Appeal No 1122 of1966
Appeal from the judgment and decree dated January 29 1964 of the Calcutta High Court in Appeal from original order No 28 of 1960
B P Maheshwari and Sobhag Mal Jain for the appellant
Niren De Attorney General N section Bindra and section P Nayar for the respondent
The Judgment of the Court was delivered by Vaidialingam J
This appeal by the plaintiffs appellants on certificate granted by the Calcutta High Court is directed against the judgment and decree of the Division Bench of that Court dated January 29 1964 in Appeal from Original Order No 28 of 1960 affirming the judgment and decree dated July 16 1959 of the learned Single Judge in Suit No 2745 of 1947
The circumstances leading up to the institution of the said suit may be stated
The appellants who were dealing also in the purchase of new and second hand machinery on coming to know from an adver tisement in a Daily that the defendant respondent was offering for sale aero scrap addressed a letter dated November 6 1946 to the respondent intimating their desire to purchase the materials advertised for sale and stating that one of their representatives 129 would be contacting them shortly
Obviously the parties must have met and decided about the purchase as is seen from the letter dated November 18 1946 addressed by the General Manager of the respondent to the appellants
That letter refers to a discussion that the parties had on that day and the respondents confirmed having sold to the appellants the entire lot of aero scrap lying at Panagarh on the terms and conditions mentioned in the letter
The material was stated to be in Dump No 1 near the flight line at Panagarh and the approximate quantity was 4000 tons of aero scrap more or less
The letter refers to the appel lants having agreed to pay Rs 10 lakhs as price of the materials in the said Dump No 1 against which the receipt by cheque of a sum of Rs 250000 was acknowledged by the respondent
There is a further reference to the fact that the appellants had agreed to pay the balance of Rs 750000 that day itself
The letter also refers to the fact that the price mentioned does not include sales tax to be paid by the appellants and to certain other matters which are not relevant for the purpose of the appeal
The letter further says  The company s terms of business apply to this contract and a copy of this is enclosed herewith
We shall refer to the relevant clauses in the company s terms of business referred to in this letter a little later
It is enough to note at this stage that those terms of business have been made part of the terms and conditions governing the contract
On the same day the appellants sent a reply to the respondent acknowledging the letter
The appellants said that they noted that the respondent wants to sell the aero scrap as it is and that it wanted the appellants to pay the full value viz the balance of Rs 750000 at once
The appellants confirmed the arrangement contained in the respondent s letter but regarding payment the appellants said that they agree to pay the balance amount in two instalments viz Rs 250000 on or before November 22 1946 and the balance of Rs 500000 on or before December 14 1946
They also further stated that they shall commence taking delivery after making full payment
The respondent by its letter dated November 20 1946 acknowledged the receipt of the appellants  letter dated November 18 1946 together with the modifications contained therein
But the respondent emphasised that the other terms and conditions will be as mentioned in its letter of November 18 1946
On November 22 1946 the appellants sent a communication purporting to be in continuation of their letter dated November 18 1946
In this letter they state that the transaction has been closed without inspecting the materials merely on the assurance of the respondent that the quantity of aero scrap was about 4100 tons
The appellants further state that they have since obtained 130 information that the quantity stated to be available is not on the spot and therefore they cannot do the business
Under the circumstances they request the respondent to treat their letter dated November 18 1946 as cancelled and to return the sum of Rs 250000 already paid by them
The respondent sent several letters to the appellants asking them to pay the balance amount and take delivery of the goods but the appellants refused to pay any further amount to the respondent
The respondent ultimately forfeited the entire sum of Rs 250000 which according to it was earnest money and then cancelled the contract
Now that we have referred to the material correspondence that took place between the parties as well as the final action of the defendant of forfeiting the amount it is now necessary to advert to certain clauses in the Company s terms of business which as mentioned earlier have been made by the defendant s letter dated November 18 1946 as part of the terms and conditions of the contract
We have also referred to the fact that the appellants in their reply dated November 18 1946 have accepted the same
The respondent s terms of business contain various clauses of which clauses 9 and 10 are relevant for our purpose
They are 9
Deposits The buyer s hall deposit with the Company 25 of the total value of the stores at the time of placing the order
The deposit shall remain with the Company as earnest money and shall be adjusted in the final bills no interest shall be payable to the buyer by the Company on such amounts held as earnest money
Time and method of payment
a The buyer shall before actual delivery is taken or the stores despatched under conditions pay the full value of the stores for which his offer has been accepted less the deposit as hereinbefore contained after which a Shipping Ticket will be issued by the Company in the name of the buyer
