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Kanpur Iron Brass Works and Flour Mills Vs. Banarsi Das and ors. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtAllahabad High Court
Decided On
Case NumberSecond Appeal No. 922 of 1950
Judge
Reported inAIR1959All755
ActsSale of Goods Act, 1930 - Sections 4 and 54
AppellantKanpur Iron Brass Works and Flour Mills
RespondentBanarsi Das and ors.
Appellant AdvocateD.D. Seth, Adv.
Respondent AdvocateS.B. Varma, ;J. Swaroop and ;H. Swaroop, Advs.
DispositionAppeal allowed
Excerpt:
contract - breach of contract - sections 4 and 54 of sale of goods act, 1930 - contract made between parties for delivery of goods and an advance amount was paid - amount paid held to be earnest money and forfeited seller on breach of contract by purchaser. - - the defendant had manufactured the 20 kolhus which he had undertaken to construct, that the said kolhus were lying in his workshop, and that, in spite of repeated notices on his part the plaintiff had failed to take delivery of the same. there is a well recognised usage in india to make such payments in the beginning to serve the two fold purpose mentioned above. the thing given in that way must be given by the contracting party who gives it, as an earnest or token of good faith, and as a guarantee that he will fulfil his.....nasirullah beg, j.1. this second appeal has been filed by the kanpur iron brass works and flour mills. '2. the appellant was the defendant in a suit brought by the plaintiff for recovery of rs. 3,000/-, which was alleged by the plaintiff to have been advanced to the defendant towards the purchase of 20 bengal type kolhus to be manufactured by the defendant and delivered to the plaintiff according to the agreement between the parties. the plaintiff's case was that the defendant had committed breach of contract by failing to supply the kolhus as stipulated, and hence he claimed a refund of the above amount. the plaintiff further claimed an amount of rs. 810/- by way of interest.3. the suit was resisted by the defendant. the defendant's case was that there was no breach of contract on his.....
Judgment:

Nasirullah Beg, J.

1. This second appeal has been filed by the Kanpur Iron Brass Works and Flour Mills. '

2. The appellant was the defendant in a suit brought by the plaintiff for recovery of Rs. 3,000/-, which was alleged by the plaintiff to have been advanced to the defendant towards the purchase of 20 Bengal Type Kolhus to be manufactured by the defendant and delivered to the plaintiff according to the agreement between the parties. The plaintiff's case was that the defendant had committed breach of contract by failing to supply the kolhus as stipulated, and hence he claimed a refund of the above amount. The plaintiff further claimed an amount of Rs. 810/- by way of interest.

3. The suit was resisted by the defendant. The defendant's case was that there was no breach of contract on his part. The defendant had manufactured the 20 kolhus which he had undertaken to construct, that the said kolhus were lying in his workshop, and that, in spite of repeated notices on his part the plaintiff had failed to take delivery of the same. The defendant therefore alleged thatthere was, on the other hand, a breach of contract on the part of the plaintiff. The defendant's case was that the said amount of Rs. 3,000/- was earnest money, and was, therefore, liable to be forfeited on breach of contract by the plaintiff, and, in any case, the defendant had suffered damages, and, taking into consideration the reasonable compensation to which he was entitled, the decree for Rs. 3,000/-in favour of the plaintiff should not have been passed.

4. The suit seems to have been hotly contested in both the Courts below. The trial Court came to the conclusion that the party guilty of committing the breach of contract was the plaintiff, and not the defendant. It was further of opinion that the amount of Rs. 3,000/- was paid by way of earnest money, and, as such, it was liable to be forfeited on breach of contract by the plaintiff. As however, eight kolhus had been delivered to the plaintiff, the trial Court split up this amount of Rs. 3,000/-, and decreed a proportionate amount of this deposit, namely 8/20ths of Rs. 3,000/- i.e., an amount of Rs. 1,200/- in favour of the plaintiff. It rejected the plaintiff's claim in respect of interest.

5. In appeal the lower appellate Court reversed the decree of the trial Court. It upheld the finding of the trial Court to the effect that the party guilty of brace of contract was the plaintiff, as the plaintiff had refused to take delivery of 12 out of 20 kolhus, With regard to the question relating to the nature of Rs. 3,000/- said to have been advanced by the plaintiff to the defendant it observed is follows :

'The controversy between the parties about the deposit of Rs. 3,000/- having been made as an advance or as earnest money is superfluous., because the amount whether called by the name of 'deposit' or 'advance' or 'earnest money' cannot in the absence of clear contract, be made liable to forfeiture on the mere happening of a breach of contract by the purchaser.'

It further held as follows .

'But notwithstanding the breach of contract on the part of the plaintiff he is entitled to recover the amount of Rs. 3,000/- from the defendant because of the absence of any forfeiture Clause in the contract.'

In this view of the matter the lower appellate Court allowed the appeal and decreed the plaintiff's claim for recovery of Rs. 3,000/- with proportionate costs of both the Courts against the defendant. It however dismissed the plaintiff's claim in respect of Rs. 810/- as interest by way of damages.

