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THE NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

PROJECT
On
M/S. Kailash Nath Associates vs. Delhi Development Authority & Anr.
2015 (4) SCC 136.
submitted by
Manasvi Sharma
Enrolment Number: A-2755
Roll Number: 2024BALLB33
I Semester
B. A. LL. B. (Hons.)

submitted to
Asst. Prof. Dr. Mayank Tyagi
Date of submission:
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Declaration
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“I, Manasvi Sharma, D/O Richa Sharma, Roll Number 2024BALLB33, Enrolment Number
A-2755 do hereby declare that the Project titled M/S. “Kailash Nath Associates vs. Delhi
Development Authority & Anr.” is an outcome of my independent research and diligence has
been carried out under the guidance of Dr. Mayank Tyagi. In the footnotes and bibliography, I
have thoroughly recognized the literature that I used for the purpose of this research. The
project is not plagiarised, and every effort has been made to avoid plagiarism. According to
the Turnitin Report, the similarity index is __ percent. If my project is determined to be
plagiarised, the course teacher has complete authority to request that I alter it. If I do not
follow the teacher's directions, my project may be referred to the Committee Against the Use
of Unfair Means, and I will comply with the decision of the said Committee.”
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Acknowledgment
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“It is an honor and a privilege for me to express my gratitude to my teachers for their
insightful advice and helpful critique, which allowed me to refine and finish my project.
Their never-ending encouragement and wise counsel kept me on course throughout the entire
process. I'm grateful to Dr. Mayank, our Law of Contracts professor, for giving me this
amazing opportunity. Prof. (Dr.) Surya Prakash, vice chancellor of the National Law Institute
University, Bhopal, supplied the resources and facilities to us. I'd also like to express my
gratitude to the university's computer and library staff for helping us locate and choose books
from the library. Finally, I'd like to express my gratitude to my loved ones and friends for
their encouragement, love, and support throughout this effort.”
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Table of Contents
Declaration...........................................................................................................................................
Acknowledgment.................................................................................................................................
M/S. Kailash Nath Associates vs. Delhi Development Authority & Anr.,........................................
Background of the case.......................................................................................................................
Facts of the case...................................................................................................................................
Issues and Questions raised before the court.....................................................................................
Arguments raised on behalf of the appellant...................................................................................
Arguments raised on behalf of the respondent................................................................................
Provisions/ Statues involved..............................................................................................................
Judgement.........................................................................................................................................
Conclusion..........................................................................................................................................
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M/S. Kailash Nath Associates vs. Delhi Development Authority & Anr.,
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Court: Madras High Court

M/S KAILASH NATH ASSOCIATES

…. appellant

VERSUS

DELHI DEVELOPMENT AUTHORITY & ANR.

…. Respondent

Pronounced On: 9th January, 2015

Citation: 2015 (4) SCC 136.

Bench: Division Bench

Judges:

• HON’BLE MR. JUSTICE RANJAN GOGOI

• HON’BLE MR. JUSTICE R F NARIMAN

Number of Opinions: In this case, the bench delivered a single opinion.

Type of Opinion: Unanimous

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Background of the case

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M/S Kailash Nath Associates entered into a contract with the DDA for the sale of a project,
which included specific timelines and deliverables. However, disputes arose regarding the
execution of the project, leading to allegations of breach of contract. The DDA's actions,
including delays and changes in project specifications, were contested by M/S Kailash Nath
Associates, which claimed that these actions adversely affected their ability to fulfill the
contract.

The case highlights significant legal principles concerning contract law, the rights and
responsibilities of public authorities, and the remedies available to parties in the event of a
contractual dispute. It also examines the extent to which statutory bodies can alter contractual
terms and the implications of such alterations on private entities engaged in public contracts.

The appellant filed a petition with the Delhi High Court seeking a refund of the earnest
money along with a request for specific performance of the contract. The High Court ordered
the reimbursement of the earnest amount but denied the request for specific performance.
However, upon appeal to the Division Bench of the High Court, the earlier decision of the
Single Bench was overturned, and the request for the refund of the earnest amount was also
rejected.

Ultimately, the Supreme Court ruled that the appellant had not breached the contract, and
therefore, no penalty could be imposed in the form of forfeiture of the earnest money under
Section 74 of the Indian Contracts Act, 1872.