The buyer shall sign his copy of the Shipping Ticket before the same is presented to the Depot concerned for taking delivery of the stores concerned
b If the buyer shall make default in making payment for the stores in accordance with the provisions of this contract the
Company may without prejudice to its rights under Clause 11 thereof or other remedies in law 131 forfeit unconditionally the earnest money paid by the buyer and cancel the contract by notice in writing to the buyer and resell the stores at such time and in such manner as the Company thinks best and recover from the buyer any loss incurred on such resale
The Company shall in addition be entitled to recover from the buyer any cost of storage warehousing or removal of the stores from one place to another and any expenses in connection with such a resale or attempted resale thereof
Profit if any on resale as aforesaid shall belong to the Company
 From the above clauses it will be seen that a buyer has to deposit with the company 25 of the total value and that deposit is to remain with the company as earnest money to be adjusted in the final bills
The buyer is bound to pay the full value less the deposit  before taking delivery of the stores
In case of default by the buyer the company is entitled to forfeit unconditionally the earnest money paid by a buyer and cancel the contract
The appellants instituted suit No 2745 of 1947 in the Original Side of the Calcutta High Court against the respondents for recovery of the sum of Rs 250000 together With interest
The plaintiffs pleaded that there had been no concluded agreement entered into between the parties and even when the matter was in the stage of proposal and counter proposal the plaintiffs had withdrawn from the negotiations
They alleged that even if there was a concluded contract the same was vitiated by the false and an true representations made by the respondents regarding the quantity of scrap material available and the plaintiffs had been induced to enter into the agreement on such false representations
Hence the plaintiffs were entitled to avoid the contract and they have avoided the same
They pleaded that the respondents were never ready and willing to perform their part of the contract
Even on the assumption that the plaintiffs had wrongfully repudiated the contract such repudiation was accepted by the defendant by putting an end to the contract
The respondents were not entitled to forfeit the sum of Rs 250000 as the latter cannot take advantage of their own wrongful conduct
In any event the sum of Rs 250000 represents money had and received by the defendants to and for the use of the plaintiffs
The plaintiffs in consequence prayed for a decree directing the defendants to refund the sum of Rs 250000 together with interest at 6 from November 18 1946
The defendants contested the claim of the plaintiffs
They pleaded that a concluded contract has been entered into between 132 the parties as per two letters dated November 18 and November 20 1946
The appellants had agreed to buy the lot of scraps lying in Dump No 1 for Rs 1000000 of which Rs 250000 was paid as deposit
The defendants had agreed to the balance amount being paid in instalments as asked for by the plaintiffs in their letter of November 18 1946
The defendants further pleaded that there has been no misrepresentation made by them but the plaintiffs without any justification repudiated the contract by their letter dated November 22 1946
As the plaintiffs wrongfully repudiated the contract the defendants as they are entitled to in law forfeited the sum of Rs 250000 paid by the plaintiff as earnest money under the terms of business of the Company which had become part of the contract entered into between the parties
The defendants further pleaded that they have always been ready and willing to perform their part of the contract and that they in fact even after the plaintiff repudiated the contract called upon them to pay the balance amount and take delivery of the articles
But the plaintiffs persisted in their wailful refusal to perform their part and therefore the defendants had no alternative but to forfeit the earnest money and conduct a resale of the goods
The defendants further pleaded that the appellants had to pay them a sum of Rs 42499 for the loss and damage sustained by the defendants They further urged that the plaintiffs were not entitled to claim the refund of the sum of Rs 250000 or any part thereof which had been paid as earnest money and forfeited according to law and the terms of contract by the defendants
Though the plaintiffs have raised various contentions in the plaint it is seen from the judgments of the learned Single Judge and the Division Bench on appeal that the appellants conceded that they committed breach of contract and that the defendants have been at all material times ready and willing to perform their part of the contract
The plea that the plaintiffs entered into the contract under a mistake of fact and that they were induced to so enter into the contract due to the misrepresentation of the defendants regarding the quantity of scrap available was also given up
The appellants have also accepted the position that there has been a concluded contract between the parties and the said contract was concluded by the correspondence between the parties consisting of the letters dated November 18 1946 and November 20 1946
The plaintiffs have further abandoned the plea that the defendants were not ready and willing to perform their part of the contract
Therefore the two questions that ultimately survived for consideration by the Court were 1 as to whether the sum of Rs 250000 was paid by the plaintiffs as and by way of part payment or as earnest deposit and 2 as to whether the defendants were entitled to forfeit the said amount
