Civil Appeal No 851 of 1966
Appeal by special leave from the judgment and order dated December 20 1963 of the Allahabad High Court Lucknow Bench in First Civil Appeal No 28 of 1954
Jagdish Swarup Solicitor General Yogeshwar Prasad CM Kohli and GR Chopra for the appellant
LM Singhvi and SP Nayar for the respondent
CJ Maula Bux hereinafter called the plaintiff entered into a contract No C74 with the Government of India on February 20 1947 to supply potatoes at the Military Headquarters UP Area and deposited an amount of Rs 10000 as security for due performance of the contract
He entered into another contract with Government of India on March 4 1947 No C120 to supply at the same place poultry eggs and fish for one year and deposited an amount of Rs 8500 for due performance of the contract
Clause 8 of the contract ran as follows The officer sanctioning the contract may rescind his contract by notice to meus in writing  i ii iii iv If Iwe decline neglect or delay to comply with any demand or requisition or in any other way fail to
perform or observe any condition of the contract
v vi In ease of such rescission myour security deposit or such portion thereof as the officer sanctioning the contract shall consider fit or adequate shall stand forfeited and be absolutely at the disposal of Government without prejudice to any other remedy or action that the Government may have to take 930 In the case of such rescission the Government shall be entitled to recover from meus on demand any extra expense the Government may be put to in obtaining suppliesservices hereby agreed to be supplied from elsewhere in any manner mentioned in clause 7ii hereof for the remainder of the period for which this contract was entered into without prejudice to any other remedy the Government may have
 The plaintiff having made persistent default in making regular and full supplies of the commodities agreed to be supplied the Government of India rescinded the contracts the first on November 23 1947 and the second on December 21947 and forfeited the amounts deposited by the plaintiff
The plaintiff commenced an action against the Union of India in the Court of the Civil Judge Lucknow for a decree for Rs 20000 being the amounts deposited with the Government of India for due performance of the contracts and interest thereon at the rate of 6 per cent
per annum
The Trial Court decreed the suit
The Court held that the Government of India was justified in rescinding the contracts but they could not for left the amounts of deposit for they had not suffered any loss in consequence of the default committed by the plaintiff
The High Court of Allahabad in appeal modified the decree and awarded Rs 41625 only with interest at the rate of 3 per cent from the date of the suit
The plaintiff has appealed to this Court with special leave
The trial Court found in decreeing the plaintiff s suit that there was no evidence at all to prove that loss if any was suffered by the Government of India in consequence of the plaintiff s default and on that account amounts deposited as security were not liable to be forfeited
In the view of the High Court to for feature of a sum deposited by way of security for due performance of a contract where the amount forfeited is not unreasonable section 74 of the Contract Act has no application
The Court observed that the decision of this Court in Fateh Chand vs Balkishan Dass1 did not purport to overrule the previous trend of authorities to the effect that earnest money deposited by way of security for the due performance of a contract does not constitute penalty contemplated under section 74 of the Indian Contract Act that even if it be held that the security deposited in the case was a stipulation by way of penalty the Government was entitled to receive from the plaintiff reasonable compensation not exceeding that amount whether or not actual damage or loss was proved to have been caused and that even in the absence of evidence to prove the actual damage or loss caused to the Govern  931 ment there were circumstances in the case with indicated that the amount of Rs 10000 in the case of potato contract and Rs 8500 in the case of poultry contract may be taken as not exceeding the reasonable compensation for the breach of contract by the plaintiff
 The High Court further observed that the contract was for supply of large quantities of potatoes poultry and fish which would not ordinarily be available in the market and had to be procured in case of breach of contract everyday with great inconvenience and in the circumstances the Court could take judicial notice of the fact that 1947 48 was the period when the prices were rising and it would not have been easy to procure the supplies at the rates contracted for
The High Court concluded   taking into consideration the amount of inconvenience and the difficulties and the rising rate of prices it would not be unfair if in case of such breach for the supply of such huge amounts of potatoes and poultry we consider an amount of Rs 18500 by way of damages as being not unreasonable Under the terms of the agreements the amounts deposited by the plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract
