INTRODUCTION

Salmond defines contract as “A contract is an agreement creating and defining obligation

between two or more persons which rights are acquired by one or more to acts or forbearance
on the parts of others”.1 Section 2(h)2 of the Indian Contract Act, 1872 defines contract “as an
agreement enforceable by law”. There are three essentials of a contract, a valid offer, a valid
acceptance of the offer and a valid consideration for the same.

Contracts often contain a stipulation or a clause that specifies the amount of money a
defaulting party is required to pay to the other party in the event of a breach of contract. 3
Section 744 of the Contract Act, 1872 deals with the cases that provide for a stipulation to be
paid in case of a breach of contract.

There is a difference in the Indian and English legal position regarding this as explained by
the Supreme Court in its judgement in Fateh Chand v. Balkishan Dass5 in which the court
held: “The section is clearly an attempt to eliminate 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”6 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

1 POLLOCK & MULLA, THE INDIAN CONTRACT ACT, 15 (Anirudh Wadhwa, 2015).
2
The Indian Contract Act, 1872, No. 9.
3 http://docs.manupatra.in/newsline/articles/Upload/30C28D5D-262B-4A4A-AE17-C4D86F92BCE0.pdf.

4
Section 74, The Indian Contract Act, 1872, No.9.
“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.”
5 Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515.
6 See : https://www.merriam-webster.com/legal/in%20terrorem

1
In terrorem is a latin word for “by way or threat or intimidation”.

2
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.”7

On 9th January, the Supreme Court of India delivered its judgement in the case of Kailash
Nath Associates v. Delhi Development Authority8. The question before the court was that
whether the Delhi Development Authority (DDA)9 was justified in forfeiting the earnest
money of the appellant and whether or not any breach of contract occurred. The court in its
judgement considered some important questions regarding the Section 74 of the Indian
Contract Act, 1872. As it is noted by the researcher that Section 74 has given rise to difficult
questions in these recent years and the court’s interpretation of this section in this case is
slightly in contrasting light as opposed to the earlier judgements of the Court.

The Part 3 of the research project discusses the law of damages under the Indian Contract
Act, 1872 and the Part 4 of the paper examines the facts of this case, the issues that were
raised and the researcher has made an attempt to critically analyze the decision given by the
court with the help of judicial precedents relating to the same issue. In the Part 5 of the
project, the researcher has undertaken the critical analysis of the Supreme Court’s
interpretation of Section 74 of the Indian Contract Act, 1872 and its possible implications.
The researcher has also referred for this purpose, the court’s earlier judgements regarding the
interpretation of this section in order to critically observe the change in the view of the court
regarding the same.

The Part 6 of the paper concludes by the arguing that even though the decision reasonably
addresses questions in the specific facts of the case and slightly changes the interpretation of
Section 74 by making it more explicit but in the larger picture it fails to decide several
question that are still left unanswered.

7
Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515.
8 Kailash Nath Associates v. DDA, (2015) 4 SCC 136
9 Hereafter it will be referred as DDA

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RESEARCH METHODOLOGY:

• RESEARCH DESIGN

The undertaken critical study of the Supreme Court’s judgement in Kailash Nath Associates
v. Delhi Development Authority. The territory of the research is not only restricted to India
and the researcher also discusses some English case laws. The research is a doctrinal research
based on the existing law of damages under Contract Act and the judgements of the court in
this case and earlier cases. The data has been collected from the different primary and
secondary sources using library and online website resources. The data has been selected
randomly given constraints of time, manpower, finance and material etc.

• AIMS & OBJECTIVES

The aim of this paper is to provide a detailed study of the Supreme Court’s judgement in
Kailash Nath Associates v. Delhi Development Authority, also to critically analyse the
liquidated damages in India and the interpretation of Section 74 of the Indian Contract Act,
1987 by the Supreme Court in this case.


Analyze the facts of the case in Kailash Nath Associates v. Delhi Development
Authority

To critically analyze the judgement in the case of Kailash Nath Associates v. Delhi
Development Authority.

To develop any criticisms, if any.

•
SCOPE AND LIMITATIONS

Though the researcher has tried his level best to not leave any stone unturned in doing his
research work to explain the judgement of the court in this case and the various aspects
relating to it, but the implications being vast cannot be confined, thus, the research work has
sought with some of the unavoidable limitations.