133 The learned Single Judge and on appeal the Division Bench have held that the sum of Rs 250000 paid by the appellants was so paid as and by way of deposit or earnest money and that it is only when the plaintiffs pay the entire price of the goods and perform the conditions of the contract that the deposit of Rs 250000 will go towards the payment of the price
It is the further view of the Courts that the amount representing earnest money is primarily a security for the performance of the contract and in the absence of any provision to the contrary in the contract the defendants are entitled to forfeit the deposit amount when the plaintiffs have committed a breach of contract
In this view the defendant s right to forfeit the sum of Rs 250000 was accepted and it has been held that the plaintiffs are not entitled to claim refund of the said amount
The plaintiffs  suit in the result was dismissed by the learned Single Judge and on appeal the decree of dismissal has been confirmed
On behalf of the appellants Mr Maheshwari learned counsel has raised two contentions  1 That the amount of Rs 250000 paid by the plaintiffs and sought to be recovered in the suit is not by way of a deposit or as earnest money and that on the other hand it is part of the purchase price and therefore the defendants are not entitled to forfeit the said amount
2 In this case it must be considered that the sum of Rs 250000 has been named in the contract as the amount to be paid in case of breach or in the alternative the contract contains a stipulation by way of penalty regarding forfeiture of the said amount and therefore the defendants will be entitled if at all to receive only reasonable compensation under section 74 of the Contract Act and the Courts erred in not considering this aspect
Under this head the counsel also urged that even a forfeiture of earnest money can only be if the amount is considered reasonable and in this case the amount which represents 25  of the total price cannot be considered to be reasonable and hence the appellants are entitled to relief in law
The learned Attorney General on behalf of the respondents pointed out that the material correspondence between the parties by which the contract was concluded read along with the terms of business will clearly show that the sum of Rs 250000 paid by the appellants was as earnest
It was further pointed out that the position in law is that the earnest money is part of the purchase price when the transaction goes through and is performed and that on the other hand it is forfeited when the transaction falls through by reason of the fault or failure of the vendee
The learned Attorney General invited us to certain decisions laying down the salient features of earnest deposit  and the right of the party to whom the amount has been paid to forfeit when the opposite party has committed a breach of contract
Regarding the second contention of 134 the appellant the learned Attorney General pointed out that the appellants never raised any contention that the amount of Rs 250000 deposited by the appellants is to be treated as a sum named in the contract as the amount to be paid in case of breach or that the contract must be considered to contain any stipulation by way of penalty
He also pointed out that the question of reasonableness or otherwise of the earnest deposit forfeited in this case was never raised by the appellant at any stage of the proceedings in the High Court
Therefore section 74 of the Contract Act has no application
The first question that arises for consideration is whether the payment of Rs 250000 by the appellants was by way of deposit or earnest money
Before we advert to the documents evidencing the contract in this case it is necessary to find out what in law constitutes a deposit or payment by way of earnest money and what the rights and liabilities of the parties are in respect of such deposit or earnest money
Borrows in Words  Phrases Vol
11 gives the characteristics of earnest
According to the author An earnest must be a tangible thing
That thing must be given at the moment at which the contract is concluded because it is something given to bind the contract and therefore it must come into existence at the making or conclusion of the contract
The thing given in that way must be given by the contracting party who gives it as an earnest or token of good faith and as a guarantee that he will fulfil his contract and subject to the terms that if owing to his default the contract goes off it will be forfeited
If on the other hand the contract is fulfilled an earnest may still serve a further purpose and operate by way of part payment
 Benjamin in his book on Sale 8th Edition after referring to clause 17 of the Statute of Frauds and section 41 of the Sale of Goods Act 1893 providing for giving something in earnest to bind the contract or in part payment says at p 219   give something in earnest  or in part payment  are often treated as meaning the same thing although the language clearly intimates that the earnest is something to bind the bargain  or the contract  whereas it is manifest that there can be no part payment till after the bargain has been bound or closed
 The author further states that there are two distinct alternatives viz a buyer may give the seller money or a present as a token or evidence of the bargain quite apart from the price ie earnest or 135 he may give him part of the agreed price to be set off against the money to be finally paid ie part payment and that if the buyer fails to carry out the contract and it is rescinded cannot recover the earnest but he may recover the part payment
