(1) These are two petitions arising out of same proceedings. One is by Puran Chand against the Official Receiver and G. D. Khanna and Sons under S.45-B of the Banking Companies Act, 1949 read with S. 457 of the Companies Act, 1956. In this petition Puran Chand has alleged that property known as ' The Bank Godowns' situate at Simla and belonging to the Simla Banking and Industrial Co., Ltd., (in liquidation), was auctioned by the Official Liquidator. The petitioner, who was the highest bidder had purchased it for Rs. 24,600/-. The auction took place on 24-9-1956, and in part payment of the purchase price, a sum of Rs. 4,000/- had been deposited by Puran Chand. This sale was confirmed on 1-10-1956. The liquidator had informed the petitioner on 3-10-1956 that the sale in his favour had been confirmed.
In this petition it is stated that the petitioner desires that the sale be completed by execution of a registered document and by delivery of actual possession to the petitioner. The petitioner also wants the liquidator to satisfy him as to his title to the property, and his right to sell and to execute the sale deed. The petitioner has expressed his willingness to pay the balance of the purchase price when the liquidator is in a position to fulfil his obligations as vendor. No relief has been sought against respondent No. 2, who was the auctioneer who had auctioned the property.
(2) The Official Liquidator in his written statement has traversed the pleas of the petitioner. He has admitted that the highest bid of the petitioner being of Rs. 24,600/- made by him at public auction on 24-9-1956 had been accepted. He had failed to deposit 1/4th of the purchase money and had only paid Rs. 4,000/- on 27-9-1956. He has not made good his promise to pay the balance of the purchase price. It was stated in the written reply that it was announced at the auction, that with the exception of the room on the ground-floor, the remaining godowns were in the possession of the tenants and that possession would be given to the purchaser by attornment on the part of the tenants. It was pleaded, that having made a default in the payment, the petition was just an attempt to forestall the official liquidator's petition for the enforcement of the default clause and for ordering resale of the property at the petitioner's risk.
He also contended that the petitioner had never complained to the Official Liquidator about delivery of vacant possession or as to the execution of the sale deed and his only object was to delay the payment of the balance amount. Regarding the Bank's title, the Official Liquidator stated, that he had always been ready and willing to satisfy the petitioner, who in fact could have no doubt about the title. It was also said, that the demand for actual possession had been made for the first time in this petition and Puran Chand knew, before making the bid, that the godowns were occupied by the tenants and that the successful bidder would not be given vacant possession of the portions of the building which are under occupation of tenants.
(3) The other petition is by the Official Liquidator purporting to be under S. 45-B of the Banking Companies Act read with S. 151 of the Code of Civil Procedure. In this petition he has asked, that the amount of Rs. 4,000/- deposited by Puran Chand should be forfeited and the property be resold at auction-purchaser's risk and cost. In reply Puran Chand auction-purchaser has submitted that unless the vendor is prepared to deliver actual possession he is within his rights to repudiate the contract. The following issues were framed by Chopra J. on 11-1-1957:
1. Was it announced at the auction as a condition that vacant possession could not be given to the purchaser and therefore the purchaser is not entitled to vacant possession.
2. Is the petitioner entitled to repudiate the sale, in case vacant possession is not delivered tohim ?
3. Which party is at fault and what is its effect ?
The above issues may be dealt with together.
(4-6) (His Lordship considered the oral evidence and proceeded:)
(7) Exhibit R. 11 is an important document. It is a notice given on behalf of Puran Chand by his lawyer on 17-10-1956. All that is stated in the notice is, that Puran Chand had learnt that the property auctioned and purchased by him did not belong to the bank; and that this property had only been mortgaged with the bank. The information, it was stated, had aroused doubts in his client's mind about the bank's title to the property, as to the bank's right and competency in passing a good title to his client and also as to his having peaceful enjoyment of the premises. The Official Liquidator was asked to send the copies of the title-deeds of the property in favour of the bank and his right to sell it. In this notice, not a word was said regarding the delivery of the actual possession of the property to Puran Chand.
