Case Note & Summary
The petitioners, Shri K Babjan and K Sulaiman, filed writ petitions under Articles 226 and 227 of the Constitution of India challenging Rule 6(3)(d) of the Karnataka Urban Development Authority (Disposal of Corner Sites and Commercial Sites) Rules 1991 as ultra vires and unconstitutional. They also sought a writ of mandamus directing the Shimoga Urban Development Authority (respondent No.1) to refund amounts of Rs.1,86,250/- and Rs.1,56,500/- with interest at 18% p.a. The petitioners had participated in an auction of sites by paying a deposit of Rs.10,000/- each as required under Rule 6(3)(a). However, they failed to pay the balance amount within the stipulated period, leading to forfeiture of the deposits under Rule 6(3)(d). The court heard the learned counsel for the petitioners and considered the validity of the rule. The court found that Rule 6(3)(d) was in conflict with Section 74 of the Indian Contract Act, 1872, which prohibits forfeiture of earnest money without proof of actual loss. The rule allowed forfeiture of the entire deposit without any assessment of loss, making it penal and unconscionable. Consequently, the court declared Rule 6(3)(d) as ultra vires the Constitution and directed respondent No.1 to refund the deposit amounts to the petitioners with interest at 18% p.a. from the date of deposit until payment.
Headnote
A) Constitutional Law - Ultra Vires - Rule 6(3)(d) of the Karnataka Urban Development Authority (Disposal of Corner Sites and Commercial Sites) Rules 1991 - Conflict with Section 74 of the Indian Contract Act, 1872 - The rule providing for forfeiture of deposit upon failure to pay the balance amount within the stipulated period was held to be penal and unconscionable, as it allowed forfeiture without proof of actual loss. The court declared the rule ultra vires the Constitution and directed refund of the deposit amounts of Rs.1,86,250/- and Rs.1,56,500/- with interest at 18% p.a. (Paras 2-4) B) Contract Law - Forfeiture of Deposit - Section 74 of the Indian Contract Act, 1872 - Penalty - The court held that forfeiture of earnest money without proof of loss is a penalty and cannot be enforced. The rule in question was found to be in conflict with Section 74, which requires that only reasonable compensation, not exceeding the amount named, can be recovered. (Paras 2-4)
Issue of Consideration
Whether Rule 6(3)(d) of the Karnataka Urban Development Authority (Disposal of Corner Sites and Commercial Sites) Rules 1991 is ultra vires the Constitution and in conflict with Section 74 of the Indian Contract Act, 1872, and whether the petitioners are entitled to refund of the deposit amount with interest.
Final Decision
The court allowed the writ petitions, declared Rule 6(3)(d) of the Karnataka Urban Development Authority (Disposal of Corner Sites and Commercial Sites) Rules 1991 as ultra vires and unconstitutional, and directed respondent No.1 to refund the amounts of Rs.1,86,250/- and Rs.1,56,500/- to the petitioners with interest at 18% p.a. from the date of deposit until payment.
Law Points
- Rule 6(3)(d) of the Karnataka Urban Development Authority (Disposal of Corner Sites and Commercial Sites) Rules 1991 is ultra vires the Constitution and in conflict with Section 74 of the Indian Contract Act
- 1872
- Forfeiture of deposit without proof of loss is penal and unconscionable
- Writ of mandamus for refund of deposit with interest at 18% p.a.