But this does not affect the seller s right to recover damages for breach of contract unless it as by way of deposit or guarantee in which case it is forfeited
It is further stated that an earnest does not lose its character because the same thing might also avail as a part payment
Regarding deposit the author states at p 946 that a deposit is not recoverable by the buyer for a deposit is a guarantee that the buyer shall perform his contract and is forfeited on his failure to do so and if a contract distinguishes between the deposit and installments of price and the buyer is in default the deposit is forfeited
Halsbury in Laws of England Vol
34 III Edition in paragraph 189 at p 118 dealing with deposit states  Part of the price may be payable as a deposit
A part payment is to be distinguished from a deposit or earnest
A deposit is paid primarily as security that the buyer will duly accept and pay for the goods but subject thereto forms part of the price
Accordingly if the buyer is unable or unwilling to accept and pay for the goods the seller may repudiate the contract and retain the deposit
 Earl Jowitt in his Dictionary of English Law says Giving an earnest or earnest money is a mode of signifying assent to a contract of sale or the like by giving to the vendor a nominal sum eg a shilling as a token that the parties are in earnest or have made up their minds
 In Howe vs Smith1 Fry LJ discussed the history of earnest which is identical with a deposit
In that case the plaintiff agreed to purchase a property for the price mentioned in the agreement and paid pound 500 on the signing of the agreement Al as a deposit and in part payment of the purchase money There where other stipulations in the agreement regarding title to the property and the payment of the balance of the purchase money
The plaintiff apprehending that the defendant vendor would resell the property brought an action against him for specific performance of the agreement but the suit was dismissed on the ground 1 LR 1884 Ch D 89
136 that there had been inordinate delay on the plaintiffs part in insisting on the completion of the contract
The plaintiff appealed
Before the Court of Appeal a request was made on his behalf for leave to amend the plaint that if specific performance could not be decreed he should get a return of the deposit of pound 500
Leave was granted by the Appellate Court and the question hence arose as to whether the plaintiff was entitled to get a refund of the said amount
In dealing with the deposit claimed back by the plaintiff Cotton LJ at p 95 observes What is the deposit  The deposit as I understand it and using the words of Lord Justice James in L R 10 Ch
512 is a guarantee that the contract shall be performed
If the sale goes on of course not only in accordance with the words of the contract but in accordance with the intention of the parties in making the contract it goes in part payment of the purchasemoney for which it is deposited but if on the default of the purchaser the contract goes off that is to say if he repudiates the contract then according to Lord Justice James he can have no right to recover the deposit
 Bowen LJ at p 98 states We have therefore to consider what in ordinary parlance and as used in an ordinary contract of sale is the meaning which business persons would attach to the term deposit 
Without going at length into the history or accepting all that has been said or will be said by the other members of the Court on that point it comes shortly to this that a deposit if nothing more is said about it is according to the ordinary interpre tation of business men a security for the completion of the purchase
But in what sense is it a security for the completion of the purchase  It is quite certain that the purchaser cannot insist on abandoning his contract and yet recover the deposit because that would be to enable him to take advantage of his own wrong Fry LJ at p 101 observes Money paid as a deposit must I conceive be paid on some terms implied or expressed
In this case no terms are expressed and we must therefore inquire what terms are to be implied
The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into 137 account but if the contract is not performed by the payer it shall remain the property of the payee
It is not merely a part payment but is then also an earnest to bind the bargain so entered into and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract
 Ultimately the Court of Appeal rejected the claim of the plaintiff for refund of the deposit
In Soper vs Arnold1 the House of Lords had to consider the right of the plaintiff therein to claim a refund of the deposit made by him
In that case the plaintiff had contracted to purchase a piece of land and entered into an agreement with the vendee
The agreement provided that the purchaser viz the plaintiff should make a deposit and it further provided that if the vendee failed to comply with the conditions the deposit should be forfeited
The plaintiff accordingly paid the deposit but as he was not in a position to complete the contract by paying the balance purchase money the contract could not be fulfilled
When in another litigation it was subsequently found that the vendor s title to the property was defective the plaintiff brought an action to recover his deposit on the ground of mistake and failure of consideration
The suit was dismissed and the Court of Appeal also confirmed the said decision
The House of Lords also finally rejected the plaintiff s claim
