Judgement Briefs

Contract Law

Fateh Chand v. Balkishan Das

AIR 1963 SC 1405; [1964] 1 SCR 515

Citation
AIR 1963 SC 1405; [1964] 1 SCR 515
Court
Supreme Court of India
Date
1963
Bench
J.C. Shah and other JJ

Facts

  • Fateh Chand agreed to sell immovable property to Balkishan Das.
  • Balkishan paid ₹25,000, consisting of:
  • ₹1,000 described as earnest money;
  • ₹24,000 as part payment.
  • The agreement permitted forfeiture if the purchaser failed to complete.
  • The purchaser obtained possession but did not complete the sale.
  • The seller resumed possession and sought to retain the entire ₹25,000.
  • The seller did not prove substantial financial loss caused by the purchaser’s breach.

Issue

  • Whether the seller could automatically forfeit the full contractual amount.
  • How Section 74 applies to stipulated sums and forfeiture clauses.

Rule

  • Section 74 applies whenever a contract names an amount payable or imposes a penalty upon breach.
  • The court may award reasonable compensation, not exceeding the stipulated amount.
  • The stipulated sum is the maximum, not an automatic entitlement.
  • The court must consider actual loss where it can be proved.
  • Reasonable compensation cannot be awarded arbitrarily.
  • Genuine earnest money may sometimes be forfeited, but a large part-payment cannot simply be retained as a penalty.

Application

  • The ₹24,000 was part of the purchase price rather than genuine earnest money.
  • Allowing its complete forfeiture would impose a substantial penalty.
  • The seller had recovered possession and did not prove that the property’s value had fallen or that resale caused substantial loss.
  • Section 74 required the court to determine reasonable compensation rather than mechanically enforce the contractual wording.
  • The fact that breach occurred did not itself establish the full loss claimed.
  • The Court allowed compensation connected with the purchaser’s use or occupation of the property, but refused arbitrary forfeiture unrelated to demonstrated injury.
  • Indian law therefore differs from the old English distinction between penalties and liquidated damages: Section 74 governs both and centres on reasonable compensation.

Conclusion

  • The seller could not retain the entire ₹25,000.
  • Only reasonable compensation connected with proved loss could be awarded.
  • Use this case for: a stipulated sum under Section 74 is only the ceiling; the court awards reasonable compensation.