6. Dissatisfied with the said judgment the defendant has filed this appeal.

7. Having heard learned counsel for the parties at length I am of opinion that this appeal should be allowed. I may, at the very outset, mention that in my opinion the view taken by the lower appellate Court that the question whether Rs. 3,000/- was merely an advance or earnest money was superfluous because neither could be recovered in the absence of any express or clear contract to the effect that the amount was liable to be forfeited on breach of the contract by the purchaser, appears to be an erroneous one. I am, on the other hand, of opinion that the sole question that is material in the present case relates to the nature of this amount, and the conclusion to which the Court arrives in this regard would make a difference in the approach of the case.

8. On the question whether this amount of Rs. 3,000/- is merely an advance payment of purchase price or in the nature of earnest money, having considered the entire evidence adduced by the parties, I am of opinion that this amount is in the nature of earnest money. The contract whichhas given rise to the present dispute was admittedly entered into between the parties on 2-1-1946. On that date two documents came into existence, viz. Exts. 2 and 3. Ext. 2 is a letter and Ext. 3 is a receipt. Both of them were written simultaneously, and are part of the same transaction. The nature of the transaction in question has, therefore, to be determined in the light of both these documents. The first document, viz., the letter Ex. 2 is on a printed form. It bears the name of 'Kanpur Iron Brass Works and Flour Mills' at its head. This letter proceeds to state as follows :

'Sirs,

I/We hereby agree to your terms of which a few have been noted below and have pleasure to place the following order and deposit a sum of Rs. 3,000/- as advance.'

It may be mentioned that the entire sentence quoted above is in print except the numeral '3,000/-' which is filled in the blank space after the word 'Rs.'. The important point to note in the above document is that it states that the sum of Rs. 3,000/- was a deposit made by the plaintiff, The use of the term 'deposit' has got some legal significance. In Wharton's Law Lexicon, Fourteenth Edition, deposit has been defined as

'money paid to a person as an earnest or security for the purpose of some contract, especially for the sale of real estate.'

9. In P. Ramanatha Iyer's Law Lexicon of British India, (1.9-10 Edition) the meaning of the word deposit' has been stated as follows :

'The use of the word 'deposit' in contract implies an agreement that the sum deposited may be forfeited in case of breach by depositor.'

Reference in this connection is also made to the case of Tikam Chand-Bhag Chand v. Firm Kakhan Lal Din Dayal, AIR 1937 Lah 842.

10. In the present case the word 'deposit' isadmittedly used in connection with a contract. Thedefendant is a business firm. As mentioned by meabove, the word 'deposit' is found in a printedform. This appears to be a set form used by thisfirm in all its business dealings. It is to be filledup by parties entering into contractual obligationswith it. The form has been particularly designed forthis purpose.

The firm has frequent business dealings, and I have no doubt that the use of the word 'deposit' in such a document must have been made deliberately and with the set purpose of accepting advance from its customers by way of deposit for the purpose of securing its rights under the contract, and seeing that the terms of the contract are adhered to by the other party. There is no statement in the document that this amount is to be treated as part payment of the price: straightway. On the other hand, the use of the word 'deposit' would indicate that it is to be kept in deposit or retained by the vendor for a certain purpose. This is not, therefore, a case of advance simpliciter, but a case of advance by way of deposit.

11. The use of the word 'advance' in Ext. 2 is no less significant. It indicates that the payment was being made at the very inception of the contract. The payment was in fact made simultaneously with or, to be more correct, immediately after the agreement was entered into as a part of the same transaction. The agreement was the mere word of the party. The immediate payment thereafter was the first translation of the word into action by thy same party.

Such conduct in the very beginning is obviously meant to put a seal on the contract and to operate as a gesture or guarantee of bona fide of the party making the payment. It serves as a kindof signal of confirmation of the contract that had been entered into by him. The amount of Rs. 300/- was to serve a double-purpose. First, it was to serve as a token of ratification of the contract already entered into and secondly, it was to serve as an offer of security for its future performance by the party tendering it.

The first purpose is emphasised by the use of the word 'advance' and the second is emphasised by the use of the word 'deposit'. In such a transaction the seller was taking a risk in embarking on the work of construction and the buyer, by making such a payment, was exhibiting that he was really earnest and serious about the matter, as he was also prepared to take a corresponding risk by parting with a substantial cash amount by way of 'advance'. There could be no question of any payment of price at that stage for the goods were not in existence at all.

There is a well recognised usage in India to make such payments in the beginning to serve the two fold purpose mentioned above. This usage is an old one. The practice in England seems to be the same. It appears to be all prevalent and is followed not only in cases of sales of movable properties but also in cases of sales of immovable properties. It has been accorded judicial recognition in a number of cases, and law courts have taken repeated notice of the same.

12. In Nareshh Chandra Guha v, Ram Chandra, : AIR1952Cal93 , it was held that in the absence of any contrary intention, money paid by the purchaser to the vendor at the time of the agreement be it described as earnest money or deposit money or by any other name -- is presumed to be earnest or security for the performance of the contract of sale, liable to be forfeited if the contract fails by reason of the default on the purchaser's part. Law raises in such cases an initial presumption in favour of the vendor clothing him with a right to forfeit the money.