I think that the demand of delivery of actual possession is an afterthought on the part of Puran Chand and it has been made for the first time in his petition. I am satisfied from the evidence of R. W. 1 and R. W. 3, that it was made clear to all the bidders including the petitioner Puran Chand, that actual possession would not be delivered of the godowns which were in the occupation of the tenants and Puran Chand was fully aware of that fact before he bid for the property. At no time was there any doubt in his mind regarding the delivery of actual possession.
(8) Mr. M. L. Sethi, learned counsel for Puran Chand has drawn my attention to the provisions of S. 55(1)(f) of the Transfer of Property Act. He has argued that in the absence of the contract to the contrary, the seller was bound to give to the buyer such possession of the property as its nature admitted. He has cited in support of his arguments Sashi Bhusan v. Rai Chand, AIR 1950 Cal 333, Hyam v. Gubby, 32 Ind Cas 53: (AIR 1916 Cal 1)(FB) Vuddandam v. Venkatakameswara Rao, AIR 1951 Mad 470 and Panchapagesa Ayyer v. Arunachala Mudaliar, 1932 Mad WN 122.
He has relied upon these rulings for the proposition, that when the vendor is not in a position to give possession of the property agreed to be sold by him to the purchaser, the purchaser will be entitled by virtue of S. 55(1)(f) of the Transfer of Property Act and S. 39 of the Contract Act, to rescind the contract and claim the advance that has been paid by him. The words 'such possession of the property as its nature admits' occurring in S. 55(1)(f) refer to an incident which is inherent in the property, and the presence of tenants or trespassers in the house cannot affect the nature of the property so far as the question of delivery of actual possession is concerned.
(8a) The words 'In the absence of any contract to the contrary', show, that the operation of this section can be excluded by any contract or agreement between the parties: vide Webb v. Macpherson, ILR 31 Cal 57(PC). I think that on the evidence on the record of this case, the contract to the contrary has been indicated with sufficient clarity. Before the conclusion of the sale, on an enquiry by the bidders including Puran Chand, it was made clear beyond doubt, that actual possession of that actual possession of that portion of the property which was with the tenants, would not be delivered but that the tenants, would attorn to the purchaser. The provisions of S. 55(1)(f) of the Transfer of Property Act are not, therefore, attracted to the facts of this case.
(9) The learned counsel for Puran Chand has made it clear that his client is unwilling to pay the balance of the price if he is not going to obtain vacant possession of the property for which he bid at the auction. In view of my findings above, the delivery of vacant possession was not a condition of the contract. The breach of contract has been committed by Puran Chand. The legal consequences of rescission of contract must, therefore, follow. The claim of Puran Chand, as made in this petition, cannot, therefore, be sustained, and his petition is dismissed with costs.
(10) The Official Liquidator in his petition dated 28-12-1956, has prayed that the amount of deposit paid by Puran Chand should stand forfeited on account of failure on his part to abide by the terms of the contract, and the property should be re-auctioned at the risk and cost of Puran Chand.
(11) Exhibit R. 1 is a printed copy of notice of sale by public auction of three properties, including the Bank's godowns. It was mentioned in R. 1 that the highest bidder would be required to pay one-fourth of the amount of bid at the close of the auction and the balance would be payable within fifteen days of the intimation of confirmation of the sale by the High Court. Exhibit R. 5 is a typewritten document signed by the auctioneer, stating that the auction was commenced at 11-3-a.m., and the conditions of sale, reproduced therein, were read out and explained in the presence of the Official Liquidator. The conditions of sale which have relevance for decision of this case are Nos. 3, 4 and 5 which are reproduced below:
'1. * * * *2. * * * * 3. That the highest bidder shall deposit one-fourth of the purchase money forthwith with the Official Liquidator in cash or by cheque endorsed 'GOOD FOR PAYMENT'.
4. That the balance of the purchase money shall be paid within fifteen days of the intimation of confirmation of the sale by the High Court.
