Manohar Pershad, J.
1. This appeal and cross-objections arise out of O. S. No. 1 of 1958, a suit by the plaintiff Mohd. Dalil Khan Bozai, appellant in the appeal, for recovery of O. S. Rs. 22,845-10-0 equivalent to I.G. Rs. 19,581-12-3 against the Government in respect of sums alleged to be due under four contracts which he executed for the Government.
The facts giving rise to the present action are: Mohd. Dalil Khan Bozai, the appellant herein, took four contracts from the Government. The first contract related to the annual maintenance of Vikarabad-Bijapur Metal Road for 1930-51 chargeable to the normal annual maintenance grant. The second contract relates to the maintenance of Vikarabad-Bijapur Metal Road for 1950-51 chargeable to 55 per cent extra grant. The third contract relates to the laying of cement concrete in the road of 3 miles from Langar House Junction to Ibrahim Bagh Military Barracks Dust proofing Osmansagar Road,1357 F. The last contract relates to resurfacing Hyderabad-Masulipatam strategic metal road, 1353F.
As regards the first contract his case was thatduring the period of this contract, he executed 1,44,540 cubic feet of metal consolidation during rainy season, but there was no rain and so he claimed at Rs. 75 /- per thousand cubic feet which was the rate allowable during non-season rates. Admitting having received Rs. 50/- per thousand cubic feet, he now claims Rs. 25/- per thousand cubic feet, being the difference amounting to Rs. 3613-8-0 (O. S.). As regards the second contract, hiscase was that he had to collect metal between miles 27 to 32. He collected metal and was paid for themetal collection at miles 31 and 32 but for themetal collected at miles 29 and 30, 3445 and 3085 cubic feet respectively he was not paid. Thus he claims Rs. 671-1-7 and Rs. 564-8-10 totalling KB. 1235-10-5 on this count and also Rs. 377-11-4 on account of extra lead necessitated by reason of metal not being available at the quarry indicated in the chart prepared and kept at the office of the Executive Engineer, Roads Division. In respect of the third contract, he claims Rs. 14,466-5-6 (O.S.) made up of Rs. 6757-1-3 for 21120 cubic feet of metal collected for berms, Rs. 500-4-0 for carting empty cement bags and the return of further security deposit Rs. 4554/- and the earnest money of Rs. 2655/- In respect of the 4th contract, he claims O. S. Rs. 2325/- being made up of Rs. 1011/- the amount of further security deposit and Rs. 1314/-the amount of earnest money refundable to him.
2. The defendant-Government filed a written statement pleading that the plaintiff was not entitled to be paid at the rate of Rs. 75/- which was non-season rate for the first contract as he undertook to perform the contract during the months of August and September and the rate being for a particular period and not subject to the conditions of rain-fall. As regards the claim of the plaintiff for the collection of metal at miles 29 and 30, it was pleaded that he was not entitled to get any money because the metal was not stacked in proper standard sizes notwithstanding directions to that effect. It was further averred that the quantity of metal collected was 1569 cubit feet and 670 cubic feet respectively and not 3445 and 3085 cubic feet as alleged by the plaintiff. As regards the claim for extra lead it was pleaded that it was unfounded because the rate was agreed upon for metal collection inclusive of lead royalty etc., at a thorough and flat rate. With regard to the claim for the return of earnest money and further security it was pleaded the plaintiff was not entitled to get those amounts as the same were forfeited to the Government on account of the failure of the plaintiff to complete the work within the stipulated time. In respect of the claim for cement concrete i.e., the third contract, it was pleaded that there was no order to collect any metal and whatever the plaintiff had collected, he was paid on 29-7-1951. With regard to the return of further security deposit and earnest money in respect of the fourth contract, it was contended that it could not be paid before the final sanction of the revised estimate and, as the plaintiff refused to sign on the final bill, it could not be finalised and on finalisation it was found that Rs. 175/-were yet to be recovered from the plaintiff. Legal objections were also raised that the dates of cause of action stated in the plaint were not correct and the claim of the plaintiff was barred by limitation.
