  of  any  State  Government,   gives any bond for the performance of any public duty or   act in which the public are interested, he shall be liable,   upon breach of any condition of any such instrument, to   pay the whole sum mentioned therein.

Explanation.—A person who enters into a contract with   Government does not necessarily thereby undertake any   public duty, or promise to do an act in which the public   are interested.”

33. Section 74 occurs in Chapter 6 of the Indian Contract Act, 1872  

which reads “Of the consequences of breach of contract”. It is in fact  

sandwiched  between  Sections  73  and  75  which  deal  with  

compensation for loss or damage caused by breach of contract and  

compensation for  damage which a  party may sustain  through non-

fulfillment  of  a  contract  after  such  party  rightfully  rescinds  such  

contract.    It  is  important  to  note  that  like  Sections  73  and  75,  

compensation is payable for breach of contract under Section 74 only  

where damage or loss is caused by such breach.  

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34. In Fateh Chand v. Balkishan Das,  1964 SCR (1)  515, this  

Court held:

“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  terrorem  is  a  penalty  and  the  Court   refuses  to  enforce  it,  awarding  to  the  aggrieved  party   only  reasonable  compensation.  The  Indian  Legislature   has  sought  to  cut  across  the  web  of  rules  and   presumptions  under  the  English  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 penalty. ….    Section 74 of  the Indian Contract  Act deals with the   measure of damages in two classes of cases (i) where the   contract names a sum to be paid in case of breach and   (ii) where the contract contains any other stipulation by   way of penalty. We are in the present case not concerned   to decide whether a covenant of forfeiture of deposit for   due performance of a contract falls within the first class.   The  measure  of  damages  in  the  case  of  breach  of  a   stipulation by way of penalty is by Section 74 reasonable  compensation not exceeding the penalty stipulated for. In   assessing damages the Court has, subject to the limit of   the  penalty  stipulated,  jurisdiction  to  award  such   compensation as it  deems reasonable having regard to   all  the  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 the Court duty to award compensation   

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according to 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  compensation  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.”(At page 526, 527)

  Section 74 declares the law as to liability upon breach   of contract where compensation is by agreement of the   parties pre-determined, or where there is a stipulation by   way of penalty. But the application of the enactment is   not restricted to cases where the aggrieved party claims   relief as a plaintiff. The section does not confer a special   benefit upon any party; it merely declares the law that   notwithstanding any term in the contract predetermining   damages or providing for forfeiture of any property by   way  of  penalty,  the  court  will  award  to  the  party   aggrieved only reasonable compensation not exceeding   the amount named or penalty stipulated. The jurisdiction   of  the  court  is  not  determined  by  the  accidental   circumstance of the party in default being a plaintiff or a   defendant  in  a  suit.  Use  of  the  expression  "to  receive   from the party  who has broken the contract"  does not   predicate  that  the  jurisdiction  of  the  court  to  adjust   amounts which have been paid by the party in default   cannot be 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 regard to the conditions existing on the date of   the breach.”(At page 530)

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contract.  But  the  expression  "whether  or  not  actual   damage or loss is proved to have been caused thereby" is   intended  to  cover  different  classes  of  contracts  which   come  before  the  Courts.  In  case  of  breach  of  some   contracts it  may be impossible for the Court  to assess   compensation arising from breach, while in other cases   compensation  can  be  calculated  in  accordance  with   established rules. Where the Court is unable to assess the   compensation,  the  sum  named  by  the  parties  if  it  be   regarded as  a genuine pre-estimate  may be taken into   consideration  as  the  measure  of  reasonable   compensation, but not if the sum named is in the nature   of  a  penalty.  Where  loss  in  terms  of  money  can  be   determined, the party claiming compensation must prove   the loss suffered by him.

