Skip to content


Naresh Chandra Guha Vs. Ram Chandra Samanta and ors. - Court Judgment

LegalCrystal Citation
SubjectProperty
CourtKolkata High Court
Decided On
Case NumberCivil Revn. No. 865 of 1950
Judge
Reported inAIR1952Cal93,55CWN765
ActsTransfer of Property Act, 1882 - Section 55 and 55(6); ; Contract Act, 1872 - Sections 64, 65 and 74
AppellantNaresh Chandra Guha
RespondentRam Chandra Samanta and ors.
Appellant AdvocateRam Krishna Pal and ; Sourindra N. Ghose, Advs.
Respondent AdvocateChandidas Roy Choudhury, Adv.
Cases ReferredChiranjit Singh v. Har Swarup
Excerpt:
- p.n. mookerjee, j.1. this rule has been obtained by the plaintiff against the dismissal of his suit for, inter alia, recovery of a certain sum of money, paid by him as earnest money in connection with an agreement for sale of land. in the suit, there was also a claim for interest by way of damages. the suit has been dismissed by the learned 'subordinate judge, exercising powers under the provincial small cause courts act, and in this rule, the plaintiff has challenged the said dismissal.2. the material facts lie within a short compass and they are as follows : on march 24, 1948, the defendant-opposite parties executed in favour of the plaintiff-petitioner a 'baina' or agreement for sale, ex. 1, in respect of certain lands and received from him (the plaintiff) a sum of rs. 501/- as and by.....
Judgment:

P.N. Mookerjee, J.

1. This rule has been obtained by the plaintiff against the dismissal of his suit for, inter alia, recovery of a certain sum of money, paid by him as earnest money in connection with an agreement for sale of land. In the suit, there was also a claim for interest by way of damages. The suit has been dismissed by the learned 'Subordinate Judge, exercising powers under the Provincial Small Cause Courts Act, and in this Rule, the plaintiff has challenged the said dismissal.

2. The material facts lie within a short compass and they are as follows : On March 24, 1948, the defendant-opposite parties executed in favour of the plaintiff-petitioner a 'baina' or agreement for sale, Ex. 1, in respect of certain lands and received from him (the plaintiff) a sum of Rs. 501/- as and by way of earnest money. Later on, the parties differed as to the extent and scope of the subject-matter of the said 'baina', Ex. 1 with the result that the transaction eventually fell through. Thereupon, the plaintiff demanded back the earnest money and, the defendants having refused to, return the same, the plaintiff instituted the present suit.

3. The plaintiff's main allegations were that the transaction had fallen through owing to default on the part of the defendants,--in other words, that the defendants were guilty of breach of contract,-and, that, accordingly, the plaintiff was entitled to a return of the earnest money and was also, in the circumstances, entitled to interest by way of damages. The defence, inter alia, was that the defendants had, in the exercise of their lawful rights, forfeited the earnest money and, as such, the plaintiff was not entitled to its return or to any relief in the suit. According to both parties, the contract was at an end. Each party, however, accused the other of having broken the contract. The plaintiff contended that the 'baina' Ex. 1, entitled him to the disputed lands in mokarari rights (including the subordinate interest, if any),-in other words, to the superior or mokarari interst and also to the subordinate interst, if any, in the disputed lands,- and to khas or actual possession of the said lands. The defence, on the other hand, was that, upon a proper construction of the 'baina', Ex. 1, the plaintiff was entitled only to the superior or mokarari interest in the disputed lands as distinct from the subordinate interest, if any, and was entitled to possession only of the superior interest and not to actual or khas possession of the said lands.

4. The learned Subordinate Judge held against the plaintiff on the question of construction of the 'baina', Ex. 1, and found that the plaintiff was the party in default,-in other words, that the plaintiff was guilty of breach of contract,-and he held, further, that the defendants had lawfully forfeited the earnest money. On the above findings, the learned Subordinate Judge dismissed the plaintiff's suit. In this Rule, two contentions have been raised on behalf of the plaintiff-petitioner. One is that, on the queston of construction of the 'baina', Ex. 1, the learned Subordinate Judge was in error in not accepting the plaintiff's case, as set out above, and that, because of this mistake, the learned Subordinate Judge came to a wrong conclusion on the question of responsibility for the breach of contract,-in other words, that he was wrong in finding that the plaintiff was guilty of the breach. The second contention is that, even assuming that the learned Subordinate Judge's construction of the 'baina', Ex. 1, was correct and that the plaintiff had been guilty of breach of contract, still the defendants were not entitled to forfeit the earnest money and the plaintiff was, notwithstanding the default on his part, entitled to its return.