13. In Mathradas Valabhadas v. Punathil Aboobacker : AIR1951Mad752 it was observed that regard being had to ordinary usage, the payment of money at the time of contract styled as 'advance' by the parties should be considered to be an earnest money and not payment on account. Such money was, therefore, liable to be forfeited on account of a breach. In Narayanamurthi v. Nageswara Rao : AIR1941Mad108 also it was held that in respect of contract of goods it has been customary in India to receive sums of money by way of deposit or earnest. Such sums are forfeited when default is made by the vendee.

In Habibullah v. Arman Dewan AIR 1920 Cal 679 it was held that where upon an agreement of sale, the vendee deposits a sum of money with the vendor, the deposit', unless paid on any special terms, is not merely a part payment but is an earnest, so that on the one hand, if the contract is performed, it is brought into account as part payment; on the other hand, if the purchaser makes default, it may be retained by the vendor, and is thus a security for the performance of the purchaser's part of the contract.

14. The following statement in the commentary on the Indian Contract Act by Sir Henry Cunningham and Sir Hortio Shephard (11th Edn.) is relevant in this connection :

The deposit which is frequently made on the signing of a contract for the sale of land is in the nature of earnest; it is not only part-payment but is also intended to bind the bargain entered into and creates by the fear of its forfeiture a motivein the payer to perform the rest of the contract.' (p, 318)

15. The historical aspect of the above practice has been dealt with in Story's Treatise on the Law of Contracts (Fifth Edition) Vol II at p. 204 thus :

'The practice of ratifying a contract of sale by some formal act, which should be typical of the conclusive assent of both parties, is recorded in the most ancient annals of history. In Ruth (Ruth IV. 7) we read that amongst the Jews 'it was the manner to confirm all things, for a man to pluck off his shoe, and give it to his neighbour and this was a testimony in Israel.' In the same manner was the contract of sale between Boaz and Elimelech ratified (Ruth, iv. 8, 9). So, also, the northern nations confirmed their contracts by shaking hands; and this practice still exists in England and America, and is recognized by the Romans and the common law (Bracton, 1, 2, c, 27, Inst, 1 til. 24). Earnest is only a ratification of the contract, however, and gives the buyer a conditional right to the goods, upon payment of the whole price.'

16. In Roland Burrows book on 'Words and Phrases Judicially 'Noticed,' the meaning of the term 'earnest' has been expounded thus :

'It is somewhat difficult to give a precise definition of the word 'earnest'. Certain characteristics, however, seem to be clear. An earnest must be a tangible thing ....... that thing must begiven at the moment at which the contract is concluded, because it is something given to bind the contract, and, therefore, it must come into existence at the making or conclusion of the contract. The thing given in that way must be given by the contracting party who gives it, as an earnest or token of good faith, and as a guarantee that he will fulfil his contract, and subject to the term that if, owing to his default, the contract goes off, it will be forfeited. If, on the other band, the contract is fulfilled, an earnest may still serve a further purpose and operate by way of part payment.' (p. 165)

17. Even if the above recital in Ext. 2 is co sidereal to be ambiguous, that ambiguity is amply cleared up by the other document viz., Exf. 3, the receipt. This document was admittedly executed on the same date immediately after the contract Ext. 2 as a concluding part of the same transaction. This receipt was executed by the same party, i.e., the defendant, in whose printed letter form the contract Ext. 2 was signed. In this receipt which is of this very amount of Rs. 3000/-, this sum is described as having been received by the defendant as 'Biana.' The word 'Biana' clearly means 'earnest money.' The plaintiff did not object to the description of this amount as 'Biana' in the receipt. In fact Ex. 3, the receipt is produced by the plaintiff himself in this case, and is strongly relied on by him as the basis of his present claim.

18. The conduct of the parties also supports the same conclusion. It is admitted between the parties that on 5-3-1946 the plaintiff took delivery of the first instalment of eight kolhus from the defendant. The price of the Kolhus stipulated between the parties was Rs. 600/-. per Kolhu, The price of eight Kolhns would be Rs. 4800/-. If this amount was part payment of the purchase price, one would have expected that Rs. 3000/-would have been set off towards the price of eight kolhus. According to the admitted case of both the parties, however, this amount was not set off towards the price of eight Kolhus supplied, butthe entire amount of Rs. 3000/- was still retained by the seller with him.

This conduct would further support the conclusion that this amount was to be retained by the defendant upto the completion of the transaction, i.e., until the defendant was sure that the terms of the entire transaction were complied with by the plaintiff. P.W. 1 also admitted in his evidence that this amount was not adjusted towards the price of the kolhus. Under the circumstances, the defendants version that this amount was given by way of' earnest money appears to be worthy of credence.