3. On these averments in the pleadings in all ten issues were framed. On the evidence produced, the learned Judge found that the plaintiff was entitled to claim Rs. 3613-8-0. As regards the claim of the plaintiff arising out of the second contract, he found that the plaintiff was entitled to the amounts of Rs. 671-1-7 and Rs. 564-8-10 as due for the metal collection, but disallowed the claim of the plaintiff with regard to extra lead, the re-tarn of earnest money and security deposit. As to the claim of the plaintiff in respect of the thirdcontract, the lower Court allowed it to the extent of further carting charges, return of further security and return of earnest money, but disallowed his claim to the extent of the cost of the metal collected. As regards the claim of the plaintiff in respect of the fourth contract it found that the plaintiff was not entitled to any amount i.e., earnest money or the further security because the plaintiff himself was found due to the Government. In the result, the trial Court decreed the suit of the plaintiff to the extent of Rs. 12,383-6-5 with proportionate costs and dismissed the rest of his claim. Hence, as stated earlier, the appeal by the plaintiff and the cross-objections by the Government.
4. The appeal of the plaintiff is confined to the items disallowed by the lower Court viz., the extra lead relating to the second contract, the amount of earnest money and further security, the claim for the cost of the metal collected in respect of the third contract to the extent of Es. 6757-1-3 and Rs. 2325-5-0 earnest money and further security relating to the fourth contract. The cross-objections by the Government relate to the claim of the plaintiff for non-season rate awarded by the lower Court to the extent of Rs. 3613-8-0 the claim for the metal collection allowed to the extent of Rs. 671-1-7 and Rs. 564-8-10 totalling Rs. 1235-10-5, the amount relating to the carting of empty bags the amount of further security and the earnest money relating to the third contract.
5. We would first take up the appeal of the plaintiff, and discuss the items in seriatim disallowed by the Court below.
6-7. The first item relates to the second contract and that is with regard to the extra lead. (His Lordship perused and discussed the evidence and then continued.) We therefore agree with the view of the trial Court that the plaintiff is not entitled to claim any extra amount.
8. We next proceed to consider the other items in respect of this second contract viz., the return of the earnest money and further the security deposit that have been disallowed by the trial Court.
It is not denied that the amounts of Rs. 578-14-0 and Rs. 299/- earnest money and further security deposit respectively stood to the credit of the plaintiff. As per clause 10 of the agreement, the amounts held in deposit together with the earnest money will be returnable three months after the completion of the consolidation work on the Divisional Engineer's certifying to the satisfactory condition of the road surface. In the instant case, admittedly, the work was not completed. The contract was cancelled on 15-3-51 on the ground that the contractor had not completed the work within the specified period. The question arises whether in such circumstances the contractor is entitled to the return of the deposits. The contention of the learned counsel for the appellant-contractor is that in the absence of any agreement between the parties that if the work is not found satisfactory the contract would be cancelled and the earnest money and further security would be forfeited, the Government is not entitled to forfeit those amounts. Even assuming, the learned counsel contended, that the Government had a right to cancel the contract since the procedure laid down has not been followed and the authority cancellingthe contract was not the competent authority, such a cancellation would not give a right to the Government to forfeit the said amounts.
On behalf of the Government, it is contended by Sri Shanker Rao, the learned Government Pleader that Clause 10 of the agreement clearly gives a right to the Government to forfeit the earnest money and further security on failure of the contractor to complete the work within the specified period. Even assuming, the learned counsel contended that clause does not empower the Government, there is an implied authority to forfeit the amount of deposit and further security on failure of the fulfilment of the contract. In this connection, the learned counsel placed his reliance on the case of Howe v. Smith, 1884-27 Ch D 89 at p. 101, Naresh Chandra v. Ram Chandra, : AIR1952Cal93 , Abdul Gani and Co. v. Trustees Bombay Port, : AIR1952Bom310 , Natesa Aiyar v. Appavu Padayachi, ILR 38 Mad 178 : (AIR 1915 Mad 896). The President, Vellore Taluk Board v. Gopalasami Naidu, ILR 38 Mad 801 : (AIR 1916 Mad 485), Punamchand v. Official Liquidator, and Section 74 of the Indian Contract Act, Lastly, it is contended that assuming that the Government had no right to forfeit the earnest money and further security, still the plaintiff is not entitled to recover these amounts, as the same was barred by limitation.
