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TMI Blog1969 (10) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... ed about the purchase, as is seen from the letter, dated November 18, 1946 addressed by the General Manager of the respondent, to the appellants. That letter refers to a discussion that the parties had on that day and the respondents confirmed having sold to the appellants the entire lot of aero-scrap lying at Paragarh, on the terms and conditions mentioned in the letter. The material was stated to be in Dump No. 1 near the flight line at Paragarh and the approximate quantity was 4000 tons of aero-scrap, more or less. The letter refers to the appellants having agreed to pay Rs. 10 lakhs as price of the materials in the said Dump No. 1, against which the receipt, by cheque, of a sum of Rs. 2,50,000 was acknowledged by the respondent. There is a further reference to the fact that the appellants had agreed to pay the balance of Rs. 7,50,000 that day itself. The letter also refers to the fact that the price mentioned does not include sales-tax to be paid by the appellants and to certain other matters, which are not relevant for the purpose of the appeal. The letter further says : "The company's terms of business apply to this contract and a copy of this is enclosed herewith". We shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is now necessary to advert to certain clauses in the Company's terms of business which, as mentioned earlier, have been made by the defendant's letter dated November 18, 1946 as part of the terms and conditions of the contract. We have also referred to the fact that the appellants in their reply dated November 18, 1946 have accepted the same. The respondent's terms of business contain various clauses, of which clauses 9 and 10 are relevant for our purpose. They are "9. Deposits The buyer s hall deposit with the Company 25% of the total value of the stores at the time of placing the order. The deposit shall remain with the Company as earnest money and shall be adjusted in the final bills, no interest shall be payable to the buyer by the Company on such amounts held as earnest money. 10. Time and method of payment. (a) The buyer shall, before actual delivery is taken or the stores despatched under conditions, pay the full value of the stores for which his offer has been accepted less the deposit as hereinbefore contained after which a Shipping Ticket will be issued by the Company in the name of the buyer. The buyer shall sign his copy of the Shipping Ticket before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot entitled to forfeit the sum of Rs. 2,50,000 as the latter cannot take advantage of their own wrongful conduct. In any event, the sum of Rs. 2,50,000 represents money had and received by the defendants to and for the use of the plaintiffs. The plaintiffs, in consequence, prayed for a decree directing the defendants to refund the sum of Rs. 2,50,000 together with interest at 6% from November 18, 1946. The defendants contested the claim of the plaintiffs. They pleaded that a concluded contract has been entered into between the parties as per two letters dated November 18 and November 20, 1946. The appellants had agreed to buy the lot of scraps lying in Dump No. 1 for Rs. 10,00,000 of which Rs. 2,50,000 was paid as deposit. The defendants had agreed to the balance amount being paid in instalments as asked for by the plaintiffs in their letter of November 18, 1946. The defendants further pleaded that there has been no misrepresentation made by them but the plaintiffs, without any justification, repudiated the contract by their letter dated November 22, 1946. As the plaintiffs wrongfully repudiated the contract, the defendants, as they are entitled to in law, forfeited the sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s so paid as and by way of deposit or earnest money and that it is only when the plaintiffs pay the entire price of the goods and perform the conditions of the contract that the deposit of Rs. 2,50,000 will go towards the payment of the price. It is the further view of the Courts that the amount representing earnest money is primarily a security for the performance of the contract and, in the absence of any provision to the contrary in the contract, the defendants are entitled to forfeit the deposit amount when the plaintiffs have committed a breach of contract. In this view the defendant's right to forfeit the sum of Rs. 2,50,000 was accepted and it has been held that the plaintiffs are not entitled to claim refund of the said amount. The plaintiffs' suit, in the result, was dismissed by the learned Single Judge and, on appeal, the decree of dismissal has been confirmed. On behalf of the appellants Mr. Maheshwari, learned counsel, has raised two contentions : (1) That the amount of Rs. 2,50,000 paid by the plaintiffs and sought to be recovered in the suit is not by way of a deposit or as earnest money and that, on the other hand, it is part of the purchase price and therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e we advert to the documents evidencing the contract in this case, it is necessary to find out what in law constitutes a deposit or payment by way of earnest money and what the rights and liabilities of the parties are, in respect of such deposit