Supreme Court Rules Forfeiture of Earnest Money by DDA Unjustified Without Breach or Loss

Apex Court Restores Single Judge’s Order Ordering Refund of ₹78 Lakhs Earnest Money with Interest to M/s Kailash Nath Associates in Landmark Contract Dispute

In a significant judgment delivered on January 9, 2015, the Supreme Court of India ruled in favor of M/s Kailash Nath Associates, holding that the forfeiture of earnest money by the Delhi Development Authority (DDA) was unjustified in the absence of any breach of contract or loss suffered by the DDA. The apex court restored the decision of the Single Judge of the Delhi High Court, which had ordered the refund of ₹78,00,000 along with 9% interest per annum to the appellant.

The case arose from a public auction conducted by the DDA in 1982 for Plot No.2-A in Bhikaji Cama Place, New Delhi. M/s Kailash Nath Associates emerged as the highest bidder with a bid of ₹3.12 crores and deposited 25% earnest money amounting to ₹78 lakhs as per the auction terms. The balance 75% was to be paid within three months. However, due to a general recession, the appellant and similarly situated parties sought an extension for payment.

DDA constituted two High Powered Committees which recommended extending the payment timeline with interest charges. The DDA accepted these recommendations and conveyed an offer to the appellant by a letter dated December 1, 1987, seeking their consent to pay the balance amount in installments with 18% interest. The appellant promptly consented.

Complications arose when the Central Government clarified in 1990 that the land was not Nazul land, contrary to DDA's earlier assumption, leading to prolonged delays. Eventually, in 1993, DDA canceled the allotment and forfeited the earnest money citing the appellant’s failure to pay the balance amount.

The appellant challenged the forfeiture in court, seeking specific performance or refund of earnest money with damages. The Single Judge ruled that the time for payment had been extended by the conduct of the parties and that DDA had not given any notice to the appellant prior to cancellation. It was also highlighted that DDA suffered no loss, having re-auctioned the plot in 1994 for ₹11.78 crores, significantly higher than the original bid.

However, the Division Bench of the Delhi High Court reversed this decision, holding that time being the essence of contract cannot be waived unilaterally, and that forfeiture was valid as per contract terms.

Upon appeal, the Supreme Court examined the principles under Sections 63, 73, and 74 of the Indian Contract Act, 1872. It emphasized that:

- Time fixed for performance can be unilaterally extended by the promisee when the extension benefits the promisor (Section 63).

- Compensation for breach under Section 74 is payable only when damage or loss is caused.

- Forfeiture of earnest money is covered by Section 74 and must be reasonable and linked to actual damage.

The Court referred to precedents including Citi Bank N.A. v. Standard Chartered Bank (2004) and Fateh Chand v. Balkishan Das (1964), underscoring that forfeiture without loss or breach is impermissible.

The apex court found that DDA, by its conduct and letters, had waived the original time frame, and the appellant had consented to the extended payment schedule. The cancellation and forfeiture without notice amounted to breach of contract by DDA. Moreover, since DDA incurred no loss (having sold the property for a much higher price later), it was arbitrary and unfair to deprive the appellant of the earnest money.

The Court also held that as a public authority, DDA is bound by Article 14 of the Constitution to act fairly, justly, and reasonably, even in contractual matters.

Thus, the Supreme Court allowed the appeal, restoring the Single Judge’s order directing refund of the earnest money with interest. Both parties were directed to bear their own costs.

This judgment clarifies the law on forfeiture of earnest money in auction sales, reinforcing that forfeiture must be just, linked to actual breach and loss, and that unilateral extensions of time by the promisee benefit the promisor and are valid under the Contract Act.

Statutory provisions

Indian Contract Act, 1872 Sections 20, 55, 62, 63, 73, 74, 75; Article 14 of the Constitution of India

M/s. Kailash Nath Associates v. Delhi Development Authority (SC) : Law Finder Doc Id # 640338