In discussing the nature of the deposit made by the plaintiff under the agreement Lord Macnaghten at p 435 observes The deposit serves two purpose if the purchase is carried out it goes against the purchase money but its primary purpose is this it is a guarantee that the purchaser means business and if there is a case in which a deposit is rightly and properly forfeited it is I think when a man enters into a contract to buy real property without taking the trouble to consider whether he can pay for it or not In Farr Smith  Co vs Messrs Ltd 2 dealing with the question as to whether the payment was by way of earnest given to bind the contract or it was a part payment towards the price
Wright J observes at p 408  Certain characteristics however seem to be clear An earnest must be a tangible thing in which definition it may be that a deposit is included but in the old cases it was always some tangible thing
That thing must be given at the moment at which the contract is concluded 1 LR 188914 AC 429 1 LR 1928 1 KBD 397
CI70 10 138 because it is something given to bind the contract and therefore it must come into existence at the making or conclusion of the contract
The thing given in that way must be given by the contracting party who gives it as an earnest or token of good faith and as a guarantee that he will fulfil his contract and subject to the terms that if owing to his default the contract goes off it will be forfeited
If on the other hand the contract is fulfilled an earnest may still serve a further purpose and operate by way of part payment The learned Judge quoting the observations of Hamilton J in Sumner and Leivesley vs John Brown  Co1 observes at p 409  Earnest 
meant something given for the purpose of binding a contract something to be used to put pressure on the defaulter if he failed to carry out his part
If the contract went through the thing given in earnest was returned to the giver or if money was de ducted from the price
If the contract went off through the giver s fault the thing given in earnest was forfeited
 The Judicial Committee had to consider in Chiranjit Singh vs Har Swarup2 the question as to whether a payment maade by way of earnest money by a buyer could be recovered when the buyer had committed breach of contract
In that case the plaintiff had entered into a contract with the defendant for purchase of a property
One of the terms of the contract of sale was Willing on old terms namely earnest twenty thousand balance in two moieties
first payable on executing conveyance last within six months net cash we receive 4 lakhs 76000
 The plaintiff did not pay the earnest money eo nomine but sent two cheques amounting to Rs 165000 and obtained a receipt hat this amount was paid towards the sale price of the estate in question out of the total consideration of Rs 476000
Later 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
Therefore it was clear that the plaintiff purchaser was unable or unwilling to complete the contract of purchase
The plaintiff notwithstanding his default sued to recover the entire sum of Rs 165000 paid by him
The High Court held that as the plaintiff had broken the contract he must lose the earnest money of Rs 20000 but was entitled to a refund of the balance amount of Rs 145000 from and out of the amounts paid by him on that account
The plaintiff dissatis 1 25 Times L R 745
2 AIR 1926 PC 1
139 fled with the decision of the High Court carried the matter in appeal to the Judicial Committee for obtaining relief of repayment of earnest money also
The Judicial Committee agreed with the High Court that from and out of the amounts paid by the plaintiff a sum of Rs 20000 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
 Holding that the above principle applied squarely to the contract before them they dismissed the paintiff s appeal for refund of earnest
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 transetion is carried out
4 It is forfeited when the 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
Having due regard to the principles enunciated above we shall now consider the relevant claims in the contract between the parties in the case before us to ascertain whether the amount of Rs 250000 paid by the appellant constitutes earnest money and if so whether the respondents were justified in law in forfeiting the same
We have already referred to the letter dated November 18 1946 written by the respondents to the appellants confirming the sale of scrap lying in Dump No 1
That letter states that the total price for which the appellants agreed to purchase the scrap material is Rs 1000000 against which a sum of Rs 250000 had been paid and the balance amount was to be paid that day itself
In the reply sent by the appellant on the same day they 140 confirmed the arrangement referred to by the respondents but regarding the payment of the balance amount they agreed to pay the same in two instalments
The letter of November 18 1946 to the appellants clearly refers to the fact that the Company s Terms of Business applied to the contract and a copy of the said terms was also sent to the respondents
The respondents by confirming the arrangement by their letter of November 18 1946 were fully aware that the terms of business of the respondent company formed part of the contract
entered into between the parties
We have also referred earlier to clauses 9 and 10 of the Terms of Business of the respondents
Clause 9 requires the buyer to deposit 25of the total value of the goods at the time of placing the order
That clause also further provides that the deposit shall remain with the company as earnest money to be adjusted in the final bills
It further provides that no interest is payable to the buyer by the company on such amounts held as earnest money
There is no controversy in this case that the appellants deposited the sum of Rs 250000 under this clause nine representing 25 of the purchase price of Rs 1000000
