1. These five civil revision petitions arise out of an order passed by the Subordinate Judge of Berhampur as Small Cause Court Judge in five S. C. C. suits Nos. 80/51, 81/51, 82/51, 83/51 and 31/52. All the suits were tried analogously and disposed of in one judgment and similarly the five revision petitions were heard analogously and will be dealt with in one judgment.
2. The petitioner in all these revisions is one Srimati T. Ranganayakamma who was the owner of about 8.6 acres of land situated within the limits of Berhampur Municipality. She got the plot divided into several small house sites and after obtaining the approval of the Municipality advertised early in October, 1948 for the sale of those house sites by public auction to the highest bidder. The auction was held on the 10th and 11-10-1948 at the spot and 20 to 22 house sites were sold to the highest bidders. The opposite parties in these revisions had bid for some of the house sites and the bid was accepted by the auctioneer. The following table will give a clear idea of the amount of the bid, the amount of the earnest money deposited by the highest bidder and other particulars connected with the litigation.
No. of C. R.No. of S.C.C. SuitName of the plaintiffPlot for which the plaintiff bidThe bid amountDate of auctionAmount deposited
1.193/52.80/51S. Rajagopalan Subudhi15Rs. 2,700/-10-10-48Rs. 400/-2.196/5281/51N. Ramachandra Rao21Rs. 8,200/-11-10-48Rs. 400/-3.195/5282/51M. Jaganayakuly12Rs. 1,300/-10-10-48Rs. 408/- & 14Rs. 1,500/- 4.197/52.83/51K. Chidambaram Subudhi16Rs. 2,260/-10-10-48Rs. 300/-5.194/52.31/52E. Krishnamurty11Rs. 1,050/-10-10-48Rs. 130/-
Amount claimed by the plaintifi in the suit. 1. Rs. 500/- 2. Rs. 500/- 3. Rs. 408/- 4. Rs. 408/- 5. Rs. 176 12.9
Before the commencement of the bid the conditions of the sale were read out to all the persons at the spot and one of the conditions was that the highest bidder should deposit one-eighthof the purchase money immediately after the sale was knocked down in his favour and that he should pay the balance within one month thereof failing which the advance amount paid by him would be forfeited and the property would be resold and the loss, if any, would be recovered from him. This is the usual condition for deposit of earnest-money insisted upon generally before the holding of any sale by public auction. The opposite-parties deposited the various sums as earnest-monies in respect of their bids.
Subsequently, however, differences arose between the parties in consequence of which the balance of the purchase money was not paid and then the opposite parties instituted the suits under revision claiming refund of the earnest monies deposited by them. The petitioner, however, contended that in accordance with the conditions of the sale the earnest monies were forfeited inasmuch as the opposite parties were mainly responsible for breach of the original contract of sale in not paying the balance of the purchase money within the stipulated time. Before the learned S. C. C. Judge there was some controversy between the parties as to who was responsible for breach of the contract of sale each party accusing the other. But the finding of the learned Judge, which was not rightly challenged before us, is to the effect that the purchasers (the plaintiffs) were to blame and that the seller (the defendant-petitioner) was, therefore, entitled to rescind the contract of sale.
3. Having thus disposed of the main question of fact in favour of the petitioner the learned Judge discussed the legal question as to whether the buyer was entitled to the refund of the earnest money or else whether the seller could, under the terms of the contract, treat it as having been forfeited due to the buyer's default in fulfilling the terms of the contract. He thought that the earnest money was in the nature of a 'benefit' under the contract of sale and that consequently by virtue of Section 64, Contract Act the seller was bound to refund it to the buyer.
He was fully aware of the decision of the Privy Council in -- 'c (A) to the effect that the earnest money is forfeited when the contract of sale falls through by reason of the default of the vendee. But he thought that the said decision of the Privy Council would require some modification in view of two subsequent decisions of the Privy Council reported in -- 'Bhai Panna Singh v. Arjun Singh', AIR 1929 PC 179 (B) -and --'Muralidhar Chatterjee v. International Film Co.', AIR 1943 PC 34 (C).
4. The English law regarding earnest money is well settled. As pointed out by Fry L. J. in --'Howe v. Smith', (1884) 27 Ch D 89 at p. 101 (D)
'in the event of the contract being performed it (meaning earnest money) 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, creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.'
