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

1. 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.2. The appellants, who were dealing also in the purchase of new and second hand machinery, on coming to know from an advertisement in a Daily that the defendant-respondent was offering, for sale area-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 would be contacting them shortly. Obviously the parties must have met and decided about the purchaser, 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 appellants 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 Rupees 2,50,000/- was acknowledged by the respondent. There is a further reference to the fact that the appellants had agreed to pay the balance of Rs. 7,50,000/- that day itself. The letter also refers to the fact that the price mentioned does not include sale-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 companys terms of business apply, to this contract and a copy of this is enclosed herewith".We shall refer to the relevant clauses in the companys 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.3. 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. 7,50,000/- at once. The appellants confirmed the arrangement contained in the respondents letter; but regarding payment, the appellants said that they agree to pay the balance amount in two installments, viz., Rs. 25,0,000/- or before November 22, 1946 and the balance of Rs. 5,00,000/- 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, 1946.4. 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 4,100 tons. The appelants future state that they have since obtained 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. 2,50,000/- already paid by them.5. The respondents 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. 2,50,000/- which, according to it, was earnest money and then cancelled the contract.6. 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 Companys terms of business which, as mentioned earlier, have been made by the defendants 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.7. The respondents terms of business contain various clauses, of which clauses 9 and 10 are relevant for our purpose. They areDeposits.The buyer shall deposit with the Company 25 per cent 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.10. Time and method of payment.(a) The buyer shall, before actual delivery is taken or the stores dispatched 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 II thereof or other remedies in law 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 thethe above clauses, it will be seen that a buyer has to deposit with the company 25 per cent 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.8. 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.2,50,000/- 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 untrue 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 defendants by putting an end to the contract. The respondents were not entitled to forfeit the sum of Rs.2,50,000/- as the latter cannot take advantage of their own wrongful conduct. In any event, the sum of Rupees 2,50,000/- 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.2,50,000/- together with interest at 6 per cent from November 18, 1946.9. The defendants contested the claim of the plaintiffs. They pleaded that a concluded contract has been entered into between the parties as per the 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.10,00,000/- of which Rs.2,50,000/- 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 Rupees 2,50,000/- paid by the plaintiffs 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 they, in fact, even after the plaintiffs repudiated the contract, called upon them to pay the balance amount and take delivery of the articles. But the plaintiffs persisted in their wilful 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.42,499/- 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.2,50,000/- or any part thereof which had been paid as earnest money and forfeited according to law, and the terms of contract, by the defendants.10. 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.2,50,000/- 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.11. The learned Single Judge and, on appeal, the Division Bench, have held that the sum of Rs.2,50,000/- 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 Rupees 2,50,000/- 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 defendants right to forfeit the sum of Rs.2,50,000/- 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.

Court's reasoning:
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.