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Judgment
R.S. Dalvi, J.
This Chamber Summons is taken out by the applicant for raising the attachment levied on the property of original respondents / award debtors being Gala No.12, SIA Industrial Estate, Sonawala Cross Road No.2, Goregaon (East), Mumbai 400 063. The applicant is a partner of the original respondent. The property of the applicant is attached in execution of the decree against the original respondents under the provisions of Order 21 Rule 50(1)(b) of the CPC.
The attachment has been levied pursuant to the consent terms filed before the arbitrator in arbitration between the claimants and the respondents. The claimant was to be given possession of one Unit No.19 on or before 30th June, 2007. The claimant was already put in possession of Unit No.12 which is sought to be attached. The claimant would have to give back Unit No.12 upon obtaining the possession of Unit No.19. Consequently it will continue to occupy the Unit No.12 until possession is given. This was to be without payment of any compensation for the use and occupation of Unit No.12. The Consent Terms provided damages in case of default of the respondent in handing over possession of Unit No.19. This was to be a penalty of Rs.3500/-per day of the delay to the claimants.
Upon Unit No.19 being ready for possession the claimant was to receive notice of that fact and was to take possession within 15 days thereof and handover possession of Unit No.12 to the respondents.
Penalty was provided for default in handing over possession of Unit No.12 also at the same rate being the penalty of Rs.3500/-per day.
There has been extensive affidavits filed and evidence led about when the possession of Unit No.19 was handed over to the claimant. The respondents contended that it was some time in 2007. The claimant contends that it was on 29th July, 2008.
Only four dates are material in this regard. The possession was to be handed over by 30th June, 2007 for the penalty which was provided. The premises was under construction. Occupation certificate was granted on 13th May, 2008. An earlier order came to be passed 15th July, 2008 by this Court directing the parties to exchange the premises within 15 days of that order. The possession is actually stated to be taken on 29th July, 2008.
It may be accepted that possession was taken on that date because it would not be material in view of what shall be considered presently.
The premises No.12 was 500 Sq.ft. in area. The premises No.19 was to be 600 Sq.ft. in area and the premises having area 620 Sq.ft. is stated to be given to the claimant.
The claimant continued in possession until he was offered the alternate premises. This was without payment of any maintenance / compensation.
Under these circumstances even if possession was delayed by the 13 months, as is the claimant''s case, no monetary loss to the claimant would be caused. The claimant would not require to take any other premises. The claimant would not be required to pay for those premises or the same premises. The claimant would not also be required to make payment of the alternate premises before it is given. There would be, therefore, no loss or damage to the claimant.
It is in these circumstances that the question of the admitted penalty of Rs.3,500/-per day which was agreed between the parties and which is sought to be enforced by the claimant would have to be seen.
It is the case of the claimant that it is a reasonable pre-estimate of the loss or damage that the claimant would suffer and would not require to prove it. It is the case of the respondents that the penalty is in terrorem, being exorbitant and requires payment of over Rs.13 lacs to be made for the default of about 13 months whilst the claimant continued in possession of another premises in the same building and of about the same area.
It may be mentioned that neither the affidavits of the claimant in the Chamber Summons nor the affidavit of evidence of the claimant in the trial makes out any case of any loss suffered by the claimant. Hence claimant has neither tried to show the loss, if any, nor to prove the loss, if any, suffered. Indeed as aforesaid there can be no loss.
Having seen that there was no loss that the claimant suffered it would have to seen whether any damages pre-estimated by the parties could be given.
The law in this regard, being the law of damages in a contract as per the consent terms in this case, is enunciated in Section 73 and 74 of the Indian Contract Act which runs thus :
Compensation for loss or damage caused by breach of contract. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
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.
Under the general rule of the proof of damages the loss suffered would have to be proved by the party claiming it under Section 73 of the Act. Section 74 is in nature of an exception. If the parties quantified the loss that they would suffer and mention it in their contract as payable by the party in breach of the contract it would be a pre-estimated damage. A reasonable and genuine pre-estimate of the damage is payable without proof of loss. If the pre-estimate is in nature of penalty, the loss would have to be proved for claiming the penalty. In this the parties have quantified the loss as penalty in no uncertain terms. The expression appears at least twice in the aforesaid clause of the consent terms, being clause 1 and is equally made applicable to both the parties.
