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1988 DIGILAW 351 (KER)

SEETHARAMA v. ABBAS

1988-07-28

RADHAKRISHNA MENON

body1988
Judgment :- 1. The defendant in a suit for recovery of money is the revision petitioner. 2. The respondent instituted the suit for recovery of a sum Rs. 2,000/- which be had paid to the defendant at the time of execution of Ext A1 agreement. 3. The trial court accepted the contention of the defendant petitioner namely that, be is entitled to forfeit the amount as the plaintiff failed to perform his part of the contract, and dismissed the suit. On appeal, the appellate court reversed the judgment and decree of the trial court and decreed the suit. 4. The learned counsel for the petitioner argues that the amount in deposit is 'earnest money' and therefore, on the failure of the plaintiff to perform his part of the contract, the petitioner has the right to forfeit the amount. In support of this argument, be relied on the following rulings: i. H.C. Mills v. Tata Air Craft (AIR. 1970 SC. 1986) ii. Maula Bux v. Union of India (AIR. 1970 SC. 1955) iii. Ambunhi v. Sharada Amma (1974 KLT. 471). 5. Mrs. Devakikutty, learned counsel for the respondent-plaintiff on the other hand, contended that the amount in dispute was specifically paid as part of the purchase price of Rs. 25,000/- and therefore the same cannot be treated as 'earnest money' which, under law represents the guarantee that the contract will be fulfilled. This amount therefore cannot be forfeited unless the court in exercise of power under S 74 of The Contract Act finds that the amount sought to be forfeited is reasonable, the learned counsel submits. The counsel adds that so far as the sum already paid is concerned the same can be forfeited only if there exists a covenant in the contract enabling forfeiture, unlike in the case of earnest money. 6. To consider these rival contentions it is necessary to understand what is meant by 'earnest money', it is also necessary to construe S.74 of The Contract Act. 7. To call a particular deposit 'earnest money' certain conditions must be satisfied, and they are. 6. To consider these rival contentions it is necessary to understand what is meant by 'earnest money', it is also necessary to construe S.74 of The Contract Act. 7. To call a particular deposit 'earnest money' certain conditions must be satisfied, and they are. It should be given at the time when the contract was concluded, it is an earnest to bind the bargain; it will be treated as part of the purchase price when the transaction is carried out; it will be forfeited when the contract falls by reason of the default or failure of the purchaser, and unless, there exists a clause to the contrary in the contract, on default committed by the purchaser, the seller is entitled to forfeit the earnest money. (See the decision of the Supreme Court in H. C. Mill's and Maula Bux's cases and also Chiranjit Singh v. Harswarup (AIR. 1921 P.C.1). 8. Now coming to S.74 of the Contract Act: I shall first read relevant portion of the Section: "When a contract has been broken, if a sum is named to 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". (emphasis supplied) This Section provides for compensation for breach of contract in two classes of cases, (1) where the contract names a sum to be paid in case of breach and (2) where the contract contains any other stipulation by way of penalty. One thing is clear from this Section and it is this: The words "if the contract contains any other stipulation by way of penalty" in the Section apply to all stipulations by way of penalty; whether the condition is to pay an amount named in the contract or the stipulation provides for forfeiture of money already paid; etc. I am fortified in this view by the decision of the Supreme Court in Fateh Chand v. Balkishan Dass (AIR. 1963 SC. 1405). I am fortified in this view by the decision of the Supreme Court in Fateh Chand v. Balkishan Dass (AIR. 1963 SC. 1405). The Supreme Court also observed thus: "The expression "if the contract contains any other stipulation by way of penalty" widens the operation of the section so as to make it applicable to all stipulations by way of penalty, whether the stipulation is to pay an amount of money, or is of another character, as, for example, providing for forfeiture of money already paid. There is nothing in the expression which implies that the stipulation must be one for rendering something after the contract is broken. There is no ground for holding that the expression "contract contains any other stipulation by way of penalty" is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited". It therefore follows that the party who claims that he is entitled to forfeit the money or other property already delivered should establish that the terms of the contract expressly or by clear implication enables him to forfeit the said money or property for breach of contract. (See Mohammed Sultan Rowther v. Naina Mohammad and others. AIR 1973 Mad 233) also. The compensation that the court would award under S.74 must be reasonable, and must also be subject to the maximum stipulated in the contract. I make it clear, that since the question whether S.74 covers the claim for earnest also does not arise in this case, it is unnecessary to deal with that question here. I therefore do not express my opinion on this question. It is left open. 9. The inference therefore is that if the amount in deposit is not regarded as 'earnest money' but treated as predetermined amount representing compensation for breach of contract, then the same can be forfeited only if the contract contains stipulation either express or implied enabling forfeiture, and is also reasonable. 