Madhava v. Kasaragod Minicipality — 1972 DIGILAW 223 (KER)

ORDER : 1. This is a revision petition by the defendant against the decree and judgment of the Munsiff, Kasaragod, in a Small Cause Suit No. 54 of 1970 decreeing the suit instituted by the respondent-Municipality, the plaintiff, for the arrears of licence fee from 10th January 1968 to the date of suit at the rate of Rs. 131 per month with interest and costs. 2. The only question argued in this revision petition is that the forfeiture of security amount of Rs. 393 is illegal and unsustainable as the forfeiture clause in the contract between the parties is a penal provision which, in the circumstances of the case, cannot be enforced in view of the provisions of section 74 of the Indian Contract Act. 3. On execution of Ext. A-1 agreement the petitioner took possession of a shop building from the respondent-Municipality agreeing to pay a fee of Rs. 131 every month beginning from 10th November 1966. The petitioner further stipulated in Ext. A-1 that he shall pay the licence fee on or before the 10th day of each month from which the fee shall become due. 4. Para 3 of Ext. A-1 agreement further provided that: “The licensee shall deposit further a sum which will make the total deposit equal to three times of the amount of one month licence fees for the shop room as security for the due and faithful observance and compliance with the terms of this deed. The said security deposit shall not bear any interest and shall be returned to the licensee on the termination of this licence after adjustment of any amount that may be found due to the Municipality.” Para 4 of Ext. A-1 provided that: “The Municipality shall forfeit to its funds the entire deposit money referred to in clause (3) (referred to above) hereof on the licensee making default in paying the fees within the period and in the manner as stipulated in clause (2) hereof, The licence shall stand cancelled and revoked on the expiry of this period of one month.” 5. It is admitted that the petitioner did not pay the monthly licence fee due on 10th January 1968 until 31st January 1968 or thereafter. So he was declared a defaulter. On the basis of Ext. It is admitted that the petitioner did not pay the monthly licence fee due on 10th January 1968 until 31st January 1968 or thereafter. So he was declared a defaulter. On the basis of Ext. B-3 notice dated 5th April 1968 the Municipality informed the petitioner that because of his default to pay the monthly rent on or before 31st January 1968, the security deposit of Rs. 393 held by the Municipality had been forfeited to the Municipal funds under the terms and conditions of Ext. A-1 contract. So they informed him that he could not claim any adjustment of the amount of licence fee payable by him under the contract towards the security deposit. 6. The learned counsel of the revision petitioner contended that the forfeiture clause in Ext. A-1 is in the nature of a penalty and therefore the forfeiture clause cannot be enforced against him in view of section 74 of the Contract Act. 7. It is well settled that section 74 of the Contract Act has no application to a deposit for due performance of a contract and in such cases a suit by the party in default for the refund of deposit will not be under the section. The principle embodied in section 74 is that where a penalty or liquidated damages is fixed under a contract to be paid in case of its breach the court has to give reasonable compensation to the aggrieved party not exceeding the amount mentioned in the contract as penalty and liquidated damages. The section contemplates the case of recovery of compensation and not a case in which money has been paid by way of compensation. Moreover, it is the party aggrieved that can recover compensation for damages from another party who breaks the contract. But a party who himself has not fulfilled his obligation under the contract cannot invoke section 74 of the Contract Act and claim refund of the amount deposited by him for due performance of the contract. 8. The above principle of law was enunciated in the following observation of Fry, L.J. in Howe vs. Smith, 1884 Ch. D. 89: “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. 8. The above principle of law was enunciated in the following observation of Fry, L.J. in Howe vs. Smith, 1884 Ch. D. 89: “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 it is then also an earnest to bind the bargain so entered into and created by the fear of its forfeiture a motive in the payer to perform the rest of the contract.” 9. In a later decision of, the Madras High Court reported in Rattamma vs. Krishnamurthi, AIR 1928 Mad. 326, it is held that if the money by the purchaser was by way of security for fulfilment of the bargain, it was liable to be forfeited on his default. 10. The opinion expressed in the above case is reproduced with approval in Venkataperumal vs. Thiruppuvanam Panchayat Board, AIR 1955 Mad. 717 . It reads: “A sum of money paid as advance by the purchaser to the vendor in respect of the sale of goods can be recovered by the purchaser, even though the transaction of sale fell through owing to the purchaser's default, unless the vendor proves a contract express or implied that the money paid as advance should be treated as security for the purchaser's fulfilment of the bargain and as such liable to be forfeited on his default.” It was sufficient in such cases to show that there was an express or implied contract that the amount paid should be treated as a security deposit in which Case the deposit made as security for the due performance of the contract could be forfeited. 11. The Bombay High Court also held the same view as the Madras High Court held in the above cases. The learned Judges, Chagla, C.J. and Tendolkar, J. held in Abdul Gani vs. Trustees, Bombay Port, AIR 1952 Bom. 11. The Bombay High Court also held the same view as the Madras High Court held in the above cases. The learned Judges, Chagla, C.J. and Tendolkar, J. held in Abdul Gani vs. Trustees, Bombay Port, AIR 1952 Bom. 310 that section 74 of the Contract Act was inapplicable to deposits made for due performance of a contract. Chagla, C.J. who spoke for the Division Bench stated: “It is a guarantee for the performance of the contract, and it supplied a motive to the parties to fulfil their obligations under the contract. It acts “in terrorem” and by reason of the fear that the deposit might be forfeited if the contract is not performed, the parties are induced to carry out their obligations under the contract.” 