RFA No.458/2011 & 457/2011 Page 1 of 22 * IN THE HIGH COURT OF DELHI AT NEW DELHI + RFA Nos. 458/2011 & 457/2011 % 2nd September, 2011 1. RFA No.458/2011 M/S. M.C. AGRAWAL HUF ......Appellant Through: Mr. P.K. Aggarwal, Advocate with Ms. Mercy Hussain, Advocate. VERSUS M/S. SAHARA INDIA & ORS. ...... Respondents Through: Mr. Vivek Kohli, Advocate with Mr. Abhishek Swaroop, Advocate. 2. RFA No.457/2011 M/S. SAHARA INDIA & ORS. ...... Appellants Through: Mr. Vivek Kohli, Advocate with Mr. Abhishek Swaroop, Advocate. VERSUS M/S. M.C. AGRAWAL HUF ......Respondent Through: Mr. P.K. Aggarwal, Advocate with Ms. Mercy Hussain, Advocate. CORAM: HON’BLE MR. JUSTICE VALMIKI J.MEHTA 1. Whether the Reporters of local papers may be RFA No.458/2011 & 457/2011 Page 2 of 22 allowed to see the judgment? 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes VALMIKI J. MEHTA, J (ORAL) 1. These are two cross appeals, one filed by the landlord (RFA No.458/2011) and the other filed by tenants (RFA No.457/2011) against the impugned judgment and decree of the trial Court dated 16.5.2011 whereby the suit of the landlord for possession and mesne profits with respect to the premises being a flat bearing No.817A, 8th Floor, Ambadeep Building No.24, Kasturba Gandhi Marg, New Delhi, was decreed. The grievance of the landlord is with respect to denial of claim by the trial Court with respect to executive class tickets in addition to the mesne profits, whereas the grievance of the tenants is with respect to awarding mesne profits at double the market rent without any evidence being led by the landlord and which decree is argued to be violative of Section 74 of the Contract Act, 1872. The tenants also question the grant of the high rate of interest at 20%. A minor issue with regard to liability towards the mesne profits is also raised that the same are payable only till 31.12.2004 and not 3.4.2005 as granted by the trial Court. I may finally add that the landlord has argued that the liability for mesne profits RFA No.458/2011 & 457/2011 Page 3 of 22 continues till date because the entire possession of the tenanted premises has not been given. The main argument as advanced by the landlord, who appeared in person, and who was karta of the landlord HUF however was that since as per the lease deed the tenants were in addition to the payment of rent liable to give a certain number of executive class air tickets, it was argued that the value of these air tickets have to be included in the mesne profits to be awarded. Assistance is sought in this behalf by the landlord of the order of the Supreme Court dated 28.4.2008 and which is an order which had allowed an amendment application filed by the landlord with respect to claim of mesne profits to include the claim towards the executive class air tickets. 2. The fact that there is a relationship of landlord and tenant is not disputed. It is also admitted that premises are outside the protection of Delhi Rent Control Act, 1958 and the tenancy was terminated by a legal notice. The tenants have also in the meanwhile delivered possession of the suit premises by depositing the keys in the Court on 3.4.2005. The main issue which is therefore required to be adjudicated is as to what should be rate of mesne profits which should be allowed to the landlord till 3.4.2005 when the keys of the property were deposited in the Court alongwith the issue as to whether the tenants continue to be liable RFA No.458/2011 & 457/2011 Page 4 of 22 to pay the mesne profits as the landlord alleges that the complete possession of the property has not yet been given. 3. On the aspect of the date till which mesne profits are payable, there is no doubt that mesne profits will be payable till the keys were deposited by the tenants in the Court on 3.4.2005 inasmuch as there are admissions noted in the impugned judgment that the tenants had removed the walls of the tenanted premises and the original position of the tenanted premises was restored only on 31.12.2004 and whereafter on 3.4.2005 the possession was handed over by depositing the keys in the Court on 3.4.2005. Learned counsel for the tenants had only weakly disputed the payment of mesne profits from 31.12.2004 till 3.4.2005 and has not disputed the liability to pay mesne profits till 31.12.2004. I therefore hold that mesne profits shall be payable till 3.4.2005. 4. The entitlement of a landlord to claim mesne profits from a tenant who is in illegal possession of the premises after the tenancy is terminated, is governed by Section 2 (12) of Code of Civil Procedure, 1908 (CPC) and which defies mesne profits as under:- “Section 2(12) “mesne profits” of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, RFA No.458/2011 & 457/2011 Page 5 of 22 but shall not include profits due to improvements made by the person in wrongful possession.” The above provision has been interpreted in various judgments that ordinarily the mesne profits which a landlord is entitled against a tenant who continues to stay in the tenanted premises after the termination of the tenancy is the amount which the premises can fetch if let out on rent during the period of its illegal occupation by the tenant. 