Case: Shree Hanuman Cotton Mills &amp; Ors Vs. Tata Air-Craft Ltd

plaintiff therein was entitled to forfeit a sum of Rs.1,000/- 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.24,000/- 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.1,000/- paid as earnest money, when default was committed by the buyer. But, regarding the second item of Rs.24,000/- 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, (of SCR) = (at p. 1411 of AIR):"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 contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by S. 74 reasonable compensation not exceeding the penalty stipulated for".Again, at p. 528 (of SCR) = (at p. 1411 of AIR) 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 S. 74. In all cases, therefore, 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."The Court further observed at p. 529 (of SCR) = (at p. 1412 of AIR) :"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. 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 forfeiture 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 determined by the accidental circumstances 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" 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 S. 74 of the Contract Act and ultimately fixed a particular amount which the plaintiff would be entitled to as reasonable compensation in the circumstances.36. 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.2,50,000/- shows that the contract contains a stipulation by way of penalty and therefore section 74 is attracted. It is not possible to accept this contention. As we have already pointed out, this Court, in the above decision, recognised the principle that earnest money can be forfeited, but in dealing with the rest of the amount which was not, admittedly, earnest money, S. 74 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.37. Mr. Maheshwari finally urged that S. 64 of the Contract Act may apply and he has also relied on the decision of the Judicial Committee in Murlidhar Chatterjee v. International Film Co. 70 Ind App 35 = (AIR 1943 PC 34). 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 S. 64 of the Contract Act and it follows that the decision of the Judicial Committee, referred to above, and dealing with S. 64, has no relevance.38. 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 S. 19 of the Contract Act. But they have abandoned that plea and have admitted that the breach of contract was committed by them. Hence S. 64 cannot be invoked by the appellants.39. In this view, the second contention also fails.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]24. From a review of the decisions cited above, the following principles emerge regardingmust 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 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 thethis 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 per cent 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.2,50,000 deposited by the appellants, representing 25 per cent of the total of Rs.10,00,000, is "earnest money" under clause 9 of the Terms ofIn 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.We are not 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.1,000/- 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.24,000/- 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.1,000/- paid as earnest money, when default was committed by the buyer. But, regarding the second item of Rs.24,000/- 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 thewe have already pointed out, this Court, in the above decision, recognised the principle that earnest money can be forfeited, but in dealing with the rest of the amount which was not, admittedly, earnest money, S. 74 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 notour opinion there is no scope for applying S. 64 of the Contract Act and it follows that the decision of the Judicial Committee, referred to above, and dealing with S. 64, has nohave 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 S. 19 of the Contract Act. But they have abandoned that plea and have admitted that the breach of contract was committed by them. Hence S. 64 cannot be invoked by the appellants.39. In this view, the second contention also fails.