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Dinanath Damodar Kale Vs. Malvi, Mody, Ranchhoddas and Co. - Court Judgment

LegalCrystal Citation
SubjectContract;Property
CourtMumbai
Decided On
Case Number O.C.J. Appeal No. 54 of 1928 and Suit No. 776 of 1928
Judge
Reported inAIR1930Bom213; (1930)32BOMLR272
AppellantDinanath Damodar Kale
RespondentMalvi, Mody, Ranchhoddas and Co.
DispositionAppeal dismissed
Excerpt:
.....of land - sale at auction-conditions of sale-deposit, of earnest money--for feilure of deposit on breach of contract by vendee-vendee's breach-forfeiture of deposit-forfeiture valid-indian contract act (ix of 1872), sections 73, 74- penalty-stare decisis.;the plaintiff purchased immovable property at an auction sale, one of the conditions of sale required him to pay a deposit of twenty-five per cent, of the purchase price as soon as the bid was accepted, and another provided that if ho failed to pay the purchase price within the time specified the deposit money could be forfeited. the deposit money was duly paid ; but default having occurred in payment of the purchase price within time, the vendors forfeited the deposit money. the plaintiff' having sued for relief against the forfeiture..........he saw no distinction between the case of a deposit or earnest money and the case of a penalty for breach of contract. from that decision the plaintiff prefers the present appeal and he asks us to say that the amount of deposit comes within section 74 of the indian contract act and that, under the circumstances of the case and having regard to the severe nature of the conditions of sale, the court should deal equitably in the matter and allow him to receive back the amount of his deposit, and he points to the fact that on the resale of the property the vendor sustained no damage but on the contrary actually made a small profit.2. i now turn to the conditions of sale. it is true that those conditions are extremely severe, but, presumably, the plaintiff agreed to them with his eyes open......
Judgment:

Norman Kemp, Kt., Acting C.J.

1. This was a suit by the plaintiff for specific performance of an agreement to sell to him certain immoveable property and. in the alternative, for return of his deposit. The learned trial Judge, Mr. Justice Fawcett, held that the plaintiff, the buyer, had committed breach of the contract, but, whilst treating the amount of deposit as a penalty under Section 74 of the Indian Contract Act, he came to the conclusion that the amount of deposit, Rs. 4,300, was not an unreasonable amount of compensation to be awarded to the vendor under that section. He saw no distinction between the case of a deposit or earnest money and the case of a penalty for breach of contract. From that decision the plaintiff prefers the present appeal and he asks us to say that the amount of deposit comes within Section 74 of the Indian Contract Act and that, under the circumstances of the case and having regard to the severe nature of the conditions of sale, the Court should deal equitably in the matter and allow him to receive back the amount of his deposit, and he points to the fact that on the resale of the property the vendor sustained no damage but on the contrary actually made a small profit.

2. I now turn to the conditions of sale. It is true that those conditions are extremely severe, but, presumably, the plaintiff agreed to them with his eyes open. Condition No. 4 requires a deposit of twenty-five per cent, of the amount of the purchase price and stipulates that it shall be paid, as soon as the property is knocked down to the purchaser. No time was fixed for completion, but this, for the purposes of this appeal, is immaterial. Condition No. 21 then proceeds to state that 'if the purchaser shall fail to pay the balance' of the purchase, price in or about the time specified (and in the present case the time was fixed by a notice given by the vendor to the vendee), or in other respect shall fail to observe and perform these conditions or any of them, his deposit money shall be forfeited and the vendor shall be at liberty to re-sell.' The contract is dated November 30, 1927, and so far as the deposit is concerned it proceeds to state ' 1 have paid the sum of Bs. 4,300 by way of deposit and in part payment of the purchase price to the vendors.' Here I may pause to remark that the words ' in part payment ' have no effect to bring into operation the application of those authorities which say that where instalments or part of the price are to be forfeited on breach of the contract such a clause is a penalty under Section 74 of the Indian Contract Act or under the decided cases in England. The words in the contract mean that the sum of Es. 4,300 is retained as a deposit and a guarantee of performance by the buyer and that once the contract is completed the ' earnest ' becomes a part of the purchase price. The reason is obvious for, were it not so, the deposit might have to be handed back to the buyer and recovered again as part of the price from the purchaser, whereas if the earnest is made part of the price, it can be treated on performance as a part-payment and need not be returned to the buyer.

3. I think the point which is raised before us is too clear for argument and had it not been for the fact that the learned trial Judge made no distinction between a penalty and a deposit or ' earnest' probably we would have seen nothing of this appeal. Among the authorities referred to by us are certain Bombay decisions which were not cited before the learned trial Judge. Had they been cited before him, he would, possibly, have taken a different view of the case.