5. The first contention of the petitioner presents no serious difficulty. The 'baina', Ex. 1, expressly mentions that the defendants had only the superior or mokarari interest in the disputed lands and that there was a subordinate interest therein in the name of one Haroo Sardar, which subordinate interest had already been purchased by the plaintiff. There is also nothing in the 'baina', Ex. 1, to show that the defendants undertook to put the plaintiff in khas or actual possession of the disputed lands. In the above context, it is also quite clear from the 'baina', Ex. 1, that the reference to the subordinate khatian in the schedule and in the body of the 'baina' (Ex. 1) was merely for the purpose of identifying the site of the lands agreed to be sold. In such circumstances, it cannot be said that the defendants had stipulated by the agreement, Ex. 1, to sell any subordinate interest as well, or to give the plaintiff khas or actual possession of the disputed lands. The plaintiff's case, therefore, on the question of construction of the 'baina', Ex. 1, must fail. It has hot been disputed,-and, indeed, it cannot be disputed on the materials on record, - that if the plaintiff's case on the construction of the 'baina', Ex. 1, fail, he must be held to have been guilty of breach of the contract. Consequently, there is no escape from the conclusion that it was the plaintiff, and not the defendants, who was the party in default or, in other words, that the plaintiff was guilty of breach of the contract in question. The learned Subordinate Judge's finding in this respect must, therefore, be affirmed and the petitioner's first contention must be overruled.

6. The petitioner's second contention, however, raises a rather serious and difficult problem. Admittedly, there is, in the 'baina', Exhibit 1, no clause, authorizing forfeiture of the earnest money. Admittedly also, there is, therein, no clause, providing for refund or return of the same. In such circumstances, the question arises as to what are the rights of the respective parties in regard to the earnest money when the contract for sale has been broken by the intending purchaser, usually called, and hereinafter also referred to as, the purchaser.

7. The question thus raised has often come before the Courts both here and in England. Some time, the question has also arisen under slightly different circumstances, namely, where the 'baina' or agreement for sale contained an express clause or covenant for forfeiture of the earnest money or deposit or deposit money, as it was variously called, in case of default on the part of the purchaser. The difference in circumstances, however, has been considered to be material for the decision of the rights of the parties with regard to such money (see the observations of Mellish, L. J. in 'Ex parte Barrel'; 'In re Parnell', (1875) 10 Ch. A 512 and see also 'Hall v. Burnell', (1911) 2 Ch. 551, 'Bishan Chand -v. Radha Kishan', 19 All 489, 'Roshan Lal v. The Delhi Cloth & General Mills Co. Ltd.', 33 All 166 and 'Mangobinda Dutta v. J. Baisogmaff, AIR (9) 1922 Cal 104) and agreements, containing covenants or clauses of forfeiture in regard to such money, have, in this respect, been always treated on the same footing as agreements without the same, provided, of course, there is no clause for return or refund of the money in question, applicable to the particular circumstances (vide 'Howe v. Smith', (1884) 27 Ch. D 89 and 'Natesa v. Appava', 38 Mad 178 and 'Halsbury's Laws of England', Second Edition, Vol. 29, pages 375-6, Article 514).