5. That in case of failure of payment of the balance amount within the period prescribed, the earnest money of one-fourth shall be forfeited. 6. * * * *
(12) It was argued by the learned counsel for Puran Chand that the deposit of Rs. 4,000/- was solely in the nature of part payment towards the price and was liable to be returned to the vendee and could not be forfeited. On the other side, it was contended by the learned counsel for the Official Liquidator that this amount was in the nature of earnest money and was paid by way of security for completion of the contract.
(13) The first rule in interpreting a contract is, that the language used by the parties should be examined in order to find a clue as to their intention. The question to be posed in all such cases is, quid inter contrahentes actum est:--what was the real intention of the contracting parties But where it is difficult to determine the real intention when the Courts Act on the principle that the deposit is not merely part payment but also a guarantee of the due performance of the contract by the purchaser, and as such, it is liable to be forfeited if the sale is repudiated by the purchaser. A deposit which is paid under a contract of sale, serves two purposes; if sale is effected the amount of deposit is credited towards the purchase money, but essentially, it is in the nature of security for the performance of the contract even where the terms of the contract do not expressly provide forfeiture of the deposit in case of default on the part of the vendee.
Such a term is deemed implied unless the contract shows any intention to exclude forfeiture. By virtue of the very purpose of the deposit of the earnest, the vendor is entitled to retain it as forfeited if the agreement is not honoured by the purchaser through his default. If a person under contract to purchase, deposits money on account of purchase price the money so deposited is earnest money although the intention of the parties is, that at the time of consummation of the agreement it is to be applied towards the purchase price. 'Earnest' may be money or a tangible thing given at the time of the conclusion of the contract in order to bind the bargain.
Such a thing or money is given as an earnest or token of good faith, and as a guarantee, for fulfillment of the contract, and is subject to forfeiture if the contract falls through owing to vendee's default. If a contract is fulfilled then the earnest serves a further purpose and it then operates by way of part payment. Giving of earnest and making of the part payment are two separate and independent matters each with a distinct purpose.
(14) The object of giving earnest is to make the contract binding; and in its essential nature, it is not a contribution made in the course of the performance of the contract as, that, is the purpose of part payment.
(15) In the words of Fry, L. J.:
'Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are 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 it then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract'. Howe v. Smith, (1884) 27 Ch D 89(101).
(16) Baron Pollock in Collins v. Stimson, (1883) II QBD 142 (143) said:
'According to the law of vendor and purchaser the inference is that such a deposit is paid as a guarantee for the performance of the contract goes off by default of the purchase, the vendor is entitled to retain the deposit'.
(17) Reference may also be made to the following English decisions:
1. Depree v. Bedborough, (1863) 33 LJ Ch 134: 4 Giff 479: 66 ER 795;
2. In re, Parnell, Ex parte Barrell, (1875) 44 LJ Bk 138: 10 Ch A 512;
3. Soper v. Arnold, (1889) 59 LJ Ch 214 (217): 14 AC 429.
4. Hall v. Burnell, (1911) 81 LJ Ch 46: (1911) 2 Ch 551;
5. Farr, Smith and Co. Ltd. v. Messers Ltd., (1928) 1 KB 397 (408);
6. See also Fry on Specific Performance, Second Edition, para 1460.
(18) The principles relating to forfeiture of deposit on default on the part of the vendee, as enunciated by Courts in England, have been followed by Courts in India, and reference may be made to the following, among other cases,--