In a Full Bench decision of the Madras High Court in -- 'Natesa Aiyar v. Appavu Padayachi', AIR 1915 Mad 896 (E) this view of the English law of contract was applied in construing the relevant provisions of the Contract Act also and it was held that the buyer was not entitled to claim refund of the earnest money forfeited when a contract for sale of immovable property fell through due to his default. Doubtless, Sadasiva Ayyar J. delivered a dissentient judgment holding that the buyer was entitled to the refund of the earnest money and that the remedy of the seller was only by way of damages. The majority view, however, has been uniformly accepted in all succeeding decisions of the various High Courts in India and it is unnecessary to refer to them in detail. In the Privy Council decision reported in AIR 1926 PC 1 (A) which arose out of a case from Allahabad their Lordships explained the true meaning of earnest money in the following terms:
'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.'
They were undoubtedly aware that in India, the law of contract had been codified in the Contract Act and yet they did not consider that any of its provisions would render the English law concept of earnest money inapplicable in India. Hence, this Privy Council decision is a direct authority in support of the majority view of the Full Bench of the Madras High Court cited above and it has been uniformly followed in several subsequent decisions -- 'Dinanath Damodar v. Malvi Mody Ranchhoddas and Co.', AIR 1930 Bom 213 (F); -- 'Bhalchandra v. Mahadeo', AIR 1947 Nag 193 (G); -- 'Parampal Singh v. Budh Singh', AIR 1938 Lah 62 (H); -- 'Krishna Chandra v. Mamud Bepari', AIR 1936 Cal 51 (I); -- 'Nadiar Chand v. Satish Chandra', AIR 1927 Cal 964 (J) and -- 'Abas Ali v. Kodhusao', AIR 1929 Nag 30 (2) (FB) (K).
5. The next question for consideration is whether the two subsequent decisions of the Privy Council reported in AIR 1929 PC 179 (B) and AIR 1943 PC 34 (C) can be said to have changed the law in this respect.
In AIR 1929 PC 179 (B) the suit was brought by the vendor for damages for breach of contract of the sale. It was found that on re-sale of the same property the vendor was put to a loss of Rs. 1,000/-. But he had received Rs. 500/- as earnest money from the vendee at the time of finalising the original contract of sale. Their Lordships held that the said sum of Rs. 500/-should be deducted from the total damages of Rs. 1,000/- in estimating the net damages payable to the vendor. This decision has no application to the present case nor can it be said to have impliedly overruled the decision of the Privy Council in AIR 1926 PC 1 (A). On the contrary, it has assumed that the vendor was entitled to forfeit the earnest money; but in calculating the damages payable to him for breach of the contract that sum was deducted from the total damages due. The learned lower Court has obviously miscontrued this judgment.
6. Similarly, AIR 1943 PC 34 (C) cannot be said to have either impliedly overruled or cast any doubt on the principle laid down in AIR 1926 PC 1 (A) which has been the settled law regarding the right of a vendor to forfeit earnest money. In the latter Privy Council case the question for consideration was whether a portion of the consideration money paid by the vendee to the vendor could be retained by the vendor when the contract for sale subsequently fell through due to the failure on the part of the vendee to carry out his term of the contract. There was no question of deposit of earnest money. The initial payment by the vendee was in the nature of part payment of the price for the property contracted to be sold.
Their Lordships held, after construing Sections 39 and 64, Contract Act, that the sum received by the vendor as part of the consideration money was a 'benefit' under the contract which he was bound to refund to the vendee and his remedy was by way of the set off for damages for breach of contract.
7. Mr. M.S. Rao on behalf of the opposite parties however urged that though AIR 1943 PC 34 (C) did not deal expressly with a case of earnest money there were observations therein which would tend to show that the English law concept of earnest money should not be applied in construing the relevant provisions of the Indian Contract Act. In particular, he relied on the following passage in the judgment:
'The right to damages presents no insuperable objection to the application of Section 64 to cases of rescission under Section 39, and Section 64 applies in their Lordships' Judgment to the present case. Their Lordships are not concerned to make the Act agree in its results with the English law. It may be that in such a case as the present the defendants could not in England be made liable to refund any portion of the Rs. 4000 paid on account, even upon proof that they had sustained no damage by the plaintiff's breaches. That the matter is not quite clear may be inferred from dicta in -- 'Mayson v. Clouet', (1924) AC 980 at p. 987 (L) and --'Dies v. British and International Mining & Finance Corporation Ltd.', (1939) 1 KB 724 (M). It is at least certain that if the party who rightfully rescinds a contract can recover damages from the party in default and is afforded proper facilities of set off. The Indian legislature may well have thought that his just claims have been met. The fact that a party to a contract is in default affords good reason why 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 the duty of restitution would seem to emerge.'