8. One aspect of the matter which has often caused considerable anxiety to Judges had reference to the nature of the money in question, whether described as earnest money or deposit or deposit money, namely, whether it was intended to serve as earnest money in the real sense of the term, that is, whether it was intended to serve as earnest or security for the performance of the contract in question, necessarily implying a liability to forfeiture in case of default on the part of payer or depositor, that is, the purchaser. This difficulty has i-ways been resolved by Judges by applying what may appositely be described as the 'golden rule of intention'. In search of this intention Courts have at times wandered into regions of fancy but the rule itself has seldom been seriously questioned. It is also clear from the authorities that, in applying this rule, Judges have uniformly accepted the view that, in the absence of a contrary intention, express or implied, in the agreement for sale, money paid by the purchaser to the vendor at the time of such agreement, be it described as earnest money or deposit 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 default on the purchaser's part; in other words, law raises in such cases, an initial presumption in favour of the vendor, clothing him with a right to forfeit the money, the presumption, however, being rebutable and the right defeasible by proof of a contrary intention, express or implied, in the contract in question. This position is well illustrated by, amongst others, the English cases of 'Depree v. Bedborough', (1863) 4 Giff 479, 'Ex parte Barrel, 'In re Parnell', (1875) 10 Ch. A 5.12, 'Collins V. Stimson', (1883) 11 QBD 142, 'Howe v. Smith',. (1884) 27 Ch. D 89, 'Soper v. Arnold', (1889) 14 AC 429, 'Levy v. Stogdon', (1899) 1 Ch. 5, 'Sprague v. Booth', (1909) A C 576, 'Hall v. Burnell', (1911) 2 Ch 551 and Mayson v.. Clouet', (1924) A C 980 and by the Indian decisions reported in the cases of 'Bishan Chand v. Radha Kishan', 19 All 489, 'Roshan Lai v. Delhi Cloth and General Mills Co. Ltd.', 33 All. 166, 'Natesa v. Appavu', 38 Mad 178, 'Maham-mad Habibullah v. Muhammad Shaft', 41 AIL 324, 'Atul Chandra v. Sarat Chandra', 24 Cal, W N 967, 'Mangobinda Dutta v. J.' Baisogmaff', A I R 1922 Cal 104, 'Chiranjit Singh v. Har Swarup', A I R (13) 1926 P C 1, 'Nadiar Chand v. Satis Chandra', 55 Cal 638, 'Krishna Chandra v. Khan Mamud'. 40 CWN 659, and 'Younie v. Tulsiram' : AIR1942Cal382 and the apparent conflict discernible between the said cases and the cases of 'Palmer v. Temple', (1839) 9 Ad & El 508, 'In re Dagenham (Thames) Dock Co.', (1873) 8 Ch A 1022,, 'Ballabhdas v. Paikaji', 38 Ind Cas 915, 'Rattamma v. Krishnamurthi', 54 Mad L Jour 40,. and 'Varadaraja v. Muniappa', 57 Mad L Jour 785, is easily explicable on the above statement of the rule. The test of reasonableness of the amount involved, as laid down in the cases of 'Manian Patter v. Madras Rly. Co.', 29 Mad 118, 'Singer Manufacturing Co. v. Raja Prosad', 36 Cal 960 and 'Younie v. Tulsiram', : AIR1942Cal382 and 'Cooper v. L B & S C Rly.. Co.', (1879) 4 Ex D 88 at pp. 92-93, is also, in the ultimate analysis, founded upon the same exposition of the rule, and, the disinclination, of the Courts, noticed above, to differentiate between cases with and without clauses of forfeiture is also referable to the same and clearly consistent therewith. It is also to be remembered in this connection that between earnest money and part payment of price there is a fundamental distinction or difference in this respect and the rule of forfeiture has no application to money received as such part payment. (Vide 'Ballabhdas v. Paikaji', 38 Ind Cas 915 (Nag); 'Habibullah v. Arman Dewan', 24 Cal WN 40; 'Varadaraja v. Muniappa', 57 Mad L Jour 785 and Krishna Chandra Rudrapal v. Khan Mamud Bepari', 40 Cal W N 659 and 'Mayson v. Clouet', (1924) A C 980 pp. 986-7, See also 'Cornwall v. Henson', (1900) 2 Ch 298 and 'Halsbury's Laws of England', second Edition, Vol. 29 pp. 376-7, Article 514). This distinction between earnest money and part payment of price does not appear to have been strictly' observed in 'Balvanta v. Bira', 23 Bom 56 and 'Katherine Stiffles v. C. M. Martin', 39 Cal W N 174, but, as the former was a case of part payment of price and the latter- related to earnest money in the real sense of the term, the actual decisions in those two cases are clearly justified.

