Full Judgment Text
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PETITIONER:
SHREE HANUMAN COTTON MILLS & ORS.
Vs.
RESPONDENT:
TATA AIR-CRAFT LTD.
DATE OF JUDGMENT:
28/10/1969
BENCH:
VAIDYIALINGAM, C.A.
BENCH:
VAIDYIALINGAM, C.A.
SHELAT, J.M.
DUA, I.D.
CITATION:
1970 AIR 1986 1970 SCR (3) 127
1969 SCC (3) 522
ACT:
Contract--Money deposited as earnest money--Breach
committed by buyer-Right of seller to forfeit-Principles.
Contract Act (9 of 1872), ss. 64 and 74-Scope of.
HEADNOTE:
The respondent agreed to sell and the appellant agreed to
buy some aero-scrap for Rs. 10,00,000. The appellant paid
Rs. 2,50,000 on the date of the contract and it was agreed
between the parties that the balance should be paid in two
instalments. It was also agreed that the respondent’s terms
of business were made part of the terms and conditions gov-
erning the contract. According to cl. 9 of the respondent’s
terms of business the buyer has to deposit with the
respondent 25% of the total value and that deposit is to
remain with the respondent as earnest money to be adjusted
in the final bills and no interest shall be payable to buyer
on the amount. Under cl. 10 of the terms and conditions, if
the buyer makes default in making payment according to the
contract, the respondent has a right to cancel the, contract
and forfeit unconditionally the earnest money without
prejudice to any other Tights of the respondent in law. The
appellant committed breach of the contract by refusing to
pay the rest of the money and to take delivery of the aero-
scrap. The respondent thereupon cancelled the contract and
forfeited the deposit of Rs. 2,50,000.
A suit by the appellant for recovery of the amount was
dismissed.
In appeal to this Court,
HELD : (1) For a deposit by a purchaser to be treated as
earnest money the ’following conditions must be satisfied :
(i) it must be given at the moment at which the contract is
concluded; (ii) it represents a guarantee that the contract
will be fulfilled or, in other words, ’earnest’ is given to
bind the contract; (iii) it is part of the purchase price
when the transaction is carried out; (iv) it is forfeited
when the transaction falls through by reason of the default
or failure of the purchaser; and (v) unless there is
anything to the contrary in the terms of the contract, on
default committed by the buyer, the seller is entitled to
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forfeit the earnest. [139 D-F]
In the present case, the payment of Rs. 2,50,000 could not
be treated merely as part-payment towards the total price,
because, the terms of business of the respondent applied to
the contract, and under those terms, since the conditions
regarding earnest money are satisfied, the amount deposited
by the appellant was earnest money and the respondent was
entitled to forfeit if. [140; 141 F]
Howe v. Smith L.R. (1884) Ch. 89, Soper v. Arnold, I.R.
(1889) 14 A.C. 429, Farr, Smith & Co. v. Messers, Ltd. L.R.
[1928] 1 K.B.D. 397, Sumner and Leivesley v. John Brown &
Co. 25 T.L.R. 745 and Chiranjit Singh v. Har Swarup, A.I.R.
1926 P.C. 1, applied.
128
Roland Burrows, Words and Phrases Vol. 11, Benjamin on Sale,
Halsbury’s Laws of England (111 Edition) Vol. 34, p. 118,
para. 189 and Jowitt’s Dictionary of English Law, referred
to.
(2) In Fateh Chand v. Balkishan Das, [1964] 1 S.C.R. 515,
this Court recognised the principle that earnest money could
be forfeited, and that s. 74 of the Contract Act applied
only to the amount paid by the buyer which was not earnest
money. In the present case, since the entire amount paid by
the appellant was earnest money under the contract, this
decision has no application. [145 H; 146 A]
(3) As the plea of misrepresentation was abandoned by the
appellant and the breach off contract was admittedly
committed by the appellant,s. 64 of the Contract Act could
not be invoked by the appellant. [146 D]
Murlidhar Chatterjee v. International Film Co. L.R. 70 I.A.