10. The learned counsel for the petitioner nonetheless, relying on a decision of the Calcutta High Court in Naresh Chandra v. Ram Chandra (AIR 1952 Cal. 10. The learned counsel for the petitioner nonetheless, relying on a decision of the Calcutta High Court in Naresh Chandra v. Ram Chandra (AIR 1952 Cal. 93) argued that the respondent was entitled to forfeit the amount in deposit notwithstanding the fact that there was no stipulation in the contract enabling him to forfeit the same. Dilating on this aspect be argued that there is no law insisting that forfeiture in such cases can be had only if the contract contains a stipulation in that regard. This ruling in my judgment does not support the above argument of the counsel. The facts of the case show that the amount in deposit represented 'earnest money' whereas here the amount paid represents only part payment of the purchase price. That apart, on going through the ruling of the Calcutta High Court I am of the view that the ruling instead of supporting the case of the petitioner, supports the argument advanced by the counsel for the respondent. A reference to the following observation in the ruling is profitable: "between earnest money and part payment of purchase price there is a fundamental distinction or difference in this respect and the rule of forfeiture has no application to money received as such part payment". 11. To sum up: The peculiarity of 'earnest money' is that the right to forfeit the same is not the result of consensus between the parties unlike in the case where money paid or deposited with the seller, representing compensation (determinable under S.74), for breach of contract. Forfeiture of the right to money or other property already delivered and falling under S.74, can be had only if the contract contains stipulation either express or implied, in that regard. The learned counsel for the respondent, Mrs. Devakikutty therefore is well founded in her submission that the amount deposited as part of the purchase price can be forfeited only if the contract contains terms either express or implied empowering forfeiture of the said amount. 12. Let us now consider (a) whether the contract, Est. A1 contains any clause from which it can be inferred that the amount is deposit is 'earnest money' and (b) does the contract contain any forfeiture clause express or implied enabling the defendant to forfeit the amount in dispute provided it is found that the said amount represents compensation for breach of contract. A1 contains any clause from which it can be inferred that the amount is deposit is 'earnest money' and (b) does the contract contain any forfeiture clause express or implied enabling the defendant to forfeit the amount in dispute provided it is found that the said amount represents compensation for breach of contract. Relevant clauses in the contract reads: (a) "Out of the consideration of the sale deed, No. 1, has paid to No. 2 Rs. 2000/'- as advance amount in the presence of Grahasthas and No. 2 has received the same and No. 2 is liable to set off the said amount out of the consideration". (b) "In case No.1 fails to get the Sale Deed before the said date, No.1 will not be entitled to claim the advance amount and No. 2 will be entitled to utilise the same"; Clause (a) of Ext. A1 makes it clear that the amount of Rs. 2,000/- mentioned therein represents only part payment of the purchase price. Clause (b) above states that if the plaintiff (No.1 mentioned in that clause) fails to get the sale deed executed before the said date, the defendant will be entitled to utilise the same. It is clear that the parties have treated this part payment of the purchase price as compensation for breach of contract, the reasonableness of which however, is determinable under S.74 Contract Act. The deposit therefore cannot be treated as 'earnest money'. If that be so the deposit can at most be treated as compensation for breach of contract within the meaning of S.74. As already noted such amounts can be forfeited only if there exists a covenant or stipulation either express or implied in that regard in the contract. It may in this connection be noted that it is not the case of the defendant that the contract contains a stipulation enabling forfeiture of the amount. The argument of the learned counsel that the defendant is entitled to forfeit the amount mentioned in the contract although there is no stipulation in that regard in the contract, therefore is rejected. A word in this connection with reference to the rulings cited by the counsel for the petitioner at the bar: They instead of supporting bis case, support the case put forward by the plaintiff. 13. A word in this connection with reference to the rulings cited by the counsel for the petitioner at the bar: They instead of supporting bis case, support the case put forward by the plaintiff. 13. Construing a clause similar to the one on hand (clause (b) referred to above), the Supreme Court in Thackkar Keshavlal v. Paresh Amrutlal (AIR. 1973 SC. 1098) has observed thus: "But, '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 be has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty'. It was further held that the amount deposited by way of security for guaranteeing the due performance of the contract cannot be regarded as earnest money". Observing thus, the Supreme Court held: "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 bad suffered any loss or damage on account of the breach committed by the respondents". I may in this connection "observe that the petitioner herein never thought it necessary to establish that be suffered any loss or damage on account of the non-performance of the contract by the plaintiff. If as a matter of fact be bad suffered any damages, he could have adjusted the same, going by the principles enunciated by the Supreme Court in the aforesaid decision, from out of the amount in deposit. In the light of what is stated above, I do not find my way to interfere with the judgment under attack. The C.R.P. fails. Accordingly the same is dismissed. No costs.