9. It is necessary at this stage to refer to and explain the meaning and implication of an oft-quoted expression, first used by Fry L. J. in 'Howve v. Smith', (1884) 27 Ch Div 89 at p. 101, and reproduced by him in his well-known treatise on Specific Performance. That expression which runs as follows, namely, 'it (the deposit or earnest money) is not merely a part payment, but is then also an earnest to bind the bargain so entered into', apparently indicates that the description of the characteristics of the earnest money, as given in the above statement of the 'golden rule of intention', is inaccurate, that, in any event, it is incomplete and, therefore, unsafe to rely upon. The expression, however, if properly understood, presents no such difficulty. It will appear from the authorities that deposit or earnest money, contemplated above, has two characteristics-it is an earnest or security, it is also a part payment of the price-but these two characteristics belong, strictly speaking, to two different stages. In the words of Lord MacNaughten in the case of 'Soper v. Arnold', (1889) 14 A C 429 at p. 435,

'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.'

To the same effect is the decision of the Judicial Committee in the case of 'Chiranjit Singh v. Har Swarup', AIR (13) 1926 PC1, where their Lordships observe at page 2 of the Report that

'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.'

In the light of these high authorities the true meaning of the expression 'not merely a parti payment but also an earnest or security' seems to me to be that, until the contract is performed, the earnest money remains a security or earnest for performance of the contract of sale but it becomes a part payment of the price or purchase money immediately on such performance. The element of part payment remains - that is how I read these authorities - passive or dormant till performance of the contract of sale and during this period it is completely dominated or overshadowed by the active or dominant element of earnest or security. In other words, in the absence of a contrary intention, express or implied, in the contract of sale, the money is paid by the purchaser and received by the vendor as earnest or security and also as part payment in the sense that it will become part of the purchase-money in the event of performance of the contract of sale. That this is the true meaning of the expression used by Fry L. J. and quoted above, appears from the context in which Fry L. J. used the said expression in the case of 'Howe v. Smith', (1884) 27 Ch D 89, where his preceding words were as follows:

'Money paid as a deposit must, I conceive, be paid on some terms, implied or expressed ..................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 property of the payee'.' This view is well confirmed by the observations of this Court in the case of 'Habibulla v. Arman Dewan', 24 Cal WN 40 at p. 42, which run as follows: 'The deposit, unless paid on any special terms, is not merely part payment but is an earnest 'so that, on the one hand, if the contract be performed, it is brought into account as part payment: on the other hand, if the purchaser make default, it may be retained by the vendor'.'

The portions underlined (here in single quotations) above put the matter almost beyond controversy and sufficiently justify the view I have expressed above.

10. Having thus explained in some detail, the dual characteristics of earnest money and its peculiar position in relation to the rights, of the parties to a contract of sale I shall now endeavour to examine the effect thereof upon, the present case. In the 'baina', Ex. 1, there is, admittedly, no clause of forfeiture of the earnest money. Neither is there any contrary intention, express or implied, either in the shape of a clause for refund or return of the earnest money or otherwise. The stipulated price is Rs. 6,000/- and the earnest money amounts to Rs. 501/-, that is, only about 8 per cent of the stipulated price. It cannot, therefore, be termed as unreasonable in any sense of the term, and no implication of any contrary intention, referred to above can be deduced even by applying the test of 'unreasonableness of the amount in question'. In such circumstances, there being no contrary intention, express or implied, in the contract in question, the earnest money is, in my opinion, liable to forfeiture in accordance with the principles, discussed above, and the petitioner's second contention must, therefore, fail, unless there be something, in any statute or in any authoritative judicial pronouncement which clearly points to the contrary.

11. The Statute requiring consideration is. the Indian Contract Act and the judicial decision which has been relied upon by the learned Advocate for the petitioner is the Privy Council case of 'Bhai Panna Singh v. Firm Bhai Abjan Singh', 33 C W N.949. I shall also refer to and, to the extent that it may seem necessary, deal with the cases reported in 'Natesa v. Appavu', 38 Mad 178; 'Ballabhdas vrPaikaji', 38 Ind Cas 915 (Nag), already cited, and 'Dinanath Damodar Kale v. Malvi Mody Ranchoddas & Co',. 32 Bom L R 272, which have, apparently, some bearing on the question, now before me. There is one other decision, namely, 'Banku Behary v. J. C. Gaulstan', 27 Cal W N. 77, which has-sometimes been forced into discussion as a relevant authority on the present question but,, in my opinion, that decision has not even the remotest bearing on the present issue and I would content myself by merely pointing out that 'Banku Behary's case', had nothing to do with earnest money and dealt with a clear clause of penalty and rightly applied Section 74r of the Indian Contract Act, even if the purchaser there was guilty of default.