The High Court observed that the deposits so made may be regarded as earnest money
But that view cannot be accepted
According to Earl Jowitt in The Dictionary of English Law at p 689 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
 As observed by the Judicial Committee in Kunwar Chiranjit Singh vs Har Swarup1 Earnest money is part of the purchase price when the transaction goes forward it is forfeited when the transaction falls through by reason of the fault or failure of the vandee
 In the present case the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods
Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts
Such deposits cannot be regarded as earnest money
Section 74 of the Contract Act provides When a contract has been broken if a sum is named in the contract as the amount to be paid in case 1 AIR 1926 PC 1 932 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       There is authority no doubt coloured by the view which was taken in English cases that section 74 of the Contract Act has no application to cases of deposit for due performance of a contract which is stipulated to be forfeited for breach Natesa Aiyar vs Appavu Padayachi1 Singer Manufacturing Company vs Raja Prosad2 Manian Patter vs The Madras Railway Companya
But this view is no longer good law in view of the judgment of this Court in Fateh Chand s case4
This Court 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
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
 The Court also observed It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party aggrieved
There is however no warrant for the assumption made by some of the High Courts in India that section 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases whereupon breach of contract an amount received under the contract is sought to be forfeited
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 1 1913 LLR 38 Mad
2 Cal
3 Mad
4  933 only to award reasonable compensation is statutorily imposed upon courts by section 74
In all cases
there fore where there is 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 and that 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
 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 Kunwar Chiranjit Singh vs Hat Swarup t Roshan Lal vs The Delhi Cloth and General Mills Company Ltd Delhi2 Muhammad Habibullah vs Muhammad Shafi3 Bishan Chand vs Radha Kishan Das4 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
Counsel for the Union however urged that in the present case Rs 10000 in respect of the potato contract and Rs 8500 in respect of the poultry contract were genuine preestimates of damages which the Union was likely to suffer as a result of breach of contract and the plaintiff was not entitled to any relief against forfeiture
Reliance in support of this contention was placed upon the expression used in section 74 of the Contract Act the party complaining of the breach is entitled whether or not actual damage or loss is proved to have been caused there by to receive from the party who has broken the contract reasonable compensation
It is true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree and the Court is competent to award reasonable compensation in 1 AIR 1926 PC 1
2 ILR 33 All
3 ILR 41 All
490 934 case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract
But the expression whether or not actual damage or loss is proved to have been caused thereby is intended to cover different classes of contracts which come before the Courts
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
Where the Court is unable to assess the compensation the sum named by the parties if it be regarded as a genuine preestimate may be taken into consideration as the measure of reasonable compensation but not if the sum named is in the nature of a penalty
Where loss in terms of money can be determined the party claiming compensation must prove the loss suffered by him
In the present case it was possible for the Government of India to lead evidence to prove the rates at which potatoes poultry eggs and fish were purchased by them when the plaintiff failed to deliver regularly and fully the quantities stipulated under the terms of the contracts and after the contracts were terminated
They could have proved the rates at which they had to be purchased and also the other incidental charges incurred by them in procuring the goods contracted for
But no such attempt was made
Counsel for the Union however contended that in the Trial Court the true position in law was not appreciated and the parties proceeded to trial on the question whether the Government was entitled in the circumstances of the case to forfeit under cl 8 the terms of the contracts the deposits made for securing due performance of the contracts
Since there was no pleading and no issue on the question of reasonable compensation an opportunity should be given to the parties to lead evidence on this point
But with the suit out of which this appeal arises was tried another suit filed by the plaintiff Maula Bux against the Union for a decree for Rs 53000 odd being the price of goods supplied under the terms of another contract with the Government of India
