1. This appeal raises an Interesting point of law relating to the principle of equity of relief against forfeiture in a contract for sale of goods. The plaintiff-appellant agreed to purchase, and the defendant agreed to sell 200 garces of paddy at Rs. 225/- per garce, and the delivery was to be made between Bhadra Furnima and Margasir Purnima of that year. In pursuance of this agreement the plaintiff paid Rs. 2000/- on 29-6-1943 the date of the contract, and later on the 1st July 1943, a further sum of Rs. 10,000/-.
He appears to have felt some difficulty in taking delivery of the stocks from the very beginning, owing to heavy rains and transport difficulties. He failed to complete the contract within the stipulated period. On 1-11-1943 the defendant sent a registered notice, alleging breach on the part of the plaintiff and calling upon him to complete the contract by paying up the balance of the purchase-money of Rs. 33,000/- and taking delivery of the paddy from the defendant's granaries at Saleppo by the end of November, 1943, The plaintiff defaulted in taking delivery even by the end of November 1943, and it is said that he did not even reply to the defendant's registered notice.
Three years later the plaintiff sent a Pleader's notice on 29-10-1946 calling upon the defendant to refund the sum of Rs. 12,000/- with interest at 12 per cent per annum. He alleged that the contract became void and unenforceable owing to the coming into force of the Orissa Food-grains Control and Movement Order, 1943. The defendant replied to this notice by Ext. 1(a) dated 19-11-1946, denying any obligation on his part to refund the advance and also claiming damages for the loss sustained by him in reselling the paddy.
2. At the trial, the plaintiff did not press his contention based on the provisions of the Orissa Foodgrains Control and Movement Order. Nor did he put in the written contract said to have been executed between him and the defendant. He filed, instead, another contract which was impugned as a forged document, and the matter was not pursued at the trial court. There was no oral evidence adduced, and the only documentary evidence is the registered correspondence that passed between the parties.
3. The trial court held that the plaintiff was entitled to a refund of the sum of Rs. 12,000/- as the only right that the defendant had was to sue for damages and not to forfeit the amount paid as advance. He, however, dismissed the plaintiff's claim as it was barred by limitation. In the opinion of the learned Subordinate Judge, Article 97, Limitation Act governed the case.
4. Several arguments were developed before us by Mr. Rao, learned counsel for the appellant. His main contentions were;
(i) That a clause in a contract for forfeiture of earnest money applies only to sale of real property and not to sale of goods;
(ii) That such a clause is in the nature of a penalty clause and should be relieved against by Courts of Equity; and
(iii) That the only remedy of the defendant is by way of a set-off for the amount of damage sustained by him on account of the re-sale of the contracted paddy, and not by way of forfeiture of the amount deposited.
Learned counsel relied, in particular, on Sections 64 and 74, Contract Act, and contended that the defendant is bound to restore to the plaintiff the benefit that he had received under the contract & refund the amount received as advance.
5. It must be observed at the very outset that: there is a difference between the giving of an earnest money with a view to fulfil the contract, and a part-payment made towards the discharge of the contract, though there is nothing to prevent the same payment being both earnest and part-payment. It depends on the intention of the parties as to whether the sum paid was intended to be the one or the other or a combination of both. The deposit serves two purposes. Primarily its purpose is to guarantee that the purchaser means business. If the purchase is carried out, it goes against the purchase money.
If the contract falls through on account of the laches of the vendor, he is bound to return the sum so paid. If, however, the default is that of the purchaser the earnest is forfeited. If the vendor re-sells the property and claims to recover the loss arising on such re-sale, the deposit is to be taken into account in diminishing the deficiency. Where, however, a part-payment is made under the contract and the buyer commits default in performance, he can recover the purchase price that he has paid subject to the right of the seller to set-off a certain sum for damages against the purchaser. These principles apply both to purchase of immovable property and to sale of goods, and are so well-established that it is unnecessary to discuss them at length.
Instances are, however, to be found in --'Mohammad Habib-Ullah v. Mohammed Shafi', AIR 1919 All 265 (A) -- a contract for the supply of sleepers; -- 'Roshan Lal v. Delhi Cloth and General Mills Co. Ltd.', 33 All 166 (B) -- a contract for the sale of 500 bales of cotton and yarn; and -- 'Vellore Taluk Board v. Gopalaswami Naidu', AIR 1916 Mad 485 (FB) (C) --lease of market fees. There is, however, one case of the Madras High Court which has struck a dissenting note, in the judgment of Coutts-Trotter C. J. in -- 'Satyanarayanamurti v. Erikalappa', AIR 1926 Mad 410 (D) in which the learned Chief Justice made an observation that it was not the practice in mercantile contracts to forfeit the deposits, Irrespective of the damage, suffered or not suffered.