or earnest money. Borrows, in Words & Phrases, Vol. 11, gives the characteristics of "earnest". According to the author, "An earnest must be a tangible thing. That thing must be given at the moment at which the contract is concluded, because it is something given to bind the contract, and, therefore, it must come into existence at the making or conclusion of the contract. The thing given in that way must be given by the contracting party who gives it, as an earnest or token of good faith, and as a guarantee that he will fulfil his contract, and subject to the terms that if, owing to his default, the contract goes off, it will be forfeited. If, on the other hand, the contract is fulfilled, an earnest may still serve a further purpose and operate by way of part payment." Benjamin, in his book on 'Sale, 8th Edition, after referring to clause 17 of the Statute of Frauds and s. 4(1) of the Sale of Goods Act, 1893 providing for giving "somethin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposit. In that case, the plaintiff agreed to purchase a property for the price mentioned in the agreement and paid pound 500 on the signing of the agreement Al as a deposit and in part payment of the purchase-money." There where other stipulations in the agreement regarding title to the property and the payment of the balance of the purchase money. The plaintiff, apprehending that the defendant-vendor would resell the property, brought an action against him for specific performance of the agreement; but the suit was dismissed on the ground that there had been inordinate delay on the plaintiffs part in insisting on the completion of the contract. The plaintiff appealed. Before the Court of Appeal a request was made on his behalf for leave to amend the plaint that if specific performance could not be decreed, he should get a return of the deposit of pound 500. Leave was granted by the Appellate Court and the question hence arose -as to whether the plaintiff was entitled to get a refund of the said amount. In dealing with the deposit claimed back by the plaintiff, Cotton, L.J., at p. 95, observes "What is the deposit ? The deposit, as I understand it, and using the words of Lord Jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement provided that the purchaser viz., the plaintiff, should make a deposit and it further provided that if the vendee failed to comply with the conditions, the deposit should be forfeited. The plaintiff, accordingly, paid the deposit but as he was not in a position to complete the contract by paying the balance purchase money, the contract could not be fulfilled. When in another litigation it was subsequently -found that the vendor's title to the property was defective, the plaintiff brought an action to recover his deposit on the ground of mistake and failure of consideration. The suit was dismissed and the Court of Appeal also confirmed the said decision. The House of Lords also finally rejected the plaintiff's claim. In discussing the nature of the deposit made by the plaintiff under the agreement, Lord Macnaghten at p. 435 observes "The deposit serves two purpose-if the purchase is carried out it goes against the purchase-money, but its primary purpose is this, it is a guarantee that the purchaser means business; and if there is a case in which a deposit is rightly and properly forfeited it is, I think, when a man enters into a contract to buy real property without taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of the estate in question out of the total consideration of Rs. 4,76,000. Later the plaintiff informed the defendant that he was not in a position to complete the purchase and gave opportunity to the latter to sell the property to any other party. Therefore it was clear that the plaintiff-purchaser was unable or unwilling to complete the contract of purchase. The, plaintiff, notwithstanding his default, sued to recover the entire sum of Rs. 1,65,000 paid by him. The High Court held that as the plaintiff had broken the contract, he must lose the earnest money of Rs. 20,000 but was entitled to a refund of the balance amount of Rs. 1,45,000 from and out of the amounts paid by him on that account. The plaintiff, dissatisfled with the decision of the High Court, carried the matter in appeal to the Judicial Committee for obtaining relief of repayment of earnest money also. The Judicial Committee agreed with the High Court that from and out of the amounts paid by the plaintiff, a sum of Rs. 20,000 was earnest money and there was nothing in the contract to suggest that the seller had agreed to sacrifice the stipulated earnest. Regarding the legal incidents of earnest money, the Judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Terms of Business of the respondents. Clause 9 requires the buyer to deposit 25%of the total value of the goods at the time of placing the order. That clause also further provides that the deposit shall remain with the company "as earnest money", to be adjusted in the final bills. It further provides that no interest is payable to the buyer by the company "on such amounts held as earnest money". There is no controversy in this case that the appellants deposited the sum of Rs. 2,50,000 under this clause nine, representing 25% of the purchase price of Rs. 10,00,000. It is therefore clear