CASE DETAILS

  • Full Name of the Case: M/S Kailash Nath Associates V. Delhi Development Authority & Anr.
  • Court: Supreme Court of India
  • Judges: Justice Ranjan Gogoi and Justice Rohinton Fali Nariman
  • Citation: Civil Appeal No. 193 of 2015 [1]
  • Date decided: 9th January, 2015

INTRODUCTION

The judgment in the case of M/S Kailash Nath Associates V. Delhi Development Authority & Anr. impacted the Law of Contracts in India to a large extant. This judgment became prominent due to its curious and notable subject matter. Its decision was given by the Supreme Court of India.

FACTS

A plot of land referred to as ‘Plot 2-A’ situated in New Delhi was auctioned publically by the Delhi Development Authority (herein referred as DDA), the appellant- Kailash Nath Associates made the highest bid for a sum of Rs. 3.12 Crores. As per the terms of the auction, the appellant was asked to deposit 25% of the bidding amount to DDA, either in cash or by Bank Draft. The receipt of such money was acknowledged by DDA on February 18th, 1982, and the bid was hereby accepted also the appellant was directed to pay the remaining amount, i.e. 75 % by May 17th, 1982. However, in May 1982 the appellant sought to extend the time period of payment, due to the general recession in the industry; to this DDA on recommendations of High Power Committees an extension the period for payment was granted till October 1982 with along with the rate of interest of 18% p.a. which could reach up to 36% p.a. Further, DDA refrained from answering to the attempts of the appellant to contact the DDA between the time periods of 1984-87 and thereby the plot was re-auctioned at an amount of Rs. 11.78 Crores. 

The appellant approached Delhi High Court to seek refund of the earnest amount along with specific performance, to which an order was passed by the High Court for the reimbursement of the earnest amount and rejected the demand for specific performance. But the appeal to the Division Bench of the High Court reversed the decision of the Single Bench, and rejected the plea to refund the earnest amount.

Ultimately, the Supreme Court stated that there was no breach of contract from the part of the appellant for which no penalty can be imposed in the form of forfeiture of the earnest amount under section 74 of the Indian Contracts Act, 1872. 

ISSUES

  1. Whether time is an essence of contract between parties in the said case, and does it remain so throughout the performance of the terms? Or when extension is sought for performance?
  2. Whether Section 74 of the Act, 1872 can be applied to contracts demanding forfeiture of earnest money upon breach of the terms of the contract?
  3. Whether Article 14 of the Indian Constitution applies to a body like the DDA, as it represents itself as a party to the contract in the present case?

ANALYSIS

APPELLANT’S ARGUMENTS

Following arguments were presented by the learned senior councils of the appellant:

  1. That time as an essence may have been one of the condition of the auction. But, time had been extended on several instances, hence, ceased to be of the essence.
  2. That as a reply to the letter dated December 1st, 1987, the appellant submitted it would be willing to pay the remaining 75% amount with 18% interest rate, and hence, there was no breach of contract on the part of the appellant.
  3. That because the respondent sold the said plot for Rs. 11.78 Crores, no loss was suffered by the respondent. Therefore, the forfeiture of earnest money would not be in accordance with the law and the agreement.

RESPONDENT’S ARGUMENTS

Following arguments were presented by the learned senior councils of the respondents:

  1. That contentions made by the appellant are rebutted. And that a reference was made in the judgment of Shree Hanuman Cotton Mills and Anr. V. Tata Aircraft Ltd.[2]. 
  2. That the respondent sold the plot for a larger sum of money, would be irrelevant in as much as the contractual term agreed upon between parties would entitle him to forfeit earnest money on breach without any necessity of proving actual loss.
  3. That as the Central Government found that the disputed plot was not a Nazul land, the letter dated December 1st, 1987 was based on a mistake of fact and would be void under section 20[3]. On March 1st, 1990, the Central Government informed the respondent that the plot involved in the present case is not a Nazul land, and hence, the respondent by its letter of October 6th, 1993, cancelled the allotment of the plot as the appellant failed to deposit the balance 75% amount, which was accepted to by the Respondent immediately on the same date.
  4. That the respondent (DDA) is a public body which is bound by Article 14 [4] and hence, it cannot behave arbitrarily.

JUDGMENT

Following was held by the judges hearing this case; they also referred to certain precedents:

  1. That there was no breach of contract on part of the appellant since the letter of cancellation of the bid and subsequent forfeiture was made at the behest of the respondent (DDA), without notice to the appellant to deposit the remainder of the purchase amount, i.e. 75%. Hence, the earnest money was not to be forfeited as no breach of contract arose.
  2. It was referred to the judgment in Anandram Mangturam v. Bholaram Tanumal[5], that if time was an essence of a contract, then it can be waived only when both the parties consent to such waiver, reaching consensus ad idem.
  3. That respondent was the promisee and the appellant was the promisor, the respondent had a freedom to unilaterally extend the period of the payment as the benefit accrued to the promisor directly in the situation of general recession as claimed by the appellant.
  4. It was referred to the judgment in Keshavbhai Lallubhai Patel and Ors. v. Lalbhai Trikumlal Mills Ltd.[6], time could not be extended to make payment for the purchase without both the parties, namely the buyer and seller agreeing to such extension. However, this would apply only if the benefit of the extension accrues to the promisee.
  5. That section 74[7] shall be applicable in the cases of forfeiture of earnest money. There exists no breach of contract on the part of appellant and the fact that the respondent suffered no loss but made a whopping profit out of the transaction is irrelevant. The law does not provide for a windfall in case of breach when no damages are suffered by one of the parties to the contract.[8]
  6. That the provision of article 14[9] shall be applicable upon the respondent, as the article deals in eliminating any kind of arbitrariness from the administration, and provide equal, just, and fair treatment to everyone.

CONCLUSION

The judgment in the case of M/S Kailash Nath Associates V. Delhi Development Authority & Anr., delivered by the Supreme Court of India, is related to Law of Contracts. The judgment was well put together and has successfully sets a benchmark to estimate the damages in recognition of the breach of a contract; however, the underlying implications of the judgment have become an evergreen subject of debate in commercial circles.

RESOURCES

[3] Indian Contract Act, 1872

[4] Right to Equality in Indian Constitution

[6] 1958 AIR 512, 1959 SCR 213 https://indiankanoon.org/doc/3413/

[7] Indian Contract Act, 1872

[9] Right to Equality in Indian Constitution


About the Author: This Case Brief is prepared by Ms. Arushi Jain, law student at Jagran Lakecity University. She can be reached at arushijain3@yahoo.com 

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