STATE OF GUJARAT v. MOHANLAL MOTILAL AND COMPANY — 1986 DIGILAW 205 (GUJ)

M. B. SHAH, J. ( 1 ) THE plaintiff Contractor had filed Special Civil Suit No. 21 of 1974 in the Court of the Civil Judge (S. D.) Bhavnagar against the State of Gujarat for recovering Rs. 3 14 407 with 12 running interest. The said suit was partly decreed by the Civil Judge (S. D.) Bhavnagar by his judgment and decree dated 7th December 1977 by holding that plaintiff No. 2 was entitled to recover Rs. 64 920 with interest at the rate of 6 per cent per annum from the date of filing the suit till realisation. Against the said judgment and decree the State of Gujarat has filed First Appeal No. 215/78. ( 2 ) THE Contractor has filed First Appeal No. 371/78 for recovering the remaining amount as per the claim made in the suit. ( 3 ) WITH regard to the other item the learned advocate for the Contractor had not pressed it except that he had vehemently submitted that the trial Court materially erred in not passing decree for refund of the security deposit of Rs. 13 431 As against this the learned advocate for the State submitted that because the Contractor had abandoned the work and has commited breach of contract the Department was entitled to forfeit the security deposit or to levy penalty and/or recover damages because the Department has completed the work at the risk and cost of the Contractor. According to his submission the defendant has suffered heavy loss. The conditions of the contract Exhibit 95 provide that the Government is entitled to appropriate any sum of money due and payable to the Contractor under the contract against any claim of the Government. The said clause reads as under:43 sum of money due and payable to Contractor (including the security deposit returnable to the contractor under this contract shall be appropriated by the Government and shall be set off against any claim of the Government for the payment of a sum of money arising out of or under any other contract made by the Contractor with the Government. When no such amount for the purpose of recovery from the Contractor against any claim of the Government is available such a recovery shall be made from the Contractor as arrears of land revenue. When no such amount for the purpose of recovery from the Contractor against any claim of the Government is available such a recovery shall be made from the Contractor as arrears of land revenue. In this view of the specific condition in the contract the Government is entitled to appropriate the amount payable to the Contractor for any amount due to it. Therefore the question would be whether the Government can refuse to refund security deposit or pay other amount due to the Contractor solely on the ground that the Contractor has committed breach of the contract and that because of the said breach the Government has suffered loss. Now this question requires to be divided into two parts- (1) the amount of the earnest money and (2) amount due to the Contractor for some work which he has done. The learned advocate for the State has relied upon the decision in the case of M/s. H. M. K. Ansari and Co. v. Union of India AIR 1984 Supreme Court 29 wherein the Supreme Court has interpreted similar clause. The Court has held that Clause 18 of the standard form of contract unequivocally eontemplates a claim for the payment. It does not contemplate the amount due and therefore it gives wide powers to the Government to recover the amount claimed by appropriating any sum then due or which at any time thereafter may become due to the contractor under other contracts. It is held that it was not necessary that there should be a sum of money due and payable by the contractor but it was enough if there was a mere claim on the part of the State for payment of a some of money by the contractor irrespective of the fact whether such sum of money was presently due and payable or not. In this view of the matter it cannot be said that the security deposit of Rs. 13 431 deducted from the plaintiffs bills was deducted from the plaintiffs bills from due performance of the suit contract and therefore it cannot be refunded until the amount of the defendants claim against the plaintiff for the suit work is adjudicated or settled. In this view of the matter it cannot be said that the security deposit of Rs. 13 431 deducted from the plaintiffs bills was deducted from the plaintiffs bills from due performance of the suit contract and therefore it cannot be refunded until the amount of the defendants claim against the plaintiff for the suit work is adjudicated or settled. It is an admitted fact that the State had given the contract for the suit work left incomplete by the Contractor to the other Contractor for its completion at the cost of the plaintiff under the terms of the contract Exhibit 95 and that claim is still not finalised. So there is no question of refunding the security deposit at this stage. ( 4 ) APART from the aforesaid aspect in this case we are concerned only with the refund of earnest money. We are deliberately using the words earnest money and not security deposit because in this case as per the tender notice earnest money was fixed as it of estimated cost of the contract and earnest money was determined at Rs. 45 334 and the Contractor was required to pay the said