4
THE LAW OF DAMAGES UNDER THE INDIAN CONTRACT ACT, 1872

Damages, in general refers to the compensation granted due to the breach of contract, injury
or loss. According to Fuller and Perdue10, damages seek protection of “expectation interest”,
“reliance interest”, “restitution interest”. Expectation interest refers to placing the plaintiff in
a position that he would have occupied, had the defendant performed his promise by
compensating for the injury, thus, aiming at fulfilling the expectation of the promisee;
reliance interest refers to restoring the plaintiff to a position which he was in before the
promise was made in the course of which the promise altered his position by placing reliance
on the promisor; and restitution interest refers to prevention of gain by the defaulting
promisor at the expense of the promisee or to compel the defendant to pay for the values
received from the plaintiff thereby preventing unjust enrichment.11

In the Indian Contract Act, 1872, Section 7312 deals with the actual damages which are
followed after the breach of contract which resulted in any loss or injury and which are in the
form of unliquidated damages as these damages are awarded by the courts on assessment of
the loss and injury suffered by the aggrieved party, while the Section 74 deals with the
liquidated damages as it deals with the cases that provide for a stipulation to be paid in case
of a breach of contract.

Under the Common Law, if the stipulation is a genuine pre-estimate of the damages likely to
be caused by the said breach, it is called liquidated damages. Genuine pre-estimates of loss
are recoverable under law. However, if it is not a genuine pre-estimate of the loss, then it is

10
L.L. Fuller and Willian R. Perdue Jr., ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale Law
Journal 52
11 Ibid

12 Section 73, The Indian Contract Act, 1872, No.9.

“Compensation for loss or damage caused by breach of contract.—When a contract has been broken, the party
who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for
any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach,
or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the
breach.
Compensation for failure to discharge obligation resembling those created by contract.—When an obligation
resembling those created by contract has been incurred and has not been discharged, any person injured by the
failure to discharge it is entitled to receive the same compensation from the party in default, as if such person
had contracted to discharge it and had broken his contract.”
5
termed as a penalty and the said clause is considered void. So under the common law, it is
pertinent to ascertain the question that whether the stipulation is in the nature of liquidated
damages or penalty which is done by the court by taking into account a variety of relevant
factors like the intent of the parties, the character of the transaction in question, the
consequential injury to the plaintiff, etc. The House of Lords in Dunlop Pneumatic Tyre Co.
Ltd. v. New Garage and Motor Co. Ltd.13 had laid down that if a stipulation is such that it
operates “in terrorem” of the offending party to secure the performance of contract and if
such sum is extravagant, unconscionable and disproportionately large, then it shall operate as
a penalty. Penalty clauses are void and irrecoverable in nature under English Law.14 The
Indian Position is somewhat different, as far as the language of Section 74 is concerned after
the amendment15, a liquidated damages clause need not specifically state that liquidated
damages are not in the nature of a penalty. As far as the practice enunciated by the court is
concerned, more emphasis has been laid on reasonable compensation and the court has
adopted a statutory duty under the Section 74 as “…..not to enforce the penalty clause but
only to award reasonable compensation……”.16 Section 74 of the Indian Contract Act, 1872
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.”17 Apart from this, in this case the court also affirmed that “the 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”.18

13 Dunlop Pneumatic Tyre Co.Ltd. v. New Garage and Motor Co. Ltd., 1915 AC 79 : 1914 UKHL 1 (HL).
14
https://www.scconline.com/blog/post/2018/01/30/revisiting-liquidated-damages-india/.
15 Indian Contract (Amendment) Act, 1899 (VI of 1899), S.74
16
Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515
17 Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515
18 Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515

6
KAILASH NATH ASSOCIATES V. DELHI DEVELOPMENT AUTHORITY
CASE IN SUPREME COURT

FACTS OF THE CASE

The dispute in Kailash Nath case arose out of a public auction conducted by the Delhi
Development Authority (DDA) wherein the appellant made the highest bid for Plot No.2 – A,
Bhikaji Cama Place District Centre, New Delhi for Rs.3.12 crores. As per the terms and
conditions of the auction, the appellant, being the highest bidder deposited 25% of the bid
amount i.e. Rs.7800000 with DDA, this being the earnest money under the terms and
conditions of the auction. The terms and conditions of the auction provided that DDA was
entitled to forfeit this amount, which stated “in case of default, breach or non-compliance of
any of the terms and conditions of the auction or misrepresentation by the bidder and /or
intending purchaser, the earnest money shall be forfeited”.19

