Contract Law Case: Amar Adarsha Secondary School & Others vs Krishna Bahadur Shrestha, NKP 2068, No.6, P. 1028, D.N. 8635
Case: Realization of Compensation Amount as per Contract, Breach of Contract
Plaintiff: Krishna Bahadur Shrestha
Defendants: Amar Adarsha Secondary School and Nepal Bank of Ceylon
Decision No: 8635
This case is related with distinction between compensation and penalty, doctrine of Unjust Enrichment and doctrine of privity of contract.
Facts of the Case:
On this date 2058/03/18 B.S, a contract was executed between Plaintiff Krishna Bahadur and Defendant Basanta Bahadur, representing Amar Adarsha Secondary School, for sale and purchase of land owned by the school (Total Area: 5–3–3–1) for a total consideration of Rs. 1,15,32,812.50/- At the time of signing the contract, Plaintiff paid Rs. 20,00,000/- as earnest money to Defendant through cheques.
The concerned land was already mortgaged to the Nepal Bank of Ceylon. As per the contract, Defendant was required to clear bank loan, release the mortgage within 4 months, and transfer the land ownership to Plaintiff and he was supposed to pay the remaining Rs. 95,32,812.50/- in installments.
If Defendant failed to release the mortgage and transfer the ownership within 4 months, they would have to pay double the earnest money received to Plaintiff. If Plaintiff failed to get the land transferred, the earnest money would be forfeited.
Since, school failed to repay the bank loan, bank had already put the land up for auction prior to the contract and transferred the land ownership to its own name within the contract period Because the land now belonged to the bank so, defendant could not transfer it to plaintiff.
Plaintiff’s Argument:
Since defendant breached the terms of the contract and the land was already transferred to the bank, plaintiff prayed to recover double the earnest money, amounting to Rs. 40,00,000/- (Forty Lakhs) as compensation along with court fees from defendant, as per Condition No. 5 of the contract.
Defendant’s Argument:
School’s Claim: Plaintiff himself failed to pay the remaining installments within 4 months, meaning the contract was breached due to Plaintiff’s own fault. Therefore, the earnest money should not be refunded and must be forfeited. Although they initially claimed the document was forged, they later accepted it as genuine.
Bank’s Claim: There is no contract between the Bank and Plaintiff. Since the debtor school failed to repay the loan, the bank legally auctioned the collateral and acquired it under its own name. Therefore, the bank is not liable to pay any compensation.
Legal Issues:
- Is the written contract agreement executed between Plaintiff and Defendant genuine and valid?
- Who is responsible for the breach of contract? and Is defendant required to refund the earnest money of Rs. 20 Lakhs received from Plaintiff?
- Is Plaintiff entitled to receive double the earnest money as specified in the contract due to the breach of contract?
Decisions of the Courts:
Kathmandu District Court:
The plaintiff has failed to prove that they fulfilled their own obligations as required under Clause 4 of the contract agreement. Since the plaintiff did not perform their part of the contract, their claim for compensation lacks a legal basis. Therefore, the Kathmandu District Court rules that the plaintiff’s claims cannot be sustained (the case is dismissed).
Patan Appellate Court:
Regarding the claim for compensation, the plaintiff was already aware at the time of signing the contract that the property was mortgaged to the bank. Additionally, evidence shows that the bank has already auctioned and seized the land. Therefore, the appellant/plaintiff’s appeal demanding compensation equal to the earnest money (advance payment) cannot be sustained (the appeal is dismissed).
Supreme Court’s joint bench decision:
Supreme Court upheld the decision of the Appellate Court Patan.
Since, defendant failed to release the mortgage and transfer the land, it must refund Plaintiff’s Rs. 20,00,000/-
Since, Plaintiff could not present any objective evidence regarding the actual loss suffered, and because he knew the land was mortgaged to the bank at the time of executing contract, the additional Rs. 20 Lakhs (which acts as a penalty) cannot be awarded.
Established Principles:
1.Compensation cannot be a penalty or fine: In private civil or commercial transactions, one party does not hold the right to impose or collect a ‘fine’ or ‘penalty’ from the other party. If an excessive or unreasonable amount is written in the contract without proof of actual loss, it takes the form of a penalty, which courts will not enforce.
2.Prevention of Unjust Enrichment: Allowing the recovery of double the amount solely based on text of a contract without proving actual damage leads to an unfair or unjust advantage for one party, which contradicts the established doctrines of civil law.
