Contract Law

Kailash Nath Associates v. Delhi Development Authority

(2015) 4 SCC 136

Facts

DDA auctioned a plot to Kailash Nath Associates.
Kailash Nath paid earnest money.
DDA extended the time for payment of the balance price on several occasions.
Before the extended period had properly expired, DDA cancelled the allotment and forfeited the earnest money.
The plot was later re-auctioned at a substantially higher price.
DDA therefore did not suffer financial loss from the cancellation.
Kailash Nath challenged the forfeiture.

Whether earnest money could be forfeited without a completed breach and without loss.
What conditions govern Section 74 compensation?

Section 74 applies only where:
there is breach of contract; and
the claimant has suffered legal injury warranting compensation.
Reasonable compensation cannot exceed the stipulated amount.
Where loss is capable of proof, it should be proved.
A stipulated sum may be awarded without exact proof only where quantification is difficult and the amount is a genuine pre-estimate.
Forfeiture cannot become a source of unjust enrichment.
Earnest money may be forfeited only consistently with these principles.

DDA had repeatedly extended the payment period.
Its cancellation did not clearly follow an existing and established default at the relevant time.
More importantly, DDA later sold the property at a higher price.
It therefore suffered no market loss.
Retaining Kailash Nath’s deposit would give DDA an undeserved gain rather than compensation.
Section 74 does not permit payment merely because a contractual clause mentions forfeiture.
Breach and loss remain foundational.
The Court explained that “whether or not actual damage or loss is proved” does not mean compensation is payable where no loss exists.
It addresses evidentiary difficulty, not elimination of the compensatory principle.

The forfeiture was invalid, and the earnest money had to be returned.
Use this case for: Section 74 requires breach and legal injury; forfeiture is impermissible where no loss is suffered.