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Facts of the case

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1. This appeal originates from a public auction held by the Delhi Development Authority
(DDA), during which the appellant placed the highest bid of ₹3.12 Crores (Rupees Three
Crores Twelve Lakhs) for Plot No. 2-A at Bhikaji Cama Place, District Centre, New Delhi. In
accordance with the auction's terms and conditions, the appellant, as the highest bidder,
submitted an earnest money deposit of ₹78,00,000/- (Rupees Seventy Eight Lakhs), which
constituted 25% of the total bid amount. The auction conditions stipulated the following:
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i) The highest bidder shall, upon the conclusion of the auction, pay the DDA 25% of
the bid amount as earnest money, either in cash, by Bank Draft in favor of the
DDA, or by a cheque guaranteed by a Scheduled Bank, valid for three months.
Failure to pay this earnest money would result in the cancellation of the auction.
ii) The highest bid is subject to acceptance from the Vice-Chairman or an authorized
officer of the DDA, and the bid can be rejected without explanation.
iii) If the bidder defaults, breaches any terms, or misrepresents themselves, the
earnest money shall be forfeited.
iv) The successful bidder must submit a completed application form immediately
after the auction concludes.
v) Once the DDA accepts the bid, the bidder will be notified in writing and must pay
the remaining 75% of the bid amount within three months. If the bid is not
accepted, the earnest money will be refunded without interest unless forfeited per
the condition outlined.

2. On 18th February 1982, the DDA received and acknowledged receipt of the ₹78,00,000/-
earnest money, through which accepting the appellant's bid, and requested that the appellant
deposit the remaining 75% by May 17, 1982.

3. There was a general recession affecting the industry, because of which the appellant and
others in a similar situation put in a request for an extension for the payment in May 1982.

4. The DDA, in response to this, established a High-Powered Committee to review these

requests.

5. On July 21, 1982, this committee recommended an extension of time, for the remaining
75% of the bid amount. Therefore, through a letter dated August 11, 1982, the DDA granted
an extension until October 28, 1982, with interest rates varying between 18% and 36%.

6. The DDA formed another High-Powered Committee to determine if further extensions

should be granted.

7. The second committee gave the same recommendation to extend the payment timeline.

8. The DDA accepted this recommendation on May 14, 1984.

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9. The appellant replied to DDA's communication regarding the extension on the same day,
agreeing to pay the remaining 75% within the allotted time along with the 18% interest while
abiding by the payment conditions. They also requested formal approval for the same.

10. However, no action was taken for several years, during which the appellant sent multiple
letters to the DDA between 1984 to 1987 without receiving a response, until December 1,
1987

11. The appellant then approached the Delhi High Court to seek a refund of the earnest
amount, in addition to specific performance. The court delivered its judgment on September
2, 1993, concluding that the auction adhered to its terms and conditions and that disputes
arising from it fell within the realm of contract law, not under Article 226 of the Constitution.
Therefore, an order for reimbursement was passed, while the demand for specific
performance was rejected.

12. However, with an appeal to the Division bench of the High court, the decision was
reversed and the plea for the refund for the earnest amount was rejected as well.

13. Eventually, the DDA held a re-auction, in which they sold the property for ₹11.78 crores.

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Issues and Questions raised before the court

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1. Is the plaintiff entitled to specific performance of the contract?

2. Is the suit barred by time?
3. Was the cancellation of the bid fair and legal?
4. Can section 74 of the Indian Contract Act 1874 be applicable in contracts in which
forfeiture of earnest money is demanded in case of a breach of contract?

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Arguments raised on behalf of the appellant

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1. Forfeiture of Earnest Money

