Taj Mahal Hotel v. United India Insurance Co. Ltd
- 2022-02-17
Fateh Chand Balkishan Das
Citation: AIR 1963 SCC 1405
Judges: B.P. Sinha, C.J.,; J.C. Shah,; K.C. Das Gupta,; K.N. Wanchoo and; P.B. Gajendr
Facts:
By agreement dated March 21, 1949, the plaintiff contracted to sell leasehold rights in a piece of land and in the building constructed thereon to the defendant. The plaintiff received Rs. 25,000/- under the agreement and delivered possession of the building and the land in his occupation to the defendant, but the sale was not completed before the expiry of the period stipulated in the agreement, and for this default each party blamed the other. The plaintiff instituted a suit in the court of the Subordinate judge claiming to forfeit the amount of Rs. 25,000/- received by him, and praying for a decree for possession of the land and building and for compensation for use and occupation of the building from the date of delivery of possession to the defendant of the property. The defendant contended that the plaintiff having broken the contract could not forfeit the amount of Rs. 25,000/- received by him nor claim any compensation. The trial judge held that the plaintiff had failed to put the defendant in possession and could not therefore retain Rs. 25,000/- and accordingly directed that on the plaintiff depositing Rs. 25,000/- less Rs. 1,400/- the defendant do put the plaintiff in possession and awarded to the plaintiff future mesne profits at the rate of Rs. 140/- permitters from the date of the suit until delivery of possession. On appeal the High Court modified the decree of the trial court and declared that the plaintiff was entitled to retain out of Rs. 25,000/- paid by the defendant under the sale agreement, a sum of Rs. 11,250/- and directed that the plaintiff do get from the defendant compensation for use at the rate of Rs. 265/- per mensem.
Issue:
Judgement:
The Constitutional Bench was dealing with a clause in a sale deed which provided that, if for any reason the vendee fails to get the sale-deed registered by the date stipulated, the amount of Rs. 25,000 (Rs. 1,000 paid as earnest money and Rs. 24,000 paid out of the price on delivery of possession) would stand forfeited.
The above condition which provided for forfeiture of Rs 24,000 was considered by the 5 judge bench to be a stipulation in the nature of penalty rather than an liquidated damage. The Court held it to be covered under Section 74 of the Contract Act since it contains the phrase, “as the case may be, the penalty stipulated for.” The Court observed as follows:
“The expression if the contract contains any other stipulation by way of penalty widens the operation of the section so as to make it applicable to all stipulations by way of penalty, whether the stipulation is to pay an amount of money, or is of another character, as, for example, providing for forfeiture of money already paid.”
The Court speaking though JC Shah J went to rule that for an LD Clause which is in the nature of a penalty, reasonable compensation not exceeding the amount stipulated has to be awarded depending upon what the Court considers to be reasonable.
Also, while interpreting the phrase, “whether or not actual damage or loss is proved to have been caused thereby”, the Court held that it merely dispenses with the requirement of proof of actual loss or damages but nonetheless the necessity that there has been a legal injury suffered by the party is a prerequisite before awarding compensation under Section 74 of the Contract Act.
Analysis:
From a conjoint reading of the observations and rulings in the above decision of the Supreme Court, it can be stated that parties may be able to take benefit of an Liquidated Damages Clause and the requirement of proof that is strictly applicable to a Section 73 situation may not be applicable under an Liquidated Damages Claim particularly where the parties have expressly stated that the estimate of damages is a pre-estimate that is agreed between the parties and is not in the nature of a penalty.
