SECTION 74, INDIAN CONTRACT ACT, 1872: APPLICATION AND ANALYSIS IN THE LIGHT OF KAILASH NATH ASSOCIATES V. DDA

THIS ARTICLE WAS WRITTEN BY ARNAV SHASTRI, A STUDENT OF SYMBIOSIS LAW SCHOOL, PUNE.

INTRODUCTION

The following article is a critical analysis of Section 74 of the Indian Contract Act, 1872 which talks about liquidated damages to be awarded upon the breach of contract. The article does the same with respect to the application of the section in the curious case of Kailash Nath Associates v Delhi Developmental Authority. In addition to this, the article also differentiates the application of the same section in other cases with similar case facts. To conclude the article also provides insight so as to how the case and different applications of Section 74 established precedence for future cases.                                      

WHAT WAS THE CASE OF KAILASH NATH AND ASSOCIATES V. THE DELHI DEVELOPMENTAL AUTHORITY?

The appeal by Kailash Nath and Associates arose out of a public auction conducted by the Delhi Development Authority(DDA) for a plot at Bhikaji Cama Place, New Delhi. The highest bid put forth was of Rupees 3.12 Crores by the appellant. As mentioned in the terms and conditions by the auctioneer the appellant deposited a sum of Rupees 78 Lakh; 25% of the bid amount, with the Delhi Development Authority, the 78 Lakh being the earnest money to be deposited in case the bid is accepted. One of the terms and conditions also stipulated that in case of any non-compliance or misrepresentation by the bidder the earnest money shall be forfeited.

The DDA acknowledged the receipt of 78 Lakh rupees. DDA accepted the bid and also directed the appellant to deposit the remaining 75% of the amount by 17-05-1982. The appellant could not meet the deadline owing to the fact that there was a recession in the industry. The appellant made representations for the same to the DDA to further shift the deadline. DDA set up a High Order Committee to look into the representations made by the appellant. The committee found the representations made right and hence an extension was given by the DDA to the appellant to deposit the remaining 75% of the amount on 28-10-1982 with the rate of interests varying from 18% to 36%. The second deadline also could not be met by the appellant due to the ongoing recession. A second committee was set up to look into the matter and check the varsity of the claims made. The second-High Order Committee also found the representations to be true and suggested a furthered extension. The DDA this time did not respond to the appellant with any decision with regard to a particular date even after a number of reminders given by the appellant during the course of 3 years. On 1-12-1987  a letter addressed to the appellant stated that they failed to deposit the remaining 75% of the amount and henceforth the earnest money deposited is forfeited. The reason stated is the breach of the terms and conditions laid down by the DDA.

    ISSUES RAISED IN THE COURT

Whilst the hearing, there were several issues raised in the court, which included:-

• Whether Section 74 of the Indian Contract Act requires the representation of legal damages in all cases?
• Can the case take precedence from similar cases from the past and do the same rule of law applies to the case after considering the current facts?
• Does the case dilute the judgments passed in the ONGC v Saw Pipes[1] and Maula Bux v Union of India[2]?

SECTIONS IN CONTENTION

Section 73 Indian Contract Act 1872:

“Compensation for loss or damage 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.”[3]

Section 74 Indian Contract Act 1872:

“Compensation for breach of contract where the penalty is stipulated for- 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.”[4]

Section 75 Indian Contract Act 1872:

“Party rightfully rescinding to 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-fulfillment of the contract.”[5]

APPLICATION OF SECTION 74 IN KAILASH NATH ASSOCIATES V DDA AND OTHER CASES IN MUTATED CIRCUMSTANCES

Section 74 of the Indian Contracts Act 1872 deals with the area of liquidated damages. After examining the case Kailash Nath Associates v DDA, we observe that Section 74 of the Indian Contracts Act 1872 is applied differently in different cases only after due deliberations on the terms and conditions of the contract and facts of the case.

One of the decisions that saw the application of Section 74 was the case of Fateh Chand v Balkishan Das[6] (Fateh), where the court ruled that if the LD Clause is in the nature of a penalty, a reasonable compensation that does not exceed the amount stipulated has to be awarded depending upon what the Court considers to be reasonable.

In another case that applied the same rule of law, Maula Bux v Union of India; the court ruled that the aggrieved party is not always required to prove actual damages to claim a decree for compensation by the Court[7]. Another point ruled was that if the court cannot assess the compensation, a genuine pre-estimate named by the party in the contract may be taken into consideration, but not if it is termed as a penalty.