12. These decisions had been reviewed in Managing Partner, Hindustan Shipyard Ltd. Visakhapatnam vs. Attili Appalaswami, AIR 1963 A.P. 71 where Chandra Reddy, C.J. stated: “In my opinion the case of a deposit made as security for the fulfilment of the obligations under a contract is not governed by section 74. The rule as to penalty dealt with in section 74 is not applicable to cases of forfeiture of deposits where the instrument refers to some deposit as a guarantee for the performance of the contract, the party in default cannot claim a refund of the deposit since such a deposit operates as a motive to the parties to carry out the obligations under the contract.” 13. The Bombay decision, Abdul Gani vs. Trustees, Bombay Port, AIR 1952 Bom. 310 and an earlier Madras decision in Natesa Iyer vs. Appavu Padayachi, AIR 1915 Mad. 896 had been overruled by the Supreme Court in Fatch Chand vs. Balkishan Dass, AIR 1963 SC 1405 taking a different view as to the construction and application of section 74 of the Contract Act. Still the observation of the learned Judges of the Bombay High Court in the above cases will not in any way run counter to the Supreme Court decision. In the case on hand it is clear that section 74 of the Contract Act has no application. 14. In W.J. Younie vs. Tulsiram Jankiram, AIR 1942 Cal. Still the observation of the learned Judges of the Bombay High Court in the above cases will not in any way run counter to the Supreme Court decision. In the case on hand it is clear that section 74 of the Contract Act has no application. 14. In W.J. Younie vs. Tulsiram Jankiram, AIR 1942 Cal. 382 it is held that a deposit in the nature of a guarantee for performance of a contract is forfeitable upon default made by the depositor, and the forfeiture is justified if the amount is reasonable or not unreasonable and the provisions of section 74 do apply to such cases. But it is safer to point out that there is however a fundamental distinction or difference between earnest money and part payment of price and the rule of forfeiture has no application to money received as such part payment. 15. There is also a distinction between the penalty for breach of contract and the forfeiture of a deposit. While the latter is a payment actually made, the former is compensation sought for breach of contract. Section 74 of the Contract Act contemplates the case of recovery of compensation for breach of contract and not a case in which money has been paid by way of earnest (See Dinanath Damodar Kale vs. Malvi Mody Ranchhoddas and Co. AIR 1930 Bom. 213). 16. The learned counsel of the revision petitioner relied upon three decisions in support of his contention. They are: Bhimji N. Dalal vs. Bombay Trust Corporation, AIR 1930 Bom. 306, Michel Habib Raji Ayoub vs. Sheik Suleiman El Taji El Farouqui, AIR 1941 P.C. 101 and Kanak Kumari Sahiba vs. Chandan Lall Khattry, AIR 1955 Patna 215. None of these cases is on the point. They all dealt with cases of contract wherein the question was to fix the amount of damages on account of the failure of the contract due to non-fulfilment or failure to pay certain sums of money agreed to be paid in instalments under the contract. The question of either a sum of money paid as deposit for fulfilment of the contract or any earnest money retained with the party who enforced the contract did not come up for consideration in those cases. Those line of cases have no application on the question in issue in this case. 17. The question of either a sum of money paid as deposit for fulfilment of the contract or any earnest money retained with the party who enforced the contract did not come up for consideration in those cases. Those line of cases have no application on the question in issue in this case. 17. On a consideration of all the relevant decisions on the point the principle to be deduced from them touching the dispute in question can be stated in the following proposition:—A sum paid under a contract cannot be called a deposit unless it fulfils two requirements. They are: (1) Deposit must be a part payment and (2) it must be of the nature of money staked. A deposit then serves not merely as a part payment, but there is further characteristic which it possesses, namely it is paid as a guarantee that the contract shall be performed. There is a distinction between penalty for breach of contract and the forfeiture of a deposit of earnest money. While the latter is a payment actually made the former is compensation sought for breach of contract. Section 74 contemplates the case of recovery of compensation for breach of contract and not a case in which money has been paid by way of earnest. So it can be held that forfeiture of earnest money by a defaulting purchaser or a party who broke the contract is not penalty. A deposit in the nature of a guarantee for the performance of a contract is forfeitable upon default made by the depositor and the forfeiture is justified if the amount is reasonable or not unreasonable. 18. The revision petitioner broke the contract in not making the payment of licence fee on or before 31st January 1968 though it accrued due on 10th January 1968. It was a condition in Ext. A-1 contract that if the licence fee was not paid within the period in each month the security deposit of Rs. 393 which was equal to three months' licence fee shall be forfeited to the municipal funds. Section 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. 393 which was equal to three months' licence fee shall be forfeited to the municipal funds. Section 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. The petitioner has therefore no subsisting claim for the amount of security deposit which was already forfeited to the municipal funds and the respondent—Municipality had already exercised its right of forfeiture on intimation to the petitioner. The lower court's decree and judgment required no interference. The revision petition has to fail. 19. In the result, the revision petition is dismissed with costs.