In the present case, it was possible for the Government of   India  to  lead  evidence  to  prove  the  rates  at  which   potatoes, poultry, eggs and fish were purchased by them   when the plaintiff failed to deliver "regularly and fully"   the quantities stipulated under the terms of the contracts   and after the contracts were terminated. They could have   proved the rates at which they had to be purchased and   also  the  other  incidental  charges  incurred  by  them in   procuring the goods contracted for. But no such attempt   was made.”(At page 933,934)

36. In  Shree Hanuman Cotton Mills and Anr. v. Tata Aircraft  

Limited, 1970 (3) SCR 127 it was held:

“From  a  review  of  the  decisions  cited  above,  the   following principles emerge regarding "earnest":

(1) It must be given at the moment at which the contract   is concluded.

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(2)  It  represents  a  guarantee  that  the contract  will  be   fulfilled or, in other words, 'earnest' is given to bind the   contract.

(3) It is part of the purchase price when the transaction   is carried out.

(4) It is forfeited when the transaction falls through by   reason of the default or failure of the purchaser.

(5) Unless there is anything to the contrary in the terms   of the contract, on default committed by the buyer, the   seller is entitled to forfeit the earnest” (At page 139)  

“The learned Attorney General very strongly urged that   the  pleas  covered  by  the  second  contention  of  the   appellant had never been raised in the pleadings nor in   the  contentions  urged  before  the  High  Court.  The   question  of  the quantum of  earnest  deposit  which  was   forfeited being unreasonable or the forfeiture being by   way of penalty, were never raised by the appellants. The   Attorney General also pointed out that as noted by the   High Court  the appellants  led no evidence at  all  and,   after abandoning the various pleas taken in the plaint,   the only question pressed before the High Court was that   the  deposit  was  not  by  way  of  earnest  and hence  the   amount could not be forfeited. Unless the appellants had   pleaded and established that there was unreasonableness   attached to the amount required to be deposited under   the  contract  or  that  the  clause  regarding  forfeiture   amounted  to  a  stipulation  by  way  of  a  penalty,  the   respondents had no opportunity to satisfy the Court that   no question of unreasonableness or the stipulation being   by  way  of  penalty  arises.  He  further  urged  that  the   question  of  unreasonableness  or  otherwise  regarding   earnest money does not at all arise when it is forfeited   according to the terms of the contract.

   In our opinion the learned Attorney General is well   founded in his contention that the appellants raised no   

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such  contentions  covered  by  the  second  point,  noted   above. It is therefore unnecessary for us to go into the   question  as  to  whether  the  amount  deposited  by  the   appellants, in this case, by way of earnest and forfeited   as such, can be considered to be reasonable or not. We   express  no  opinion  on  the  question  as  to  whether  the   element  of  unreasonableness  can  ever  be  considered   regarding the forfeiture of an amount deposited by way   of earnest and if so what are the necessary factors to be   taken into account in considering the reasonableness or   otherwise of the amount deposited by way of earnest. If   the  appellants  were  contesting  the  claim  on  any  such   grounds,  they  should  have  laid  the  foundation  for  the   same by raising appropriate pleas and also led proper   evidence  regarding  the  same,  so  that  the  respondents   would  have  had  an  opportunity  of  meeting  such  a   claim.”(At page 142)

37. And finally in  ONGC Ltd. v. Saw Pipes Ltd.,  (2003) 5 SCC  

705, it was held:

“64. It is apparent from the aforesaid reasoning recorded   by the Arbitral Tribunal that it failed to consider Sections   73 and 74 of the Indian Contract Act and the ratio laid   down in Fateh Chand case [AIR 1963 SC 140: (1964) 1   SCR 515 at p. 526] wherein it is specifically held that   jurisdiction of the court to award compensation in case   of  breach  of  contract  is  unqualified  except  as  to  the   maximum  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   

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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.

