2015 (1) TMI 1377 - SC - Companies Law

Public auction conducted by the Delhi Development Authority ( DDA ) - Appellant made the highest bid and deposited being 25% of the bid amount, with the DDA, this being earnest money under the terms of the conditions of auction - granting the extension of time to bidders for depositing the remaining amount of 75% - recovery of damages and recovery of the earnest amount seeked - breach of contract on the part of the Appellant - Held 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 . 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. 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. 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. 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. 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 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. In the result, the appeal is allowed. The judgment and order of the Single Judge is restored

Issues Involved:
1. Validity of the forfeiture of earnest money by the Delhi Development Authority (DDA).
2. Extension of time for payment and whether time was of the essence of the contract.
3. Application of Article 14 of the Constitution regarding arbitrary state action.
4. Applicability of Section 74 of the Indian Contract Act, 1872 concerning compensation for breach of contract.

Detailed Analysis:

1. Validity of the Forfeiture of Earnest Money:
The Supreme Court examined whether the DDA's forfeiture of the earnest money deposited by the Appellant was lawful. The DDA forfeited Rs. 78,00,000/- due to the Appellant's failure to pay the remaining 75% of the bid amount within the stipulated time. The Court concluded that the forfeiture was not justified as there was no breach of contract by the Appellant. The DDA had extended the time for payment multiple times, effectively waiving the original three-month period. The Court emphasized that earnest money could only be forfeited in cases of default, breach, or non-compliance, none of which were present in this case.

2. Extension of Time for Payment and Essence of Time:
The Court noted that the DDA had extended the time for payment on several occasions, thus waiving the original time stipulation. The Appellant had responded promptly to the DDA's letter dated 1.12.1987, agreeing to pay the balance with 18% interest. The Court observed that the DDA's actions indicated that time was no longer of the essence of the contract. The DDA's failure to provide a final notice to the Appellant before terminating the contract and forfeiting the earnest money was deemed arbitrary and unjustified.

3. Application of Article 14 of the Constitution:
The Supreme Court held that the DDA, as a public authority, must act reasonably and fairly, adhering to the principles of Article 14 of the Constitution. The forfeiture of earnest money without any loss being suffered by the DDA was considered arbitrary. The Court emphasized that state actions in contractual matters must be just, fair, and reasonable, even if no actual loss is proved.

4. Applicability of Section 74 of the Indian Contract Act, 1872:
The Court analyzed the applicability of Section 74, which deals with compensation for breach of contract where a penalty is stipulated. It was noted that Section 74 applies to all stipulations naming amounts to be paid in case of breach, whether they are penalties or liquidated damages. The Court concluded that the forfeiture of earnest money in this case was not justified as there was no loss suffered by the DDA. The re-auction of the plot fetched a higher amount, indicating no financial loss. The Court reiterated that compensation for breach of contract must be reasonable and proportionate to the actual loss suffered.

Conclusion:
The Supreme Court allowed the appeal, restoring the judgment and order of the Single Judge, which directed the refund of the earnest money with 9% per annum interest. The Court held that the forfeiture of earnest money by the DDA was arbitrary and not in accordance with law, as no breach of contract or loss was established. The DDA's actions were found to be in violation of Article 14 of the Constitution, requiring state actions to be fair and reasonable.

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