Judgment :- 1. S.74 of the Indian Contract Act, 1872 concerns compensation for breach of contract where the amount to be paid in the case of such breach is named or the contract contains any other stipulation by way of penalty. That Section reads: 74. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be. the penalty stipulated for". Even if the parties to the contract stipulate for payment of a specific sum or forfeiture of a specific sum as penalty or compensation in the event of there being a breach of the contract the defaulting party is liable to pay as compensation only such sum as is found to be reasonable compensation. Such reasonable compensation cannot exceed the amount named in the contract or the penalty stipulated. If in an agreement of sale parties agree that any part of the consideration paid at the time of the agreement will be forfeited in case the vendee defaults to pay the balance, the question whether such forfeiture will be operative will have to be determined with reference to S.74. If the amount which has to be forfeited is reasonable in the sense that it is reasonable compensation for breach then, of course, it will not be a penalty and therefore will be recoverable. But if it would be more than reasonable compensation then only the amount of reasonable compensation will be recoverable. If reasonable compensation for breach is more than the sum agreed to be forfeited then again what" could be recovered would only be the amount named or penalty stipulated for. 2. Earnest money under a transaction of sale is something paid at the time of an agreement of sale in token of the earnestness of the party and it is generally a small sum. If the transaction goes through this sum is appropriated towards the price. But if it falls through the sum is forfeited. 2. Earnest money under a transaction of sale is something paid at the time of an agreement of sale in token of the earnestness of the party and it is generally a small sum. If the transaction goes through this sum is appropriated towards the price. But if it falls through the sum is forfeited. Normally, the earnest money may not be in excess of the reasonable compensation and therefore cannot be termed to be penalty. But there may be cases where under the guise of payment of earnest money, which is agreed to be forfeited in the event of breach, a sum much more than the reasonable compensation, is stipulated. In such an event even if it be named as earnest money S.74 may apply and the compensation will have to be limited to the amount determined as reasonable compensation. 3. In 1964(1) S.C. Reports 315 (Psteh Chand v. Balakrishan Das), the court was dealing with a case of claim to forfeiture of a sum of Rs. 1,000/- paid as earnest money at the time of the execution of the agreement for sale of a land for Rs. 1,12,500/- and the forfeiture of a further sum of Rs. 24,000/- paid as part of sale price. The agreement provided that on the vendee's failure to pay the balance sale price this, sum of Rs. 25,000/- will stand forfeited. Before the Supreme Court the plaintiffs' claim of forfeiture of the sum of Rs 1,000/- which was expressly named and paid as earnest money was hot challenged. But with regard to the amount of Rs. 24,000/- the court took the view that it cannot be assumed that because there was a stipulation for forfeiture the amount paid must bear the character, of deposit for the due performance of the contract. The question of compensation for breach of contract was to be determined in accordance with S.74 of the Indian Contract Act and not by reference to the Common Law of England particularly the law as to liquidated damages. Under the English law a pre-estimate of the damages agreed between the parties is held to be binding while a stipulation in terrorem is not enforceable as it amounts to penalty. Under the English law a pre-estimate of the damages agreed between the parties is held to be binding while a stipulation in terrorem is not enforceable as it amounts to penalty. Referring to this the Supreme Court said: "The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty." Dealing with the quantum of damages the Supreme Court said: "Jurisdiction of the court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles." As pointed out by the Court S.74 does not confer any special benefit upon any party, but it merely "declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture 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 Supreme Court in the decision in Maula Bux v. Union of India (AIR. 1970 SC. 1955) referred to the question of forfeiture of earnest money in a contract for sale and said: "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. That has been decided in several cases. AIR. 1926 P.C.1; Roshan Lal v. Delhi Cloth and General Mills Co. Ltd, Delhi, (1911) ILR. 33 All. 166; Muhammad Habibullah v. Muhammad Shafi, ILR 41 All 324 (AIR. 1919 All. 265); Bishen Chandy. Radha Dishan Das, (1897) ILR. 19 All. 489. These cases are easily explained, for forfeiture of a 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. 33 All. 166; Muhammad Habibullah v. Muhammad Shafi, ILR 41 All 324 (AIR. 1919 All. 265); Bishen Chandy. Radha Dishan Das, (1897) ILR. 19 All. 489. These cases are easily explained, for forfeiture of a 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." This decision has been referred to and the principles affirmed in the decision in Union of India v. Rampur Distillery & Chemical Co. Ltd. (AIR. 1973 S.C.1098). It can be said to be well settled that in a case where there is stipulation in the agreement of sale that a part of the sale price paid at the time of the agreement is to be forfeited in the event of breach by the vendee it is not open to the vendor to forfeit the entire sum as compensation for breach on the basis of the stipulation. Notwithstanding such covenant in the contract the court will have to determine the reasonable compensation and that alone can be forfeited. If the amount paid is named as earnest money and taking into account the quantum of such amount the court is of the view that it is earnest money the forfeiture may operate. That is because the amount to be so forfeited would not exceed reasonable compensation. 