On 18-02-1982, the receipt of Rs.7800000, was acknowledged by DDA and the bid was
accepted. DDA directed the appellant to deposit the remaining 75% amount by 17-05-1982,
as was stated in the conditions of the auction that ‘when the bid is accepted by DDA the
intending purchaser shall, within 3 months thereof, pay to the DDA, the balance 75% amount
of the bid….’20 However, as there was a general recession in the industry, the appellant made
representation for extending the time of payment of the remaining amount. In order to look
into these representations two high-powered committees were set up, according to the first
committee DDA extended time for payment up to 28-10-1982 and based on the
recommendations of the second high-powered committee, which was accepted by DDA on
14-05-1984, more time was given to the appellant to pay the balance amount. But nothing
happened till 01-12-1987. Even several letters written by appellant to DDA were not
responded by them.

19 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

20 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

7
Vide a letter dated 01-12-1987, the DDA informed the appellant that his case for relaxing the
provisions of the Nazul Rules, 198121 to condone the delay for payment of balance amount
was referred to the Government of India and it requested the appellant to give his consent to
pay the balance within the period that may be fixed along with the 18% interest p.a on the
belated payment. The consent for the same was given by the appellant by a letter on the same
day itself.

The central government informed DDA vide a letter dated 01-03-1990, that the land
auctioned to the appellant was not Nazul land22 and therefore there is no role of central
government in this matter. Eventually, some years after the bid was accepted by DDA, by a
letter dated 06-10-1993, the earnest money of the appellant was forfeited and the allotment of
the said plot in the favour of the appellant was cancelled. The appellant then filed a suit for
specific performance and in alternative for the refund of the earnest money. Soon after the
suit was filed, DDA re-auctioned the property for a sum of Rs.11.78 crores, nearly three
times the amount, Kailash Nath Associates had agreed to pay.

The appeal was first filed in the Single Judge Bench of the Delhi High Court, which
dismissed the suit filed by the appellant for specific performance and damages but ordered a
refund of earnest money. The appeal was then filed by the DDA in the Division Bench of the
Delhi High Court which set aside the order of the Single Judge in the favour of DDA. Then
the final appeal was filed by Kailash Nath associates against the order of the Divison Bench
in the Supreme Court

21 Delhi Development Authority (Disposal of Developed Nazul Land) Rules, 872, GSR 73, 73-115 (1981):
in exercise of the powers conferred by the clause (j) of sub-section (2) of section 56, read with sub-section (3).
of section 22 of the Delhi Development Act, 1957 (61 of 1957), the Central Government hereby made the
following rules providing for the manner of dealing with Nazul and developed by or under the control and
supervision of the Delhi Development Authority.
22 SeeDelhi Development Authority (Disposal of Developed Nazul Land) Rules, 872, GSR 73, 73-115 (1981) :
where in section 2(i) it has been stated that “Nazul land means the means the land placed at the disposal of the
Delhi Development Authority and developed by or under the control and supervision of the Delhi
Development Authority under section 22 of the Delhi Development Authority Act, 1957.

8
ISSUES RAISED

I. Whether or not in this case there could be a extension of time for performance of
contract by the promise?
II. Whether or not Article 1423 would apply in the field of contract in this case?
III. Whether there was any breach of contract by the appellant in this case?
IV. Whether or not Section 74 of the Indian Contract Act, 1872 will apply in cases of
of forfeiture of earnest money?
V. Whether or not Section 74 of the Indian Contract Act, 1872 requires the aggrieved
party to prove that actual loss or damage has occurred?