19. On behalf of the plaintiff learned Counsel has placed reliance on Ext. 9 which is a notice given on behalf of the defendant to the plaintiff. In this notice it is stated that the kolhus ordered by the plaintiff were ready and if the plaintiff did not take delivery of the same within 15 days, the defendant would have no alternative but to resell the kolhus at the risk of the plaintiff. It is further stated that the defendant will hold the plaintiff responsible for the resultant losses, if any, it further states that the defendant would appropriate the sum of Rs. 3000/-, towards the losses, if any, sustained by the defendant and would claim the balance from the plaintiff.

20. It is no doubt true that this course was open to' the defendant under Section 54 Sub-clause (2) of the Sale of Goods Act. The fact that the defendant referred to the alternative course that was also open to him, however, does not mean that he had abandoned his legal right to forfeit this amount, if he did not resort to the said course. If the defendant was entitled to forfeit this amount under law, I do not see how the threat that ho might appropriate this amount towards his losses would deprive him of the right which had vested in him. It is, however, significant to note that the defendant even in this letter does not say that the amount would be appropriated towards the purchase price. He is s in treating this amount of Rs. 3000/- in his letter as a consolidated amount to be taken into account for the adjustment of his losses after the transaction comes to a close.

The fact, however, is that the defendant did not resort to the alternative suggested in this letter. He never re-sold the said Kolhus. On the other hand the defendant's case as well as the evidence is to the effect that the Kolhus were still lying with him, that it was open, to the plaintiff to take delivery of the same and that the defendant was throughout asking him to take them away.

21. The allegations of the defendant would indicate that the Kolhus ordered by the plaintiff were of a special type known as Bengal Type of Kolhus for which there seemed to be no local market. The defendant was therefore, taking a risk in manufacturing those Kolhus. If the plaintiff did not take delivery of the same, the defendant might not find a buyer for them at all. This is another circumstance that supports the conclusion that the amount of Rs. 3000/- might have been taken by way of earnest money in order to cover this risk which the defendant was incurring. The oral statement made on oath by D.W. 1 is also clearly to the effect that the said amount was given by way of earnest money.

22.Further, it is to be remembered that, this amount of Rs. 3000/- was not advanced in respect of the sale of any existing property of estate like house, land or movable property that was nonexistent at the date of advance. In the case of immovable property, the property being existent can be and is seen and examined by the buyer before he makes up his mind. In the present casethis was not so. Only an order was placed with the defendant for preparation of certain special type of kolhus. The date of their preparation was a future one.

It was, therefore, quite possible that the plaintiff might not like the Kolhus after they were made or he might not approve of them in their ready-made form. If he took it for his personal need, his need might cease. If he took it for sale, the demand in the market might fall. The fulfilment by the plaintiff of his part of the contract, therefore depended on his personal whim and an uncertain future situation. The evidence in this case further shows that the plaintiff had already cancelled the contract entered into by him with the defendant immediately previous to the present one. The defendant, therefore, fully knew that, in any case, he was taking several risks by entering into a contract like this with the plaintiff.

The defendant is a firm whose regular business it is to enter into contracts. The defendants must have known and realised these risks at the very inception. It is, therefore, inconceivable that under the circumstances, the defendant would have entered into a transaction of this nature with the plaintiff without 'taking any step to cover these risks and to safeguard its own position. The probabilities of the situation, therefore, also strongly point to the conclusion that the amount in question was earnest money as stated by D.W. 1.

23. Thus the documentary as, well as the oral evidence produced in the case, the conduct of the parties at the time o transaction as well as subsequent to it, and also the probabilities as well as other circumstances of the case, all point to the conclusion that this sum of Rs. 3000/- was advanced by way of security or guarantee by the plaintiff for the fulfilment of the contract which was being entered into by him with the defendant.

In other words, this amount constituted a token offered on the part of the purchaser to indicate that he was really serious in the business contracted for, and had a bona fide intention of taking delivery of the Kolhus ordered by him. If this is held to be the real nature and purpose of this amount, then, in my opinion, whether it is called deposit, or advance, or earnest money does not make any difference at all. All these various expressions would be but different ways of describing the same situation.

24. The meaning of the word 'earnest' is akin to the meaning of the word 'deposit' Earnest' is defined in Wharton's Law Lexicon as a sum paid by the buyer in order to bind the seller to the terms of the agreement. In one sense earnest money can always be considered to be a part payment of the mice, 'Since in case the contract is fulfilled it will be appropriated and adjusted towards the price due at the time of the final settlement of accounts.

In fact as already observed, it serves a double purpose viz. of part-payment of price in case of fulfilment of contract, and of guarantee in case of its breach. The only question, therefore, is whether the intention of the parties at the time of advance was also that the amount was to be retained by the vendor upto the end for the purpose of seeing that the purchaser had fulfilled his part of the contract. This, as I have already observed, seems to be so in the present case.

25. If the above construction is placed onthe nature of this amount, then the fact that thereis no express or specific term in the contract thati this amount should be forfeited in case of breachas quite immaterial. Such a term would be implied in the very nature of the deposit and would e implicit in the circumstances of the case. The amount so deposited would be liable to be forfeited whether an express term to that effect exists or not, once it is proved that the plaintiff had made a default and committed a breach of the contract. This view of law finds support from a large number of cases both Indian as well as English.