amount. The tender notice further provides that a sum of Rs. 90 668 in case or in the form of completing securities will have to be deposited by the Contractor at the time of completing the tender documents if his tenders is accepted. So in this case earnest money is Rs. 45 334 and security deposit is Rs. 90 668 The contract Exhibit 96 provides that the amount of earnest money to be deposited shall be in accordance with the provisions of paras 202 and 203 of the P. W. D. Manual. With regard to the security deposit it provides that Rs. 90 668 shall be deposited in accordance with paras 203 and 209 of the P. W. D. Manual and another amount of Rs. 90 668 shall be deducted from the current bills security deposit. Now with regard to the refund of earnest money Mr. Sukhwani learned advocate for the Contractor vehemently submited that unless the alleged damages claimed by the Government are determined the Government has no right to forfeit the earnest money as such was converted into security deposit cannot be forfeited unless the claim of the Government for breach of the contract is established. Sukhwani learned advocate for the Contractor vehemently submited that unless the alleged damages claimed by the Government are determined the Government has no right to forfeit the earnest money as such was converted into security deposit cannot be forfeited unless the claim of the Government for breach of the contract is established. As against this the learned advocate for the State relied upon the decision of the Supreme Court in the case of H. M. Mills v. Tata Air Craft AIR 1970 Supreme Court 1986 where in the Court has considered in detail the position with regard to the earnest money and the provisions of Section 74 of the Contract Act and after reviewing the number of decisions of the Privy Council and the Supreme Court the Court in paragraph 24 has held as under : 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 transaction is carried out. (4) It is forfeited when 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. In that case Rs. 2,50,000 were deposited as earnest money. It represented 25% of the purchase price of 10 0 0 and Court held that respondents were entitled to forfeit the earnest money of Rs. 2 50 0 The Court relied upon the decision of the Privy Council in Chiranjit Singh v. Har Swarup AIR 1926 Privy Council 1 where the Judicial Committee considered the question as to whether a payment made by way of earnest money by a buyer could be recovered when the buyer had committed breach of contract. One of the terms of the contract of sale was payment of Rs. 20 0 as earnest money. The plaintiff of that case had not paid earnest money but had sent two cheques amounting to Rs. One of the terms of the contract of sale was payment of Rs. 20 0 as earnest money. The plaintiff of that case had not paid earnest money but had sent two cheques amounting to Rs. 1 65 0 Subsequently 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. The plaintiff notwithstanding his default sued to recover the entire sum of Rs. 1 65 0 paid by him. The High Court held that as the plaintiff had broken the contract he must lose the earnest money of Rs. 20 0 but was untitled to a refund of the balance amount of Rs. 1 45 0 from and out of the amount paid by him on the account. The Judicial Committee agreed with the High Court that from and out of the amounts paid by the plaintiff a sum of Rs. 20 0 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. This means that the Judicial Commmitte treated a sum of Rs. 20 0 out of the sum of Rs. 1 65 0 as earnest money paid under the terms ofthe agreement and claim to recover that amount of the earnest money was negatived. The Supreme Court further dealt with a contention based upon Sections 73 and 74 of the Contract Act and negatived the contention that the respondents of the case will be entitled only to compensation for any loss or damage cause to them by breach of the contract committed by the appellants by holding that it was not necessary for them to decide the said question because no such contentions were raised before the trial Court. The Court held as under: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 an opportunity of meeting such a claim. The Court further held that in the decision of the Supreme Court in the case of Maula Bux v. Union of India AIR 1970 SC 1955 the Court had no occasion to consider the question of reasonableness or otherwise of the earnest deposit being computed because 450 the Court did not agree that the view of the High Court that the deposits made and which were under consideration was paid as earnest money. The Supreme Court also considered the decision in Fateh Chand v. Balkishan Das AIR 1963 SC 1405 and held that the said decision recognised a principle that earnest money can be forfeited but in dealing with the rest of the amount which was not admittedly earnest money Section 74 shall apply. So with regard to the earnest money the Court unequivocally held that it can be forfeited if the contract fails at the default of the purchaser. In the present case admittedly the earnest money was fixed at Rs. 45 334 In this view of the matter it cannot be said that the order passed by the learned Judge not refunding the earnest money is in any way illegal or erroneous. Appeal dismissed .