12. The relevant provisions of the Indian Contract Act are Sections 64, 65 and 74 but any discussion on those sections in the present context ought, in my opinion, to be prefaced?, by some consideration of the nature and scope of the Indian Contract Act. It has often been, ruled that the said Act is not exhaustive and does not encompass the whole law of contract in this country and does not rule out the applicability of established English principles, not opposed to justice, equity and good conscience, to appropriate cases (Vide 'Irrawaddy Flotilla Co. v. Biigwandas', 18 Cal 620; P. R. & Co. v. Bhagwandas', 34 Bom 192; 'Jwaladutt R. Pillani v. Bansilal Motilal, 53 Bom 414; 'Keshavlal v. Protapsing', 56 Bom 101; 'Solomon v. Martin', 39 Cal W N 461 at p. 467 and 'Gajanan v. Moreshwar', A I R (29) 1942 Bom 302. This view is not in conflict with the decision reported in 'Mohori Bibee v. Dharmadas', 30 Cal 539, which lays down that the Contract Act is exhaustive and, even imperative, 'so far as it .goes'. The distinction between these two classes of cases is sometimes thin but each has its own sphere of application and the limited scope of the Indian Contract Act, as envisaged in the first series of decisions, referred to above, is -perfectly reconciliable with the above decision in 'Mohori Bibi's case', or with the cognate rules of interpretation laid down by the Judicial Committee in 'Mushar Sahu v. Hakim Lal', 43 Ind App 104; 'Ramanandi Kuer v. Kalawati', 7 Pat 221 and 'Chunna Mal v. Mool Chand', 9 Lah 510, to which Jack J. referred at p. 473 in 'Solomon's case', 39 Cal W N 461. (See 'Keshavlal v. Pratapsing', 56 Bom 101 at p. 114).

13. It is necessary and useful to remember the above distinction and limitation when considering the ambit and scope of particular sections of the Indian Contract Act. In cases of contract, therefore, when any matter cannot be brought within particular provisions of the Indian Contract Act without doing some violence to the language used therein and/or without leading to strange and absurd results, that matter should, in my opinion, be left to be dealt with on established English principles, not inconsistent with justice, equity and good conscience.

14. Bearing in mind this aspect of the matter, I have examined Sections 64, 65 and 74 of the Indian Contract Act in relation to the question, now before me, and, as a result of such examination, I am convinced that neither of those sections has any application to the determination of the said question.

15. Until the contract of sale is performed earnest money, as noticed above, is, in the absence of a contrary intention, just a security or earnest for the performance of that contract toy the purchaser. It is liable to be forfeited if the contract fails by reason of default on the part of the purchaser (vide the cases already cited above) and the latter is entitled to its return or refund if the contract goes off for no fault on his part (vide 'Levy v. Stogdon', (1899) 1 Ch 5; 'Ibrahimbhai v. Fletcher', 21 Bom 827 and 'Karsondas v. Chhotalal', 48 Bom .259). The mere presence or absence of a clause of forfeiture in the contract of sale makes no difference (vide 'Howe v. Smith', (1884) 27 Ch D .89; 'Hall v. Burnell, (1911) 2 Ch 551 and 'Roshanlal v. The Delhi Cloth & General Mills Co. Ltd.', , 33 All 166, and the other cases already cited). So long, therefore, as the contract of sale is not performed, the rights of the parties with regard to the earnest money rest upon a contract distinct from the real or pure contract of sale, - a contract which may, from its nature, aptly be called a 'contract of security', (relating, as it does, to the security for the performance of the real contract of sale), evidenced by the covenant or term for forfeiture, or, implied by law. This is, strictly speaking, no part of the real contract of sale and it needs performance or enforcement only when the real contract of sale is broken or goes off otherwise. Where, therefore, the contract of sale is broken by the purchaser and,as a consequence, the earnest money is forfeited by the vendor, the forfeiture takes place under the express or implied 'contract of security' which is strictly speaking, no part of the real contract of sale. It may be called an 'ancillary contract' in the words of White C. J. in 'Natesa v. Appavu', 38 Mad .178, but whatever the name, it is, strictly speaking, no part of the real or pure contract of sale. It is also quite clear that, when the contract of sale is broken by the purchaser, the vendor rescinds that contract, that is the real contract of sale and not the 'contract of security', noticed above, as, otherwise, no claim of forfeiture can arise. The benefit, therefore, that accrues to the vendor by such forfeiture is a benefit, received by him not under the real contract of sale which alone is rescinded but under the 'contract of security' which remains in force and under which the forfeiture is imposed and incurred. Sections 64, and 65 of the Indian Contract Act, although they must now be taken to deal also with the return of benefit and/or advantage received under contracts, validly rescinded, (vide Muralidhar v. International Film Co. Ltd.', A I R(30) 1943 PC 34 at pp. 38-39), can, therefore, have no application to the case,s under consideration.

