RACHAPPA MUDAKAPPA v. TIPPANNA ALMAPPA — 1981 DIGILAW 92 (KAR)

N. R. KUDOOR, J. ( 1 ) THE appellant Rachappa Mudakappa Palled in this second appeal, brought L. C. Suit No. 163/66 on the file of the Munsiff Gadag, against the defendants for the specific performance of the agreement of sale Ex. P-8 executed by the 1st defendant tippanna Almappa Kari on 16-6-63 agreeing to sell certain items of immovable properties or in the alternative for the refund of a sum of Rs. 1,000 paid by the plaintiff to the 1st defendant under the said agreement together with interest and some other conseqential reliefs. ( 2 ) THE defendants resisted the suit on several grounds. ( 3 ) THE trial court dismissed the suit as per its judgment and decree dated 26-3-70. The correctness of the said decree was challenged by the plaintiff in R. A. No. 274|1971 on the file of the Civil Judge, Gadag, which appeal came to be dismissed by the civil Judge as per his judgment dated 7-8-1963. Hence, this second appeal by the plaintiff. ( 4 ) SRI B. C. Sridharan, learned advocate appearing for the appellant, in the course of his arguments, confined himself only to the question of the plaintiff's entitlement for the refund of Rs. 1,000 paid by him on the date of the agreement. ( 5 ) IN view of his submission, the only question that arises for determination is whether or not the plaintiff is entitled for the refund of rs. 1000 paid by him to the 1st defendant under Ex. P-8. ( 6 ) SRI B. G. Sridharan, contends that the amount of Rs. 1000 paid under ex. P-8 was towards part-payment of the sale price. On this basis, he proceeds to contend that when the due performance of the contract under the said agreement failed, the plaintiff is entitled for the refund of the said amount. Thus, the learned counsel forcibly contends that the view taken by the courts below in refusing to refund the amount was against law and liable to be modified. ( 7 ) PER contra, Sri V. T. Raya Reddy, learned counsel appearing for the 1st defendant, strenuously contended that the amount of Rs. Thus, the learned counsel forcibly contends that the view taken by the courts below in refusing to refund the amount was against law and liable to be modified. ( 7 ) PER contra, Sri V. T. Raya Reddy, learned counsel appearing for the 1st defendant, strenuously contended that the amount of Rs. 1,000 paid under Exhibit P. 8 was 'earnest money' and not 'payment of part consideration' as contended for the plaintiff, that the failure of the contract was solely due to the breach committed by the plaintiff and as such the courts below were right in refusing to grant the decree in favour of the plaintiff for refund of the amount advanced by him. He further con- tendered that the claim for refund of the advance amount was barred by time. On these submissions, he maintained that the appeal brought by the plaintiff is liable to be dismissed. ( 8 ) THE distinction between 'earnest money', 'security deposit for due performance of contract' and 'part payment of price' vis-a-vis the law of foreiture applicable to them is well-settled. The distinction between 'earnest money' and 'security deposit for due performance of contract' has been dealt with and explained by the Supreme court in Maula Bux v. Union of India air 1970 SC 1955 . It is laid down in the above decision that the forfeiture of earnest money, if the amount is reasonable, does not fall within S. 74 of the contract Act. If the deposit made by the purchaser is not to be applied towards part payment of the price when the contract is completed, then it goes out of the category of 'earnest money' as observed by the Judicial committee in Chiranjit Singh v. Har swarup AIR 1926 PC 1. "earnest money is part payment of the purchase price when the transaction goes forward; it is forfeited when the transaction falls through by reason of the fault or failure of the vendee. "a deposit which cannot be applied for part payment of the price will be security for guaranteeing due performance of the contract. The forfeiture of this kind of security depends upon the proof of actual loss or the necessity to provide reasonable compensation under S. 74 of the said act. Under S. 74, when the loss in terms of money can be determined the party claiming compensation must prove the loss suffered by him. The forfeiture of this kind of security depends upon the proof of actual loss or the necessity to provide reasonable compensation under S. 74 of the said act. Under S. 74, when the loss in terms of money can be determined the party claiming compensation must prove the loss suffered by him. These principles have been reiterated by the supreme Court in Union of India v. Rampur Distiliery Chemical Co. Ltd. , air 1973 SC 1098 . . The distinction between 'earnest money' and 'part payment of price' without anything more in the contract and as to the forfeiture of the latter been explained by Das Gupta C. J. speaking for the Bench in K. C. N. Gowda and Bros. v. Molakram Tekchand and Sons AIR 1958 Mys. 10 = 1957 Mys. LJ 221 that between 'earnest money' and 'part payment of price', there is a fundamental distinction or difference, that the nomenclature whether 'earnest or advance' used in the