5. A clause in a lease deed that if a tenant stays in the premises after the expiry of the lease period or termination of the tenancy, then, the penalty/damages at double the market rate are payable would be ex facie violative of provision of Section 74 of the Contract Act, 1872 being a clause interrorem. Right from the Constitution Bench decision of the Supreme Court in the case of Fateh Chand vs. Balkishan Das AIR 1963 Supreme Court 1405 it has been held that where on account of breach of contract damages can be proved, then, there cannot be any validity of a clause which gives liquidated damages. What is the rent which the premises can fetch during the period of the illegal occupation by the erstwhile tenant is a fact which can be easily proved in a suit for possession and mesne profits against the tenants by leading evidence with respect to rents of similar premises within the locality. The Court, on considering such evidence, with respect to rent of similar premises RFA No.458/2011 & 457/2011 Page 6 of 22 thereafter awards mesne profits to the landlord. It is only in cases where the damages/mesne profits cannot be proved in a Court of law, and one of which contract was the subject matter of the decision of the Supreme Court in the case of O.N.G.C. Vs. Saw Pipes Ltd., 2003 (5) SCC 705, then, in such cases liquidated damages as fixed by the contract would become payable. The Supreme Court in the case of O.N.G.C. (supra) has referred to a classic case of delays in construction of a road being built and the consequent loss being caused on account of non collection of toll. Since it is nearly impossible to calculate the loss on account of breach of contract because the number of users of the road and hence what would be the toll tax that could not have been collected cannot be calculated consequently in such circumstances, the clause with respect to liquidated damages becomes applicable and reasonable damages not exceeding the figure of liquidated damages are awarded. However, in cases where a landlord sues an erstwhile tenant for mesne profits this would not be the position because mesne profits can surely be calculated being the rent which will be payable with respect to the premises during the period of illegal occupation by the erstwhile tenant and which is a modality applicable by virtue of the language of Section 2(12) CPC. I have had an occasion to recently consider this aspect of the ratio of the decisions of the Supreme Court under Section 74 of the Contract Act in RFA No.458/2011 & 457/2011 Page 7 of 22 the case of Dilip Kumar Bhargava Vs. Urmila Devi Sharma & Ors. in RFA No.129/2011 decided on 31.3.2011 and paras 3 to 7 of this judgment dealing with this issue read as under:- “3. Learned counsel for the appellant relies upon the Constitution Bench decision of the Supreme Court in the case of Fateh Chand Vs Balkishan Dass, (1964) 1 SCR 515; AIR 1963 SC 1405 and more particularly its paras 8,10,15 and 16 which read as under:- 8. The claim made by the plaintiff to forfeit the amount of Rs 24,000 may be adjusted in the light of Section 74 of the Indian Contract Act, which in its material part provides:- “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, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or 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 or as the case may be, the penalty stipulated for.” The section is clearly an attempt to eliminate the sometime 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. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty. 10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide RFA No.458/2011 & 457/2011 Page 8 of 22 whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. 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 damage”; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach. 15. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties pre-determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression “to receive from the party who has broken the contract” does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract. The court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such RFA No.458/2011 & 457/2011 Page 9 of 22 compensation has to be ascertained having regard to the conditions existing on the date of the breach. 16. There is no evidence that any loss was suffered by the plaintiff in consequence of the default by the defendant, save as to the loss suffered by him by being kept out of possession of the property. There is no evidence that the property had depreciated in value since the date of the contract provided; nor was there evidence that any other special damage had resulted. The contact provided for forfeiture of Rs 25,000 consisting of Rs, 1039 paid as earnest money and Rs 24,000 paid as part of the purchase price. The defendant has conceded that the plaintiff was entitled to forfeit the amount of Rs 1000 which was paid as earnest money. We cannot however agree with the High Court that 13 percent of the price may be regarded as reasonable compensation in relation to the value of the contract as a whole, as that in our opinion is assessed on an arbitrary assumption. The plaintiff failed to prove the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to