Valmiki J. Mehta, J, (Oral)

1. The challenge by means of this Regular First Appeal filed under Section 96 of the Code of Civil Procedure (CPC), 1908 is to the impugned judgment of the Trial Court dated 16.5.2011. By the impugned judgment, the Trial Court dismissed the suit of the appellant/plaintiff/proposed buyer for recovery of Rs. 10,00,000/- paid under an agreement to sell dated 4.11.2006 with respect to property bearing No. WZ-49B (admeasuring 300 square yards), Khasra No. 144-145, Village Palam, Delhi.

2. Learned counsel for the appellant/plaintiff has argued the appeal with reference to the Constitution Bench judgment of the Supreme Court reported as Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515 ; AIR 1963 SC 1405, wherein the Supreme Court has said that even if the buyer is guilty of breach of performance of an agreement to sell, however, seller cannot forfeit the earnest money received under the agreement to sell, as the forfeiture is hit by Section 74 of the Indian Contract Act, 1872 being in the nature of the penalty and forfeiture cannot take place unless loss is pleaded and proved by the seller. Paragraphs 8, 10, 15 and 16 of the judgment in the case of Fateh Chand (supra) are relevant and 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 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