35, not applicable.
[The question as to whether the element of unreasonableness
can even be taken into account when considering the
forfeiture of an amount deposited by way of earnest, and if
so what factors should be taken into account left open.]
[142 F-G]
Maula Bux v. Union of India, [1970] 1 S.C.R. 928, explained.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1122 of1966.
Appeal from the judgment and decree dated January 29, 1964
of the Calcutta High Court in Appeal from original order No.
28 of 1960.
B. P. Maheshwari and Sobhag Mal Jain, for the appellant.
Niren De, Attorney-General, N. S. Bindra and S. P. Nayar,
for the respondent.
The Judgment of the Court was delivered by
Vaidialingam, J.-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 adver-
tisement in a Daily that the defendant-respondent was
offering for sale aero-scrap, addressed a letter, dated
November 6, 1946 to the respondent intimating their desire
to purchase the materials advertised for sale, and stating
that one of their representatives
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would be contacting them shortly. Obviously the parties
must have met and decided 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 Panagarh,
on the terms and conditions mentioned in the letter. The
material was stated to be in Dump No. 1 near the flight line
at Panagarh and the approximate quantity was 4000 tons of
aero-scrap, more or less. The letter refers to the appel-
lants 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 shall
refer to the relevant clauses in the company’s terms of
business, referred to in this letter, a little later. It is
enough to note, at this stage that those terms of business
have been made part of the terms and conditions governing
the contract.
On the same day, the appellants sent a reply to the
respondent, acknowledging the letter. The appellants said
that they noted that the respondent wants to sell the aero-
scrap as it is and that it wanted the appellants to pay the
full value, viz., the balance of Rs. 7,50,000 at once. The
appellants confirmed the arrangement contained in the
respondent’s letter; but regarding payment, the appellants
said that they agree to pay the balance amount in two
instalments viz., Rs. 2,50,000 on or before November 22,
1946 and the balance of Rs. 5,00,000 on or before December
14, 1946. ,They also further stated that they shall commence
taking 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
130
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 the respondent. The respondent ultimately forfeited the
entire sum of Rs. 2,50,000 which, according to it, was
earnest money and then cancelled the contract.
Now that we have referred to the material correspondence
that took place between the parties as well as the final
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action of the defendant of forfeiting the amount, 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 same is presented to the Depot
concerned for taking delivery of the stores
concerned.
(b) If the buyer shall make default in
making payment for the stores in accordance
with the provisions of this contract the.
Company may without prejudice to its rights
under Clause 11 thereof or other remedies in
law
131
forfeit unconditionally the earnest money paid
by the buyer and cancel the contract by notice
in writing to the buyer and resell the stores
at such time and in such manner as the Company
thinks best and recover from the buyer any
loss incurred on such resale. The Company
shall, in addition be entitled to recover from
the buyer any cost of storage, warehousing or
removal of the stores, from one place to
another and any expenses in connection with
such a resale or attempted resale thereof.
Profit, if any, on resale as aforesaid, shall
belong to the Company."
From the 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
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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 contract and they have avoided the same. They
pleaded that the respondents were never ready and willing to
perform their part of the contract. Even on the assumption
that the plaintiffs had wrongfully repudiated the contract,
such repudiation was accepted by the defendant by putting an
end to the contract. The respondents were not 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
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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. 2,50,000 paid
by the plaintiff as earnest money, under the terms of
business of the Company which had become part of the
contract entered into between the parties. The defendants
further pleaded that they have always been ready and willing
to perform their part of the contract and that they, in
fact, even after the plaintiff repudiated the contract,
called upon them to pay the balance amount and take delivery
of the articles. But the plaintiffs persisted in their
wailful refusal to perform their part and therefore the
defendants had no alternative but to forfeit the earnest
money and conduct a resale of the goods. The defendants
further pleaded that the appellants had to pay them a sum of
Rs. 42,499 for the loss and damage sustained ’by the
defendants They further urged that the plaintiffs were not
entitled to claim the refund of the sum of Rs. 2,50,000 or
any part 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
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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: (1) as to whether the sum of Rs. 2,50,000
was paid by the plaintiffs as and by way of part payment or
as earnest deposit; and (2) as to whether the defendants
were entitled to forfeit the said amount.