It is argued on behalf of the claimant that the respondents actually sent notice to the claimants claiming the penalty at the same rate from the claimants. It would, therefore, have to be seen whether the same penalty can be claimed by either or both the parties alike.
The claimant continued in possession of Unit No.12. The claim amount would not handover possession until he was offered the alternate premises of Unit No.19. Once he was handed over the possession he would move into the unit close by. There would not be a single day when the claimant would be deprived by both the premises. The possession of the respondents is quite different. After the claimant takes possession of Unit No.19 he is required to handover possession of the Unit 12. This is required to be done simultaneously. However, the provision is made if the claimant does not handover possession of Unit 12 within 15 days of he being handed over possession of Unit No.19. It is in that case that the penalty would have to be paid by the claimant. This situation would arise when the claimant has possession and occupation of both the premises and he fails and neglects to handover possession of Unit 12 simultaneously whilst taking possession of Unit 19. The respondents would, therefore, not have possession of any premises whilst the claimant continued in possession of both. The respondents would suffer loss of not having any premises. That loss has been quantified by the parties. The penalty payable is, therefore, the predetermined loss of the party not having possession of the premises. This situation would never happen in case of the claimant. Yet the penalty at the same rate is provided to be given to the claimant. That would be only upon the delay in handing over possession of the premises by the respondent. Hence during the period of delay by the respondent, the claimant continued in possession of the earlier premises. But during period of the delay by the claimant in not handing over possession the respondent would be deprived of both.
Even if the parties have predetermined the loss suffered by them, can they claim such loss without proof of the loss under Section 74 of the Indian Contract Act? The parties would be entitled to claim the entire loss only in certain circumstances. In paras 46 and 64 of the case of Oil and Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd., this position has been explained at length. When the parties quantified the damages payable the actual loss or damages are not required to be proved. The quantified damages would be payable. The parties may agree for payment of such compensation. If they have so agreed they need not lead evidence to prove the loss or damages. If, however, they agreed to specified damages by way of penalty (specifically so called in this case) the Court would grant only reasonable compensation but upon proof of damages. Hence if the amount stipulated is unreasonable the party claiming the stipulated amount must prove loss or damage. However, if the compensation is a genuine pre-estimate of the loss that the parties knew they would make upon a breach of the contract, there would be no question of proving such loss. The party claiming the damages is not required to prove loss but other party is then required to lead evidence for proving that no loss occurred.
In any event the Court would only award reasonable compensation. It is held in the case of ONGC (Supra) that under Section 74 itself it is the duty of the Court to award only reasonable compensation. Hence it is the duty of the Court to enforce the penalty claimed but only award reasonable compensation. In the case of ONGC (Supra) the Court had not to deal with a case where contract named a sum to be paid in case of breach but with a case whether the contract contained stipulation by way of penalty. In such a case, therefore, loss would have to be proved. It would, therefore, have to be seen whether the parties showed a genuine pre-estimate of the damages that both the parties would suffer as the liquidated damages in their contract. As aforesaid it is clear that the stipulation in the contract stated to be a penalty is not a genuine pre-estimate of any damage that the claimant would suffer because the claimant would suffer no damage. It is observed by the Supreme Court in the judgment of ONGC(Supra) from the judgment in the case of Union of India (UOI) Vs. Raman Iron Foundry, that the stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only a reasonable compensation. The observations of the Supreme Court in the case of ONGC (Supra) make it clear that if penalty is provided and if the amount stipulated is not a genuine pre-estimate of the damage, evidence of loss would have to be led and the damage suffered would have to be shown.
Hence if a penalty is mentioned in a contract and the stipulation is not a genuine pre-estimate of the damages even reasonable compensation cannot be given without proof of loss and damage.
