Court caseAIR 1963 SC 1405

Balkishan Das agreed to sell leasehold rights in a plot and building in Delhi to Fateh Chand for Rs 1,12,500. Fateh Chand paid Rs 1,000 as earnest and Rs 24,000 on being given possession, the balance to be paid by a fixed date. The agreement provided that on default the whole of Rs 25,000 would be forfeited and the vendor could retake possession. The purchaser defaulted; the vendor sued for a declaration that the money was forfeited and for possession and mesne profits.

The Supreme Court (Shah J) held that s. 74 applies to every stipulation by way of penalty, whether it is a sum to be paid on breach or a provision for forfeiture of money already paid. The section cuts across the English distinction between liquidated damages and penalties: the court awards reasonable compensation not exceeding the amount named, and the party claiming must prove loss where proof is possible. Forfeiture of the Rs 1,000 earnest, a reasonable amount, was allowed; but the Rs 24,000 was not earnest and could be forfeited only to the extent of loss actually proved, which the vendor had not established. The Court itself fixed reasonable compensation.