contract does not master, that whether or not a payment was made by way of 'earnest' or by way of advance i. e. , part payment of the price, has to be decided in each case independent of the nomenclature and that the rule of forfeiture has no application to money received as part payment of price. On the principles laid down in the above decisions, it has to be held, that if the payment of money under a contract for sale of property-moveable or immoveable - is intended to be an earnest money , that earnest money can be forfeited upon the breach of the contract on the part of the buyer. However, the same cannot be true in the case of 'security deposit for due performance of contract' or part payment of consideration'. The mere nomenclature 'earnest', 'security deposit for due performance of contract' or 'advance towards part payment of consideration' by itself will not be conclusive for the application of the law of forfeiture. The Court, therefore, in my opinion, must carefully scrutinise the terms of the contract and spell out the intention of the parties in each case before reaching the conclusion whether the payment is by way of 'earnest' or 'security deposit for due performance of the contract' or simply a 'part payment of consideration'. The Court, therefore, in my opinion, must carefully scrutinise the terms of the contract and spell out the intention of the parties in each case before reaching the conclusion whether the payment is by way of 'earnest' or 'security deposit for due performance of the contract' or simply a 'part payment of consideration'. A similar question in an identical case in which the terms of the agreement simply provided that the plaintiff had paid Rs. 1000 towards part payment of consideration undertaking to pay the balance at the time of execution of the sale deed came up for consideration before this Court in Peter Mascarenhas v. Balakrishna (1978) 2 Kar. L. J. 94. . Jagannatha Shetty, j. after referring to the decisions stated supra, observed thus:"there is no dispute on the proposition that if the payment is intended to be an earnest money under a contract for sale of property movable or immoveable, then, that earnest money could be forfeited upon the breach of the contract on the part of the buyer. But, the same cannot be the principle in case of part payment of consideration or the deposit for guaranteeing due performance of the contract. In these two types of cases, the payment made, without anything more in the contract, cannot be regarded as earnest money and the party who received the amount cannot simply forfeit it. In other words, to put emphatically, if the money paid is only towards 'part payment of price' or as deposit for guaranteeing due performance of contract, the rule of forfeiture governing 'earnest' has no application. The Court, therefore, in each case, must carefully scrutinise the terms of the contract and the intention of the parties before reaching the conclusion whether the payment is by way of earnest ,or simply a part payment of consideration or as security deposit for due performance of contract. "in the instant case, whether the amount advanced by the plaintiff under Ex. P. 8 is 'earnest' or 'part payment of consideration' as contended by the rival parties would depend upon the. terms of the agreement. The document Ex. P. 8 was executed by the 1st defendant on 16-6-63 in favour of the plaintiff agreeing to sell certain items of immoveable properties more fully described therein for a sum of Rs. 5,800. The plaintiff advanced a sum of rs. 1000 on the date of Ex. terms of the agreement. The document Ex. P. 8 was executed by the 1st defendant on 16-6-63 in favour of the plaintiff agreeing to sell certain items of immoveable properties more fully described therein for a sum of Rs. 5,800. The plaintiff advanced a sum of rs. 1000 on the date of Ex. P-8 agreeing to pay the balance sum of Rs. 4,800 before the Sub-Registrar at the time of registration of the document. From these averments, it is clear that the amount of Rs. 1,000 advanced by the plaintiff was towards part payment of the purchase price if the transaction goes forward as contemplated in the document and completed in three months time from the date of Ex. P-8. However, we find no clause in ex. P. 8 that that amount would be forfeited if the contract falls through by reason of the fault or failure of the plaintiff. If such a clause is found in ex. P. 8, then the payment of Rs. 1000 albeit recited in the document as 'advance' (Sanchara Sanchakara Rupadinda) would have been impressed with the character of 'earnest' as observed by the Judicial Committee in Chiranjit Singh's case (2 ). The document simply provides - that the plaintiff has paid Rs. 1,000 towards 'part payment of consideration' undertaking to pay the balance of Rs. 4,800 at the time of execution and registration of the sale deed and nothing more. In that view, I am unable to persuade myself to accept the argument advanced by Sri V. T. Raya Reddy, that the amount of Rs. 1,000 paid by the plaintiff under Ex. P-8 was 'earnest'. Sri Raya Reddy has sought to support his contention that the amount paid by the plaintiff under Ex. P-8 was 'earnest' by