find any principle on which compensation equal to ten percent of the agreed price could be awarded to the plaintiff. The plaintiff has been allowed Rs 1000 which was the earnest money as part of the damages. Besides he had use of the remaining sum of Rs 24,000, and we can rightly presume that he must have been deriving advantage from that amount throughout this period. In the absence therefore of any proof of damage arising from the breach of the contract, we are of opinion that the amount of Rs 1000 (earnest money) which has been forfeited, and the advantage that the plaintiff must have derived from the possession of the remaining sum of Rs 24,000 during all this period would be sufficient compensation to him. It may be added that the plaintiff has separately claimed mesne profits for being kept out possession for which he has got a decree and therefore the fact that the plaintiff was out of possession cannot be taken, into account in determining damages for this purpose. The decree passed by the High Court awarding Rs.11,250 as damages to the plaintiff must therefore be set aside. (Underlining added) 4. To the same effect are the observations in Maula Bux Vs. UOI, 1969 (2) SCC 554, and para 4 of which reads as under:- RFA No.458/2011 & 457/2011 Page 10 of 22 “4. Under the terms of the agreements the amounts deposited by the plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The High Court observed that the deposits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in "The Dictionary of English Law" at p. 689 : "Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by giving to the vendor a nominal sum (e.g. a shilling) as a token that the parties are in earnest or have made up their minds." As observed by the Judicial Committee in Kunwar Chiranjit Singh v. Har Swarup A.I.R.1926 P.C.1 Earnest money is part of the purchase price when the transaction goes forward : it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee. In the present case the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be regarded as earnest money. 5. Section 74 of the Contract Act provides : 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, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or 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 or, as the case may be, the penalty stipulated for. ... There is authority, no doubt coloured by the view which was taken in English cases, that Section 74 of the Contract Act has no application to cases of deposit for due performance of a contract which is stipulated to be forfeited for breach : Natesa Aiyar v. Appavu Padayachi I.L.R. [1913] Mad. 178 Singer Manufacturing Company v. Raja Prosad I.L.R.[1909] Cal. 960 RFA No.458/2011 & 457/2011 Page 11 of 22 Manian Patter v. The Madras Railway Company I.L.R.[1906] Mad.188 But this view is no longer good law in view of the judgment of this Court in Fat eh Chand's case MANU/SC/0258/1963 : [1964]1SCR515 : [1964]1SCR515 . This Court observed at p. 526 : “Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty.... The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for.” The Court also observed : "It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that Section 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases whereupon breach of contract an amount received under the contract is sought to be forfeited. 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 Section 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable but not exceeding the amount specified in the contract as liable to forfeiture.", and that, "There is no ground for holding that the expression "contract contains any other stipulation by way of penalty" is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend RFA No.458/2011 & 457/2011 Page 12 of 22 covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited.” 5. In Union of India Vs. Raman Iron Foundry (1974) 2 SCC 231 there are similar conclusions. Para 11 of this judgment reads as under:- “11. Having discussed the proper interpretation of Clause 18, we may now turn to consider what is the real nature of the claim for recovery of which the appellant is seeking to appropriate the sums due to the respondent under other contracts. The claim is admittedly one for damages for breach of the contract between the parties. Now, it is true that the damages which are claimed are liquidated damages under Clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages. Section 74 of the Indian Contract Act eliminates 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. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties : a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor RFA No.458/2011 & 457/2011 Page 13 of 22 does the party complaining of the breach becomes entitled to a debt due From the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages……..………The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant.” (Underlining added) 6. A contract pertaining to breach of an Agreement to Sell is a contract where loss can be calculated, the loss ordinarily being the lesser value of the immovable property on the date of the contract. Such contracts of Agreements to Sell, being contracts where damages can