This is one such case. No evidence of any loss is led. No statement of loss suffered is stated even in the affidavit of the claimants. The claim is actually in terrorem. The claimant was well provided in the same building. The claimant had neither to go elsewhere nor to pay any compensation to the respondents. There is no loss and damage that has been caused to the claimant. The amount of Rs.3,500/-per day is quantified to be paid to the claimant whilst the claimant continued using and occupying Unit No.12 without payment of any maintenance or compensation is nothing but a penalty. The penalty is unconscionable.
In fact if the claimant does not handover possession of Unit No.12 and continued in possession of both the units the respondents may at least suffer some loss and lead evidence of such loss to be able to be granted reasonable compensation not exceeding the estimate made by the parties which is by way of penalty.
Counsel on behalf of the respondent has relied upon the judgment in the case of Maya Devi Vs. Lalta Prasad, in CA No.2458 of 2014 in SLP (c) No.23069 of 2012 in paragraph 6 of which it is held thus : The imposition and the recovery of penalty on breach of a contract is legally impermissible under the Indian Contract Act. As regards liquidated damages, the Court would have to scrutinize the pleadings as well as evidence proof thereof, in order to determine that they are not in the nature of a penalty, but rather as a fair pre-estimate of what the damages are likely to arise in case of breach of the contract. No evidence whatsoever has been led by the plaintiff to prove that the claim for twice the amount of earnest money was a fair measure or pre-estimate of damages.
The claimant has relied upon the judgment in the case of Central Inland Water Transport Corporation Limited and Another Vs. Brojo Nath Ganguly and Another, which sets out inter-alia what are called "adhesion contracts" between parties not on par setting out unconscionable contracts which one party is constrained to accept leading another party to claim damages caused by such party which are not accepted and enforced by Courts on the ground of they being unconscionable and are consequently held to be void as against public policy. Counsel on behalf of the claimant would contend that both the parties are businessmen and on par and hence the contract cannot be stated to be unconscionable as the parties must be taken to have understood the terms of the pre-estimate of the parties.
Even if that is so the judgment in the case of ONGC (Supra) as also Maya Devi (Supra) would prohibit the Court under the statutory provision of Section 74 of the Contract Act itself to enforce liquidated damages which are in the nature of the penalty without evidence that it is a fair measure of pre-estimate of the parties.
In the case of Deepa Bhargava and Another Vs. Mahesh Bhargava and Others, the predetermined interest payable by the parties at the rate of 18% p.a. was held to be not in the nature of the penalty but a reasonable pre-estimate of the loss suffered by a party under Section 74 of the Indian Contract Act and was upheld. The charge of Rs.3,500/-per day when the plaintiff continues in possession of another premises is grossly exorbitant and grossly more than such %age.
In this case there is no loss seen, shown, stated or proved. There is no loss of any principal amount. Hence the penalty of Rs.3,500/- is 3,500%- per day! A bounty of that nature is not contemplated within the expression "genuine pre-estimate". A premises of 500 Sq.ft. in place 600 Sq.ft for use and occupation would be some loss in kind. The fact that that was the premises already used by the claimant before the construction rules out that aspect also as the loss suffered by it because of the delay of the respondents.
Upon the scrutiny of the pleadings in this case it is seen that the specified amount is by way of penalty. No proof has been led by the claimant that payment of Rs.3,500/-per day which would be about Rs.1,05,000/-per month and about Rs.12,60,000/-per year is a reasonable pre-estimate of the damage and loss that the claimant would suffer by delayed handing over of the alternate newly constructed premises in the same building whilst the claimant continued to enjoy Unit No.12.
Consequently the claim is untenable in law and Unit No.12 belonging to the respondents cannot be allowed to be attached and sold in execution of the award under the aforesaid consent terms between the parties.
Hence the Chamber Summons is allowed. The attachment levied on Gala No.12, SIA Industrial Estate, Sonawala Cross Road No.2, Goregaon (East), Mumbai 400 063 is raised and set aside.
The execution application itself stands dismissed.