26. In Mangobinda v. J. Boisogmaff AIR 1922 Cal L04 the facts were that the plaintiff had paid certain sums which were to remain in deposit with the defendant and were to be kept by him as such for being eventually credited as payment or part payment against the final order. There was further no express contract that this deposit would be forfeited if the purchaser repudiated the contract.

The Division Bench of the Calcutta High Court held that a deposit made in such circumstances was liable to forfeiture, even when there was no Clause in the contract as to the forfeiture of deposit, if the purchaser repudiated the contract, The Bench further held that it was not open to the purchaser to get back the money if the contract went off through his own default, and that this would be equally so even if the seller was not put to any loss by the repudiation. In its judgment the Bench further made the following observations :

'We have not been referred to any case in which the plaintiff has been held entitled to refund of the deposit money even where there was repudiation of the contract on his part. In the present case the appellants were dissatisfied with the dealings of the respondent under the first contract, and they accordingly did not place any orders under the 2nd and 3rd contracts. They admittedly were not willing to perform their part of the contracts and their defence practically amount to a justification for repudiation of the contract. The findings of the Court of Appeal below however are against them.

It may be hard that the plaintiffs should forfeit the deposit although the defendant did not suffer any loss, but having regard to the findings arrived at by the Court of Appeal below, and to the authorities on the point, we feel constrained to dismiss the appeal. We direct however that each party to bear his own costs in all the Courts.' (pp.'105-106).

27. In the above case reference is also made to a number of English cases which contain observations relevant to the point at issue, and which are worthy of citation in this connection. In Soper v. Arnold (1889) 14 A.C. 429 at p. 435 Lord Macnaghten expounded the nature of such a deposit thus :

'The deposit serves two purposes -- if the purchase is carried out it goes against the purchase money but its primary purpose is that it is a guarantee that the purchaser means business.'

28. The next case that may be cited is. In re, Parnell; Ex parte Barell: (1S75) 10 Ch. A 512 in which it was held that :

'Where a contract for sale goes off for default of the purchaser the vendor is entitled to retain the deposit.'

The following remarks of James LJ. in this connection are also significant:

'The money was paid to the vendor as a guarantee that the contract should be performed : the Trustee refuses to perform the contract and then says 'give me back the deposit.' There is no ground for such a claim.'

The following observations of Mellish LJ. are also relevant:

'It appears to me clear that, even when there is no Clause in the contract as to forfeiture of the deposit if the purchaser repudiates the contract he cannot get back the money as the contract has gone off through his default.'

Another English case that is relevant in this connection is that of Collins v. Stimson, (1883) 11 Q.B.D. 142 (143) in which Baron Pollock observed thus ;

'According to the law of vendor and purchaser the inference is that such a deposit is paid as guarantee for the performance of the contract and where the contract goes off by default of the purchaser the vendor is entitled to retain the deposit, In Palmer v. Temple, (1839) 9 Ad and El 508 : 112 ER 1304 it was held that : 'in the absence of any specific provision the question whether the deposit is forfeited depends upon the intent of the parties to be collected from the whole instrument.'

The following observations of Lord Fry LJ. in Howe v. Smith, (1884) 27 Ch. D. 89 are also instructive in this connection :

'Money paid as a deposit must, I conceive, be paid on some terms implied or expressed, and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into and create a motive in payer to perform the rest of the contract.'

To the same effect is the law laid down in Bishon Chand v. Radha Kishan Das, ILR 19 All. 489. In this case the plaintiff had sent Rs. 650/- to the defendant a,s a deposit and in part payment of the consideration money. The court held that the person who broke the contract was the plaintiff, On the above finding the Division Bench of the Allahabad High Court held that the plaintiff was not competent to recover the deposit paid by him to the defendant.

29. Another case of the Allahabad High Court which laid down that the deposit made under such circumstances cannot be recovered by the plaintiff, is reported in Roshan Lal v. The Delhi Cloth and General Mills Company, Limited Delhi, ILR 33 All. 166.

30. In Abdul Ghani and Co. v Trustees of the Port of Bombay, : AIR1952Bom310 it is held that:

'It is not necessary in a contract to have an express provision with regard to forfeiture of a deposit. If the deposit is for the due performance of the contract, then on the failure to perform the contract add on the contract being repudiated by a party to the contract, the other party becomes entitled to forfeit the deposit. Indeed it is this very purpose that the deposit fulfils. It is a guarantee for the performance of the contract, and it supplies a motive to the parties to fulfil their obligations under the contract.'

The other esses that may be cited in support of the same proposition are reported in Nadiar Chand Guin v. Satish Chandra : AIR1927Cal964 , Ram Chand v. Central Flour Mills of Kasur, AIR 1935 Lah 192. Abas Ali v. Kodhusao , Madho Das v. Gokuldas AIR 1922 All 478, Golam Muhammad v. Akhoy Kumar. AIR 1916 Cal 974. Mangulal v. Nanhi AIR 1922 Nag 104 and Mohammad Habibullah v. Mohammad Shafi AIR 1919 All 265.