67……..In  our  view,  in  such  a  contract,  it  would  be   difficult to prove exact loss or damage which the parties   suffer because of the breach thereof. In such a situation,   if  the  parties  have  pre-estimated  such  loss  after  clear   understanding, it would be totally unjustified to arrive at   the conclusion that the party who has committed breach   of  the  contract  is  not  liable  to  pay  compensation.  It   would be against the specific provisions of Sections 73   and 74 of the Indian Contract Act. There was nothing on   record  that  compensation  contemplated  by  the  parties   was in  any way unreasonable.  It  has been specifically   mentioned that it was an agreed genuine pre-estimate of   damages  duly  agreed  by  the  parties.  It  was  also   mentioned that the liquidated damages are not by way of   penalty.  It  was also provided in the contract that such   damages are to be recovered by the purchaser from the   bills for payment of the cost of material submitted by the   contractor.  No  evidence  is  led  by  the  claimant  to   establish  that  the  stipulated  condition  was  by  way  of   

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penalty or the compensation contemplated was,  in any   way, unreasonable. There was no reason for the Tribunal   not  to  rely  upon  the  clear  and  unambiguous  terms  of   agreement stipulating pre-estimate damages because of   delay in  supply of  goods.  Further,  while extending the   time  for  delivery  of  the  goods,  the  respondent  was   informed  that  it  would  be  required  to  pay  stipulated   damages.

68. From the aforesaid discussions, it can be held that:

(1) Terms of the contract are required to be taken into   consideration before arriving at the conclusion whether   the party claiming damages is entitled to the same.

(2) If the terms are clear and unambiguous stipulating   the  liquidated  damages  in  case  of  the  breach  of  the   contract  unless  it  is  held  that  such  estimate  of   damages/compensation is unreasonable or is by way of   penalty, party who has committed the breach is required   to pay such compensation and that is what is provided in   Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and,   therefore, in every case of breach of contract, the person   aggrieved by the breach is not required to prove actual   loss or damage suffered by him before he can claim a   decree.  The  court  is  competent  to  award  reasonable   compensation in case of breach even if no actual damage   is  proved to  have been suffered in consequence of  the   breach of a contract.

(4)  In  some  contracts,  it  would  be  impossible  for  the   court  to  assess  the  compensation  arising  from breach   and if the compensation contemplated is not by way of   penalty or unreasonable, the court can award the same if   it is genuine pre-estimate by the parties as the measure of   reasonable compensation.”

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38. It  will  be  seen  that  when  it  comes  to  forfeiture  of  earnest  

money, in Fateh Chand’s case, counsel for the appellant conceded on  

facts that Rs.1,000/- deposited as earnest money could be forfeited.  

(See: 1964 (1) SCR Page 515 at 525 and 531).  

39. Shree  Hanuman  Cotton  Mills  &  Another  which  was  so  

heavily  relied  by  the  Division  Bench  again  was  a  case  where  the  

appellants conceded that they committed breach of contract.  Further,  

the respondents also pleaded that the appellants had to pay them a sum  

of Rs.42,499/- for loss and damage sustained by them. (See: 1970 (3)  

SCR  127  at  Page  132).   This  being  the  fact  situation,  only  two  

questions were argued before the Supreme Court: (1) that the amount  

paid by the plaintiff is not earnest money and (2) that forfeiture of  

earnest  money  can  be  legal  only  if  the  amount  is  considered  

reasonable. (at page 133). Both questions were answered against the  

appellant. In deciding question two against the appellant, this Court  

held:-

“But, as we have already mentioned, we do not propose   to  go  into  those  aspects  in  the  case  on  hand.  As   mentioned  earlier,  the  appellants  never  raised  any   contention that the forfeiture of the amount amounted to   a penalty or that the amount forfeited is so large that the   forfeiture  is  bad  in  law.  Nor  have  they  raised  any   

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forgotten that as has been stated above, forfeiture of earnest money on  

the facts in Fateh Chand’s case was conceded.  In the circumstances,  

it would therefore be correct to say that as earnest money is an amount  

to be paid in case of breach of contract and named in the contract as  

such, it would necessarily be covered by Section 74.

41. It must, however, be pointed out that in cases where a public  

auction  is  held,  forfeiture  of  earnest  money  may  take  place  even  

before an agreement is reached, as DDA is to accept the bid only after  

the earnest money is paid.  In the present case, under the terms and  

conditions  of  auction,  the  highest  bid  (along  with  which  earnest  

money has to be paid) may well have been rejected.   In such cases,  

Section  74  may  not  be  attracted  on  its  plain  language  because  it  

applies only “when a contract has been broken”.   