THE DECISION IN KAILASH NATH ASSOCIATES VS DDA AND ITS CRITICAL

ANALYSIS

Kailash Nath Associate’s application was filed before the Supreme Court under Article 13224
of the Indian Constitution which deals with the appellate jurisdiction of the Supreme Court.
In a judgement delivered on January 9, 2015 the court affirmed the judgement given by the
Single Judge of the Delhi High Court 25 and reversed the judgement of the Division Bench of
the High Court26, saying that the Division Bench has gone wrong in principle as there has
been no breach of contract by the appellant, as no contract had come into existence. Further,
the fact that the DDA made a profit from re-auction was not irrelevant, as the compensation
could be only given for damage or loss suffered. If damage or loss is not suffered, the law
does not provide for a windfall.27 This court held that it would be arbitrary for DDA to forfeit
the earnest money on two fundamental grounds. As stated in the terms and conditions of the

23
INDIA CONST. art.14.
“The state shall not deny to any person equality before the law or the equal protection of laws within the
territory of India”
24 INDIA CONST. art.132, cl.1.
“An appeal shall lie to the Supreme Court from any judgement, decree or final order of a High Court in the
territory of India, whether in a civil, criminal or other proceeding, [if the High Court certifies under article
134A] that the case involves a substantial question of law as to the interpretation of this constitution”.
25
Kailash Nath Associates vs DDA, 2007 SCC OnLine Del 1229.
26 DDA vs Kailash Nath & Associates, 2012 SCC OnLine Del 3091.

9
27 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

10
auction, earnest money could be forfeited only “in case of default, breach or non-compliance
of any of the terms and conditions of the auction or misrepresentation by the bidder and/or
intending purchaser.”28

The first ground is that there was no breach of contract as the DDA extended time twice by
setting up High-Powered Committees and the consent was also provided by the appellant to
pay the remaining amount with an interest of 18% on the said amount and despite this fact the
respondent never insisted upon the payment of balance bid amount.

Apart from this, regarding the issue that whether or not in this case there could be an
extension of time for performance of the contract, the Supreme Court relied on two earlier
judgements of the court. In the case of Citi Bank N.A. v. Standard Chartered Bank29 the
Supreme Court held that “Under Section 6330, unlike Section 6231, a promisee can act
unilaterally and may dispense with wholly or in part, or remit wholly or in part, the
performance of the promise made to him, or may extend the time for such performance, or
may accept instead of it any satisfaction which he thinks fit.”32 Similarly in the case of
S.Brahmanand v. K.R. Muthugopal33 the court held that “……….there is nothing strange in
time of performance being extended, even though originally the agreement had a fixed date.
Section 63 of the Contract Act, 1872 provides that every promisee may extend time for the
performance of the contract. Such an agreement to extend time need not necessarily be
reduced to writing……...in some cases, even by evidence of conduct including forbearance
on the part of the other body…..”34. In order to understand the court’s stand on this let us

28 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

29 Citi Bank N.A v. Standard Chartered Bank, (2004) 1 SCC 12.
30
Section 63, The Contract Act, 1872, No. 9.
“Every promisee may dispense with or remit, wholly or in part, the performance of the promisee made to him,
or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.”

31
Section 62, The Contract Act, 1872, No. 9.
“If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract,
need not be performed”.
32
Citi Bank N.A v. Standard Chartered Bank, (2004) 1 SCC 12.
33 S.Brahmanand v. K.R. Muthugopal, (2005) 12 SCC 764.
34 S.Brahmanand v. K.R. Muthugopal, (2005) 12 SCC 764.

11
refer another case, Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd.35 In which the
court held: “............that both buyer and the seller must agree to extend time for the delivery
of the goods. It would not be open to the promisee by his unilateral act to extend the time for
performance of his own accord for his own benefit.” 36 But in the present case37 as pointed out
by the apex court the position is different, as the appellant is the promisor and the DDA is the
promisee. In such a situation, DDA can certainly unilaterally extend the time for payment
under the Section 63 of the Contract Act as the time for payment is not for DDA’s own
benefit but for the benefit of the appellant.

The second ground on which it was arbitrary for DDA to forfeit the earnest money as DDA
was not put to any loss and even if DDA could insist on a contractual stipulation in its favour,
it would be arbitrary to allow DDA as a public authority to forfeit Rs.7800000 without any
loss being caused to it. The Supreme Court decided that Article 14 of the Indian Constitution,
would apply in the field of contract in this case and the apex court reversed the finding of the
Delhi High Court. The Delhi Court in its judgement had stated “… reasonableness in state
action is a facet of Article 14 of the Constitution of India and in the field of contract would
have considerable play at the pre-contract stage. Once parties have entered into a contractual
obligation, they would be bound by the contract ”38 The Delhi High Court relied on the
Supreme Court’s decision in T.P. Daver v. Lodge Victoria39 but the Supreme Court stated that
T.P Daver v. Lodge Victoria40 is not an authority of Article 14 at all because it deals with
clubs and the fact that rules or bye-laws which bind members of such club have to be strictly
adhered to. The Supreme court while deciding that Article 14 will be applied in this case
referred to its judgement in Shrilekha Vidyarthi v. State of U.P41. in which the court held
“…… the impact of every state action is also on public interest it is really the nature of its

