Fateh Chand v. Balkishan Dass

Facts

Balkishan Das agreed to sell his rights in land and a building to Fateh Chand. Rs 1,000 was paid as earnest at the agreement. The buyer paid a further Rs 24,000 as first instalment and took possession; he was to register the sale deed within two months and then pay the balance of Rs 87,500. The agreement provided that if registration was delayed the contract was cancelled, the buyer would return possession, and the Rs 24,000 would be forfeited. On the buyer's default the seller sought to forfeit Rs 25,000.

Issues

• Whether the seller could forfeit the entire Rs 25,000, or only the Rs 1,000 earnest, on the buyer's breach.
• Whether Section 74 applies to a stipulation for forfeiture of money already paid, and to what compensation the seller is entitled.

Arguments

The seller contended the whole Rs 25,000 was earnest and forfeitable, and that the forfeiture clause should be enforced as agreed. The buyer contended only Rs 1,000 was true earnest; the Rs 24,000 was part of the price, and the forfeiture clause was a penalty enforceable only on proof of actual loss.

Held

The Supreme Court held that Section 74 deals with both a named sum payable on breach and any other stipulation by way of penalty, and the measure in either case is reasonable compensation not exceeding the stipulated sum. The expression 'any other stipulation by way of penalty' comprehensively covers forfeiture of money or property already delivered, not merely sums to be paid. The court has a statutory duty not to enforce the penalty but to award only reasonable compensation according to settled principles, subject to the stipulated ceiling. As the seller proved no loss, no damages were due and the forfeited Rs 24,000 had to be returned.

Ratio decidendi

Under Section 74, where a contract stipulates a penalty (including forfeiture of sums already paid), the court can award only reasonable compensation not exceeding the stipulated amount, and the named sum is merely the upper limit, not an automatic entitlement.

Significance

The leading Supreme Court authority on Section 74 and penalty/liquidated-damages clauses in India. It abolished the English distinction in operation by making the named sum a ceiling on reasonable compensation, and extended Section 74 to forfeiture of money already paid. Foundational precedent followed and refined in Maula Bux v. Union of India and ONGC v. SAW Pipes Ltd.

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