42. In the present case, forfeiture of earnest money took place long  

after an agreement had been reached.  It is obvious that the amount  

sought to be forfeited on the facts of the present case is sought to be  

forfeited without any loss being shown.  In fact it has been shown that  

far from suffering any loss, DDA has received a much higher amount  

on re-auction of the same plot of land.

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43. On  a  conspectus  of  the  above  authorities,  the  law  on  

compensation for breach of contract under Section 74 can be stated to  

be as follows:-

1. Where a sum is named in a contract as a liquidated amount  

payable  by  way  of  damages,  the  party  complaining  of  a  

breach  can  receive  as  reasonable  compensation  such  

liquidated  amount  only  if  it  is  a  genuine  pre-estimate  of  

damages fixed by both parties and found to be such by the  

Court. In other cases, where a sum is named in a contract as  

a  liquidated  amount  payable  by  way  of  damages,  only  

reasonable compensation can be awarded not exceeding the  

amount so stated. Similarly, in cases where the amount fixed  

is in the nature of penalty, only reasonable compensation can  

be awarded not  exceeding the penalty so  stated.   In  both  

cases,  the liquidated amount  or  penalty is  the upper limit  

beyond  which  the  Court  cannot  grant  reasonable  

compensation.

2. Reasonable  compensation  will  be  fixed  on  well  known  

principles that are applicable to the law of contract, which  

are to be found inter alia in Section 73 of the Contract Act.  

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3. Since  Section  74  awards  reasonable  compensation  for  

damage or loss caused by a breach of contract, damage or  

loss caused is  a  sine qua non  for  the  applicability  of  the  

Section.  

4. The  Section  applies  whether  a  person  is  a  plaintiff  or  a  

defendant in a suit.  

5. The sum spoken of may already be paid or be payable in  

future.  

6. The expression  “whether  or  not  actual  damage  or  loss  is  

proved to have been caused thereby” means that where it is  

possible to prove actual damage or loss, such proof is not  

dispensed with.  It is only in cases where damage or loss is  

difficult or impossible to prove that the liquidated amount  

named in the contract, if a genuine pre-estimate of damage  

or loss, can be awarded.  

7. Section 74 will apply to cases of forfeiture of earnest money  

under  a  contract.  Where,  however,  forfeiture  takes  place  

under the terms and conditions of a public auction  before  

agreement is reached, Section 74 would have no application.

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44. The Division Bench has gone wrong in principle.  As has been  

pointed  out  above,  there  has  been  no  breach  of  contract  by  the  

appellant. Further, we cannot accept the view of the Division Bench  

that the fact that the DDA made a profit from re-auction is irrelevant,  

as that would fly in the face of the most basic principle on the award  

of  damages  –  namely,  that  compensation  can  only  be  given  for  

damage or loss suffered.  If damage or loss is not suffered, the law  

does not provide for a windfall.  

45. A great deal of the argument before us turned on notings in files  

that  were  produced  during cross-examination  of  various  witnesses.  

We have not referred to any of these notings and, consequently, to any  

case  law  cited  by  both  parties  as  we  find  it  unnecessary  for  the  

decision of this case.  

46. Mr.  Sharan submitted  that  in  case  we were  against  him,  the  

earnest money that should be refunded should only be refunded with  

7% per annum and not 9% per annum interest as was done in other  

cases.  We are afraid we are not able to agree as others were offered  

the refund of earnest money way back in 1989 with 7% per annum  

interest  which they accepted.  The DDA having chosen to fight  the  

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present  appellant  tooth  and nail  even on refund of  earnest  money,  

when there was no breach of contract or loss caused to it, stands on a  

different footing. We, therefore, turn down this plea as well.  

47. In the result, the appeal is allowed.  The judgment and order of  

the Single Judge is restored.  Parties will bear their own costs.  

…..…………………J. (Ranjan Gogoi)

…..…………………J. (R.F. Nariman)

New Delhi; January 09, 2015.

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