Mr. Rao urged that though under the English law, deposit of a portion of the purchase money is not refundable to the vendee where the contract for sale eventually fails due to his default, under the Indian law of contract as construed in the aforesaid Privy Council decision such deposit was refundable and that the same principle should apply as regards earnest money also. Theobvious answer to this argument is that earnest money is not the same as deposit of a portion of the price but is of a two-fold character. It is part payment of the price if the transaction is completed. But it is also an earnest or guarantee that the contract shall be performed. Hence, it is not correct to say that the right of the vendee to the refund of a sum deposited as part of the purchase price must necessarily extend to a right to the refund of the earnest money also.
8. The matter can be considered from another aspect also. All that the Privy Council said in AIR 1943 PC 34 (C) was that the sum deposited as part of the sale price was a 'benefit' under the contract which the vendor was bound to refund under Section 64. Can it be said that the earnest money is a 'benefit' under the contract for sale? The majority view in AIR 1915 Mad 896 (E) is to the effect that it is not a 'benefit' under main contract for sale and that there was an ancillary contract, namely, forfeiture of the earnest money if the transaction was not completed within the stipulated time. Hence, Section 64 would not apply. Doubtless, Sadasiva Ayyar J. in his dissentient judgment has not accepted this view and Mr. M.S. Rao practically adopted the reasoning of that learned Judge. I, however, see no adequate reason for not following the majority view which has been followed by almost all the High Courts in India for such a long time.
9. The next question for consideration is whether by virtue of Section 74, Contract Act the petitioner was entitled only to reasonable compensation and not to the whole of the earnest money We are conscious that there are some decisions to the effect that where the earnest money forms a substantial portion of the purchase price its forfeiture may amount to a 'penalty' within the meaning of Section 74, Contract Act (see -- 'Subbarayalu v. Annamalai', AIR 1944 Mad 526 (N) and -- 'Kanhai Lal v. Lakshmichand', AIR 1933 Nag 223 (O). Support for this view may be found in the following observations of Miller J. in the majority decision of the Full Bench of the Madras High Court in AIR 1915 Mad 896 (E).
'There may be cases where the Courts must find that the amount of the deposit or payment in advance is so great in comparison with the amount payable under the contract, that the parties cannot have intended it as a mere security for performance but rather as a punishment for non-performance of the contract and in those cases the Court may doubtless refuse to allow the retention of the whole of the deposit; but where there is no such disproportion and nothing unreasonable in regarding the deposit as a security, then the defaulter will not be allowed to recover back what he has paid on an express stipulation that it shall be forfeited in the event of default.'
For the purpose of this case it is unnecessary to consider those circumstances where the forfeiture of the earnest money may amount to a 'penalty' so as to attract the principles of Section 74, Contract Act. The earnest money in each of the suits is a very small portion of the agreed purchase price, being less than one-fourth. There seems, therefore, absolutely no reason why thesums should not be forfeited In view of the express agreement between the parties at the time of the contract for sale authorising such forfeiture.
10. Our attention was also invited to a Division Bench decision of this Court in -- 'N.V. Jagannadhayya v. Ramnatha Mohapatra', AIR 1955 Orissa 11 (P) where some of the questions of law raised in these revision petitions have also been discussed. An attempt was however made to distinguish that case on the ground that it referred to forfeiture of earnest money in a contract for sale of goods and that the same principles may not apply in respect of earnest money for sale of immovable property. That Division Bench however observed that there is no distinction as regards liability for forfeiture of earnest money between a contract for sale of moveable property and immovable property. In the present case we are concerned only with the consequence of breach of contract of a sale of immovable property.
11. For the aforesaid reasons, we would, in disagreement with the lower Court, hold that the earnest money was rightly forfeited and the plaintiffs were not entitled to a refund of the same. The revision petitions are allowed the orders of the lower Court in all the five S. C. C. suits are set aside and the plaintiffs' suits are all dismissed with costs throughout. The petitioners should get one consolidated hearing fee of Rs. 50/- i.e., Rs. 10-1-0 in each revision.
12. I agree.