But the contrary view has found favour in several later decisions of the same Court: See for instance -- 'Seethanna v. Yassikalappa', AIR 1926 Mad 117 (E); and -- 'Narayanamurti v. Nageswara Rao', AIR 1941 Mad 108 (F) in which Venkataramana Rao J. observed, referring to the remarks of Coutts-Trotter C. J. that:
'Whatever may be the practice with regard to mercantile contracts in England, so far as I am aware, even in respect of sale of goods it has been customary in this country to receive sums of money by way of deposit or earnest and such sums were forfeited when default is committed by the vendee, and Courts have given effect to such forfeiture.'
I am in entire agreement with this view of the learned Judge and would hold that the amount paid by way of earnest or deposit in fulfilment of a contract is liable to be forfeited, whether it be a contract for sale of lands or of goods.
6. With regard to the second contention, it is doubtless true that Courts have intervened to relieve a party against a forfeiture clause by way of penalty, but every clause providing for forfeiture is not necessarily penal in character. Unless the seller seeks to exact payment of an extravagant sum for default in payment by the buyer of a nominal sum, a clause providing for forfeiture does not become a penalty. The stipulation must appear unconscionable on a consideration of all the circumstances.
If, for instance, the seller insists on payment of 50 per cent of the purchase-price in addition to the deposit, and on failure of the purchaser to complete the contract the vendor re-sells the property and makes a profit, and claims to retain the deposit as well as the 50 per cent already paid, the Court will relieve the purchaser against the forfeiture. This view is reflected by Sadasiva Iyer J. in -- 'Natesa Iyer v. Appavu Padayachi', AIR 1915 Mad 896 (FB) (G).
In -- 'Ex parte Hulse', (1873) 8 Ch A 1022 (H), a stipulation that half of the purchase-money should be forfeited was held to be a penalty clause and was relieved against. The principle therefore is that while this equity is available to a defaulting purchaser the vendor cannot forestall this equity by demanding an extravagant sum as deposit, any more than he can recover a penalty by claiming liquidated damages.
7. The third point raised by learned counsel is that the seller's remedy is only by way of a claim for damages and not by way of forfeiture of the amount deposited with him.
It is clear, on the evidence, that the plaintiff was guilty of breach of contract and that the defendant rescinded it by his registered notice, Ex. 1, in which he distinctly stated that besides forfeiting the deposit he would claim damages for any possible loss resulting from a re-sale of the paddy. This was reiterated in the defendant's letter Ext. 1(a). We are, therefore, bound to hold that it was an integral term of the contract that the amount of deposit should be forfeited besides entitling the defendant to claim damages.
8. Learned counsel relied on Section 74, Contract Act, in support of his contention that the party complaining of the breach is entitled to receive reasonable compensation. This Section, in terms, applies only to contracts where a penalty is stipulated for by way of liquidated damages and does not apply to deposits paid as a guarantee for the fulfilment of the contract. A stipulation to pay a deposit is ancillary to the contract itself and may be enforced even if the contract is broken.
In -- 'Subbarayar & Brothers v. Muniswami Iyer & Sons', AIR 1926 Mad 1133 (I) it was held that in all cases of deposits on contracts a person in default cannot claim a return of the deposit; and if the damages which the defendant claims would be much more than the amount deposited, no obligation would arise to return the deposit for which credit will be given as in estimating the amount of damages. But it is left to the option of the vendor to treat the contract as subsisting in spite of the default committed by the purchaser, in order that he may proceed to re-sell and claim as damages an amount exceeding the amount of deposit.
But this itself implies that the deposit is forfeited. If, however, he chooses to treat the contract as rescinded he cannot recover damages on account of any deficiency arising on re-sale, for in such a case he re-sells the property as absolute owner and has no further recourse against the defaulting purchaser. In -- 'W. J. Younie v. Tulsiram', AIR 1942 Cal 382 (J) it was expressly laid down that forfeiture of a deposit is justified if the amount is reasonable and the provisions of Section 74, Contract Act do not apply to such cases. This case is on all fours with the present case.
In -- 'Manian Patter v. Madras Ry. Co. Ltd.', 29 Mad 118 (K) the applicability of Section 74 was considered and it was held that that Section did not apply to cases of forfeiture of deposits except when the circumstances warranted the Court's intervention to relieve against a penalty. The latest Privy Council decision reported in --'Muralidhar Chatterji v. International Film Co. Ltd.', AIR 1943 PC 34 (L) has been relied on by learned counsel, but this case is no authority for the proposition advanced by him.
That was not a case of forfeiture of earnest money, but a case of payment under a contract. There the suit was brought for the recovery of damages for loss of profit for refund of the sum paid on account, and for expenses incurred. The issue that fell to be decided was whether the defendant had broken the contract and whether the other party had suffered damages. Sir George Rankin delivering the judgment of the Board said that if a party to a contract is in default he should pay damages but further exaction is not justified by his default.
'Where a payment has been made under a contract which has .... for whatever reason .... become void a duty of restitution would seem to emerge.'
