This article is written by Maria Binny Palamattom.
The appellant (M/S Kailash Nath) filed the case before the Hon’ble Supreme Court of India aftermath the highest bid in the auction undertaken by Delhi Development Authority (DDA) for Plot No. 2-A, Bhikaji Kama Place, District Centre, New Delhi. The bidding made by the litigant at the closeout was endorsed being the most elevated offered at a measure of Rs.3.12 Crores to which the sincere sum chose for the equivalent was 25% of it that is Rs.78,00,000/ – sufficing the terms and conditions of the auction on 18th of February 1982. This amount was duly deposited by the appellant and the receipt of the same was acknowledged by the DDA.
Followed by the acknowledgement and receipt, DDA guided the appealing party to pay the leftover 75% of the sold sum by 17th of May 1982. However, the appellant sought for an extension to the DDA to complete the payment, due to the reasons that arose through the general recession in the industry then. On this note, taking into consideration, the recommendations of High Power Committees that addressed the grievances of the appellant an extension was granted till 28th of October 1982 with interests differing from 18% to 36%. Further, DDA refrained from answering to the attempts of the appellant to contact the DDA from 1984-87 and thereby the plot was re-auctioned at an amount of INR 11.78 Crores.
The appellant approached the Single Bench at the High Court seeking the refund of the earnest amount along with specific performance to which an order was passed for the reimbursement of the earnest amount and rejected the demand for specific performance. The appeal to the Division Bench of the High Court reversed the decision of the Single Bench and thereby rejected the plea for refund of the earnest amount. Finally, at the Supreme Court, the appeal was allowed stating that there was no breach, from the part of the appellant of the contract for which no penalty can be imposed in the form of forfeiture of the earnest amount under Section 74 of the Indian Contracts Act, 1872.
The case majorly revolves around the ambit of Section 74 of the Indian Contract Act, 1872 which deals with the penalty imposed on the breach of contract and thereby the authority of the aggrieved part to seek for damages for the damage incurred. In this case, the forfeiture of the earnest amount paid by the appellant was argued to be valid under the aforesaid section and thereby this was included in the terms and conditions of the public auction where the breach or losses accompanying to the breach could be met with the forfeiture of the earnest amount which was paid in advance. Moreover, the Court referred to numerous pre existing precedents to analyze whether an actual breach of shortfall has arisen from the part of the appellant in order to penalize with forfeiture and whether this can be applicable as the terms and conditions of a public auction.
In the case of Anandram Mangturam v. Bholaram Tanumal, the court held that any changes accommodated to the time period granted for the execution of a contract has to be in Consensus Ad Idem and hence must be via a bilateral communication. Also, in the case of Keshavbhai Lallubhai Patel & Ors. v. Lalbhai Trikumlal Ltd., the apex court reverberated the aforesaid judgment and stated that such extension can be applicable with the benefit that accrues the promisee (here, DDA/respondent). On the other hand, in the case of Citibank N.A v. Standard Chartered Bank, the court adjudged that the unilateral agreements for extension are valid with reference to Section 63 of the Act which discusses about the promise that may dispense or remit performance of promise.
The allowance of the appeal of Kailash Nath Asoociates(KNA)(The appellant) by the bench led by Hon’ble Justice R F Nariman sought to raise numerous questions on the ambit of Section 74 of the Indian Contract Act, 1872 which are inclusive of the reasonability of the damages which are liquidated when it comes to the role of a penalty in an occasion of breach of such contracts. The case law and the associated judgment therefore play a vital role as a model precedent when it comes to contractual damages. The approval of the appeal by the apex court, focused on views and arguments raised such as; whether a breach of contract has taken place? And does a public body like DDA has the authority to claim damages in the form of forfeiture?
Whether breach of contract has taken place?
The DDA as per the terms and conditions of the auction possessed the authority to forfeiture the earnest amount (25%) in the occasion of the breach of contract. On this note, the primary challenge before the Hon’ble Court was the due recognition of such breach if any. As per the observations of the Hon’ble Bench, the appellant had not refused to make the aforesaid payment before the completion of the extended period, i.e. 3 months. Hence, the breach cannot be intended to have occurred. On this note, irrespective of the existent question regarding the unilateral extension of the deadline for the performance of the contract, the conclusion is undoubtedly in concurrence with the provision under the Act.
Breach of Contract in its very essence possesses numerous spheres of failure to performance. This is inclusive of the failure of either of the parties to perform an agreement or obligation; moreover the party who’s aggrieved by such breach is expected to be compensated with damages/compensation in adherence to the losses incurred as per Section 73 of the Act. In the above case, since the appellant has not expressly or impliedly disagreed to make the payment within the deadline of execution; though extended stays immune from the act of breach. In the case of Hadley v. Baxendale, the court held that the damages arisen from the losses incurred by the parties should be calculated fairly and reasonably and is supposed to be in contemplation to both the parties. Also in the case of Victoria Laundry (Windsor Ltd.) v. Newman Industries Ltd., the parties in fault were ordered by the Court to pay for the ordinary losses that arose from the breach and not any extra ordinary losses beyond the scope and value of the contract.
In this case, the court focuses on the aspect of disagreement from the part of the appellant to pay off the remaining 75% of the auctioned amount. Under Section 63 of Indian Contract Act, 1872 even if unilateral attempt is made to extent the time period for execution can be considered. So, the issue on whether the passive stand at tranquility where the promise failed to accept the communication or notify the promise regarding the fulfillment of the contract puts forth questions on changing dimensions of the breach of contract. Thence, on the notion that is established through the judgment which relied on the fact that the notification through the letter of cancellation of the bid along with the notice of forfeiture were made unilaterally without the knowledge of the other party cannot be considered as a reasonable justification of the interpretation of Section 74 of the Act for which the breach cannot be considered to have taken place.
