TMI Blog1969 (10) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... in the plaint, the only question pressed before the High Court was that the deposit was -not by way of earnest and hence the amount could not be forfeited. If the. appellants had proceeded on that basis, then the contract would have been voidable at their instance under s.19 of the Contract Act. But they have abandoned that plea and have admitted that the breach of contract was committed by them. Hence s. 64 cannot be invoked by the appellants. In this view, the second contention also fails. Appeal dismissed. - 1122 OF 1966 - - - Dated:- 28-10-1969 - J.M. SHELAT, C.A.VAIDYIALINGAM, I.D.DUA, JJ. JUDGMENT This appeal, by the plaintiffs-appellants, on certificate granted by the Calcutta High Court, is directed against the judgment and decree of the Division Bench of that Court, dated January 29, 1964 in Appeal from Original Order No. 28 of 1960, affirming the judgment and decree, dated July 16, 1959 of the learned Single Judge in Suit No. 2745 of 1947. The circumstances leading up to the institution of the said suit may be stated. The appellants, who were dealing also in the purchase of new and second hand machinery, on coming to know from an advertisement in a Daily th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking delivery after making full payment. The, respondent by its letter dated November 20, 1946 acknowledged the receipt of the appellants letter dated November 18, 1946 together with the modifications contained therein. But the respondent emphasised that the other terms and conditions will be as mentioned in its letter of November 18, 1946. On November 22, 1946, the appellants sent a communication, purporting to be in continuation of their letter dated November 18, 1946. In this letter they state that the transaction has been closed without inspecting the materials, merely on the assurance of the respondent that the quantity of aero-scrap was about 4,100 tons. The appellants further state that they have since obtained information that the quantity stated to be available is not on the spot and therefore they cannot do the business. Under the circumstances, they request the respondent to treat their letter, dated November 18, 1946 as cancelled and to return the sum of Rs. 2,50,000 already paid by them. The respondent sent several letters to the appellants asking them to pay the balance amount and take delivery of the goods; but the appellants refused to pay any further amount to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above clauses, it will be seen that a buyer has to deposit with the company 25% of the total value and that deposit is to remain with the company as earnest money to be adjusted in the final bills. The buyer is bound to pay the full value -less the deposit, before taking delivery of the stores. In case of default by the buyer, the company is entitled to forfeit unconditionally the earnest money paid by a buyer and cancel the contract. The appellants instituted suit No. 2745 of 1947 in the Original Side of the Calcutta High Court against the respondents for recovery of the sum of Rs. 2,50,000 together With interest. The plaintiffs pleaded that there had been no concluded agreement entered into between the parties and even when the matter was in the stage of proposal and counter-proposal, the plaintiffs had withdrawn from the negotiations. They alleged that even if there was a concluded contract, the same was vitiated by the false and an true representations made by the respondents regarding the quantity of scrap material available and the plaintiffs had been induced to enter into the agreement on such false representations. Hence the plaintiffs were entitled to avoid the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art thereof which had been paid as earnest money and forfeited according to law, and the terms of contract, by the defendants. Though the plaintiffs have raised various contentions in the plaint, it is seen from the judgments of the learned Single Judge and the Division Bench, on appeal, that the appellants conceded that they committed breach of contract and that the defendants have been at all material times ready and willing to perform their part of the contract. The plea that the plaintiffs entered into the contract under a mistake of fact and that they were induced, to so enter into the contract due to the misrepresentation of the defendants regarding the quantity of scrap available, was also given up. The appellants have also accepted the position that there has been a concluded contract between the parties and the said contract was concluded by the correspondence between the parties consisting of the letters dated November 18, 1946 and November 20, 1946. The plaintiffs have further abandoned the plea that the defendants were not ready and willing to perform their part of the contract. Therefore the two questions that ultimately survived for consideration by the Court were: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the material correspondence between the parties, by which the contract was concluded, read along with the terms of business will clearly show that the sum of Rs. 2,50,000 paid by the appellants was as earnest. It was further pointed out that the position in law is that the earnest money is part of the purchase price when the transaction goes through and is performed and that on the other hand it is forfeited when the transaction falls through by reason of the fault or failure of the vendee. The learned Attorney General invited us to certain decisions laying down the salient features of earnest deposit and the right of the party to whom the amount has been paid to forfeit when the opposite party has committed a breach of contract. Regarding the second contention of the appellant, the learned Attorney General pointed out that the appellants never raised any contention that the amount of Rs. 2,50,000 deposited by the appellants is to be treated as a sum named in the contract as the amount to be paid in case of breach or that the contract must be considered to contain any stipulation by way of penalty. He also pointed out that the question of reasonableness or otherwise of the earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not affect the seller s right to recover damages for breach of contract unless it as by way of deposit or guarantee in which case it is forfeited. It is further stated that an earnest does not lose its character because the same thing might also avail as a part payment. Regarding "deposit", the author states at p. 946, that a deposit is not recoverable by the buyer, for a deposit is a guarantee that the buyer shall perform his contract and is forfeited on his failure to do so and if a contract distinguishes between the deposit and installments of price and the buyer is in default, the deposit is forfeited. Halsbury, in "Laws of England", Vol. 34, III Edition, in paragraph 189 at p. 118, dealing with deposit, states : "Part of the price may be payable as a deposit. A part payment is to be distinguished from a deposit or earnest. A deposit is paid primarily as security that the buyer, will duly accept and