9. We would first take up the question whether there is any clause in the agreement entitling the Government to forfeit the earnest money and the amount of further security on the failure of the contractor to complete the work within the specified time. It is common ground that excepting Clause 10 of the agreement, there is no other provision.
10. Clause 10 of the agreement runs thus: 'The amount thus held in deposit together with the earnest money will be returned three months after the completion of the consolidation on the Divisional Engineer's certifying to the satisfactory condition of the road surface.' This clause only enjoins that the amount and the earnest money and further security would be returned to the contractor three months after the completion of the consolidation on the Divisional Engineer's certifying to the satisfactory condition of the road surface. There is nothing in the above clause indicating the right of the Government to forfeit the said amounts. The lower Court has held that the Government was competent to forfeit the earnest money and the further security under Clause 10 of the agreement as the contract was not performed before the due date and explanation for delay was given by the contractor that because he had to quarry metal in quarries which were at greater distances than that indicating in the chart, the delay was occasioned was not sustainable. We do not agree with the view of the trial Court. Assuming that the contractor's explanation was not satisfactory, the Government would not have the right to forfeit the two said amounts under Clause 10 of the agreement, as there is no express provision.
We have next to consider whether this right to forfeit could be inferred. For that we have to see what is the nature of the money in questiondescribed as earnest money or further security deposit. To put it in the words of Lord Justice Cotton in the case of (1884) 27 Ch D 89 at p. 95 says:
'............ What is the deposit? The depositas I understand it, and using the words of Lord Justice James, 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 purchase money 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.' To the same effect is the observation of their Lordships of the Privy Council in the case of Chiranjit Singh v. Har Swamp, AIR 1926 PC 1:
'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.' The observations of Lord Justice Fry in (1884) 2.7 Ch D 89 at p. 101 are appropriate: '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 forefeiture a motive in the payer to perform the rest of the contract.'
11. From the above discussion, it follows that the deposit is a guarantee for the performance of the contract, and until the contract is performed the earnest money remains a security or earnest for the performance of the contract. The moment the contract is performed it becomes a part of the price or purchase money. But it is liable to be forfeited if the contract does not go through due to the fault of the contractor. In other words, it acts in terrorem and parties are induced to carry out their obligations under the contract for fear of forfeiture if the contract is not carried out.
12. The next question that arises therefore is whether Section 74 of the Indian Contract Act is applicable to a deposit made for the due performance of a contract. It is well known that Section 74 was enacted to do away with the difference that existed in the English law between liquidated damages and penalty. Owing to the conflicting decisions the legislature here thought fit to eliminate the distinction between liquidated damages and penalty altogether and to provide a simple clear rule in Section 74 to deal with both cases of penalty and liquidated damages. Section 74 embodies the principle that, where a penalty or liquidated damages is fixed under a contract to be paid in case of its breach, the Court is given the discretion to give reasonable compensation not exceeding the amount mentioned in the contract either as liquidated damages or as penalty. The other question that we have to consider is whether on a true construction of Section 74 a case of a deposit or of any amount paid at the time the contract is entered into for the due performance of the contract comes within the ambit of Section 74 and whether the rights of parties in relation to this deposit or sum can be adjudicated upon under the said section. The section clearly contemplates that party aggrieved has to receive from the party in default some amountor something in the nature of a penalty, but does not contemplate cases of deposits made for due performance of the contract. Such deposits cannot be considered to be amounts to be paid in case of a breach, nor can it be considered to be any other stipulation by way of penalty. In the instant case, no amount has been provided for by way of liquidated damages to be paid to the other party who has broken the contract; on the other hand, the amounts are deposit amounts. Section 74 therefore, in our opinion, does not apply.