133
The learned Single Judge and, on appeal, the Division Bench,
have held that the sum of Rs. 2,50,000 paid by the
appellants was 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 defendants are not entitled to
forfeit the said amount. (2) In this case, it must be
considered that the sum of Rs. 2,50,000 has been named in
the contract as the amount to be paid in case of breach or
in the alternative the contract contains a stipulation by
way of penalty regarding forfeiture of the said amount and
therefore the defendants will be entitled, if at all, to
receive only reasonable compensation under S. 74 of the
Contract Act and the Courts erred in not considering this
aspect. Under this head, the counsel also urged that even a
forfeiture of earnest money can only be, if the amount is
considered reasonable and in this case the amount which
represents 25 % of the total price cannot be considered to
be reasonable and hence the appellants are entitled to
relief in law.
The learned Attorney General, on behalf of the respondents,
pointed out that 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
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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
earnest deposit forfeited in this case, was never raised by
the appellant at any stage of the proceedings in the High
Court. Therefore s. 74 of the Contract Act has "no
application.
The first question that arises for consideration is whether
the payment of Rs. 2,50,000 by the appellants was by way of
deposit or earnest money. Before 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 "something in
earnest to bind the -contract, or in part payment", says, at
p. 219 :
" give something in earnest’ or ’in part
payment,’ are often treated as meaning the
same thing, although the language clearly
intimates that the earnest is something to
bind the bargain,’ or, ’the contract,’ whereas
it is manifest that there can be no part
payment till after the bargain has been bound,
or closed."
The author further states that there are two distinct
alternatives, viz., a buyer may give the seller money or a
present as a token or evidence of the bargain quite apart
from the price, i.e., earnest, or
135
he may give him part of the agreed price -to be set off
against the money to be finally paid, i.e., part payment and
that if the buyer fails -to carry out the contract and it is
rescinded, cannot recover the earnest, but he may recover
the part payment. But this does 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
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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 earnest or earnest-money is a mode
of signifying assent to a contract of sale or
the like, by giving to the vendor a nominal
sum (e.g., a shilling) as a token that the
parties are in earnest or have made up their
minds."
In Howe v. Smith(1) Fry, L.J., discussed the history of
"earnest", which is identical with a 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
(1) L.R. [1884] Ch. D. 89.
136
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
Justice James (in L. R. 10 Ch. 512), is a
guarantee that the contract shall be
performed. If the sale goes on, of course,
not only in accordance with the words of the
contract, but in -accordance with the
intention of the parties in making the
contract, it goes in part, payment of the
purchasemoney for which it is deposited; but
if on the default of the purchaser the
contract goes off, that is to say, if he
repudiates the contract, then, according to
Lord Justice James, he can have no right to
recover the deposit."
Bowen, L.J., at p. 98, states
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"We have therefore to consider what in
ordinary parlance, and as used in an ordinary
contract of sale, is the meaning which
business persons would ’attach to the term
’deposit’. Without going at length into the
history, or accepting all that has been said
or will be said by the other members of the
Court on that point, it comes shortly to this,
’that a deposit, if nothing more is said about
it, is, according to the ordinary interpre-
tation 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
137
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 the claim of the
plaintiff for refund of the deposit.
In Soper v. Arnold(1) the House of Lords had to consider the
right of the plaintiff therein to claim a refund of the
deposit made by him. In that case the plaintiff had
contracted to purchase a piece of land and entered into an
agreement with the vendee. The agreement 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
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into a contract to buy real property without
taking the trouble to consider whether he can
pay for it or not."
