Sabina DCosta v. Joseph Antony Noronha — 1983 DIGILAW 9 (KAR)

Judgement JUDGMENT :- This appeal by the defendant is directed against the judgment and decree dated 17-3-1975 passed by the District Judge, South Kanara, Mangalore, in R. A. No. 20 of 1972 on his file, allowing the appeal on setting aside the judgment and decree of the trial Court dated 15-7-1972, passed by the Prl. Civil Judge, Mangalore, in O. S.No. 116 of 1970 on his file, dismissing the suit of the plaintiff. 2. The plaintiff instituted a suit for recovery of Rs. 13,117-50 P. along with is and future interest. According to him, he entered into an agreement of sale with the defendant as per Ext. P-1 on 21-8-1969. It was agreed by the defendant that the suit property would be sold to the plaintiff for Rs, 30,000/- within the time fixed that is within 31-10-1969. There were some stipulations between the parties and the defendant was to comply with certain conditions. The plaintiff averred that the defendant did not comply with those conditions and was not ready and willing to perform her part of the contract within time, though he was ready and willing at all times to perform his part of the contract. Thus, he asserted that it was the defendant who committed breach of that contract. Hence, he instituted the suit for return of the advance consideration, namely, Rupees 10,000/- along with special damages at Rs. 2000/- and interest at 9 % per annum from the date of the suit amounting to Rs. 1117-50P. Altogether he claimed Rs, 13,117-50P, as stated above, along with future interest. 3. The suit was resisted by the defendant. She contended that it was the plaintiff who committed the breach of contract, she having performed her part of the contract. She further asserted that Rs. 10,000/- were paid by the plaintiff towards earnest money by way security to perform his part of the contract and the same was liable to be forfeited and was forfeited. Hence, she contended that the suit of the plaintiff was not tenable. She denied that the plaintiff suffered any damages. 4. The trial Court raised the following issues as arising for consideration from the pleadings. (1) Whether the terms of the contract were not complied with by the defendant, as specified in the contract? (2) Whether time was the essence of the contract? She denied that the plaintiff suffered any damages. 4. The trial Court raised the following issues as arising for consideration from the pleadings. (1) Whether the terms of the contract were not complied with by the defendant, as specified in the contract? (2) Whether time was the essence of the contract? (3) Whether the plaintiff proves that he suffered damages to the extent of Rs. 2000/-? (4) Whether the plaintiff is entitled to recover the advance amount with interest at 9 per cent per annum? (5) Whether the defendant had suffered any damages? 5. The trial Court, appreciating the evidence on record, answered Issue No. 1 holding that it was the plaintiff who committed breach of contract; under Issue No. 2 the trial Court held that the time was the essence of the contract; under Issue No. 3 the trial Court held that the plaintiff failed to establish that he suffered damages to the extent of Rs. 2000/-. Under Issue No. 4, the trial Court found in the negative so also under Issue No. 5 and in that view it dismissed the suit of the plaintiff. Aggrieved by the said judgment and decree, as stated above, the plaintiff went up in appeal at R. A. No. 20 of 1972 before the learned District Judge, South Kanara Mangalore and the learned District judge in the course of his judgment raised the following points as arising for his consideration in the appeal. (1) Whether the defendant committed breach of the agreement as alleged by the plaintiff, or, whether the plaintiff committed, breach of the agreement as contended by the defendant? (2) Whether time was the essence of the contract? (3) Whether the amount of Rs. 10,000/given by the plaintiff to the defendant at the time of the agreement Ext.P-1 is earnest money or money given for the due performance of the contract or whether it is only an advance? (4) Whether the plaintiff proves that he has suffered special damages to the extent of Rs. 2000/- or any amount? (5) Is the plaintiff entitled to recover the said amount of Rs, 10,000/- plus any amount by way special damages? (6) Whether the defendant has suffered any damages? (7) What order? 6. (4) Whether the plaintiff proves that he has suffered special damages to the extent of Rs. 2000/- or any amount? (5) Is the plaintiff entitled to recover the said amount of Rs, 10,000/- plus any amount by way special damages? (6) Whether the defendant has suffered any damages? (7) What order? 