35 Keshavlal Lallubhai Patel v. Lalbhai Trikumal Mills Ltd., 1959 SCR 213.
36 Keshavlal Lallubhai Patel v. Lalbhai Trikumal Mills Ltd., 1959 SCR 213.
37
Kailash Nath Associates v. DDA, (2015) 4 SCC 136.
38 DDA vs Kailash Nath & Associates, 2012 SCC OnLine Del 3091.
39
T.P Daver v. Lodge Victoria , (1964) 1 SCR 1.
40 T.P Daver v. Lodge Victoria , (1964) 1 SCR 1.
41 Shrilekha Vidyarthi v. State of U.P, (1991) 1 SCC 212.

10
personality as state which is significant and must characterize all its actions, in whatever
field, and not the nature of function, contractual or otherwise……the requirement of Article
14 being the duty to act fairly, justly and reasonably, there is nothing which militates against
the concept of requiring state always to act, even in contractual matters.” 42 Based on this the
court decided that once the State or an instrumentality of state is a party to the contract, it has
an obligation in law to act fairly, justly and reasonably.

Based on these observations the court decided in favour of the appellant and restored the
order of the Single Judge of the Delhi High Court that the decision of DDA to forfeit the
earnest money was arbitrary and the court directed the DDA to refund the earnest money
along with an interest of 9% per annum.

THE LARGER PICTURE: COURT’S INTERPRETATION OF SECTION 74 OF

THE CONTRACT ACT, 1872 AND ITS IMPLICATIONS

Contracts often contain a stipulation or a clause that specifies the amount of money a
defaulting party is required to pay to the other party in the event of a breach of contract.43
Section 74 of the Indian Contract Act, 1872 deals with the cases that provide for a stipulation
to be paid in case of a breach of contract.

The main issue in this case was regarding the interpretation of Section 74 of the Contract
Act, 1872 is that whether or not this section requires the plaintiff to prove loss. In this order,
court seems to have interpreted the phrase in the Section 74 in the Contract Act, 1872
“whether or not actual loss is proved to have been caused thereby” in a contrasting light as
opposed to the interpretation adopted in the earlier cases. In order to critically analyze it let
us understand the court’s stand on the Section 74 in the earlier cases and then understand the
interpretation of the court regarding this section in this case. The researcher has also
discussed some of the

42 Shrilekha Vidyarthi v. State of U.P, (1991) 1 SCC 212.

11
43 http://docs.manupatra.in/newsline/articles/Upload/30C28D5D-262B-4A4A-AE17-C4D86F92BCE0.pdf.

12
subsequent judgements which have followed the same reasoning as adopted by the court in
Kailash Nath Associates v. DDA.44

JOURNEY FROM THE FATEH CHAND CASE

In the Fateh Chand Case45, the court had held that Section 74 of the Contract Act, 1872
“…….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 breach…….”46.

Also in Maula Bux v. Union of India47 the court had a similar opinion and it held that “….it is
true that in every case of breach of contract the person aggrieved by the breach is not required
to prove actual loss or damage suffered by him before he can claim a decree, and the court is
competent to award reasonable compensation in case of breach even if no actual damage or
loss is proved to have been suffered in consequence of breach….”.48

So from these judgements it can be inferred that there is no emphasis on proving the actual
loss suffered by the party. Another case, ONGC Ltd. V. Saw Pipes Ltd.49 in which the court
was of the view that “ Section 74 is to be read along with Section 7350 and, therefore, in every
case of breach of contract, the person aggrieved by the breach is not required to prove actual

44 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

45 Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515.
46
Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515.
47 Maula Bux v. Union of India, (1969) 2 SCC 554.
48
Maula Bux v. Union of India, (1969) 2 SCC 554.
49 ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705.
50 Section 73, The Indian Contract Act, 1872, No.9.
“Compensation for loss or damage caused by breach of contract.—When a contract has been broken, the party
who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for
any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach,
or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the
breach.
Compensation for failure to discharge obligation resembling those created by contract.—When an obligation
resembling those created by contract has been incurred and has not been discharged, any person injured by the
failure to discharge it is entitled to receive the same compensation from the party in default, as if such person
had contracted to discharge it and had broken his contract.”