It is therefore clear that this amount deposited by the appellant is a deposit as earnest money Mr Maheshwari drew our attention to the letter dated Nov ember 18 1946 sent by the respondents to the appellants wherein the respondents have stated that the appellants have agreed to pay Rs 1000000 for all the materials in Dump No 1 against which a cheque for Rs 250000 has been paid and that the appellants further agreed to pay the balance of Rs 750000 that day itself
This statement according to the learned counsel will clearly show that the sum
of Rs 250000 has been paid as part payment towards the total price pure and simple and there is no question of any payment by way of earnest money
But this contention ignores the last recital in the said letter wherein it has been specifically stated that the terms of business of the respondent company applied to the contract
This condition has also been accepted by the appellants in their reply dated November 18 1946
Therefore the position is this that the terms of business of the respondent company have been incorporated as part of the letter and has been embodied in the terms of contract between the parties
Clause 9 to which we have already referred clearly shows that 25 of the total value is to be deposited and that amount is to remain with the respondents as earnest money
It is again emphasized in clause 9 that the amount so deposited as earnest will not bear any interest but will be only adjusted in the final bills
Therefore the amount of Rs 250000 deposited by the appellants representing 25 of the total of Rs 1000000 is earnest money under clause 9 of the Terms of Business
141 We have also earlier referred to clause 10 of the Terms of Business which relates to the time and method of payment
Under clause 10b a right is given to the respondents when the buyer makes default in making payment according to the contract to forfeit unconditionally the earnest money paid by the buyer
That clause further provides that this forfeiture of earnest money is without proudly to the other rights of the respondents in law
We have referred to the fact that though the appellants raised pleas that they have not committed any breach of contract and that on the other hand the respondents were the parties in breach these contentions were not pursued and had been abandoned before the High Court
Further as noted by the High Court the appellants conceded that they had committed a breach of the contract
If so as rightly held by the High Court under clause 10b the respondents were entitled to forfeit the earnest money of Rs 250000
Before closing the discussion on this aspect it is necessary to note that in the case before the Privy Council in Chiranjit Singh s Case though the contract stipulated that a sum of Rs 20000 should be paid as earnest the buyer did not pay any amount by way of earnest as such but he paid by two cheques the sum of Rs 165000 against the purchase price of Rs 476000
The receipt of the sum of Rs 165000 granted by the seller was also stated to be only towards the sale price
But nevertheless the High Court as well as the Judicial Committee treated a sum of Rs 20000 out of the sum of Rs 165000 as earnest money paid under the terms of the agreement and a claim to recover that amount of earnest money was negatived
In the case before us the contract read with the Terms of Business of the company clearly refers to the earnest money being paid and to the fact of Rs 250000 having been paid as earnest
Therefore there is no ambiguity regarding the nature of the above payment and the right of the respondents to forfeit the same under the terms of the contract when the appellants admittedly had committed breach of the contract cannot be assailed
The first contention for the appellants therefore fails
The second contention of Mr Maheshwari noted earlier is really based upon sections 73 and 74 of the Contract Act
According to the learned counsel under section 73 the respondents wilt be entitled only to compensation for any loss or damage caused to them by the breach of the contract committed by the appellants
Counsel very strongly relied upon section 74 of the Contract Act
According to him the sum of Rs 250000 referred to in the contract must be treated as the amount to be paid in case of a breach
In the alternative counsel also urged that the provision in the contract regarding the forfeiture of the said amount should be treated as a term containing a stipulation by way of a penalty
Under any of 142 these circumstances the remedy of the aggrieved party would be to get compensation which is adjudged reasonable by the Court
Counsel also urged that earnest money unless it is considered to be a reasonable amount could not be forfeited in law
The learned Attorney General very strongly urged that the pleas covered by the second contention of the appellant had never been raised in the pleadings nor in the contentions urged before the High Court
The question of the quantum of earnest deposit which was forfeited being unreasonable or the forfeiture being by way of penalty were never raised by the appellants
The Attorney General also pointed out that as noted by the High Court the appellants led no evidence at all and after abandoning the various pleas taken in the plaint the only question pressed before the High Court was that the deposit was not by way of earnest and hence the amount could not be forfeited
Unless the appellants had pleaded and established that there was unreasonableness attached to the amount required to be deposited under the contract or that the clause regarding forfeiture amounted to a stipulation by way of a penalty the respondents had no opportunity to satisfy the Court that no question of unreasonableness or the stipulation being by way of penalty arises
He further urged that the question of unreasonableness or otherwise regarding earnest money does not at all arise when it is forfeited according to the terms of the contract