We are supported in this view by the case of ILR 38 Mad 178 : (AIR 1915 Mad 896) (FB), Bhalchandra v. Mabadeo, AIR 1947 Nag 193, Jamai Majri Coal Co., Ltd. Chhindwara v. S.N Lokras, ILR 1950 Nag 625, W. J. Younie v. Tulsiram Jankiram, AIR 1942 Cal 382, : AIR1952Bom310 . As discussed above, the earnest money and the further security deposit being a guarantee for the due performance of the contract, if the contract goes off due to the fault of the contractor, the Government, in our opinion, would be entitled to forfeit the amount even in the absence of an express agreement. In instant case, the contract has not gone through and it was cancelled. It is the case of the Government that as the contractor did not complete the work within the specified time, it was cancelled, whereas it is the case of the contractor that he had to quarry metal from quarries which were at a greater distance than that indicated in the quarry chart and he could not complete the contract within time. This, in our opinion, cannot be a valid ground for not completing the work within the specified time. The Government therefore were justified to cancel the contract. The learned counsel for the plaintiff attacks this cancellation on the ground that it was not in conformity with Clause 17 and also that the order of cancellation was not by a competent authority,
13. In order to appreciate the contention of the learned counsel, a reference to Clause 17 of the agreement is necessary, which runs thus:-
'The contractor shall satisfactorily execute and complete the work in strict accordance with the plans, estimate and specification (herewith filed) and with all instructions issued by the Divisional Engineer from time to time and deliver the work by 15-3-51 from the date of taking the contract and signing the general conditions of the contract agreement. If the contractor fails to complete the work within the time stipulated, the Divisional Engineer may either order the contractor to discontinue the work forthwith and employ other persons to execute the remaining portion thereof, recover from the said contractor any extra cost that such proceeding might entail, or the Divisional Engineer may allow the contractor to complete the work charging for each day the work remaining unfinished a penalty .......'
The above provision casts a duty on the contractor to finish the work within the specified term and if he fails to do so, the Divisional Engineer is given a discretion to cancel the contract and employ other persons to execute the remaining portion thereof, recover from the contractor any extra cost that such proceeding might entail or he may allow the contractor to complete the work charging for each day the work (remains ?) unfinished by him apenalty. It is common ground that the contract was cancelled. We have therefore to see whether after cancelling the contract the Department has followed the procedure laid down in the above clause. The learned Government Pleader could not satisfy us from the record as to what procedure was followed. Sri Narasimha Iyengar, the learned counsel for the appellant stated that the Government did not give the work to any other person nor did it allow the contractor to complete it. The Government Pleader was not in a position to contradict this statement. It was also urged on behalf of the appellant that no notice was given to the contractor before the cancellation of the contract. As the Department has not followed the procedure laid down in Clause 17, though the Government is competent to cancel the contract, since the above formalities have not been followed, the Government would not be entitled in these circumstances to forfeit the earnest money and further security amount,
14. The other question that remains to be decided is whether the claim of the plaintiff for the return of the earnest money and further deposit amount is within time.
Admittedly, the contract was cancelled on 15-3-51. The present suit for return of the earnest money and further security was filed on 8-10-1955. Having regard to the date of the cancellation and institution of the suit, the present claim of the plaintiff would be barred by limitation. The plaintiff relies on Ex. A-61, a letter dated 6-11-1952 from the Executive Engineer, Road Division, Hyderabad, to the plaintiff and Ex. A-10 dated 3-9-52 letter from the Secretary to Government, P. W. D., Hyderabad, to the plaintiff's advocate, to show that the suit is in time. In Ex. A-61 there is no mention of the earnest money. It only refers to the stacking of the metal in standard size, though the cause title of the letter refers to the claims of the contractor. Ex. A-10, no doubt refers to the further security deposit, and earnest money but as regards the earnest money, there is a clear statement that it has been confiscated in favour of the Government and there is no acknowledgment on the part of the Government to repay the amount whereas with regard to the security amount, it is stated that the same would be refunded to the contractor after he stacks the metal in question in standard stack and they are measured and through Ex. A-61, the contractor was asked to restack the same to the above standard size within one month from the date of the letter. Reading Exs. A-10 and A-61 together, there cannot be any question of limitation so far as further security amount is concerned. Sri Narasimha Iyengar, relying on the cause-title of the letter (Ex. A-61) and para 8 of the written statement wherein the Government has stated that the amount of further security and the earnest money could not be paid before the final sanction of the revised estimate, contended that having regard to the above fact even as regards the return of the earnest money there could not be any question of limitation. We are afraid we cannot accept the contention of the learned counsel for the appellant. In so far as the return of the earnest money relating to the second contract is concerned, there is a clear denial by the Government and the reference in para 8 of the written statement to thereturn of the earnest money relates to the 4th contract. Thus we are clear that so far as the claim of the plaintiff to the return of the earnest money is concerned, it is barred by limitation. Of course, the plaintiff would be entitled to the refund of the further security amount as discussed above.