13
loss or damage suffered by him before he can claim a decree. The court is competent to
award reasonable compensation in case of breach even if no actual damage is proved to have
been suffered in consequence of the breach of the contract”51

Therefore, the Section 74 is only supplementary to Section 73 and it does not make any
departure from the principle behind both sections in regard to the basic philosophy
underlining the sections, that in case of a breach, the aggrieved party must be compensated
and restored to a position it would have been in, had the contract been performed, that means
the party complaining of the breach is entitled to succeed only on proof of ‘legal injury’
having been suffered by him in the sense of loss or damage having been sustained on account
of such breach.52 Similar reasoning was given by the Division Bench of Kerela High Court in
a judgement in State of Kerala v. United Shippers and Dredgers Ltd.53 in which the High
Court held that “ ……that the party complaining of breach of contract and claiming
compensation is entitled to succeed only on proof of "legal injury" having been suffered by
him in the sense of some loss or damage having been sustained on account of such breach, is
clear from Section 73 and 7554 of the Act……”.55

From these judgements it is inferred that it is sufficient for the aggrieved party to merely
show that damage or hurt has been occurred and then it is for the court to determine the
extent of loss suffered and then by applying the common man prudence test, award
reasonable compensation, subject to the maximum stipulation provided in the contract itself.

51
ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705
52 2
FREDRICK POLLOCK & DINSHAW FARDUNJI MULLA, THE INDIAN CONTRACT AND SPECIFIC
RELIEF ACTS 1295 (Nilima Bhadbhade ed., Lexis Nexis 2016)
53
State of Kerala v. United Shippers and Dredgers Ltd., AIR 1982 Ker. 281
54 Section 75, The Indian Contract Act, 1872, No.9
“Party rightfully rescinding contract, entitled to compensation.—A person who rightfully rescinds a contract is
entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract.”
55 State of Kerala v. United Shippers and Dredgers Ltd., AIR 1982 Ker. 281

14
THE INTERPRETATION OF SECTION 74 IN KAILASH NATH V. DDA

The position of law seemed to be clear in the earlier cases regarding Section 74 of the Indian
Contract Act,1872 that the section requires the party complaining of breach to show legal
injury but it does not intend for the aggrieved party to prove actual loss or the extent of loss
suffered by it before it could claim a decree for the award of reasonable compensation from
the court. The main problem is with the interpretation of the phrase in Section 74 “whether or
not actual loss or damage is proved to have been caused thereby”.56 In this case the court has
interpreted the phrase in a contrasting light as opposed to the interpretation adopted by the
court in the earlier cases. The court in this case held that : “…… 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.”57 Apart from this
another question before the court was that whether Section 74 will apply to cases of forfeiture
of earnest money under a contract. Regarding which the court held that “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,
this section would have no application”.58 This reasoning was adopted by the court because if
we see the Section 74 it says; “ When a contract has been broken…..” , that means it will only
be applied only when an agreement has been reached.

The Hon'ble Apex Court in Kailash Nath v. Delhi Development Authority59 laid down the
guidelines for determining whether parties are entitled to 'liquidated damages or reasonable
compensation'. For the sake of brevity the basic principles are summarized below:

56 Section 74, The Indian Contract Act, 1872.

57
Kailash Nath Associates v. DDA, (2015) 4 SCC 136.
58 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.
59 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

15
a) Sum named in the contract is payable as the liquidated damages only if it is 'genuine pre-
estimate of damages' otherwise the parties is entitled to only reasonable compensation not
exceeding the fixed sum mentioned in the contract;

b)If any penalty is stipulated in the contract then only reasonable compensation is awarded
not exceeding the amount so fixed for the penalty;

c) In case the court decides to award reasonable compensation, the basic principles of Section
73 shall apply in assessment of compensation;

d) Proof of damage or loss is a sine qua non60 for grant of reasonable compensation under
Section 74 and such proof is dispensed only if damages are difficult or impossible to prove
and liquidated damages are genuine pre-estimate of damages.