31. The case of the Privy Council Chiranjit Singh v. Bar Swamp AIR 1926 P.C. 1 is also a clear authority for the proposition that earnest money is part of the purchase price where the transaction goes forward. It is forfeited when the transaction falls through by reason of the fault of failure of the vendee. In this case the' facts were that an amount of Rs. 20,0007- was stipulated as the earnest money, whereas the sale price of the estate sought to be purchased by the plaintiff was fixed at Rs. 4,76,000/-. The plaintiff did not pay the earnest money as stipulated, but paid a consolidated amount of Rs. 1,65,000/- towards the sale price.

Under these circumstances their Lordships of the Privy Council held that the purchaser having broken the contract must lose Rs. 20,000/- out of the amount as this amount was stipulated to be the earnest money. The plaintiff was, however, allowed to recover Rs. 1,45,000/- the remaining amount. On behalf of the respondent reliance was placed on this part of the judgment of their Lord ships of the Privy Council for the proposition that the amount paid towards purchase price can be recovered. I do not, however, think that this part of the observation of their Lordships of the Privy Council can be invoked in support of the respondent in the present case, as the amount of Rs. 3000/- has been found to be paid not towards the purchase price but as earnest money. Hence the part of the reasoning that would apply to the present case is that which relates to Rs. 20,000/- and not that which relates to Rs. 1,45,000/-.

On the other hand, the fact that in that case even though earnest money was paid along with the purchase price, yet it was held to be recoverable by the plaintiff would strongly support the defendant's case. In the present case the alleged advance by way of deposit or earnest money was a separate item paid in the very beginning of the contract, and not along with any amount paid as the price. In fart in the present case the goods in respect of which the said amount was paid did not even exist at the time of advance and no purchase price could, therefore, be said to be due at all at the time. The circumstances in favour of the defendant in the present case are, therefore, clearer and stronger than those in the case before their Lordships of the Privy Council.

32. Learned counsel for the respondent has also tried to rely on Mohammad Zafar Ahmad Khan v. Mt. Hamida Khatoon : AIR1945All70 . In this case AIR 1926 P.C, preferred to above is relied on, and it is held that where earnest money is deposited with the vendor as a guarantee for the purpose of the agreement, it shall be forfeited on breach of agreement by the vendee. Read as a whole, I am of opinion that this case, far from supporting the case of the plaintiff, on the other hand supports the defendant's case.

33. On behalf of the respondent the case of Dcsu Rattamma v. K. Krishna Murthi AIR 1928 Mad. 326 was also cited. In this case it was held that:

'Where the vendor neither alleges nor proves that the advance is earnest money, and it is treated merely as part payment of purchase money in the account books of the defendants, it is not a deposit in the strict sense of the word.'

This case has no application to the facts before us. In the present case the vendor has throughout alleged that the money in question was earnest money. Further, the money was never treated in his account books as part of purchase money. On the other, hand, in the receipt issued by him at the very time of the transaction he had described this money to be earnest money, and the said description was not objected to by the vendee. This receipt, as already observed has been produced by the plaintiff himself in the present case as a part of his own evidence.

34. The last case cited by the respondent is Premji Mulji v. Garlick and Co., 90 Ind Cas 573: (AIR 1925 Sind 254). In this case it was held that:

'In the case of an alleged breach of contract by a buyer, the seller cannot forfeit any amount paid by the buyer as part of purchase money, where the seller has not claimed to appropriate the amount against any loss suffered by him in consequence of the breach, but has rather expressly reserved his right to institute a suit in the proper Court for the recovery of any amount that may be due to him.'

35. This ease is again distinguishable from the present case. In the present case the amount was paid by the buyer not as part of purchase money but as earnest money. Further, in the present case the seller did in his letter Ex. 9 threaten that he might also resort to the alternative of appropriating the amount in question against losses suffered by him in consequence of the breach. Moreover he has not made any express reservation of any right to institute any other suit for recovery of any amount.

36. The law cited above would clearly bear out the proposition that the money paid under such circumstances, whether described as money paid in advance by way of deposit, or as earnest money, or money paid as security for the purpose of the contract cannot be recovered by the plaintiff if he is proved to be in default Further it is also clear that an express stipulation of forfeiture is not necessary in such cases, for such a term is necessarily implied in the very nature of the deposit. The lower appellate Court was, therefore, clearly wrong in holding that the question whether the money was earnest money, or advance, or deposit was irrelevant and superfluous, and that an express promise of forfeiture is necessary in every case.

37. The trial court did hold that the amount deposited was in the nature of earnest money. It, however, split up the entire amount of security into two portions, as eight Kolhus were admittedly accepted by the plaintiff. It accordingly decreed Rs. 1200/- i.e. proportionate amount of money, viz. 8/20th of Rs. 3000/- in favour of the plaintiff. It seems to me that the amount of Rs. 3000/- was a consolidated amount and this consolidated amount should be treated as a security for the performance of the entire contract.

The contract was that the plaintiff would accept the entire total of 20 kolhus. If the plaintiff did not accept all the 20 kolhus he must be held to have committed a breach of the contract. Mere acceptance of eight kolhus cannot therefore, in my opinion, relieve him from the legal liability of forfeiture which is incurred by the buyer once he is found to be guilty of breach of contract.