a ruling of this court in Letitia Castelino v. Jerone d'silva (1971) 2 Mys. LJ. 157. I may point out that the observation in that decision may not be helpful to support his contention in this case as on the facts of that case, it was found that the parties intended to treat the deposit as 'earnest money'. Such an intention between the parties cannot be gathered from the terms of the agreement in the instant case. Such an intention between the parties cannot be gathered from the terms of the agreement in the instant case. ( 9 ) ONE other argument canvassed by sri Raya Reddy was that the 1st defendant, both in his reply notice dated 4-9-63 as well as in the written statement pointedly informed the plaintiff that in case the plaintiff fails to perform his part of the contract within the time stipulated under the agreement, the sum advanced by him would not be refunded, thereby clearly notified to the plaintiff that the amount advanced by him under ex. P. 8 would be treated as earnest money. It is his further submission that the 1st defendant could treat the amount advanced by the plaintiff as 'earnest money' by issuing a notice to the plaintiff in that regard. In support of this submission, he sought to place reliance on a decision of the Supreme Court in Gomathinayagam v. Paldniswami Nadar AIR 1967 SC 868 . and the "relevant passage on which reliance was placed reads thus:"it is true that even if time was not originally of the essence, the appellants could, by notice served upon the respondent, call upon him to take the conveyance within the time fixed and intimate that in default of compliance with the requisition, the contract will be treated as cancelled. "it seems to me that the above observation will not help Sri Raya Reddy to maintain his contention that the incidence and nature of the amount advanced under a contract of sale could be changed either by a buyer or a seller by his unilateral declaration to treat the advance in a particular way other than the one intended by both parties under the terms of the agreement, more so by a party to change the character of the deposit to his advantage without the concurrence of the other party, as it would amount to material alteration of the terms of the contract as originally entered into. The same result will not flow out, in the event of the seller serving a notice upon the buyer calling upon him to take the conveyance within the time fixed under the contract and further intimating that in default of compliance with the requisition, the contract will be treated as cancelled. The same result will not flow out, in the event of the seller serving a notice upon the buyer calling upon him to take the conveyance within the time fixed under the contract and further intimating that in default of compliance with the requisition, the contract will be treated as cancelled. In such a case, there will not be any material change in the terms of the contract as in response to such a notice the buyer is required to take the conveyance within the time fixed under the original contract and it would be only an advance notice to the buyer to treat the contract as cancelled in the event he failed to comply with the terms of the contract originally fixed. Thus, I am inclined to hold that the above decision is. of no assistance to support the contention advanced by Sri Raya Reddy. Once it is held that the amount advanced by the plaintiff to the defendant under Ex. P-8 was not 'earnest money" and only 'part payment of consideration", it follows that the plaintiff is entitled for a decree for the return of the said amount. ( 10 ) NOW coming to the second argument that the claim for the return of the advance amount was barred by time, I see little substance in this contention. The amount was advanced on 16-6-63 the date of execution of Ex. P-8. Three months' time was provided for the completion of the transaction under the agreement. The plaintiff could have brought the suit for the refund of the advance amount on the ground of failure of the contract only after the expiry of three months, the time fixed for the due performance of the contract under ex. P. 8. The suit was filed on 16-6-66 which was well within three yea,rs from the date the cause of action accrued in favour of the plaintiff for claim ing return of the advance amount. In that view, the suit was well within time. ( 11 ) IN the result, for the reasons stated above, the appeal is allowed in part. In reversal of the judgment and decree of the courts below, the suit is decreed in part, decreeing the claim of the plaintiff for refund of Rs. 1,000 with interest at 6% from the date of suit till the date of realisation. ( 11 ) IN the result, for the reasons stated above, the appeal is allowed in part. In reversal of the judgment and decree of the courts below, the suit is decreed in part, decreeing the claim of the plaintiff for refund of Rs. 1,000 with interest at 6% from the date of suit till the date of realisation. The judgment and decree of the courts below regarding the dismissal of the suit of the plaintiff in respect of other reliefs are hereby, confirmed, the parties are entitled to proportionate costs throughout. --- *** --- .