6. The learned District Judge, reassessing the evidence on record, in the light of the arguments addressed before him, answered the points as under : Under Point No. 1 : The learned District Judge has held that the defendant did not commit a breach of the contract. It was the plaintiff that committed the breach of the agreement. Under Point No. 2: The learned District Judge answered in the negative. Under Point No. 3 he held that the amount of Rupee 10,000/- was not earnest money or money for the due performance of the contract. It was only an advance out of he sale consideration that was given by the plaintiff to the defendant. Under Point No. 4 he held in the negative and under Point No. 5 he answered that the plaintiff is entitled to recover back Rs. 10,000/- from the defendant. As the plaintiff failed to show that he suffered any special damages, he was not entitled to get any amount by way of special damages. Under Point No. 6 he answered in the negative and in that view the learned District Judge allowed the appeal setting aside the judgment and decree of the trial Court and decreed the plaintiff's suit for a sum of Rs. 10,000/-from the defendant with future interest on the said sum at the rate of 6% per annum from the date of the decree that is from 17-3-1975 till recovery. He directed the parties to bear their respective costs of both the Courts. Aggrieved by the said judgment and decree the defendant has come up with the above second appeal before this Court. The plaintiff has filed cross-objections with regard to the special damages disallowed and against other findings given against him. 7. The learned Advocate appearing for the defendant-appellant strenuously urged before me that the Court below was not justified in holding that the matter falls within the purview of Section 74 of the Contract Act. According to him, since there was a special clause in the agreement Ex.P1 itself, at clause No. 7, that the amount of Rs. 7. The learned Advocate appearing for the defendant-appellant strenuously urged before me that the Court below was not justified in holding that the matter falls within the purview of Section 74 of the Contract Act. According to him, since there was a special clause in the agreement Ex.P1 itself, at clause No. 7, that the amount of Rs. 10,000/- is to be forfeited in case of breach of contract committed by the plaintiff, the stipulation certainly amounted to earnest money and not advance, though with a penalty clause. Hence, he submitted that the trial Court was justified in dismissing the suit of the plaintiff' and that the first appellate Court was not justified in decreeing the suit with regard to Rs. 10,000/-. 8. As against that the learned Advocate appearing for the respondent plaintiff while supporting the judgment anti decree of the first appellate court further submitted that the first appellate court was not justified in holding that the plaintiff failed to establish that he suffered damage, to the extent of Rs. 2000/- by way of special damages. 9. The points, therefore, that arise for my consideration in this appeal and cross-objections are: (1) Whether the court below was justified in holding that Rs. 10,000/- was merely an advance towards sale consideration and that it did not partake the nature of earnest money? (2) Whether the first appellate Court was justified in holding that the plaintiff failed to establish any damages? 10. The learned Advocate appearing for the appellant submitted that the entire document should be perused to find out whether the parties intended that Rs. 10,000/- should be considered as earnest money in the sense that it was given as security for the due performance of the contract or merely as an advance towards sale consideration. He further submitted that the words used in the document would not fix the nature of the money paid as the documents are not generally drafted by experts. 11. The learned Advocate appearing for the appellant invited my attention to a decision of this Court in the case, Lelitia Castelino v. Jerome D'silva. (1971 (2) Mys LJ 157) : (AIR 1972 Mys 281, wherein it is held as under : "Where money is paid under a contract (of sale), the nomenclature employed, whether earnest or advance is not really the crux of the matter. (1971 (2) Mys LJ 157) : (AIR 1972 Mys 281, wherein it is held as under : "Where money is paid under a contract (of sale), the nomenclature employed, whether earnest or advance is not really the crux of the matter. Though the clause providing for forfeiture of amount in the event of default by the purchaser is not by itself a conclusive circumstance, that circumstance has to be taken into consideration along with other circumstance to ascertain the real character of the amount paid under the contract." It is further held as under: "Where an amount is paid on the date of the agreement, there is an initial presumption that the amount was paid as security for due performance of the contract. ( AIR 1952 Cal 93 was relied). That the amount has been described as advance and not earnest is not sufficient circumstance to rebut this presumption". 12. It is no doubt true that in the present agreement (Exhibit P-1), the money is described as advance towards consideration. But in Clause 7, it is made clear that if the plaintiff fails to perform his part of the contract and commits breach, he shall forfeit Rs. 10,000/- given as a advance. Relying on this, the learned Advocate appearing for the appellant pressed on me that the money advanced should be treated as earnest money. 13. In view of the authentic pronouncement of the Supreme Court, however, this distinction also would lose much of its importance, for, the Supreme Court has held in cases more than one that even if the money is described as earnest money, Section 74 of the Contract Act would come into play. The Supreme Court has also observed that even if there is a clause for forfeiture by way of penalty, the Court is not only empowered but has a duty to apply the provisions of Section 74 of the Contract Act. 14. The Supreme Court has also observed that even if there is a clause for forfeiture by way of penalty, the Court is not only empowered but has a duty to apply the provisions of Section 74 of the Contract Act. 14. Section 74 of the Indian Contract Act reads : "Compensation, for breach of contract where penalty stipulated for.