Page 1 of 4 * IN THE HIGH COURT OF DELHI AT NEW DELHI % Date of Order : 27.11.2008 + RFA 786/2005 KING KAKKAR ..... Appellant Through: Mr. Raman Kapur, Advocate versus OMESH RAI PAHUJA ..... Respondent Through: Mr. Sujan Singh, Advocate CORAM: HON'BLE MR. JUSTICE PRADEEP NANDRAJOG HON'BLE MR. JUSTICE J.R.MIDHA 1. Whether reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not? 3. Whether judgment should be reported in Digest? PRADEEP NANDRAJOG, J. (Oral) 1. Heard learned counsel for the parties. 2. The appellant was a buyer and the respondent was a seller. They entered into an agreement to sell, Ex.PW-1/3, on 2.8.1999. Appellant was referred to as the second party in the agreement. The respondent was referred to as the first party in the agreement. 3. Clause 8 of the agreement stipulated as under:- “That if second party infringes the terms and conditions of this agreement and will not make balance payment within stipulated period then the first party have the right to recover the balance money and get the transaction enforced through court of law by filing the suit for specific performance in the court or first party shall recover double the amount of the earnest Page 2 of 4 money.” 4. Appellant did not pay the balance sale consideration and did not get executed the sale deed in his favour. Not only did he forfeit Rs.5,00,000/- received by way of earnest money, respondent filed a suit to recover a further sum of Rs.5,00,000/- alleging that the right emanated in his favour by virtue of clause 8 of the agreement to sell in question. 5. The respondent has succeeded. 6. A short submission is urged by the appellant. Challenging the impugned judgment and decree dated 4.8.2005 which has awarded Rs.5,00,000/- in favour of the respondent and against the appellant with interest @ 6% per annum from 1.4.2000 till the money is realized, counsel urges that it is settled law that an amount stipulated by way of penalty and not a reasonable pre-estimate of liquidated damages cannot be enforced and damages have to be awarded on proof of loss. 7. Learned counsel for the respondent states that as held in the decision reported as AIR 2003 SC 2629 ONGC Vs. SAW Pipes Ltd., when an amount is stipulated in a contract requiring to be paid by the party in breach to the opposite party the said amount has to be paid by the party in breach. 8. Law is clear. Even this was the ratio in the decision in SAW Pipes’ case (supra). Where a sum is stipulated by way of penalty the same cannot be enforced except on proof of actual Page 3 of 4 damages. But where the amount is a reasonable pre-estimate of the damages which would be suffered on account of breach, the same can be enforced. In para 65 of the decision in SAW Pipes’s case law was crystallized as under:- “65. 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’s case (supra) 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 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. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach. Take for illustration: if the parties have agreed to purchase cotton bales and Page 4 of 4 the same were only to be kept as a stock-in-trade. Such bales are not delivered on the due date and thereafter the bales are delivered beyond the stipulated time, hence there is breach of the contract. Question which would arise for consideration is – whether by such breach party has suffered any loss. If the price of cotton bales fluctuated during that time, loss or gain could easily be proved. But if cotton bales are to be purchased for manufacturing yarn, consideration would be different.” 9. Learned counsel for the respondent admits that there is no evidence on record that on account of price of property falling his client suffered a loss. Counsel further concedes that there is no proof of the value of the property of the respondent diminishing. 10. The clause in question is ex-facie by way of penalty. 11. Noting that the respondent has already enriched himself by Rs.5,00,000/- we allow the appeal and set aside the impugned judgment and decree dated 4.8.2005. Suit filed by the respondent is dismissed with cost throughout against the respondent and in favour of the appellant. 12. Money deposited by the appellant and kept in a fixed deposit be returned to the appellant with accrued interest. PRADEEP NANDRAJOG, J. J.R.MIDHA, J. NOVEMBER 27, 2008 mm