In our opinion the learned Attorney General is well founded in his contention that the appellants raised no such contentions covered by the second point noted above
It is therefore unnecessary for us to go into the question as to whether the amount deposited by the appellants in this case by way of earnest and forfeited as such can be considered to be reasonable or not
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 had an opportunity of meeting such a claim
In this view it is unnecessary for us to consider the decision of this Court in Maula Bux vs Union of India1 relied on by the appellants and wherein there is an observation to the effect  Forfeiture of earnest money under a contract for sale of property movable or immovable if the 1  amount is reasonable does not fall within section 74 of the Indian Contract Act
That has been decided in several cases
Kunwar Chiranjit Singh vs Har Swarup AIR 1926 PC 1 Roshan Lal vs The Delhi Cloth and General Mills Co Ltd Delhi ILR 33 All
166 Muhammad Habibullah vs Muhammad Shafi ILR 41 All 324 Bishan Chand vs Radha Kishan Das ILR 19 All 489
These cases are easily explained for forfeiture of 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
 The learned Attorney General has pointed out that the decisions referred to in the above quotation do not lay down that the test of reasonableness applies to an earnest deposit and its forfeiture
He has also pointed out that this Court in the above decision did not agree with the view of the High Court that the deposit the recovery of which was sued for by the plaintiff therein was earnest money
The learned Attorney General also referred Us to various decisions wherein according to him though the amounts deposited by way of earnest were fairly large in proportion to the total price fixed under the contract nevertheless the forfeiture of those amounts were not interfered with by the Courts
But as we have already mentioned we do not propose to go into those aspects in the case on hand
As mentioned earlier the appellants never raised any contention that the forfeiture of the amount amounted to a penalty or that the amount forfeited is so large that the forfeiture is bad in law
Nor have they raised any contention that the amount of deposit is so unreasonable and therefore forfeiture of the entire amount is not justified
The decision in Maula Bux s Case1 had no occasion to consider the question of reasonableness or otherwise of the earnest deposit being forfeited
Because  from the said judgment it is clear that this Court did not agree with the view of the High Court that the deposits made and which were under consideration were paid as earnest money
It is under those circumstances that this Court proceeded to consider the applicability of section 74 of the Contract Act
Mr Maheshwari has relied upon the decision of this Court in Fateh Chand vs Balkishan Das1 wherein according to him this 1  2  144 Court has held under similar circumstances that the stipulation under the conrtact regarding forfeiture of the amount deposited is a stipulation by way of penalty attracting section 74 of the Contract Act
On this assumption counsel urged that there is a duty statutorily imposed upon Courts by section 74 of the Contract Act not to enforce the penalty clause but only to award reasonable compensation
This aspect he urges has been totally missed by tile High Court
We are inclined to accept this contention of the learned counsel
This Court had to consider in the said decision two questions  i Whether the plaintiff therein was entitled to forfeit a sum of Rs 1000 paid as earnest money on default committed by the buyer and ii whether the plaintiff was further entitled to forfeit the entire sum of Rs 24000 paid by the buyer under the contract which recognised such right
This Court held that the plaintiff was entitled to forfeit the sum of Rs 1000 paid as earnest money when default was committed by the buyer
But regarding the second item of Rs 24000 this Court held that the same cannot be treated as earnest and therefore the rights of the parties would have to be adjudged under section 74 of the Contract Act
In view of this conclusion the Court further had to consider the relief that the plaintiff had to get when breach of contract was committed by the buyer and in dealing with this question it observed at p 526 Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases i where the contract names a sum to be paid in case of breach and ii where the contract contains any other stipulation by way of penalty
We are in the present case not concerned to decide whether a covenant of forfeiture of deposit for due performance of a conrtact falls within the first class
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
 Again at p 528 it observed In our judgment the expression the contract contains any other stipulation by way of penalty  comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future or for forfeiture of right to money or other property already delivered
Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by section 74
In all cases therefore where there is 145 a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture the court has jurisdiction to award such sum only as it considers reasonable but not exceeding the amount specified in the contract as liable to forfeiture The Court further observed at p 529  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 does 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
Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined or where there is a stipulation by way of penalty
But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff
I The section does not confer a special benefit upon any party it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for for feiture 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 jurisdiction of the Court is not deter mined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit
Use of the expression to receive from the party who has broken the contract does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract
 This Court applied section 74 of the Contract Act and ultimately fixed a particular amount which the plaintiff would be entitled to as reasonable compensation in the circumstances
Mr Maheshwari placed considerable reliance on the above extracts in support of his contention and urged that the recitals regarding forfeiture of the amount of Rs 250000 shows that the contract contains a stipulation by way of penalty and therefore s74 is attracted
It is not possible to accept this contention
As we have already pointed out this Court in the above decision 146 recognised the principle that earnest money can be forfeited but in dealing with the rest of the amount which was not admittedly earnest money s74 was applied
In the case before us the entire amount as evidenced by the contract and as held by us earlier is earnest money and therefore the above decision does not apply
Mr Maheshwari finally urged that s64 of the Contract Act may apply and he also relied on the decision of the Judicial Committee in Murlidhar Chatterjee vs International Film Co1
On the basis of that ruling he urged that the respondents are bound to restore the benefit that they have obtained under the contract
In our opinion there is no scope for applying s64 of the Contract Act and it follows that the decision of the Judicial Committee referred to above and dealing with s64 has no relevance
We have already pointed out that the appellants raised a contention that they had been induced to enter into the agreement on a misrepresentation made by the respondents regarding the quantity of material available
If the
appellants had proceeded on that basis then the contract would have been voidable at their instance under s19 of the Contract Act
But they have abandoned that plea and have admitted that the breach of contract was committed by them
Hence section 64 cannot be invoked by the appellants
In this view the second contention also fails
In the result  the appeal fails and is dismissed with costs
VPS Appeal dismissed
1 L R 70 IA 35


Summary:
The respondent agreed to sell and the appellant agreed to buy some aero scrap for Rs 1000000
The appellant paid Rs 250000 on the date of the contract and it was agreed between the parties that the balance should be paid in two instalments
It was also agreed that the respondent s terms of business were made part of the terms and conditions gov erning the contract
According to cl 9 of the respondent s terms of business the buyer has to deposit with the respondent 25 of the total value and that deposit is to remain with the respondent as earnest money to be adjusted in the final bills and no interest shall be payable to buyer on the amount
Under cl 10 of the terms and conditions if the buyer makes default in making payment according to the contract the respondent has a right to cancel the contract and forfeit unconditionally the earnest money without prejudice to any other Tights of the respondent in law
The appellant committed breach of the contract by refusing to pay the rest of the money and to take delivery of the aero scrap
The respondent thereupon cancelled the contract and forfeited the deposit of Rs 250000
A suit by the appellant for recovery of the amount was dismissed
In appeal to this Court HELD  1 For a deposit by a purchaser to be treated as earnest money the following conditions must be satisfied  i it must be given at the moment at which the contract is concluded ii it represents a guarantee that the contract will be fulfilled or in other words earnest  is given to bind the contract iii it is part of the purchase price when the transaction is carried out iv it is forfeited when the transaction falls through by reason of the default or failure of the purchaser and v 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
139 D F In the present case the payment of Rs 250000 could not be treated merely as part payment towards the total price because the terms of business of the respondent applied to the contract and under those terms since the conditions regarding earnest money are satisfied the amount deposited by the appellant was earnest money and the respondent was entitled to forfeit if
140 141 F Howe vs Smith  Soper vs Arnold IR  Farr Smith  Co vs Messers Ltd LR 1928 1 KBD 397 Sumner and Leivesley vs John Brown  Co and Chiranjit Singh vs Har Swarup AIR  applied
128 Roland Burrows Words and Phrases Vol
11 Benjamin on Sale Halsbury s Laws of England 111 Edition Vol 34 p 118 para
189 and Jowitt s Dictionary of English Law referred to
2 In Fateh Chand vs Balkishan Das   this Court recognised the principle that earnest money could be forfeited and that section 74 of the Contract Act applied only to the amount paid by the buyer which was not earnest money
In the present case since the entire amount paid by the appellant was earnest money under the contract this decision has no application
145 H 146 A 3 As the plea of misrepresentation was abandoned by the appellant and the breach off contract was admittedly committed by the appellants 64 of the Contract Act could not be invoked by the appellant
146 D Murlidhar Chatterjee vs International Film Co LR 70 IA 35 not applicable
The question as to whether the element of unreasonableness can even be taken into account when considering the forfeiture of an amount deposited by way of earnest and if so what factors should be taken into account left open 142 F G Maula Bux vs Union of India   explained