The forfeiture of the earnest money (₹78 lakhs) by the Delhi Development
Authority (DDA) was unjustified. They contended that there was no breach of
contract on their part because the DDA had extended the time for payment
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multiple times, which indicated that the DDA was accommodative of the
delays and therefore, the forfeiture was not warranted.
2. No Loss to DDA
The appellant emphasized that due to the delay in payment, the DDA did not
suffer any loss. The DDA did re-auctioned the plot for which they got a
significantly higher amount (₹11.78 crores). This higher re-auction price
shows that the DDA was not at a disadvantage and, in fact, benefited from the
delay. Therefore, the retention of the earnest money was unjust.
3. Arbitrary Action by DDA
The appellant argued that the DDA’s action of forfeiting the earnest money
without proper notice and without insisting on the balance payment within a
specific timeframe was arbitrary. The claim was that the DDA’s actions
violated principles of natural justice, since the appellant was not given a fair
opportunity to comply with the terms of the payment.
4. Waiver of Conditions
The appellant pointed out that the DDA had waived the strict enforcement of
the auction conditions by extending the payment deadlines. By doing so, the
DDA had implicitly accepted the delays and had not insisted on strict
adherence to the original terms. Therefore, the forfeiture of the earnest money
was not justified, as the DDA had already shown leniency and flexibility in
enforcing the contract terms.
5. Doctrine of Unjust Enrichment
The appellant argued that the Delhi Development Authority (DDA) was
unjustly enriched by retaining the earnest money. Unjust enrichment occurs
when one party benefits at the expense of another in a manner deemed unjust
by law. The appellant contended that since the DDA did not suffer any actual
loss due to the delay in payment, retaining the earnest money would result in
an unfair gain for the DDA. They argued that the principle of unjust
enrichment should apply, requiring the DDA to return the forfeited amount.
6. Section 74 of the Indian Contract Act
Section 74 of the Indian Contract Act deals with compensation for breach of
contract where a penalty is stipulated. The appellant argued that the forfeiture
of the earnest money was essentially a penalty. According to Section 74, when
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a contract has a clause for penalty, the party claiming compensation must
prove the actual loss suffered. The appellant contended that since the DDA did
not suffer any actual loss, the forfeiture of the earnest money was excessive
and should be subject to judicial scrutiny to ensure it was reasonable and
proportionate.
7. Equitable Relief
The appellant sought equitable relief, which is a remedy provided by courts
based on principles of fairness and justice. They argued that the court should
intervene to prevent the DDA from taking undue advantage of the situation.
The appellant emphasized that equity demands that the DDA should not be
allowed to retain the earnest money when no actual loss was incurred. They
appealed to the court’s sense of fairness, arguing that the DDA’s actions were
not justifiable under equitable principles.

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Arguments raised on behalf of the respondent

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1. Forfeiture of Earnest Money:

The DDA argued that the forfeiture of the earnest money (Rs. 78 lakhs) was
justified since it was in compliance with the auction terms. They stated that the
appellant failed to deposit the remaining 75% of the bid amount within the
time that was agreed upon, despite being granted multiple extensions. This
failure to comply with the payment schedule was seen as a breach of the
auction terms, warranting the forfeiture.
1. No Breach of Contract:
The DDA maintained that there was no breach of contract on their part. They
argued that the appellant was fully aware of the auction’s terms and conditions
and still failed to fulfill their contractual obligations.
2. No Discrimination:
The respondents countered the appellant’s claim of discrimination by stating
that the cases cited by the appellant (such as M/s. Ansal Properties and
Industries Private Limited and M/s. Skipper Tower Private Limited) were not
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comparable. They argued that each case was decided based on its specific facts
and circumstances, and the DDA had acted consistently within the framework
of the law and the auction terms
3. Legal Validity of Forfeiture Clause:
The DDA argued that the forfeiture clause in the auction terms was legally
valid and enforceable. They contended that such clauses are standard in public
auctions to ensure serious participation and compliance with the terms. The
DDA maintained that the forfeiture clause was a reasonable and necessary
provision to protect the interests of the public authority.
4. Mitigation of Loss:
The respondents claimed that the forfeiture of the earnest money was a
reasonable measure to mitigate potential losses due to the appellant’s failure to
complete the transaction. They argued that the forfeiture was not punitive but
compensatory in nature, intended to cover the administrative and other costs
incurred by the DDA due to the appellant’s default.
5. Previous Conduct of the Appellant:
The DDA highlighted the appellant’s previous conduct, including delays and
requests for extensions, to argue that the appellant was not diligent in fulfilling
their contractual obligations. They contended that the appellant’s behavior
demonstrated a lack of seriousness and commitment to completing the
transaction, justifying the forfeiture of the earnest money

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Provisions/ Statues involved

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Indian Contract Act, 1872 - Section 74

Compensation for breach of contract where penalty stipulated for: 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.

Constitution of India - Article 14

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Equality before law: The State shall not deny to any person equality before the law or the
equal protection of the laws within the territory of India.

Constitution of India - Article 226

provides the High Courts with the power to issue writs, including writs in the form of habeas
corpus, mandamus, prohibition, quo warranto, certiorari, or any of them, to any person or
authority, including the government.