The recognition of damages
Indian Contract Act, 1872, doesn’t provide a specific definition for damages. However, every case that compensate the aggrieved party in the case of a breach or non compliance of a contract or an agreement at the option of the party at fault seeks to address the measures of compensation in the form of damages. Under the Civil Law, damages in its very essence are divided into several categories inclusive of liquidated; unliquidated, compensatory, exemplary and so on varying from case to case. The liquidated damages, most often referred to as contractual damages in the cases of breach are computed with the knowledge of both the parties, at cases even before entering in to a contractual relationship. A liquidated damages provisions seeks to undergo the test in order to compute the same in the case of a breach. This is inclusive of analyzing the intent of the parties towards unliquidated damages, estimated damages during the contract creation in case of a breach and the difficulty in analyzing the damages before the establishment of the contract.
In this case, the existent terms and conditions of the public auction stated for the forfeiture of the earnest amount (INR 78,00,000/-) by the party in case of a breach. This was applicable for all the parties who were chosen for the same. In its judgment, the Hon’ble Court stated that even in the case of an actual breach, DDA was not authorized to forfeiture the earnest damages on grounds such as unjustifiable appropriation of the said amount with no loss being suffered; said that the property was re auctioned at an amount multiple times greater than the previous value in adherence to the constitution. This raises question on whether the damages arising from the breach of contract if any is on liquidated basis or otherwise [Here forfeiture]. In the said precedent it is to be recognized in adherence to the losses incurred creating an ambiguity in the interpretation of Section 74 of the Act.
The impact on the Saw Pipes Case
In the case, of ONGC v. Saw Pipes Ltd., the case which had immediately before the KNA Case, bench led by Hon’ble Justice M B Shah held that, if there has been a pre conceived agreement or consensus in which the parties have agreed to pay off an amount as liquidated damages in the case of a breach, then such amount can be used without any further requirement to calculate the actual loss due to breach. The case therefore, has been a notable precedent in recognizing the damages incurred by the aggrieved party in the case of a breach and had attempted to provide an ambit for Section 74 of the Act. However, the cases past the KNA case, inclusive of MBL Infrastructure Ltd. v. Ircon International Ltd., the Calcutta High Court upheld the decision in the case of Saw Pipes Ltd. by stating that the decision of one division bench cannot be overruled by another with one and the same authority.
The concept of calculating losses incurred by the aggrieved party therefore, can create issues with reference to the plausibility and feasibility of matters in similar nature pending before the courts. Similar judgments in support of liquidated damages recurred in the case of Mahangar Telephone Nigam Ltd. v. Haryana Telecom Ltd., where the arbitral reward affirmed on the Saw Pipes case in due recognition to the contractual damages concept. The impact of KNA case on the pre existent Saw Pipes Case that had laid down the relevance and priority provided to the pre estimated damages with the consensus by the parties of a contract in a genuine nature plays a vital role especially with reference the importance to be provided to the losses incurred by the parties.
On one hand, the KNA case has impacted or attempted to dilute the role of liquidated damages as stated under Section 74 of Indian Contract Act, 1872. This occurred when the judgment favored to prioritize the losses incurred, if any by the aggrieved party in order to attain the authority to penalize on the grounds of breach. This is where the curt stated that, compensation can only be granted in the case where a damage or loss has arisen and not otherwise. The court here gets justified to the extent where the re-auction of the plot took place at a fairly large amount in comparison to the former. In the case of Fateh Chand, followed by the case of Maula Bux, similar decisions on the ambit of Section 74 had arisen. On the former, the court referred to its jurisdiction on determination of damages and in the latter held with due recognition to the former judgment such damages are not pre estimated, and then the courts can consider the losses as estimated by the aggrieved party.
On the other hand, KNA case considered not to have impacted the previous precedents that in the absence of a justifiable estimate of damages; i.e. liquidated, then the only remaining option within or beyond the ambit of Section 74 is the calculation of losses. Moreover, within the KNA case, it was also stated that in a case where damages are unable to be recognized this option as declared by the court can be made use of. Considering the terms of the audit stated by DDA, which said that, in case of default, breach or non- compliance of any of the terms or conditions of the auction or misinterpretation by the bidder and/or intending purchaser, the money shall be forfeited. On acknowledging this clause, the court recognized the absence of breach for which the forfeiture cannot be approved.
The case of Kailash Nath v. Delhi Development Authority & Anr., precisely developed the need to emphasize and analyze the aspects concerning the estimation of damages in recognition of the breach of a contract. The question of whether, a breach of contract has taken place or not was duly addressed and recognized by the court in adherence to the facts of the case and absence of consideration post payment of the earnest value of 25%. Section 74 of the Act itself seeks to remedy in the form of a penalty, when a contract has been broken.
In this case, though has not diluted the pre existing usage of liquidated damages, raises concerns on the validity of such quantified values in a contract. The ratio that sought for the calculation of losses as an aftermath of the breach of contract cannot be acknowledged or affirmed as a reliable precedent towards the extent that it is relied on the absence of a pre estimated value considerate to parties to the contract in the form of liquidated damages that are stipulated in advance to the contract.
The precedent therefore, provided considerate attention towards the concept of estimation of damages in the case of breach of a contract without ideally diluting the existent precedents that govern such jurisdiction and instead diversified the ambit of recognition on whether the breach has actually taken place and the act of estimation in the absence of a definite sum that a party agrees to pay or deposit in the case of a breach, out of good faith (estimation) and consideration. However, notably the ambiguity prevalent in determination of penalty in the form or forfeiture or damages on the basis of losses and its feasibility in accordance Section 74 of Indian Contract Act, 1872, when the breach or breakage of contract is recognized continues to prevail.
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