- 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". 15. In the instant case, both the Courts below have concurrently held that it is the plaintiff himself who has committed the breach of the contract and it is obvious that he is not entitled to recover any damages - not even reasonable compensation from the defendant. 16. The Supreme Court of India, in the case, Fateh Chand v. Balkishan Dass, ( AIR 1963 SC 1405 ), in para 8 of the judgment, has ruled thus : "Section 74 of the Indian Contract Act is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in lerrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. 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." Again, in para-10 of the judgment, the Supreme Court has observed : "....The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing the damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. 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. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of 'actual loss or damage'; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach." Again, in the case, Maula Bux v. Union of India ( AIR 1970 SC 1955 ), the Supreme Court has observed in para-7 of the judgment thus : "Forfeiture of earnest money under a contract for sale of property-movable or immovable - if the amount is reasonable, does not fall within Section 74. That has been decided in several cases : AIR 1926 PC 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); Bishan Chand v. Radha Kishan 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, Section 74 applies. Muhammad Habibullah v. Muhammad Shafi, ILR 41 All 324 : (AIR 1919 All 265); Bishan Chand v. Radha Kishan 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, Section 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." Further, explaining the clause 'whether or not actual damage or loss is proved to have been caused thereby', the Supreme Court observed that the clause is intended to cover different classes of contracts which come before the Court; that in case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules: that where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty and that where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. Again, in the case, Union of India v. Rampur Distillery and Chemical Co. Ltd., ( AIR 1973 SC 1098 ), the Supreme Court, explaining Section 74 of the Contract Act, has observed in paras 4 and 5 of the judgment thus : "4. It is important that the breach of contract caused no loss to the appellants. The stipulated quantity of rum was subsequently supplied to the appellants by the respondents themselves, at the same rate. The appellants, in fact, made no attempt to establish that they had suffered any loss or damage (on account of the breach committed by the respondents. 5. Following the decision in Maula Bux's case, (1970) 1 SCR 928 : ( AIR 1970 SC 1955 ) we hold that the High Court was right in rejecting the appellants' claim that they are entitled to forfeit the security deposit...." 17. 5. Following the decision in Maula Bux's case, (1970) 1 SCR 928 : ( AIR 1970 SC 1955 ) we hold that the High Court was right in rejecting the appellants' claim that they are entitled to forfeit the security deposit...." 17. Thus, these decisions rendered by the Supreme Court ex cathedra. firmly establish the proposition that if what is contemplated in the agreement is by way of penalty, then Section 74 of the Indian Contract Act would come into play. But, if the contract is such as damages cannot be ascertained, then, if the parties pre-estimated the damages and the same appears reasonable, that amount shall be considered proper and shall be forfeited. 18. In the instant case, what is contemplated by the parties is forfeiture by way of penalty. That being so, Section 74 of the Indian Contract Act comes into play. The Courts below have concurrently held that it is the plaintiff that committed the breach of contract. They have further held that the defendant also has not proved any special damage caused to her. In the circumstances, the First Appellate Court has rightly held that the very fact that the defendant was paid Rs. 10,000/- and she retained it would itself be sufficient to compensate her for whatever inconvenience caused to her and, therefore, she would be obliged to return Rs 10,000/- received an advance. The decision so rendered is in accordance with the letter and spirit of Section 74 of the Indian Contract Act, the provisions of which are applicable to the facts of the present case. In that view, I hold that there is no reason for me to interfere with the judgment and decree made by the First Appellate Court. 19. As pointed out above, it is the, plaintiff who committed breach of the contract. He has not proved any special damages suffered. That being so, the cross-objections are also liable to be dismissed. 20. In the result, both the appeal and the cross-objections are hereby dismissed. In the peculiar facts of the case, I make no order as to costs of this appeal or the cross-objections.