SC: Damages become Due on the Date of Breach of Contract

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March 14, 2018

Case name: M/s Fortune Infrastructure v. Trevor D’Lima & Ors.

Date of Judgement: March 12, 2018

In the case, the Respondents were aggrieved that the appellants were not delivering the possession of flats and accordingly approached the NCDRC (National Consumer Dispute Redressal Commission) to hold that the appellants were guilty of deficiency in service and unfair trade practices as per the provisions of the Consumer Protection Act, 1986.

Thereafter, the NCDRC directed the appellants to refund the amount of Rs.1, 87, 00,000/- and pay a sum of Rs. 3, 65, 46,000/- as to the complainants. Aggrieved by NCDRC’s order, the appellants approached the Supreme Court, the Appellants contended that they had transferred the project to a different company thereby they should be discharged from any liability for not handing over the disputed property to the answering respondents and also to consider the downward trends shown in the real estate market which mandates a lesser compensation, compared to the one awarded by the NCDRC.

Issue- whether there is deficiency of service on the part of the appellants? If so, what is just and reasonable compensation?

Bench’s Verdict

Contractual Damage to Injured Party for Loss of Bargain- That it is now well established that the contractual damages are usually awarded to compensate an injured party to a breach of contract for the loss of his bargain. Reference was made by the Bench to the case of Johnson and Anr. v. Agnew[1], wherein it was held that the general principle for the assessment of damages is compensatory, i.e. that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed.

The Court noted that the aforesaid settled principle is more applicable to the real estate sector. If the seller wants to limit their liability for breach of contract under the aforesaid rule, they have to portray that they have performed their obligation in a prudent manner. It may be noted that the onus is on the seller to show his best efforts and bona fides in discharging the obligation. It may be noted that even in the absence of fraud, mere unwillingness to carry out the duty could constitute bad faith sufficient for the purchaser to claim damages.

With reference to the facts of the instant case, the Court noted that the appellants did not give any valid reasons as to why they transferred the property to a third party, despite their contractual obligation to the respondents (complainants). Thus, the obligation was on the appellants to show that they were unable to transfer the property to the respondent.

Delay in delivery of possession of flat- The Court remarked that a person cannot be made to wait indefinitely for the possession of flats allotted to them and they were entitled to seek the refund of the amount paid by them, along with compensation.

When no delivery period is stipulated- In such cases, the Court noted that a reasonable time has to be taken into consideration. In the facts and circumstances of this case, a time period of 3 years was deemed as reasonable for completion of the contract. The Court was of the view that as no redevelopment of the property had taken place, there was deficiency of service on the part of the appellants.

What should be the quantum of compensation?

For quantum of compensation on account of delay in delivery of flats, the Supreme Court made reference to the case of Ghaziabad Development Authority v. Balbir Singh[2], wherein the Court observed that there was no fixed formula for fixing damages.

That whenever the builder has refused to perform the contract without valid justification, the buyer is entitled for compensation as he has been deprived of price escalation of the flat. Every breach of contract gives rise to an action for damages. Such amount of damages must be proved with reasonable certainty.

Whether the date for the purpose of assessing damages should be from the date on which the breach took place or should it be from the date of judgment?

The Supreme Court observed that as per the settled law, the damages become due on the date when the breach of contract takes place, and are normally assessed by the reference to the time of breach. This rule is based on the principle that the injured party is presumed to be in knowledge of the breach as soon as it is committed and at that time he can take appropriate measures of mitigation to control the loss flowing from the breach. The Court also stated that the courts may deviate from the aforesaid rule and fix appropriate date in facts and circumstance of a case if aforesaid presumptions could not be established or it would not be reasonable to follow the rule.

It may be noted that where there is non-delivery of the flat/house, and the developer has refused to provide alternative and equivalent accommodation, and the buyer lacks means to purchase a substitute from the market, then in such circumstances, damages would not be reasonable to be assessed on the breach date.

That where a party sustains loss by reason of a breach of contract, the damages are to be granted so as to place the suffering party in the same position as if the contract had been performed. Thus, damages other than consequential loss have to be measured at the time of the breach. However, the aforesaid rule is flexible which needs to be assessed in facts and circumstances of individual case.

In the facts and circumstances of the instant case, the Supreme Court observed that the compensation awarded by the NCDRC surpassed the actual-loss based damages and enter the domain of gain-based remedy. Thus, the Court modified the amount of compensation and reduced it to Rs. 2, 50, 00,000/-.

The Court in the case additionally noted that there was no dispute about the fact that damages for the contractual breach is generally compensatory arising out of the breach. Therefore, the damages awarded should not be excessive and a Court/tribunal needs to take a balanced approach so as to ensure right compensation.

Read the case here.

[1] [1979] 1 All ER 883

[2] (2004) 5 SCC 65