M/s. Kailash Nath Associates v. Delhi Development Authority & Anr.
- ByPravleen Kaur --
- 06 May 2025 --
- 0 Comments
1. Introduction
This case revolves around a public auction conducted by the Delhi Development Authority (DDA) for Plot No. 2-A, Bhikaji Cama Place, District Centre, New Delhi. The appellant, M/s. Kailash Nath Associates, emerged as the highest bidder with a bid amount of Rs. 3.12 crores. As per the terms and conditions of the auction, the appellant deposited Rs. 78 lakhs, which was 25% of the bid amount, as earnest money with the DDA. [Para 2]
2. Sequence of Events
1. Acceptance of Bid and Extension of Time for Payment
1. The DDA acknowledged the receipt of Rs. 78 lakhs and directed the appellant to deposit the remaining 75% by 17.5.1982. [Para 3]
2. Due to a general recession in the industry, the appellant and others sought an extension of time for payment. [Para 3]
3. The DDA set up two High Powered Committees, which recommended granting extensions, and the DDA extended the time for payment twice. [Paras 3, 4, 5]
2. DDA's Letter and Appellant's Consent
1. On 1.12.1987, the DDA issued a letter (marked "without prejudice") to the appellant, seeking their consent to make the balance payment along with 18% interest, as the case was referred to the Central Government for relaxation of Nazul Rules. [Para 6]
2. The appellant promptly consented to the terms on the same day. [Para 7]
3. Central Government's Clarification and DDA's Cancellation
1. On 1.3.1990, the Central Government informed the DDA that the land in question was not Nazul land. [Para 8]
2. Despite this, on 6.10.1993, the DDA cancelled the allotment of the plot and forfeited the earnest money of Rs. 78 lakhs, citing the appellant's failure to deposit the balance 75%. [Para 9]
3. Legal Proceedings
1. Suit for Specific Performance and Damages 1. The appellant filed a suit for specific performance and, alternatively, for recovery of the earnest amount and damages. [Para 10]
2. Shortly after, the DDA re-auctioned the premises and fetched Rs. 11.78 crores. [Para 11]
2. Single Judge's Order
1. The Single Judge dismissed the suit for specific performance and damages but ordered the refund of the earnest money with 9% interest per annum. [Para 11]
2. The Single Judge held that the DDA did not suffer any loss and that the forfeiture of earnest money without notice was arbitrary. [Paras 67, 68, 69]
3. Division Bench's Judgment
1. The Division Bench set aside the Single Judge's order and upheld the forfeiture of the earnest money. [Para 12]
4. Supreme Court's Observations and Findings
1. Forfeiture of Earnest Money
1. The earnest money could be forfeited under the conditions of auction only in case of default, breach, or noncompliance by the bidder. [Para 15]
2. The DDA did not insist on the payment of the balance 75% within three months and instead extended the time twice, indicating a waiver of the time essence. [Para 15]
3. There was no breach of contract or misrepresentation by the appellant to justify the forfeiture of earnest money. [Para 15]
2. DDA's Letter and Appellant's Consent
1. The DDA's letter of 1.12.1987 and the appellant's consent were valid, as the DDA's understanding was that the payment of the balance 75% was important, regardless of whether the land was Nazul or not. [Para 17]
2. The DDA, being a public authority, could not behave arbitrarily by canceling the allotment after the Central Government's clarification. [Para 17]
3. Arbitrary Forfeiture and Application of Article 14
1. The forfeiture of earnest money was arbitrary on two grounds: (i) there was no breach of contract by the appellant, and (ii) the DDA did not suffer any loss, yet appropriated Rs. 78 lakhs. [Para 29]
2. Article 14 of the Constitution (equality before law) would apply in the field of contract, as the DDA is a public authority and cannot act arbitrarily. [Para 29]
4. Applicability of Section 74 of the Contract Act
1. Section 74 deals with compensation for breach of contract where a penalty is stipulated. [Para 31]
2. As earnest money is an amount to be paid in case of breach and named in the contract as such, it would necessarily be covered by Section 74. [Para 40]
3. However, in cases of public auctions, Section 74 may not apply if the forfeiture takes place before an agreement is reached. [Paras 41, 42]
4. In the present case, the forfeiture took place long after an agreement was reached, and the DDA did not suffer any loss but instead made a profit on re-auction. [Para 42]
5. Principles of Compensation under Section 74
1. The Court enunciated seven principles governing compensation for breach of contract under Section 74. [Para 43]
2. Notably, reasonable compensation can be awarded only if damage or loss is caused by the breach, and the liquidated amount or penalty is the upper limit. [Paras 43.1, 43.3]
6. Errors in the Division Bench's Judgment
1. The Division Bench erred in principle by holding that the DDA's profit from re-auction was irrelevant, as compensation can only be given for damage or loss suffered. [Para 44]
2. If no damage or loss is suffered, the law does not provide for a windfall. [Para 44]
5. Conclusion
The Supreme Court allowed the appeal, restored the Single Judge's order, and directed the refund of the earnest money of Rs. 78 lakhs with 9% interest per annum. The Court held that the forfeiture of earnest money by the DDA was arbitrary, as there was no breach of contract by the appellant, and the DDA did not suffer any loss but instead made a profit on re-auction. [Paras 44, 47]
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