pay for the goods, but, subject thereto, forms part of the price. Accordingly, if the buyer is unable or unwilling to accept and pay for the goods, the seller may repudiate the contract and retain the deposit." Earl Jowitt, in his Dictionary of English Law, says "Giving an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t point, it comes shortly to this, that a deposit, if nothing more is said about it, is, according to the ordinary interpretation of business men, a security for the completion of the purchase. But in what sense is it a security for the completion of the purchase ? It is quite certain that the purchaser cannot insist on abandoning his contract and yet recover the deposit, because that would be to enable him to take advantage of his own wrong" Fry, L.J., at p. 101, observes "Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract." Ultimately, the Court of Appeal rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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." The learned Judge, quoting the observations of Hamilton, J., in Sumner and Leivesley v. John Brown Co.( 25 Times L. R, 745), observes at p. 409: " Earnest . . . meant something given for the purpose of binding a contract, something to be used to put pressure on the defaulter if he failed to carry out his part. If the contract went through, the thing given in earnest was returned to the giver, or, if money, was deducted from the price. If the contract went off through the giver s fault the thing given in earnest was forfeited." The Judicial Committee had to consider in Chiranjit Singh v. Har Swarup( A.I.R. 1926 P.C. 1) the question as to whether a payment maade by way of earnest money by a buyer could be recovered when the buyer had committed breach of contract. In that case the plaintiff had entered into a contract with the defendant for purchase of a property. One of the terms of the contract of sale was "W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest. Having due regard to the principles enunciated above, -we shall now consider, the relevant claims in the contract between the parties in the case, before us, to ascertain whether the amount of Rs. 2,50,000 paid by the appellant constitutes earnest money and if so whether the respondents were justified in law in forfeiting the same. We have already referred to the letter, dated November 18, 1946 written by the respondents to the appellants confirming the sale of scrap lying in Dump No. 1. That letter states that the total price for which the appellants agreed to purchase the scrap material is Rs. 10,00,000 against which a sum of Rs. 2,50,000 had been paid and the balance amount was to be paid that day itself. In the reply sent by the appellant on the same day, they confirmed the arrangement referred to by the respondents but, regarding the payment of the balance amount, they agreed to pay the same in two instalments. The letter of November 18, 1946 to the appellants clearly refers to the fact that the Company s Terms of Business applied to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be only adjusted in the final bills. Therefore the amount of Rs. 2,50,000 deposited by the appellants, representing 25% of the total of Rs. 10,00,000, is "earnest money" under clause 9 of the Terms of Business. We have also earlier referred to clause 10 of the Terms of Business, which relates to the time and method of payment. Under clause 10(b) a right is given to the respondents when the buyer makes default in making payment according to the contract, to forfeit unconditionally the earnest money paid by the buyer. That clause further provides that this forfeiture of earnest money is without proudly to the other rights of the respondents in law. We have referred to the fact that though the appellants raised pleas that they have not committed any breach of contract and that on the other hand the respondents were the parties in breach, these contentions were not pursued and had been abandoned before the High Court. Further, as noted by the High Court, the appellants conceded that they had committed a breach of the contract. If so, as rightly held by the High Court, under clause 10(b) the respondents were entitled to forfeit the earnest money of Rs. 2,50,000. Before closin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The question of the quantum of earnest deposit which was forfeited being unreasonable or the forfeiture being by way of penalty, were never raised by the appellants. The Attorney General also pointed out that as noted by the High Court the appellants led no evidence at all and, after abandoning the various pleas taken in the plaint, the only question pressed before the High Court was that the deposit was -not by way of earnest and hence the amount could not be forfeited. Unless the appellants had pleaded and established that there was unreasonableness attached to the amount required to be deposited under the contract or that the clause regarding forfeiture amounted to a stipulation by way of a penalty, the respondents had no opportunity to satisfy the Court that no question of unreasonableness or the stipulation being by way of penalty arises. He further urged that the question of unreasonableness or otherwise regarding earnest money does not at all arise when it is forfeited according to the terms of the contract. In our opinion the learned Attorney General is well founded in his contention that the appellants raised no such contentions covered by the second point, noted abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions, wherein, according to him, though the amounts deposited by way of earnest were fairly large in proportion to the total price fixed under the contract, nevertheless the forfeiture of those amounts were not interfered with by the Courts. But, as we have already mentioned, we do not propose to go into those aspects in the case on hand. As mentioned earlier, the appellants never raised any contention that the forfeiture of the amount amounted to a penalty or that the amount forfeited is so large that the forfeiture is bad in law. Nor have they raised any contention that the amount of deposit is so unreasonable and therefore forfeiture of the entire amount is not justified. The decision in Maula Bux s Case([1970] 1 S.C.R. 928. (2) (1964) 1 S.C.R. 515) had no occasion to consider the question of reasonableness or otherwise of the earnest deposit being forfeited. Because , from the said judgment it is clear that this Court did not agree with the view of the High Court that the deposits made, and which were under consideration, were paid as earnest money. It is under those circumstances that this Court proceeded to -consider the applicability of s. 74 of the Contract Act. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by s. 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture." The Court further observed at p. 529 : "There is no ground for holding that the expression contract contains any other stipulation by way of penalty is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants. under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalt ..... 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