In Farr, Smith & Co. v. Messrs, Ltd. (2) dealing with the
question as to whether the payment was by way of earnest
given to bind the contract, or it was a part payment towards
the price. Wright J., observes at p. 408 :
"Certain characteristics, however, seem to be
clear, An earnest must be a tangible thing, in
which definition it may be that a deposit is
included, but in the old cases it was always
some tangible thing. That thing must be given
at the moment at which the contract is
concluded,
(1) L.R. [1889]14 A.C. 429, (1)
L.R. (1928] 1 K.B.D. 397.
6Sup. CI/70-10
138
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."
The learned Judge, quoting the observations of Hamilton, J.,
in Sumner and Leivesley v. John Brown & Co.(1), 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 de-
ducted 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(2) 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
"Willing on old terms namely earnest twenty
thousand balance in two moieties. first
payable on executing conveyance, last within
six months net cash we receive 4 lakhs
76,000."
The plaintiff did not pay the earnest money eo nomine but
sent two cheques amounting to Rs. 1,65,000 and obtained a
receipt ?hat this amount was paid towards the sale 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
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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, dissatis-
(1) 25 Times L. R, 745.
(2) A.I.R. 1926 P.C. 1.
139
fled 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 Judicial
Committee stated
"Earnest money is part of the purchase price
when the transaction goes forward; it is
forfeited when the transaction falls through,
by reasons of the fault or failure of the
vendee."
Holding that the above principle applied squarely to the
contract before them, they dismissed the paintiff’s appeal
for refund of earnest.
From a review of the decisions cited above, the following
principles emerge regarding "earnest":
(1) It must be given at the moment at which
the contract is concluded.
(2) It represents a guarantee that the
contract will be fulfilled or, in other words,
’earnest’ is given to bind the contract.
(3) It is part of the purchase price when
the transetion is carried out.
(4) It is forfeited when the transaction
falls through by reason of the default or
failure of the purchaser.
(5) Unless there is 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
140
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
contract and a copy of the said terms was also sent to the
respondents. The respondents, by confirming the
arrangement, by their letter of November 18, 1946 were fully
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aware that the terms of business of the respondent company
formed part of the contract. entered into between the
parties. We have also referred, earlier, to clauses 9 and
10 of the 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 Nov-
ember 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 total
price, pure and simple, and there is no question of any
payment by way of earnest money. But this contention
ignores the last recital in the said letter wherein it has
been specifically stated that the terms of business of the
respondent company applied to the contract. This condition
has also been accepted by the appellants; in their reply,
dated November 18, 1946. Therefore the position is this,
that the terms of business of the respondent company have
been incorporated as part of the letter and has been
embodied in the terms of contract between the parties.
Clause 9, to which we have already referred, clearly shows
that 25% of the total value is to be deposited and that
amount is to remain with the respondents as earnest money.
It is again emphasized in clause 9 that the amount so
deposited as earnest will not bear any interest, but 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.
141
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 closing the discussion on this aspect, it is
necessary to note that in the case before the Privy Council,
in Chiranjit Singh’s Case, though the contract stipulated
that a sum of Rs. 20,000 should be paid as earnest, the
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buyer did not pay any amount by way of earnest, as such, but
he paid by two cheques the sum of Rs. 1,65,000 against the
purchase price of 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 very strongly relied
upon s. 74 of the Contract Act. According to him, the sum
of Rs. 2,50,000, referred to in the contract, must be
treated as the amount to be paid in case of a breach. In
the alternative, counsel also urged that the provision in
the contract regarding the forfeiture of the said amount,
should be treated as a term containing a stipulation by way
of a penalty. Under any of
142
these circumstances, the remedy of the aggrieved party would
be to get compensation which is adjudged reasonable by the
Court. Counsel also urged that "earnest money", unless it
is considered to be a reasonable amount, could not be
forfeited in law.
