Fateh Chand v. Balkishan Das
Supreme Court of India · 15 January 1963 · 5 judges · 1963 AIR 1405; 1964 SCR (1) 515
Section 74 of the Contract Act applies to every stipulation by way of penalty, including forfeiture of money already paid; the seller could keep only the Rs. 1,000 earnest money, not the Rs. 24,000 part price, without proof of loss.
Facts
By an agreement of 21 March 1949, the plaintiff (Balkishan Das) agreed to sell leasehold rights in land and a building in Delhi to the defendant (Fateh Chand) for Rs. 1,12,500. The defendant paid Rs. 1,000 as earnest money and, on taking possession on 25 March 1949, Rs. 24,000 'out of the sale price'. The agreement provided that if the vendee failed to get the sale deed registered by 1 June 1949, the Rs. 25,000 would be forfeited. The sale was not completed and each side blamed the other. The plaintiff sued for possession, forfeiture and compensation for use and occupation. The trial court held the plaintiff in breach; the High Court held the defendant in breach, allowed the plaintiff to retain Rs. 11,250 (ten per cent of the price) and awarded Rs. 265 a month for use and occupation. The defendant appealed on a certificate.
Questions before the Court
- Which party committed breach of the contract of sale?
- Does Section 74 of the Contract Act apply to a stipulation for forfeiture of an amount already paid under the contract?
- What compensation could the plaintiff retain out of Rs. 25,000, and on what basis were mesne profits to be assessed?
What the Court held
- Agreeing with the High Court, the defendant and not the plaintiff committed breach of the contract.
- Rs. 24,000, paid 'out of the sale price' on delivery of possession, was not earnest money, and the covenant for its forfeiture was a stipulation by way of penalty.
- The words 'any other stipulation by way of penalty' in Section 74 cover every covenant involving a penalty, including forfeiture of money or property already delivered. The court may award only reasonable compensation not exceeding the amount stipulated, whether the party in default is plaintiff or defendant.
- Section 74 dispenses with proof of actual loss but does not justify compensation where no legal injury results. With no proof of loss, the forfeited earnest money of Rs. 1,000 and the benefit of holding Rs. 24,000 were sufficient compensation; the award of ten per cent of the price rested on an arbitrary assumption.
- Mesne profits under Section 2(12) of the CPC are measured by the value of the user to the person in wrongful possession, not a return on the property's value. The trial court's rate of Rs. 140 a month was restored, with interest at six per cent.
Why it matters
The judgment explains that Section 74 sets aside the English distinction between liquidated damages and penalties, laying down a single rule of reasonable compensation up to the stipulated sum. It holds that Section 74 also governs forfeiture of amounts already paid, rejecting the contrary view of the Bombay and Madras High Courts, and that the provision dispenses only with proof of actual loss, not with the need for legal injury.
In the Court's words
Copied from the official judgment; each passage links to its page.
“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.”
“In our judgment the expression "the contract contains any other stipulation by way of penalty" 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 reasonable compensation is statutorily imposed upon courts by s. 74.”
“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"; t does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted”
“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 on the value of the user, but on an estimated return on the value of the property, cannot be sustained.”
Provisions interpreted
Related judgments
Case and bench
- Parties
- Fateh Chand v. Balkishan Das
- Case
- Civil Appeal No. 287 of 1960
- Decided
- 15 January 1963
- Bench
- Shah, J.C., Sinha, Bhuvneshwar P. (CJ), Gajendragadkar, P.B., Wanchoo, K.N., Gupta, K.C. Das
- Opinions
- Unanimous. The judgment of the Court was delivered by Shah, J.
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