Thus, the employer is entitled to claim Liquidated Damages only if the court/arbitrator finds
that these are genuine pre-estimate of damages otherwise he will be entitled only for
reasonable compensation assessed according to the well settled principles of Section 73.61

SUBSEQUENT JUDGEMENTS

There are many judgements of recent times in which the courts have placed their reliance on
the judgement of the Supreme Court in Kailash Nath Associates v. DDA62. Recently
in Raheja Universal Pvt. Ltd.v. B.E. Bilimoria & Co. Ltd.63, the Bombay High Court
elaborated on the scope and implications of liquidated damages under Section 74 of the
Indian Contract Act 1872 and concluded that the actual loss or injury has to be proved for
claiming liquidated damages, and such proof may be exempted when it is not possible to do

60 See:https://www.merriam-webster.com/dictionary/sine%20qua%20non.
Sine qua non is a latin maxim which means “something absolutely indispensable or essential”
61
http://www.mondaq.com/india/x/678638/Contract+of+Employment/
Emerging+Judicial+Trends+In+The+Enforceability+Of+International+Arbitral+Awards+In+India.
62 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.
63 Raheja Universal Pvt. Ltd. v. B.E. Bilimoria & Co. Ltd., (2016) 3 AIR Bom R 637.

16
so, provided that such liquidated damages are a genuine pre-estimate of loss.64 In this case the
division bench of the high court relied on the judgement of the Supreme Court in Kailash
Nath v. DDA65 and held that the appellant had not led any evidence to support its claim for
liquidated damages, and in absence of any evidence he will not be granted any liquidated
damages.

CONCLUSION

The judgement of the court is not the best example of how courts can or should address the
question that whether damages are to be provided in cases of breach and how Section 74 is to
be interpreted. The Indian law on liquidated damages has been less than clear on several
aspects. This decision does not do much to clear the air and there are several issues that still
need clarity and discussion. First of all this case was a clear cut case to be decided as first of
all DDA was performing a public duty and it was unreasonable on the part of DDA to forfeit
the earnest money as no loss was occurred to them. Apart from that fault was on the part of
DDA as despite the fact that appellant consented to pay the remaining amount with interest
no date was given by the DDA to pay the said amount. It was DDA’s fault as it again and
again extended the time and they were only not clear as to whether the land is a Nazul land or
not.

The court while interpreting Section 74 did not answer, as to how does a court determine that
whether the liquidated amount is a genuine pre-estimate of damages?, as parties deem such a
provision to be efficient in case of litigation, since liquidated damages is more or less a short
cut to proving damages in case of breach of contract. In such a scenario, what precisely does
the promisee will have to show in order to establish that the liquidated amount is a genuine
pre-estimate of damages. It should not be as rigorous as it is in Section 73. In practice,
however, does this not mean that the promisee is forced to show that the liquidated amount is
reasonable, especially in the absence of pointers from the court on whether and how should

64 http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/a-

liquidated-damages-clause-does-not-oust-the-need-to-prove-the-loss-bombay-hc.html?
no_cache=1&cHash=192085dae1d2b084d45cc213192b78eb.
65 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

17
the promisee establish this? In other words, the court in the present case and even in earlier
cases is not clear whether the parameters for establishing reasonableness of the liquidated
amount ex-post the breach (refer Section 73) is the same as those for establishing the
liquidated amount to be a genuine pre-estimate and reasonable ex-ante the breach (refer
Section 74). If the distinction is unclear or non-existent, Section 74 virtually becomes
redundant as this section seeks to rationalize and simplify the law on party agreed damages.

Even though the decision reasonably addresses questions in the specific facts of the case and
slightly changes the interpretation of Section 74 by making it more explicit but in the larger
picture it fails to decide that whether the Indian courts retain equitable jurisdiction to grant
relief against penalty clauses even if section 74 does not apply in terms. There is some
support in the early cases for this proposition, but the Supreme Court in Kailash Nath
Associates v. DDA 66appears to have assumed that this jurisdiction does not exist. It was, of
course, unnecessary to decide this point given the question before the court; and its
observations can therefore be treated as obiter. But the point remains unresolved in India and
it is one that warrants close consideration.

"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements
for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are
found to be correct, the cause is served; and if any are found to be incorrect the very process
of finding out my mistakes must lead to the discovery of the right reasons, or better reasons
than I have been able to give, and the cause is served just as well.”67

66 Kailash Nath Associates v. DDA, (2015) 4 SCC 136.

67 HM Seervai, Preface to 1st ed., Constitutional Law of India

18
ANNEXURE

1. Name of the Case Kailash Nath Associates v. Delhi Development Authority

(2015) 4 SCC 136.