The learned Attorney General very strongly urged that the
pleas covered by the second contention of the appellant had
never been raised in the pleadings nor in the contentions
urged before the High Court. 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 above. It is
therefore unnecessary for us to go into the question as to
whether the amount deposited by the appellants, in this
case, by way of earnest and forfeited as such, can be
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considered to be reasonable or not. We express no opinion
on the question as to whether the element of
unreasonableness can ever be considered regarding the
forfeiture of an amount 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(1)
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
(1) [1970] 1 S. C.R. 928.
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 amount
paid -as earnest money does not amount to
imposing a penalty. But if forfeiture is of
the nature of penalty, S. 74 applies. Where
under the terms of the contract the party in
breach has undertaken to pay a sum of money or
to forfeit a sum of money which he has already
paid to the party complaining of a breach of
contract, the undertaking is of the nature of
a penalty."
The learned Attorney General has pointed out that the
decisions referred to in the, above quotation do not lay
down that the test of reasonableness applies to an earnest
deposit and its forfeiture. He has also pointed out that
this Court, in the above decision, did not agree with the
view of the High Court that the deposit, the recovery of
which was sued for by the plaintiff therein, was earnest
money. The learned Attorney General also referred ’Us to
various decisions, 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(1) 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
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earnest money. It is under those circumstances that this
Court proceeded to -consider the applicability of s. 74 of
the Contract Act.
Mr. Maheshwari has relied upon the decision of this Court in
Fateh Chand v. Balkishan Das(1) wherein, according to him,
this
(1) [1970] 1 S.C.R. 928. (2) (1964) 1
S.C.R. 515.
144
Court has held, under similar circumstances, that the
stipulation under the conrtact regarding forfeiture of the
amount deposited is a stipulation by way of penalty
attracting s. 74 of the Contract Act. On this assumption,
counsel urged 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 observed at p. 526
"Section 74 of the Indian Contract Act deals
with the measure of damages in two classes of
cases (i) where the contract names a sum to be
paid in case of breach and (ii) where the
contract contains any other stipulation by way
of penalty. We are in the present case not
concerned to decide whether a covenant of
forfeiture of deposit for due performance of a
conrtact falls within the first class. The
measure of damages in the case of breach of a
stipulation by way of penalty is by s. 74
reasonable compensation not exceeding the
penalty stipulated for."
Again, at p. 528 it observed
"In our judgment the expression ’the contract
contains any other stipulation ’by way of
penalty’ comprehensively applies to every
covenant involving a penalty whether it is for
payment on breach of contract of money or
delivery of property in 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
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a stipulation in the nature of penalty for
forfeiture of an amount deposited pursuant to
the terms of contract which expressly provides
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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
penalty. But the application of the enactment
is not restricted to cases where the aggrieved
party claims relief as a plaintiff. I The
section does not confer a special benefit upon
any party; it merely declares the law that
notwithstanding any term in the contract
predetermining damages or providing for for-
feiture of any property by way of penalty, the
court will 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,
146
recognised the principle that earnest money can be
forfeited, but in dealing with the rest of the amount which
was not, admittedly, earnest money, s.74 was applied. In
the case before us the entire amount, as evidenced by the
contract and as held by us earlier, is earnest money and
therefore the above decision does not apply.
Mr. Maheshwari finally urged that s.64 of the Contract Act
may apply and he also relied on the decision of the Judicial
Committee in Murlidhar Chatterjee v. International Film
Co.(1). On the basis of that ruling he urged that the
respondents are bound to restore the benefit that they have
obtained under the contract. In our opinion there is no
scope for applying s.64 of the Contract Act and it follows
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that the decision of the Judicial Committee, referred to
above, and dealing with s.64 has no relevance.
We have already pointed out that the appellants raised a
contention that they had been induced to enter into the
agreement on a misrepresentation made by the respondents
regarding the quantity of material available. 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.
In the result’, the appeal fails and is dismissed with
costs.
V.P.S. Appeal dismissed.
(1) L. R. 70 I.A, 35.
147