In that suit the Union claimed that it had set off the amount due to the plaintiff amounts which the plaintiff was liable to pay as compensation to the Union for loss suffered because of the plaintiff s failure to carry out the terms of the contracts C74 and C120
The Trial Court held in that case that the Union failed to prove that any loss was suffered by it in consequence of the default by Maula Bux to supply potatoes poultry eggs and fish as stipulated by him
Against the judgment of that Court Appeal No 2001 of 1966 is filed in this Court and is decided today
The High Court of Allahabad having confirmed the decree passed by the Trial Court no useful purpose will be served by directing a fresh enquiry into the question whether the Union 935 of India is entitled to recover from the plaintiff any reasonable compensation for breach of contracts and whether that compensation is equal to or exceeds the amounts deposited
Evidence on that question has already been led and findings have been recorded
In dealing with the Appeal No 2001 of 1966 we have held that the Union has failed to establish by evidence that any damage or loss was suffered by them which arose out of the default committed by the plaintiff
We decline therefore to afford another opportunity for leading the evidence as to the loss suffered by the Union on account of the failure on the part of the plaintiff to carry out the contracts
On the view taken by us it must be held that the High Court was in error in disallowing the plaintiff s case
The High Court has held that the plaintiff is not entitled to any interest prior to the date of the suit
No argument has been advanced before us challenging that view
Since interest was not recoverable under any contract or usage or under the provisions of the Interest Act 1838 the High Court allowed interest at the rate of 3 per annum on Rs 41625 from the date of the suit the rate of interest allowed on the claim decreed also should not exceed 3 per cent per annum
We set aside the decree passed by the High Court and substitute the following decree The Union of India do pay to the plaintiff Rs 18500 with interest at the rate of 3 per annum from the date of the suit till payment
 The plaintiff was guilty of breach of the contracts
Considerable inconvenience was caused to the Military authorities because of the failure on the part of the plaintiff to supply the food stuff contracted to be supplied
Even though there is no evidence of the rates at which the goods were purchased we are of the view having regard to the circumstances of the case that the fairest order is that each party do bear its own costs throughout
Appeal allowed


Summary:
The appellant entered into a contract with the respondent to supply some goods and deposited a certain amount as security for due performance of the contract
It was stipulated that the amounts we re to stand forfeited in case the appellant neglected to perform his part of the con tract
When the appellant made defaults in the supply the respondent rescinded the contract and forfeited the amount deposited
The appellant filed a suit for recovery of the amount with interest
The trial court decreed the suit holding that the respondent was justified in rescinding the contracts but could not forfeit the deposit for it had not suffered any loss in consequence of the default committed by the appellant
The High Court modified the decree and awarded the respondent a major portion of the amount deposited as damages
The High Court took the view that the forfeiture of a sum deposited by way of security for due performance of a contract where the amount forfeited was not unreasonable section 74 of the Contract Act had No application and that the deposits so made could be regarded as earnest money
HELD The High Court was in error in disallowing the appellant s claim
i Earnest money is a deposit made by a purchaser to be applied towards part payment of the price when the contract is completed and till then as evidencing an intention on the part of the purchaser to buy property or goods
Forfeiture of earnest money under a contract for sale of property if the amount is reasonable does not fall within section 74 of the Contract Act
933 D
Kunwar Chiranjit Singh vs Har Swarup AIR 1926 PC 1 relied on
ii 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 in the nature of a penalty and section 74 applied thereto
933 E F Fateh Chand vs Balkishan Dass   relied on
Contrary view in Natesa Aiyar vs Appavu Padayachi 1913 LLR 38 Mad
178 Singer Manufacturing Co vs Raja Prosad Cal
960 and Manian Patter vs Madras Railway Company Mad 188 disapproved
The expression whether or not actual damage or loss is proved to have been caused thereby in section 74 is intended to cover different classes of contracts which come before the courts
In ease 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 929 accordance with established rules
Where the court is unable to assess the compensation the sum named by the parties if it be regarded as a genuine preestimate may be taken into consideration as the measure of reasonable compensation but not if the sum named is in the nature of a penalty
934 A C In the present case it was possible for the respondent Government to lead evidence to prove the loss suffered but it did not attempt to do so