B.N. Maitra, J.
1. The plaintiffs' case is that there was an agreement by the defendants to sell the disputed property to them. So a deed of agreement was executed by the defendants on the 2nd Feb., 1966, contracting to transfer the property to them for Rs. 19,001/- and Rs. 3,001/- was paid as the earnest money. The contract fell through due to the defendants' default The suit is for refund of the earnest money together with a prayer for the recovery of a sum of Rs. 75/- as damages.
2. The defendants took, the defence that there was no default on their part. The contract fell through due to the plaintiffs' laches and default So pursuant to the contract embodied in the deed of agreement, the sum of Rs. 3,001/-, which had been paid as the earnest money, was forfeited.
3. The learned Munsif stated that the contract fell through due to the plaintiffs' own default and the defendants were not at fault. So the suit was dismissed. The plaintiffs went up on appeal and lost the same. Hence this second appeal.
4. A short submission has been made on behalf of the plaintiff-appellants. It has been contended that the finding that the contract fell through due to their default will not be challenged. But in view of the decision of the Supreme Court in the case of Fateh Chand v. Balkishen Das, by Shah J., in : 1SCR515 , the Court will hold that Section 74 of the Indian Contract Act applies to the facts of this case. The defendants are at best entitled to a reasonable compensation. The sum of Rs. 3,001/- cannot be reasonable compensation, within the meaning of the principles embodied in Section 74 of the Act. At best they can claim Rs. 500/- as they allege that they suffered damages to that extent. The view of the Madras and Bombay High Court was overruled by the Supreme Court in that case of Fateh Chand v. Balkishen Das (supra). The Court below referred to the single Bench case of P. N. Mookerjee, J., in the case of Naresb v. Ram Chandra in : AIR1952Cal93 . But the views expressed in that case are no longer good law after the decision of Fateh Chand v. Balkishen's case (supra). There is no bar in granting a decree to the plaintiffs.
5. The learned Advocate appearing on behalf of the defendant-respondents referred to the case of Krishna Chandra v. Mahmud Bepari in AIR 1936 Cal 51 at p. 52 to show that earnest money is a guarantee for the performance of the contract. If the transaction goes forward, it is a part of the purchase price. If it falls through due to the default or breach by the vendee, it is forfeited, in the absence of a contract either express in its terms or to be inferred from the whole contract. Time was the essence of the contract. In view of the written terms embodied in the disputed deed of agreement executed between the parties, the defendants rightly forfeited the sum of Rs. 3,001/- because they were not at fault. The contract fell through purely due to the plaintiffs' laches and default.
6. The question arises whether Section 74 of the Indian Contract Act applies to the facts of this case. Section 74 of the Indian Contract Act speaks of the measure of damages in two classes of cases, firstly, where the contract says that an amount has to be paid in case of a breach, and secondly where the contract provides for any other stipulation by way of penalty. In the second class of cases the measure of damages is reasonable compensation not exceeding the penalty stipulated for, vide the observations made in the case of Fateh Chand appearing at page 1411 of the report. It can be seen from the page 1411 --
'In our judgment the expression 'the contract contains any other stipulation by way of penalty' comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation, is statutorily imposed upon Courts by Section 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the Court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture.'
It further appears from the p. 1412 of the report:
'There is no ground for holding that the expression 'contract contains any other stipulation by way of penalty' is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by cleap implication, are liable to be forfeited.
Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the Court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit Use of the expression 'to receive from the party who has broken the contract' does not predicate that the jurisdiction of the Court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract.'
7. In the case of Maula Bux v. Union of India in : 1SCR928 , it has been stated that forfeiture of earnest money under a contract for sale of movable or immovable property, if the amount is reasonable, does not fall within the ambit of Section 74 of the Act.
8. In the case of Chiranjit Singh v. Har Swamp, AIR 1926 PC 1, the suit was filed for recovery of the earnest money of Rs. 20,000/- and also for refund of the sum of Rs. 1,45,000/- from and out of the amounts paid by him on account of con-tract of sale for purchase of a property. There was default on the plaintiff's part. He sued for recovery of Rs. 1,65,000/-which had been paid by him. The High Court held that the plaintiff was a defaulter and so he must lose the earnest money of Rs. 20,000/-, but he would get refund of the balance amounting to Rs. 1,45,000/-. The plaintiff went to the Judicial Committee and the High Court's view was affirmed.
9. In the well-known case of H. C. Mills v. Tata Air Craft, : 3SCR127 , it has been stated that the law relating to 'earnest' is as follows:
'(1) It must be given at the moment at which the contract is concluded.
(2) It represents a guarantee that the contract will be fulfilled or, in other words, 'earnest' is given to bind the contract.
(3) It is part of the purchase price when the transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.
(5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.'
9-A. Applying the principles to the facts of this case it appears that the sum of Rs. 3,001/- did not form part of the purchase price because the transaction was not carried out within the meaning of the aforesaid second proposition laid down by the Supreme Court. The case is squarely covered by the fourth proposition discussed previously because the transaction fell through due to the plaintiffs' default or failure to perform their part of the contract. Such default amounted to abandonment or repudiation of the contract.
10. The deed of agreement shows that time was the essence of the contract.
11. In the case of Maula Bux v. Union of India : 1SCR928 (supra), the appellant entered into a contract with the Government of India for the supply of goods and deposited certain amount as security. The contract was that the security deposited would be forfeited if the appellant neglected to perform his part of the contract. He was guilty of default in supplying the goods. The Government rescinded the contract and forfeited the security deposit. Hence it was held that the for-feiture of the earnest money under the contract for sale of property did not come within the provisions of Section 74 of the Act, if the amount was reasonable, because the forfeiture of a reasonable sum paid as the earnest money did not amount to the imposition of a penalty.
12. The same principle will apply to this case because the amount of Rs. 3,001/-was reasonable and it did not amount to imposition of any penalty, and I hold accordingly. The breach of the contract on the plaintiffs' part caused loss to the defendant-respondents. That is also a ground for negativing the plaintiffs' plea.
13. Hence the submission made on behalf of the appellants cannot be accepted. It is held that the provisions of Section 74 of the Indian Contract Act do not apply to the present case of refund of earnest and since that sum was a reasonable one, the prayer for refund was rightly rejected by the Courts below.
14. The appeal is dismissed. There will be no order as to costs.