4. In the suit from which this appeal has resulted the plaintiff seeks recovery of a sum of Rs. 2,700/- paid by him to the defendant pursuant to an agreement for sale dated 17 81966. Under this agreement the defendant obliged himself to sell to the plaintiff an item of immovable property for a consideration of Rs. 15,250/- Towards the sale price a sum of Rs. 2,700/- was paid as advance along with the execution of the agreement. The balance was to be paid at the time of registration of the sale deed. It is the plaintiff's case that the defendant defaulted in selling the property while the defendant's case is that it was the plaintiff who was in default. 2,700/- was paid as advance along with the execution of the agreement. The balance was to be paid at the time of registration of the sale deed. It is the plaintiff's case that the defendant defaulted in selling the property while the defendant's case is that it was the plaintiff who was in default. That it was the plaintiff who was in default has now been found concurrently and therefore the only question is if so whether the plaintiff is entitled to claim back this amount of Rs. 2,700/-paid. 5. The main question which is in controversy before me is whether the entire sum of Rs. 2,700/- can be appropriated by the defendant even if the plaintiff was in default. In other words what should be the compensation for the breach? It is true that the agreement provided that on default of the plaintiff to take the document he would forfeit the amount of Rs. 2,700/- which was part of the price paid. But counsel for the plaintiff-appellant relies on S.74 of the Indian Contract Act, 1872 to contend that in spite of such stipulation, the clause would not be enforceable as forfeiture would then be by way of penalty. For, according to counsel the sum of Rs. 2,700/- does not bear reasonable relation to the compensation and it is merely a part of the price. It is not a nominal amount and it is not earnest money. Much has to be said in favour of this contention. It is true that even if parties stipulate for forfeiture of money paid as advance sale price the court, if a controversy arises, will have to determine what the reasonable compensation would be. Therefore, if that had been the issue, forfeiture would have been limited to reasonable compensation and if there was any balance remaining out of the sale price paid the plaintiff would have been entitled to a decree. 6. Though this be the position I do not think the plaintiff in this case is entitled to seek a decree from court. That is because any such decree would be beyond the pleadings in the suit. Though what is urged before me now is that the amount of Rs. 2,700/- would be in excess of the reasonable compensation that may be determined in case of breach, an enquiry is not called for on the allegations in the plaint. That is because any such decree would be beyond the pleadings in the suit. Though what is urged before me now is that the amount of Rs. 2,700/- would be in excess of the reasonable compensation that may be determined in case of breach, an enquiry is not called for on the allegations in the plaint. The plaint proceeds only on the footing that the defendant is a defaulter and therefore the forfeiture clause will not operate. It is for this reason that plaintiff seeks a decree for the amount paid by him as part of the sale price. But now what is urged is that the plaintiff should atleast get a decree for a portion of the plaint claim that being the difference between the sum of Rs. 2,700/- paid and the reasonable compensation to be found. This necessarily would raise the issue whether this amount of Rs. 2,700/- is in excess of reasonable compensation and what such reasonable compensation would be. The plaintiff has no case in the plaint that even if he was a defaulter the defendant's right to forfeit should be limited to reasonable compensation and such compensation would be a sum lesser than the amount agreed to be forfeited. It is not. possible for this court sitting in second appeal to decide this question. It should have been a matter for pleadings. The plaintiff could have atleast claimed in the alternative that he should be entitled to recovery of any amount in excess of the reasonable compensation. Then the defendant would have been put to necessity of showing whether the whole or any part of the sum of Rs. 2,700/-could be considered as compensation due for breach of contract, and the court would have been put to the necessity of adjudicating on this question. It is not possible to decide this question for want of pleadings. It is urged by C. K. Viswanatha Iyer, counsel for appellant that, there is evidence to show that two years later the defendant sold the property for a sum of Rs. 14,100/- and if that be the case he has lost only a sum of Rs. 1150/- and that should be determined as a reasonable compensation. It is not possible to say so because besides the difference in the sale price there may be various other items which may have to be taken note of. 14,100/- and if that be the case he has lost only a sum of Rs. 1150/- and that should be determined as a reasonable compensation. It is not possible to say so because besides the difference in the sale price there may be various other items which may have to be taken note of. One cannot assume that the property was sold in the same condition as it was two years earlier. There might be various other items which could have been shown by the defendant but which he had no occasion, to prove in the absence of pleadings in the plaint. Hence I will not be justified in going into this question as matters now stand. Hence the only course open to me is to dismiss this appeal but considering the special circumstances I direct that the parties will suffer their respective costs. Dismissed.