1. Chiranjit Singh v. Har Swarup, AIR 1926 PC 1;
2. Madan Mohan v. Jawala Parshad, AIR 1950 EP 278;
3. Naresh Chandra Guha v. Ram Chandra Samanta, 55 Cal WN 765: (AIR 1952 Cal 93);
4. V. Jagannadhayya v. Ramanatha Mohanapatra, (S) AIR 1955 Orissa 11;
5. Venkoba Char v. Sanjivappa, AIR 1937 Mad 681;
6. Gopalaratna Iyengar v. Rajaratna Mudaliar, AIR 1938 Mad 246;
7. Krishna Chandra v. Mamud Bepari, AIR 1936 Cal 51;
8. Dinanath v. Malvi Mody Ranchhoddas and Co., AIR 1930 Bom 213; and
9. Muhammad Habib-Ullah v. Muhammad Shafi, ILR 41 All 324: (AIR 1919 All 265).
(19) The law forfeiting earnest in the vent of recission by the vendee is of very ancient lineage. Both early Hindu Law and also Roman Law bear testimony to the great antiquity of the practice of giving earnest as token of good faith and a guarantee of the binding character of the bargain on pain of forfeiture. In Roman Law, if the agreement of sale was followed by the giving of earnest the buyer, if he rescinded the contract, forfeited the earnest paid and if the vendor refused to perform the contract he was compelled to restore double the earnest money, even though there had been no express agreement in the matter of earnest.' 'Is qui recusat adimplere contractum, is quidem emptor est, perdit quod dedit, is vero venditor, duplum restiture, compellitur, licet nihil super arris expressum est', vide Institutes of Justinian, 3.23 pr.
(20) The early Romans treated the earnest as merely evidence of the completion of the contract (argumentum est emptionis et venditionis contractae) vide Gai 3.139. In so far as the earnest made the agreement firm it was called 'arra confirmatoria'. Originally the earnest (arra) was a specific thing, such as a ring (annulus) and it furnished a proof of he conclusion of the contract of purchase and sale (see Dig. 18,1,35). The rule of Roman Law is still the law of some countries, for instance, Austria, France, Italy, Spain, Chile, Louisiana and Japan. (See Roman Law in the Modern World by Sherman, Third Edition, Volume 2, Page 341). The principles of Roman Law relating to the earnest passed to the early jurisprudence of England and in the time of Bracton who died in 1268 A. D., the same principles became the law of England. (See (1884) 27 Ch D 89(102).
(21) According to ancient Hindu Law when for the purpose of concluding a bargain the purchaser has paid earnest money to the seller--if the transaction should fail by reason of anything done by the seller,--he shall be made to repay to the purchaser double the earnest money received by him.
(on failure he shall be compelled to pay double the earnest). The above passage is by Narada in Apararka, but is attributed to Yajnavalkya in Smritichandrika. The complete coincidence of the above passage with the
words of Justinian '* * * *
venditor, duplum restiture compellitur (vendor is compelled to restore double') is significant.
(22) According to Vyasa in Smritichandrika-
It means, that 'after having paid the earnest money, if the purchaser does not come forward to receive the article sold--the article becomes relinquished by him and he forfeits the earnest money'.
(22a) Reference in the above connection may be made to Hindu Law. In Its Sources, Volume I, By Ganganatha Jha, pages 339 and 340, and Hindu Jurisprudence by P. N. Sen, page 102.
(23) It is true that forfeitures are not as a rule forward unless the right claimed is clearly established. In this case not only the conduct of the vendor is free from blame but the defaulting purchaser even at this state is unwilling to purchase the property. In view of the statement of the petitioner's counsel that his client does not intend to purchase the property for which he had successfully bid at the auction sale, there is no alternative left but to order its resale.
If on resale the property fetches a lesser price than what had been bid for by the petitioner, then the respondent-Bank shall give credit, in calculating the deficiency to be paid by the petitioner on resale for the amount of the deposit which had been received from him. In other words, if the property is resold for less than the price for which the petitioner had undertaken to purchase it, then the Banking Company must give credit for the amount of the deposit received from the petitioner when calculating the deficiency in price on resale, vide Shuttleworth v. Clews, (1910) 1 Ch 176.
(24) In view of the above discussion, it is ordered that the amount of Rs. 4,000/- deposited by Puran Chand petitioner as earnest money stands forfeited, to the Simla Banking and Industrial Company Limited (in liquidation). The property known as 'The Bank Godowns' situated in Simla shall be resold. In case the price fetched at the resale is below Rs. 24,600/- as bid by Puran Chand at the auction sale, it shall be open to the Official Liquidator, then, to make an application to this Court for further steps to be taken in accordance with law.
(25) In the result the petition of the Official Liquidator dated 28th of December, 1956, is allowed with costs.
(26) Order accordingly.