15-17. The next item relates to the cost of the metal collected in respect of the third contract. (His Lordship discussed the evidence and continued.)
18. We therefore agree with the view of the Court below that the contractor is not entitled to any amount on this account. The last items relating to the appeal of the plaintiff are in respect of the fourth contract which are for the return of the earnest money and further security. (His Lordship considered this point and proceeded.)
19. The other question that we have to see is whether this claim is barred by limitation. To our minds, there is no question of limitation so far as those amounts are concerned firstly for the reason that the Government in para 8 of the written statement have admitted that those amounts are refundable only after the finalisation of the work on receipt of the Government sanction and preparation of the final bill signed by the contractor. The final bill admittedly has been prepared somewhere in 1955. Even otherwise, the question of limitation does not arise, in view of the acknowledgment of their liability to pay in Ex. A-10 letter from the Secretary to the Government P. W. D. to the plaintiff's advocate dated 3-9-52 wherein they have stated that the work will be finalised as soon as the Government sanction is received and the subsequent letter from the Secretary to the Government addressed to the plaintiff's advocate dated 29-11-1952. In the view we are taking, we cannot agree with the finding of the Court below that the plaintiff is not entitled to the return of the earnest money and further security amount.
20. We next proceed to consider the Cross Appeal filed by the Government. As stated earlier, it relates to the first item in the first contract, the second item in the second contract and items 2 to 4 in the third contract. Item 1 of the first contract is a claim for non-season rate at Rs. 75/- instead of Rs. 50/- the season rate. (After going through evidence his Lordship proceeded). The above evidence no doubt supports the case of the plaintiff-contractor, but what we have to see is whether in the absence of any agreement merely because the department in some cases had out of concession granted non-season rates could the contractor claim non-season rates. We are definite that the contractor could not, because the parties are bound by the terms of the agreement and there is nothing in the contract which provides for such a contingency. In India in the codified law of contract there is nothing which justifies the view that change of circumstances completely outside the contemplation of the parties at the time when the contract was entered into would justify a Court in departing from the express terms of the agreement. We are supported in this view by the case of Alopi Prashad and Sons Ltd. v. Union of India, : 2SCR793 . Even otherwise, the plaintiff, in our opinion, is not entitled to this amount as admittedly it is barred by limitation. The suit contract wascompleted 11-9-50 and the present suit claiming this suit is dated 8-10-55 i.e., more than 3 years. The plaintiff-contractor while admitting that prima facie the claim of the plaintiff would be barred by limitation placed reliance on Exs. A-7 and A-8 to have limitation. Ex. A-7 is a letter to the plaintiff from the office of the Chief Engineer dated 14-2-52. This is in reply to a letter dated 31-1-52, Ex. A-18 which does not relate to the contract in question. This letter therefore does not help the case of the plaintiff. Ex. A-8 dated 29-11-1952 a letter from the Secretary to Government, addressed to the advocate of the plaintiff is in reply to Ex. A-8 dated 17-11-52 letter of the plaintiff's advocate. In Ex. A-8 also there is no clear acknowledgment of the liability. The Government through' letter dated 23-1-51 (Ex. A-3) rejected this claim of the plaintiff. On a further representation by the plaintiff, this claim was not accepted as is evident from Ex. A-4 dated 16-3-51. As there is no clear acknowledgment of the liability to pay by the Government the amount claimed being barred by limitation, the plaintiff, in our opinion, is not entitled to get this amount. The Court below relying on Ex. A-8 has held that the claim of the plaintiff is within time. As discussed above, Ex. A-8 in our opinion is not a dear acknowledgment and does not save limitation. We therefore do not agree with the view of the Court below in this regard.