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Judgement
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Views of Justice J.S. Khehar:

After analyzing the terms of the contract and the circumstances in which the earnest money
was deposited, he came to the conclusion that the forfeiture clause in the contract was not
applicable since there was no breach of contract by M/s. Kailash Nath Associates. Moreover,
Justice Khehar elaborated on the interpretation of Section 74, stating that it allows for
reasonable compensation in case of breach of contract, but it cannot exceed the amount
stipulated in the contract, further pointing out that the purpose of Sec 74 is not punitive, and
is to ensure that the compensation awarded is fair and reasonable. Additionally, he added that
the DDA did not have enough evidence to prove the actual loss suffered due to the breach,
therefore the forfeiture was unjustified and unreasonable. He also demanded that the DDA
should refund the earnest money, plus interest, seeing the financial impact on the appellant.

Views of Justice C. Nagappan:

For the most part, Justice Nagappan agreed with Justice Khehar and reiterated that the
forfeiture was unjustified since there was no breach of contract. Moreover, he put emphasis
on the importance of being in adherence to the principle of reasonable compensation, Section
74 of Indian Contract Act 1872. Also pointing out that the actions of the DDA did not meet
the criteria of reasonable compensation, since no actual loss was suffered. Justice Nagappan
also stressed on the need for fairness and equality regarding contractual dealings. To ensure
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that the appellant was compensated for the wrongful forfeiture, Justice Nagappan agreed with
the directive to refund the earnest money, plus interest.

Overall judgment:

Section 74 of the Indian Contract Act, 1872, is interpreted in the ruling in the matter of
Kailash Nath Associates v. DDA. The court emphasised on the differentiation between
penalties and liquidated damages, stressing that the latter must represent a true approximation
of the actual loss.
In this particular instance, the court determined that Kailash Nath Associates' payment delay
had not caused the DDA to incur any financial losses. The fact that the property was re-
auctioned for a higher sum showed that the DDA had profited from the delay after all.
Consequently, it was decided that the earnest money forfeiture was unjustified.
The court also took into account the DDA's several payment extensions, which it regarded as
a refusal of the forfeiture of the earnest money. This postponement demonstrated that the
DDA was not strictly following the initial schedule and had not demanded payment right
away.

The ruling upholds the values of justice and equitable in business transactions. It emphasizes
that the application of forfeiture clauses must not lead to unfair enrichment. The court
highlights the need for fair and reasonable execution of these articles.

The court offers a thorough explanation of the rules governing liquidated damages and
penalties under Section 74 by referencing pertinent precedents, regarding the interpretation
and application of this clause of the Indian Contract Act.

To sum up, the ruling in Kailash Nath Associates v. DDA by the Supreme Court offers
clarification on how Section 74 should be interpreted as well as directions on how forfeiture
clauses should be applied. The ruling highlights the significance of equity, fairness, and
evaluating actual loss when figuring out what constitutes a reasonable number of damages for
contract violations.

The court rules in favor of the appellant in this case.

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Conclusion
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In my opinion, the Supreme Court’s decision in the M/s. Kailash Nath Associates vs. Delhi
Development Authority & Anr. case is a landmark judgment that upholds the principles of
fairness and justice in contractual agreements. The court’s ruling against the arbitrary
forfeiture of earnest money by the DDA is a significant step in ensuring that penalties are not
imposed without just cause. By emphasizing that the forfeiture must be a genuine pre-
estimate of damages and not a penalty, the court has reinforced the importance of Section 74
of the Indian Contract Act, 1872.

Moreover, the court’s observation that time was not the essence of the contract, given the
extensions granted by the DDA, highlights the need for flexibility and reasonableness in
contractual dealings. This judgment serves as a reminder that parties to a contract must act in
good faith and that any punitive measures must be justified by actual breaches.

I believe the judgment rightly balances contractual freedom and fairness by preventing unjust
enrichment or arbitrary forfeiture of sums without substantiated damage. It ensures that while
parties may pre-determine compensation for breach, such compensation must be rooted in
actual harm suffered. This approach aligns with modern legal principles of fairness and
equity, which seek to protect parties from unreasonable penal clauses while upholding the
sanctity of contracts. Ultimately, this case strengthens the legal framework governing
liquidated damages and serves as a precedent for interpreting such clauses in future disputes.

Overall, this case sets a precedent that protects parties from unjust penalties and promotes a
more equitable approach to contract enforcement. It is a commendable decision that upholds
the principles of justice and fairness, ensuring that contractual obligations are enforced in a
balanced and reasonable manner.