4. The decisions to which I refer are those in Burjorji v. Jamshed (1913) 15 Bom. I. R. 405 on appeal (1915) 18 Born. L.R. 163 P.C., which was reversed by the Privy Council not on the question of the return of the deposit but on the question whether in that case time was of the essence of the contract. Similarly, there are the decisions in Ibrahimbhai v. Fletcher I.L.R. (1896) 21 Bom. 827 and Balvanta v. Bira I.L.R. (1897) 23 Bom. 56 which are equally binding here as to the law on this point. These are all authorities which should be followed to decide the point. The trial Judge was bound to follow them (see the observations of Turner L. J. in Peruvian Railways Co. v. Thames and Mersey Marine Insurance Co.: In re Peruvian Railways Co. (1867) L.R. 2 Ch. App. 617 and the judgment of our Appeal Court in Mercantile Bank v. Mascarenhas : AIR1928Bom407 These decisions have established the law-relating to such deposits in contracts for the sale of immoveable property. It is important that there should be as little uncertainty as possible in contracts relating to the sale and purchase of land and parties who have contracted on the assumption that the law is settled should not be left to discover later that it is not. Probably there are at this moment many contracts outstanding in which such a clause relating to deposit has been inserted on the assumption that the law in this Presidency is settled and these would all be disturbed if a different view of the law were taken by us now. The principle of stare decisis is especially important in the case of contracts relating to land.

5. But apart from this the law on the point is clear. In Kunwar Chiranjit Singh v. Har Swarup A. I. R. [1926] 1 their Lordships say (p. 2):

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 vendee.

6. Turning to the law in England we have a series of decisions showing that a deposit by way of earnest in a contract for the sale of land is distinguishable from a penalty for breach of the contract. The cases cited to us by the appellant's counsel are all cases in which either an instalment of the price or a part payment was by the terms of the contract to be forfeited on breach by the purchaser. If any authority be needed to show what the law in England is it may be found in the passage in Halsbury, Vol. XXV, p. 398, para 681, which was cited to us by respondents' counsel. There it is clearly laid down that there is a distinction between a deposit and a penalty. This distinction was referred to by the majority of the Bench in the case of Bishan Chand v. Badha Kishan Das I.L.R. (1897) All. 489 where it was stated that a deposit is a payment actually made or advanced and therefore Sections 73 and 74 of the Indian Contract Act have no application in such a case and are not intended to apply to it. These sections show what is the compensation to the seller, who is not responsible for the breach. They contemplate a case in which he is seeking to recover compensation for the breach. They do not contemplate a case in which a sum of money has been paid by way of earnest. Nor is the Indian Contract Act necessarily exhaustive (see P. B. & Co. v. Bhagwandas I.L.R. (1909) 34 Bom. 193

7. Furthermore, it is to be noted that in this particular contract there was a specific condition of the sale by auction that the deposit was to be forfeited in case of default by the purchaser and we think that such a clause is not unreasonable and must be given effect to. Our own High Court Rules regarding the sale by the Sheriff's office (Rule 391) specifically allow a deposit to be forfeited and the mere fact that the word 'may' is used in that Rule cannot be taken to mean that only such sum out of the deposit can be forfeited as the Court may think proper as damages following the failure of the buyer to complete the sale.

8. Under the circumstances, I think the deposit should be forfeited and I would confirm the decision of the trial Judge but not for the same reasons so far as the deposit is concerned and dismiss this appeal with costs.

Murphy, J.

9. The only point made in this appeal is that the learned Judge who tried the suit should have relieved the appellant against the forfeiture of twenty-five per cent, of the amount of his bid on his failure to complete the transaction within the time stipulated, and that he was wrong in finding that the forfeiture of this twenty-five per cent, was a reasonable compensation to the respondents for breach of the said contract.

10. In the learned trial Judge's view Section 74 of the Indian Contract Act was applicable, as in his opinion the condition in question was in the nature of a penalty. Section 74 does not in terms deal with cases of such payment of earnest money or deposit. The nature of such payments has been stated in numerous cases cited in the course of the argument before us, and there is no doubt that they are in the class of security for the performance of the contract, and part payment of the purchase price, on completion of the transaction. I think that in the first place it cannot be held that a forfeiture of this amount is unreasonable in the circumstances of the case. Such a forfeiture is provided for in Rule 391 of the High Court Rules, in cases of sales hold by the sheriff under the orders of this Court, and also under Order XXI, Rule 86, of the Civil Procedure Code. In both these cases the amount of deposit made may be forfeited at the discretion of the Court. Apart from these parallel cases the facts of this one are covered by the cases of Natesa Aiyar v. Appavu Padayaohi I.L.R. (1913) Mad. 178 Ibrahimbhai v. Fletcher I.L.R. (1896) 21 Bom. 827 Balvanta v. Bira I.L.R. (1897) 23 Bom. 56 and Nadiar Ghand Quin v. Satis Chandra Sukal I.L.R. (1927) Cal. 638 and I think that the learned trial Judge's decree is correct and agree that this appeal must be dismissed with costs.


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