2. Composition of the Bench Division Bench

Name of the Judges Ranjan Gogoi and Rohinton Fali Nariman

3. Area of Law Contract Law

4. Brief Facts of the Case The earnest money deposited by Kailash Nath
Associates was forfeited by the Delhi Development
Authority on the ground that there was a breach of
contract by Kailash Nath Associates. Kailash Nath
Associates filed a suit for damages and the return of the
earnest money in the single judge bench of the Delhi
High court in which the judge dismissed the suit for
damages but ordered the DDA to return the earnest
money with interest. Then the appeal was filed by DDA
in the division bench of High Court which overturned
the decision of the single judge. Then the present appeal
was filed against the decision of the division bench in
the Supreme Court

5. Jurisdiction Article 132 of the Indian Constitution

6. Question of Law Whether the Delhi Development Authority was justified

in forfeiting the earnest money of Kailash Nath
Associates.

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7. Reliance on Relevant Indian Law of Contract, 1872

1. Statutes Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515

2. Cases Kailash Nath Associates vs DDA, 2007 SCC OnLine Del

1229.
DDA vs Kailash Nath & Associates, 2012 SCC OnLine
Del 3091.
Citi Bank N.A v. Standard Chartered Bank, (2004) 1
SCC 12.
S.Brahmanand v. K.R. Muthugopal, (2005) 12 SCC 764.
Maula Bux v. Union of India, (1969) 2 SCC 554.
ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705.
8. Legal issues of I. Whether or not in this case there could be a
Determination extension of time for performance of contract by
the promise?

II. Whether or not Article 14 would apply in

the field of contract in this case?

III. Whether there was any breach of contract by the

appellant in this case?

IV. Whether or not Section 74 of the Indian Contract

Act, 1872 will apply in cases of of forfeiture of
earnest money?

V. Whether or not Section 74 of the Indian Contract

Act, 1872 requires the aggrieved party to prove
that actual loss or damage has occurred?

9. Impugning the correctness I. Correct appreciation of the facts.

of the judgement on the
II. Correct appreciation of Law.
ground of
10 Question of interpretation I. Statutory provisions
.
of
II. Law of contracts

20
11 Federal disputes on Fact or I. Section 74 of the Indian Contract Act, 1872.
.
Law
II. Law of Contracts.
12 Methodology of Judging The facts of the case were verified.
.
the issues involved
13 The opinion of the Court Section 74 will apply to cases of forfeiture of earnest
.
money under a contract. Where, however, forfeiture
takes place under terms and conditions of a public
auction before agreement is reached, Section 74 would
have no application.

Under Section 74 compensation is only to be provided

only if actual loss or proof is proved and in cases in
which it is not able to prove
14 Ratio of the majority Upheld the decision of the Single Judge of the Delhi
.
opinion High Court and reversed the judgement by Division
Bench of the Delhi High Court, and the court ordered
the return of earnest money at the interest of 9 percent
per annum.
15 Whether the majority ruling Still holds good
.
in each issue
16 Whether the majority Just economic and legal order
.
decision is towards
establishing a
17 Student’s own remarks The supreme court was justified in ordering the Delhi
. Development Authority to return the earnest money with
interest to the appellants because it was unreasonable by
a public body like DDA to do that despite the fact that
no loss was caused to them and it was due to their delay
due to which the appellant was not able to complete the
contract.

20
REFERENCES

BIBLIOGRAPHY

Pollock and Mulla, The Indian Contract Act, Vol. 15 (Anirudh Wadhwa, 2015)

L.L. Fuller and Willian R. Perdue Jr., ‘The Reliance Interest in Contract Damages’ (1936) 46
Yale Law Journal 52

Fredrick Pollock & Dinshaw Fardunji Mulla , The Indian Contracts and Specific Relief Act
1295 (Nilima Bhadbhade ed., Lexis Nexis 2016), Vol. 2

HM Seervai, Preface to 1st ed., Constitutional Law of India

WEBLIOGRAPHY

www.docs.manupatra.in
www.scconline.in
http://www.nishithdesai.com
www.mondaq.com
www.merriam-webster.com
www.heinonline.org

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