21. The next item of dispute in this cross-appeal is item 2 of the second contract. This relates to the metal collection at miles 29, 30 and 31, 32. The plaintiff claims Rs. 671-1-7 and Rs. 564-8-10 respectively. (His Lordship considered the evidence and continued). In the face of the positive evidence produced on behalf of the plaintiff, it is difficult to accept the contention of the Government, that the metal collected was not 3445 C.ft. and 3085 C.ft. but 1569 and 670 C.ft. cannot be accepted. We therefore uphold the finding of the Court below in this regard.
21a. The last item of dispute in the cross appeal relates to items 2 to 4 relating to the third contract which had been allowed by the Court below. Item 2 relates to the further charges for carting empty bags. Item 3 is the return of further security. Item 4 is the return of earnest money.
22. In so far as item 2 is concerned, it is not denied by the Government. The case of the Government only was that as this amount has been included in the revised estimate, this could be paid only along with the final payment after due sanction. The Court has granted decree to the plaintiff to this extent. We agree with the view of the Court below. In our opinion, the plaintiff is entitled to get this amount.
23. The last item in this cross-appeal relates to items 3 and 4 of the third contract, the return of further security and return of earnest money. Under clause ro of the agreement (Ex. 6-5) the earnest money and further security deposit will be returned three months after the completion of the consolidation work on the Divisional Engineer certifying to the satisfactory condition of the work executed. There is no complaint in respect of the work. The work was completed on 24-1-51 F. The Government has not paid this amount. The plea taken by the Government was that as the plaintiffdid not choose to sign the required papers, the same could not be finalised and paid to the plaintiff. The learned Government Pleader could not satisfy us from the record that there was any communication sent to the plaintiff or any intimation that the final bill was ready and he should go and sign it. Our attention is drawn to Ex. A-65 dated 10-9-55. This is a communication asking the plaintiff to go over and sign, which is in respect of the fourth contract and does not relate to the third contract. The contention of the Government therefore that the plaintiff refused to sign any final bill prepared and kept ready fails. The contract was completed in 1950. So far no final bill has been drawn. It is not the case of the Government that the work was not satisfactorily done or that the approved revised estimate rates other than the tender rates were any the different from those allowed in the bill evidenced by Ex. A-81. Further no revised estimate in respect of this contract has been produced. There is no dispute with regard to the claim of the said amounts.
On the above facts, there could not be any doubt that the contractor (plaintiff) is entitled to the return of these two amounts under Clause 10 of the agreement. The contention of the Government is that even if the contractor is entitled to the return of these amounts, he cannot get a decree as that claim is barred by limitation, This contention cannot be upheld in view of the admission of the Government in para 7 of the written statement wherein they have clearly stated that the amount of further security and the earnest money relating to this contract would have been paid to the contractor along with the final payment after due sanction. Even otherwise the question of limitation does not arise having regard to Ex. A-44, a letter addressed to the plaintiff from the office of the Executive Engineer, P.W.D., dated 13-9-1950 and Exs. A-8 and A-10 dated 19-11-52 and 3-9-52 letters to the plaintiff's advocate from the Secretary to Government, P. W. D.
24. In the result, the appeal and the cross-appeal are partly allowed. The plaintiff's claim to the extent of Rs. 3613-8-0 in respect of the first contract, his claim to the extent of extra lead relating to the second contract, his claim to the refund of the earnest money to the extent of Rs. 299/- relating to the cost of the metal amounting to Rs. 6757-1-3 relating to the third contract are not accepted and the plaintiff is held to be disentitled to the same; and his claim relating to the second item of the second contract, item 3 to the extent of the security deposit amounting to Rs. 578-14-0 relating to the above contract, the claim relating to the items 2 to 4 of the third contract and items 1 and 2 of the 4th contract are decreed.
25. In the result, the plaintiff's suit is decreed to the extent of O. S. Rs. 11,849-1-5 (equivalent to I.G. Rs. 10,156-6-0) and the rest of his claim is dismissed. The sum decreed will carry interest at the rate of 5 1/4 % per annum from the date of the suit till the date of realisation. Parties would be entitled to proportionate costs throughout.