The case of Saw Pipes v ONGC ruled that, when parties agree to a genuine pre-estimate, there may be no need to prove a loss unless the Court comes to the conclusion that there was not a legal injury by the party benefitted by the LD clause.

In the case of Kailash Nath v DDA after going through the facts the court held that it would be arbitrary of the DDA to forfeit the earnest money which was 25% of the total amount(78 Lakh rupees) as there was no breach of contract by the party at the first place. Since the DDA did not respond to a number of reminders sent by the appellant for a deadline to be mentioned therefore a breach of contract never occurred. Secondly, the DDA did not suffer any loss and even if they insisted on a contractual stipulation then too it would be arbitrary for a public authority like DDA to forfeit money without actual losses. The court was of the view that in this case, Section 74 just like Section 73 and Section 75 of the Indian Contract Act entitles damages only if there is a loss occurred due to breach of contract, which in this case was nowhere to be found. The Court also held that “…damage or loss caused is a sine qua non for the applicability of Section 74“.[8] Hence the pivotal requirement to apply Section 74 i.e., ‘breach of contract’ had not been satisfied in the case.

PRECEDENT ESTABLISHED BY KAILASH NATH AND ASSOCIATES V. DDA

Relying on the above facts it has been argued that after the ruling in the Kailash Nath case the law in Saw Pipes has undergone a change and it is no longer a “good law”[9].( arguments raised in MBL Infrastructure Ltd v. Ircon International Limited[10] and Ultratech Cement Limited v. Sunfield Resources Pty. Ltd[11]) But it is not so as the Kailash Nath case paved a new line of interpretation and application of Section 74.

 To sum up, as it can be seen from the analysis above that the case does not dilute the ruling in ONGC v Saw Pipes, whereas it further brings clarity to the application of Section 74 to cases dealing with the LD clause. The rule in Fateh Chand, Maula Bux, and Kailash Nath, that a party must prove its loss to recover damages cannot be applied in all the cases. In such cases, it would be anti-ethical to the clause of the pre-estimate damage if a penalty is being charged in case of a breach.

It could also be concluded that the case changed the manner in which Section 74 of the Indian Contract Act was interpreted and applied in the past. It opened a wider range of interpretations and showcased how different cases with almost similar facts can have a different ruling and all of it depends on the specific terms stipulated in the contract.

REFERENCES

1. Ballav J. and Padhi S.(2019) Bar and Bench-‘Did Kailash Nath dilute the Saw Pipes position?’
2. https://www.barandbench.com/columns/liquidated-damage-clauses-did-kailash-nath-dilute-the-saw-pipes-position
3. Mehta K. and Edupuganti S. (2020) Mondaq-‘The Curious Case of Section 74 of the Indian Contract Act.’
4. https://www.mondaq.com/india/contracts-and-commercial-law/950450/curious-case-of-section-74-of-the-indian-contract-act
5. Niranjan V. (2016) IndiaCorpLaw- ‘The Supreme Court on Penalties and Liquidated damages.’
6. https://indiacorplaw.in/2015/06/the-supreme-court-on-penalties- and.html
7. Section 74 Indian Contracts Act 1872.
8. Section 75 Indian Contracts Act 1872.
9. AIR 1963 SC 1405.
10. 2003) 5 SCC 705.
11. 1969 (2) SCC 554.
12. Section 73 Indian Contracts Act 1872

[1] (2003) 5 SCC 705.

[2]  1969 (2) SCC 554.

[3] Section 73 Indian Contracts Act 1872.

[4] Section 74 Indian Contracts Act 1872.

[5] Section 75 Indian Contracts Act 1872.

[6] AIR 1963 SC 1405.

[7]Ballav J. and Padhi S. ‘Did Kailash Nath dilute the Saw Pipes position?’, Bar and Bench, available at https://www.barandbench.com/columns/liquidated-damages-fateh-chand-maula-bux-saw-pipes.

[8]Niranjan V. (2016) ‘The Supreme Court on Penalties and Liquidated damages.’, IndiaCorpLaw,available at  https://indiacorplaw.in/2015/06/the-supreme-court-on-penalties-and.html.

[9] Mehta K. and Edupuganti S. ‘The Curious Case of Section 74 of the Indian Contract Act.’, Mondaq, available at https://www.mondaq.com/india/contracts-and-commercial-law/950450/curious-case-of-section-74-of-the-indian-contract-act.

[10]  MANU/WB/0438/2017.

[11]  MANU/MH/2733/2016.