38. The view taken above is supported not only by law but is supported by equity also. In Alokeshi Dassi v. Kara Chand Das, ILR 24 Cal 897 referred to in AIR 1922 Cal 104 at p. 105 cited above, the learned Judges observed thus :

'It being admitted on both sides that there is nothing either in the Contract Act or the Specific Relief Act applicable to the case, it must under Sub-section 2 of Section 37 of Act XII of 1887, be governed by Rules of justice, equity and good conscience.'

Is there anything in justice, equity or good conscience to entitle the plaintiff in the present caseto a recovery of the amount claimed? The admitted facts in the present case are that the plaintiff had ordered 20 kolhus from the defendant. Both the courts have held that the 20 kolhus as ordered by the plaintiff to the defendant had been made ready by the defendant, and that the defendant, so far as his part of the contract is concerned, had fully complied with the terms of the contract, The plaintiff accepted only eight Kolhus out of them.

The plaintiff thereafter unlawIully arid unjustifiably repudiated the contract, and refused to accept the remaining twelve kolhus without proper reason. These kolhus were of a special type and the defendant had to go out of his way to make these koihus in order to conform to the particular requirements of the plaintiff. These twelve kolhus are now lying idle in the defendant's workshop. There is no sale in the market for them whatsoever. The value of these twelve kolhus now lying waste with the defendant, even at the rate of Rs. 600/- per kolhu, the rate admitted by the plaintiff, comes to Rs. 7,200/- an amount far in excess of Rs. 3,000/-.

Can the plaintiff who had placed this special order with the defendant be allowed, under the above circumstances, in equity to resile from the contract at his own sweet will, recover Rs. 3,000/-advaneed by him and at the same time refuse to abide by the terms of the contract thereby causing the defendant a loss of Rs. 7,200/-? In other words, the plaintiff having obviously caused a loss of Rs. 7,200/- to the defendant, has brought the present suit the result of which in the event of the plaintiff's success would be to cause a further loss of Rs. 3,000/- to the defendant, i.e., a total loss of Rs. 10,200/-. To allow the plaintiff to recover Rs. 3,000/- under these circumstances would, to say the least of it, be tantamount to putting a premium on dishonesty and unfairness.

Under the circumstances I do not see any justification fur the claim put forward by the plaintiff even in equity. In fact, the plaintiff came to Court with a false claim to the effect that the breach of contract was on the part of the defendant and not on his part. The allegation of the plaintiff in this regard has been found to be unfounded and incorrect by both the Courts below. Under these circumstances, I see no justification whatsoever, whether legal or equitable, in the present claim of the plaintiff.

38a. Apart from the above position, an alternative argument is also advanced by Sri D. D. Seth learned counsel for the appellant who argued the case with commendable ability. This argument in, my opinion also deserves serious consideration. On behalf of the appellant his learned counsel has argued that even supposing that the sum of Rs. 3,000/- which was in deposit with the defendant is treated as an advance simpliciter, the plaintiff would even then not be entitled to its recovery in the present case, as the defendant still, regards the contract as subsisting.

My attention in this connection is drawn to Ex. 8 dated 23-3-1946. This is a letter in which the defendant asked the plaintiff to take delivery of the remaining Kolhus, which were ready at his workshop at an early date. Reference in this connection is also made to Ex. 9--the notice sent on behalf of the defendant to the plaintiff. This notice was given as late as 3-2-1947. Even in this notice the defendant, after referring to the fact that the plaintiff had taken delivery of eight kolhus, has stated as follows :

'Thereafter my clients informed you by their letter dated 23-3-1946, that the other 12 pairs were also ready and your clients could send theirrepresentative to take delivery of those kolhus but despite that letter and reminder dated ,25-5-1946, your clients failed to remove the kolhus.'

It was further stated as follows :

'Again your clients' demand for return of Rs. 3,000/- paid to my clients as advance is unjustified. My clients manufactured the kolhus at your clients' instance and incurred expenses in manufacturing them and they are lying with my clients at your clients' risk and responsibility and your clients can remove them against payment of the price whenever they like.'

The oral evidence of D.W. 1 Bal Krishna is also to the same effect. The said witness stated :

'On 5-3-1946 the man of the plaintiff came to take 8 Kolhus and he said that he would take the remainder within 12 days after personal inspection. I sent a letter on the 23rd asking them to take away the Kolhus. The Kolhus arc lying there still.'

He further proved the letter dated 25-5-1946 which was sent under postal certificate.

39. The concurrent findings of the two Courts below also indicate that the defendant had throughout been willing to perform its part of the contract, and that the plaintiff without any justification unlawfully repudiated a solemn obligation which he had undertaken by virtue of the agreement entered into by him. In this situation which emerges from the facts which have now been proved to be beyond the pale of doubt, it is argued on behalf of the appellant that the plaintiff cannot be held to be entitled to recover the amount, even if the said amount is treated as advance.