that this amount deposited by the appellant is a deposit "as earnest money", Mr, Maheshwari drew our attention to the letter, dated November 18, 1946 sent by the respondents to the appellants wherein the respondents have stated that the appellants have agreed to pay Rs. 10,00,000 for all the materials in Dump No. 1 against which a cheque for Rs. 2,50,000 has been paid and that the appellants further agreed to 'pay the balance of Rs. 7,50,000 that day itself. This statement, according to the learned counsel, will clearly show that the sum. Of Rs. 2,50,000 has been paid as part payment towards the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,76,000. The receipt of the sum of Rs. 1,65,000, granted by the seller was also stated to be only towards the sale price. But, nevertheless, the High Court, as well as the Judicial Committee, treated a sum of Rs. 20,000 out of the sum of Rs. 1,65,000, as earnest money paid under the terms of the agreement, and a claim to recover that amount of earnest money was negatived. In the case before us, the contract read with the Terms of Business of the company, clearly refers to the earnest money being paid and to the fact of Rs. 2,50,000 having been paid as earnest. Therefore, there is no ambiguity regarding the nature of the above payment and the right of the respondents to forfeit the same, under the terms of the contract, when the appellants admittedly had committed breach of the contract, cannot be assailed. The first contention for the appellants therefore fails. The second contention of Mr. Maheshwari, noted earlier, is really based upon ss. 73 and 74 of the Contract Act. According to the learned counsel, under s. 73, the respondents wilt be entitled only to compensation for any loss or damage caused to them by the breach of the contract, committed by the appellants. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount deposited by way of earnest and if so what are the necessary factors to be taken into account in considering the reasonableness or otherwise of the amount deposited by way of earnest. If the appellants were contesting the claim on any such grounds, they should have laid the foundation for the same by raising appropriate pleas and also led proper evidence regarding the same, so that the respondents would have had an opportunity of meeting such a claim. In this view, it is unnecessary for us to consider the decision of this Court in Maula Bux v. Union of India( [1970] 1 s. C.R. 928) relied on by the appellants and wherein there is an observation to the effect : "Forfeiture of earnest money under a contract for sale of property-movable or immovable-if the amount is reasonable, does not fall within s. 74 (of the Indian Contract Act). That has been decided in several cases. Kunwar Chiranjit Singh v. Har Swarup (AIR 1926 P.C. 1); Roshan Lal v. The Delhi Cloth and General Mills Co. Ltd. Delhi (ILR 33 All. 166); Muhammad Habibullah v. Muhammad Shafi (ILR 41 All. 324); Bishan Chand v. Radha Kishan Das (ILR 19 All. 489). These cases are easily explained, for forfeiture of reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that there is a duty, statutorily imposed upon Courts by s. 74 of the Contract Act not to enforce the penalty clause but only to award reasonable compensation. This aspect, he urges, has been totally missed by tile High Court. We are inclined to accept this contention of the learned counsel. This Court had to consider, in the said decision, two questions : (i) Whether the plaintiff therein was entitled to forfeit a sum of Rs. 1,000 paid as earnest money on default committed by the buyer; and (ii) whether the plaintiff was further entitled to forfeit the entire sum of Rs. 24,000 paid by the buyer under the contract which recognised such right. This Court held that the plaintiff was entitled to forfeit the sum of Rs. 1,000 paid as earnest money, when default was committed by the buyer. But, regarding the second item of Rs. 24,000 this Court held that the same cannot be treated as earnest and therefore the rights of the parties would have to be adjudged under s. 74 of the Contract Act. In view of this conclusion the Court further had to consider the relief that the plaintiff had to get when breach of contract was committed by the buyer and, in dealing with this question, it observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the Court is not deter-mined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression 'to receive from the party who has broken the contract" does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract." This Court applied s. 74 of the Contract Act, and ultimately fixed a particular amount which the plaintiff would be entitled to as reasonable compensation in the circumstances. Mr. Maheshwari placed considerable reliance on the above extracts in support of his contention and urged that the recitals regarding forfeiture of the amount of Rs. 2,50,000 shows that the contract contains a stipulation by way of penalty and therefore s. 74 is attracted. It is not possible to accept this contention. As we have already pointed out, this Court, in the above decision, recognised the principle that earnest money can be forfeited, but in dealing with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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