4 February 2025 - Legal Updates

1. Section 74 Contract Act | Forfeiture of Earnest Money Permissible if It’s Not Excessive Amounting to Penalty

Case- Godrej Projects Development Limited vs. Anil Karlekar& Ors.

Date of Order- February 3, 2025

Bench- Justice B.R. Gavai and Justice S.V.N. Bhatti

The Supreme Court of India clarified that forfeiting a reasonable earnest money deposit does not constitute a penalty under Section 74 of the Indian Contract Act, 1872. Here are the key facts surrounding the case:

Case Background: The case involved flat purchasers (Respondents) who challenged a builder (Appellant) for forfeiting 20% of the basic sale price (BSP) as earnest money after they canceled their flat booking. The Appellant argued that the Apartment Buyer Agreement (ABA) allowed such forfeiture.

Respondents' Argument: The Respondents claimed that the forfeiture of 20% was arbitrary and unfair, suggesting it should be limited to 10%.

NCDRC Ruling: The National Consumer Disputes Redressal Commission (NCDRC) ruled in favor of the Respondents, allowing only a 10% forfeiture of the BSP as earnest money and directing a refund of the remaining amount with 6% interest per annum.

Supreme Court Appeal: The builder appealed this decision to the Supreme Court, which upheld the NCDRC's ruling. The Court found that forfeiting 20% was excessive and arbitrary, qualifying it as a penalty under Section 74.

Court's Justification: The Supreme Court emphasized that while earnest money can be forfeited as security for performance, it should not be excessive or punitive. The Court affirmed that a reasonable forfeiture amount would not be categorized as a penalty.

Interest on Refunds: Although upholding the 10% forfeiture, the Court removed the interest on refunds, stating that NCDRC was not justified in awarding interest on the amount to be refunded.

Legal Precedents Cited: The Court referenced previous cases, including Maula Bux v. Union of India and Satish Batra v. Sudhir Rawal, to support its conclusion that reasonable earnest money forfeiture does not fall under Section 74.

This ruling underscores the principle that while earnest money can serve as security in contracts, its forfeiture must remain within reasonable limits to avoid being classified as a penalty.

2. Interim Orders Affecting Substantial Rights of Parties And Causing Prejudice Are Appealable While Writ Petition is Pending

Case- State of Kerela vs. Pradeepkumar A.V

Date of Order-January 29, 2025

Bench- Justice Anil K. Narendran and Justice Muralee Krishna S.

The Kerala High Court recently reiterated that interim orders affecting substantial rights and liabilities of parties, which cause significant prejudice, are appealable during the pendency of a writ petition under Section 5(i) of the Kerala High Court Act, 1958. Here are the key facts:

Case Context: The court was examining the maintainability of a writ appeal against an interim order issued by a Single Judge while a writ petition was pending.

Legal Provision: Section 5(i) of the Kerala High Court Act states that an appeal can be made to a Bench of two Judges from a judgment or order of a Single Judge exercising original jurisdiction.

Division Bench Observations: Justices Anil K. Narendran and Muralee Krishna S. noted that the interim order in question was not merely procedural but significantly impacted the parties' substantial rights, justifying an appeal under Section 5(i).

Writ Petition Details: The writ petition sought a declaration regarding the entitlement of the senior-most Registrar of the High Court to a higher pay grade as recommended by the Chief Justice and the 11th Pay Revision Commission. An interim order was sought to mandate the Chief Secretary to issue orders for this higher pay.

Interim Order Issued: The Single Judge ordered the Chief Secretary to appear before the court if they failed to implement the Chief Justice's recommendation regarding the pay grade.

State's Appeal: The State appealed against this interim order under Section 5(i), arguing that it was excessive.

Court's Findings: The Court concluded that directing implementation of the Chief Justice's recommendation through an interim order was inappropriate and set aside that interim order. It stated that since pleadings were complete, the matter could proceed to final hearing.

Precedents Cited: The court referenced previous cases, including K.S. Das v. State of Kerala and Madhu Limaye v. State of Maharashtra, establishing that appeals against interim orders are permissible if they substantially affect rights or liabilities or involve significant matters causing prejudice.

This ruling emphasizes that interim orders with substantial implications for parties can be contested during ongoing proceedings, reinforcing judicial oversight on such matters.

3. To Establish Offence of Mischief, There Must Be Intention to Cause Loss & Destruction Caused Must Result in Loss of Value of Property

Case- Gurmail Singh vs. State of Punjab and Another

Date of Order- January 24, 2025

Bench- Justice Manisha Batra

The Punjab & Haryana High Court addressed the requirements for establishing the offence of mischief under Section 425 of the Indian Penal Code (IPC). Here are the key facts from the case:

Legal Definition: The Court emphasized that to prove mischief, there must be an intention to cause damage to property, resulting in a reduction of its value or utility. Mere loss is insufficient; criminal intent must be established.

Case Background: The case involved a plea to quash an FIR against Gurmail Singh, who was accused of setting paddy waste/stubble on fire, allegedly damaging a paddy field. The FIR included charges under Sections 427 (mischief) and 447 (criminal trespass) of the IPC.

Court's Observations: Justice Manisha Batra noted that the allegations in the complaint were vague and lacked supporting evidence. No photographs, videos, or reports were provided to substantiate claims of damage to the property.

Lack of Evidence: The Court pointed out that there was no evidence showing that the alleged act diminished or destroyed the property's value or utility. As such, it concluded that no prima facie case for an offence under Section 427 was established.

Trespassing Allegations: Regarding the trespassing claim, the Court noted that Gurmail Singh was a co-sharer of the property in question, which negated the establishment of a trespassing offence.

Civil vs. Criminal Nature: The Court highlighted that the complainants had pursued civil remedies concerning the disputed land. It stated that framing a civil dispute as a criminal offence amounted to an abuse of legal process.

Final Ruling: In light of these findings, the High Court quashed the FIR against Gurmail Singh under Section 482 of the Criminal Procedure Code (Cr.P.C.), indicating that the allegations did not meet the necessary legal standards for mischief or trespass.

This ruling clarifies essential elements required to establish mischief under IPC and reinforces that criminal liability cannot be based solely on vague allegations without substantial evidence.