Reliance in this connection on behalf of the appellant is placed on a case of the Madras High Court, viz., A. K. Oosman v. Gurtajee Coovarjee AIR 1935 Mad 903, in which it was held that where a purchaser pays money by way of advance of the purchase price and the contract is broken, before he can be entitled to the recovery of the amount advanced, he must show that the vendor has regarded the contract as at an end. Where the defendant has still treated the contract to be subsisting, the purchaser cannot be allowed to recover the advance.

Reference in this connection has also been made to the case of AIR 1926 PC 1 and it has been held that this Privy Council case has not affected this proposition of law. The other cases referred to in this connection are reported in Anto Supply Co., Ltd. v. V. Raghunatha Chetty AIR 1929 Mad 884, Sahib Dayal v. Jamal-Ud-Din, 164 Ind Cas 752; (AIR 1937 Lah 194) and Bhalchandra Pandurang v. Mahadeo Laxminarayan AIR 1947 Nag 193, containing at pages 200-201 citation from Katherine Stiffles v. Carr Mackertich Martin, 39 CAL WN 174 (181).

40. This aspect of the matter is capable of being put in another form. It can be argued with force on behalf of the appellant that the plaintiff came to Court with the allegation that he was entitled to the recovery of Rs. 3,000/- on the ground that the defendant had committed a breach of the contract, and the cause of action of the plaintiff in the present case was, therefore, the breach of contract by the defendant. The defendant, however, has succeeded in proving that he has not committed any breach of the contract whatsoever. On the other hand, he was still sticking to the contract, has throughout been ready and prepared to fulfil the same.

The defendant has, therefore, succeeded in proving that he has treated the contract to be a subsisting one. He has further succeeded in proving that the cause of action alleged by the plaintiff is a false and baseless one, The cause of action, on the basis on which 'the plaintiff came to Court, having thus disappeared, the plaintiff cannot be given any relief on the basis of a cause of action which is proved to have no existence at all. The plaintiffs suit must, therefore, fail from this point of view also.

41. From whichever point of view the matter is looked at, in my opinion, the plaintiff is not entitled to any relief in the present suit.

42. Lastly on behalf of the appellant it is also argued that it is the defendant's case that they have suffered damages as a result of the action of the plaintiff. No doubt, the defendant has failed to prove the actual amount of damages suffered by him. It was, however, open to the Court to come to the conclusion that he was entitled to a reasonable amount of compensation, and to appropriate the present amount towards the same. This manner of approach will not be unwarranted by the pleadings, as the defendant Has alleged that he has suffered damages. In paragraph 11 of the written statement it is alleged as follows :

'As a matter of fact the defendant has suffered heavier damages as the 12 pairs of kolhus were specially manufactured by the defendant for the plaintiff and owing to the introduction of new type Punjab Kolhus and the slump in oil Industry even their resale was not possible and they are lying still unsold and all costs incurred by the defendant in their, manufacture have been sheer waste.'

There is, therefore, no doubt that the 12 kolhus were ordered by the plaintiff and that these kolhus are now lying uselessly with the defendant. As already stated above, even if Rs. 600/- per Kolhu the rate at which the plaintiff himself placed the order for these Kolhus, be taken to be the reasonable value per kolhu, the value of the 12 kolhus, which are still lying uselesslv with the defendant, comes to Rs. 7,200/-. If, therefore, a reasonable assessment of the loss is to be made on the basis of the materials available in this very case, then the loss suffered by the defendant exceeds double the amount claimed by the plaintiff. Under these circumstances it is argued that the plaintiff is not entitled to any relief.

43. On behalf of the appellant reliance in this connection is placed on a case of the Allahabad High Court, viz., Munna Lal Biswanath v. Rahmatullah, 1937 All LJ 1385. In this case it was observed as follows :

'Under Section 74 of the Contract Act a party complaining of the breach is entitled to a reasonable compensation even where no actual damage or loss is proved to have been caused thereby. The plaintiffs are therefore, entitled to reasonable damages in the present case, even though they have failed to prove any actual damage or loss caused to them. The plaintiffs have been paid Rs. 200/- as earnest money which with half of the costs incurred by them in all the Courts will be sufficient as a reasonable compensation for the breach in the present case as they have failed to prove any actual damage or loss caused to them.'

44. Reliance on behalf of the appellant is also placed on another case, Mrs. M. Preston v. J. S. Humphreys : AIR1955Cal315 . In this case it was held that if a party proves that he has suffered damage, even though he has failed to provide actual proof of the said damage, it is open to the Court to award reasonable compensation.

45. On behalf of the respondent, on the other hand, objection is taken to this course on the ground that the defendant did not make any counter claim nor did he pay any court fee in respect thereof. I do not think, however, that it is necessary for me to go further into this aspect of the case, as I am of opinion that the other arguments advanced on behalf of the defendant-appellant are sufficient to repel the case of the plaintiff.

46. For the above reasons, I would allow this appeal, set aside the Judgment of the Court below and dismiss the plaintiff's suit in toto. The appellant shall be entitled to his costs in all the Courts.

47. Leave to appeal to a Division Bench isallowed.


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