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M/s. Kailash Nath Associates v. Delhi Development Authority & Anr.

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 193 of 2015)Decided 9 Jan 2015
Civil Appeal No. 193 of 2015
Justice Ranjan Gogoi · Justice Rohinton Fali Nariman

Background

The appellant won a public auction for a Delhi plot at Rs.3.12 crore and paid 25% as earnest money, but could not pay the remaining 75% on time due to an industry-wide recession. The Delhi Development Authority (DDA) itself repeatedly extended the payment deadline over several years through two High-Powered Committees, and in 1987 offered to accept the balance with 18% interest: an offer the appellant accepted the same day. Years later, with no further notice to the appellant, the DDA cancelled the allotment and forfeited the entire Rs.78 lakh earnest money, then re-auctioned the same plot for Rs.11.78 crore (nearly four times the original price).

Decision Breakdown

The Supreme Court held that since the DDA itself had repeatedly extended the payment deadline and never put the appellant on fresh notice of a final deadline before cancelling the allotment, there was no breach of contract by the appellant in the first place, so forfeiture under the auction's own terms was not justified. The Court also laid down a detailed framework on Section 74 of the Contract Act, holding that forfeiture of earnest money is itself a form of "compensation for breach" and is lawful only where actual loss or damage is shown (or is a genuine pre-estimate of loss), and since the DDA ultimately profited enormously by re-selling the plot, it had suffered no loss at all, making retention of the earnest money arbitrary and impermissible, particularly since the DDA, as a State authority, is bound by Article 14 to act fairly and reasonably even in contractual matters.

Lesson Learnt

A government authority cannot simply pocket forfeited earnest money as a windfall: compensation for breach of contract under Indian law requires either proof of actual loss or a genuine pre-estimate of loss, and a public body must act fairly and give proper notice before treating a long-running, mutually-extended deal as "breached."

Official source (sci.gov.in)View Judgment (PDF)

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