It was also held that the appellant paid the money to the respondents in part discharge ofthe consideration due, or to become due, and consequently it was a benefit received by the defendant under the contract. The respondents were, therefore, permitted to claim damages by way of a set off. In the present case, however, when the plaintiff paid the advance it was not paid for the use of the plaintiff. The defendant received the amount for his own use and when the contract was broken and the consideration failed the money held by the defendant became money received for his own use. As soon as the money was paid as deposit it became his absolutely.
If we were satisfied that the second Instalment of Rs. 10,000/- was paid as part-payment and not as earnest, we might be disposed to consider whether it would not be liable to be refunded in the absence of proof of damages incurred by the defendant. But the correspondence that passed between the parties clearly shows that the entire amount of Rs. 12,000/- was received as earnest money and no question of refund would therefore arise.
9. Even if we were to uphold the contention of the appellant that the sum of Rs. 10,000/- can be regarded as a part-payment towards the contract itself, there is yet another hurdle which the appellant has to get over before he can claim recovery. The contract was terminated on 30-11-1943 and the suit was filed on 7-12-1946, that is, clearly, more than three years after the rescission. The lower court held that the suit is barred by Article 97 or Article 115, Limitation Act. The contention for the appellant is that Article 120 is more appropriate and not Article 97 or 115, and that a six-year period of limitation is available to the plaintiff.
10. But before Article 120 is invoiced we have to see whether there is no other Article of the Limitation Act which can be specifically applied to the facts of this case. In -- 'Hanuman Kamat v. Hanuman Mandur', 18 Ind App 158 (PC) (M) the purchaser failed to obtain mutation of the property purchased by him, and then sued for possession of the purchased share. He did not ask, in the alternative, for return of the consideration money.
When he failed to obtain possession he started a second suit for recovery of the consideration amount together with interest. Their Lordships of the Judicial Committee held that Article 97 would apply as the failure of consideration arose when the plaintiff failed to obtain possession. In -- 'Mt. Basso Kuar v. Lala Dhum Singh', 15 Ind App 211 (PC) (N) the plaintiffs filed the suit for recovery of the amount due from the defendant when the defendant's suit to enforce the contract and adjust the money owed by him to the plaintiff was dismissed.
Their Lordships held that a debt retained in part-payment of the purchase money is, in effect and as between the vendor & the purchaser a payment of that part. The consideration for the sale by the defendant failed when the decree of the High Court Was made and therefore the period of limitation would run from the date of the decree dismissing the defendant's earlier suit. Their Lordships further observed that:
'It would be a lamentable state of the law if it were found that if a debtor, who, for years, has been insisting that his creditor shall take payment in a particular mode, turn round and say that the lapse of time has relieved 'him from paying at all.'
To the same effect is the case reported in --. 'Amna Bibi v. Udit Narain', 36 Ind App 44 (PC) (O). Article 115 applies only to a suit for compensation for breach of contract and would not apply to a case like the present. Our attention was drawn to the Pull Bench decision of the Madras High Court in 'Venkata Gurunadha Ramseshayya v. Tripurasundari Cotton Press Ltd.', AIR 1926 Mad 615 (FB) (P) and to a decision of the Rangoon High Court in -- 'Maung Po Kin v. Maung Po Oh', AIR 1925 Rang 373 (Q). The Madras case was one under the Companies Act. In the Rangoon case the suit was well within three years, whether Article 97 or Article 120 applied.
As was pointed out in -- 'Lalji Singh v. Ramrup Singh', AIR 1934 Pat 148 (R) Article 115, Limitation Act would apply to a case of damages for breach of contract by the defendant, and Article 97 would apply to a case where that which is to pass from one contracting party to the other: cannot, by reason of circumstances since the contract, pass to the other party, and therefore the plaintiff calls upon the defendant to fulfil the terms of his contract either expressly or impliedly, that he will, in such circumstances, return anything which has been already paid on account of the contract. See also -- 'Sudhamukhi Debi v. Chairman of Tollygunge Municipality', AIR 1934 Cal 148 (S).
There is also another decision, reported in -- 'Madhavdas Paramanand v. Jan Mohamed Ghulam Hayder', AIR 1942 Sind 37 (T) where it was held that Article 97 governs a suit by a buyer for return of part of the consideration in a contract for sale which he had improperly declined to complete. I am accordingly satisfied, on a review of the authorities, that this is a case governed by Article 97, Limitation Act and that the plaintiff's suit is barred by limitation.
11. The appeal therefore fails and is dismissed. But we would not saddle the appellant with costs of the respondent as the amount forfeited is sufficient to cover any possible loss that the respondent may have incurred by reason of the breach of contract. We would accordingly dismiss the appeal preferred by the defendant, viz.. First Appeal No. 19 of 1950, against the order of the lower court disallowing him the costs of the trial.
12. In the result, both the appeals are dismissed. But each party will bear his own costs of this litigation throughout.
13. I agree.