16. As to section 74, it is enough to say that, by its very terms, it is inapplicable to cases of earnest money which is an amount, paid really under the 'contract of security', as named above, and there is no question of any breach of that contract or of any amount payable on such breach, - at the time of the making of the contract of sale and is not, at any rate, an amount, 'named in the contract of sale to be paid as compensation on breach thereof. It is to be remembered, further that forfeiture of earnest money is not in the nature of damages or compensation for breach of contract, (see Halsbury's 'Laws of England', Second Edition, Volume 29, p. 378, Article 517). Section 74 of the Indian Contract Act, cannot therefore, be attracted to such cases without doing violence to the language used therein. It may also be pointed out in this connection that application of Section 74 to cases of earnest money would, in many instances, lead to strange and absurd consequences. This would be apparent if we remember that usually earnest money is small (see in this connection the observations in 'Ballabhdas v. Paikaji', 38 Ind Cas 915 at P 921 (Nag), where the origin and nature of earnest money is discussed at some length) and that if earnest money be taken to be 'the sum named in the contract as the amount to be paid in case of its breach' within the meaning of Section 74, as it must necessarily be if Section 74 is to be held applicable to cases of 'earnest money', the vendor, whatever his losses for breach of the contract by the purchaser, would not be able to recover any compensation beyond the earnest money which would be, in view of the terms or provisions of the said section, the maximum compensation, recoverable by him, - in other words, that the vendor, whatever his losses, would, in many instances, be limited to a small compensation. A strange situation would thus be treated, the absurdity whereof, even apart from any question of unjustness, or injustice would at once be manifest.

17. In the above state of things - and as there is nothing compelling in its favour either in the State or in principle or in the authorities - I am not inclined to subscribe to the view that Section 74 of the Indian Contract Act applies to cases of ' earnest money'. I am unable, therefore, to agree with the opinion expressed by Sadasiva Aiyar J. in his dissentient judgment in the case of 'Natesa v. Appavu', 38 Mad 178, and, on the whole, I respectfully agree with the views, expressed by White C. J. and Miller J. in 'Natesa's case', 38 Mad 178, and by the learned Judges of the Bombay High Court in the case of 'Dinanath Damodar v. Mody Ranchoddas & Co.', 32 Bom L R 272. I hold, accordingly, that section 74 cannot be invoked by a defaulting purchaser to resist in any manner or to any extent whatsoever, the vendor's claim for forfeiture of the earnest money.

18. I have explained above why Sections 64, 65 and 74 of the Indian Contract Act would not apply to cases of earnest money. To the reasons already given I would like to add one more consideration.

19. It is clear from the Indian authorities, cited above, that notwithstanding the presence of the said sections 64, 65 and 74 on the statute book for all this time the law as laid down in the English Case of 'Howe v. Smith', (1884) 27 ChD 89, has been followed and applied in this country for over half a century. It is clear also that there is nothing in that law which is opposed to justice, equity or good conscience. That law should, therefore, be left undisturbed on principles of 'stare decisis'. (Vide 'Dinanath v. Malvi', 32 Bom L R 272).

20. From the above discussion the view emerges that Sections 64, 65 and 74 of the Indian Contract Act are inapplicable to cases of 'earnest money'. This view is not in any way inconsistent with or affected by the decision of the Judicial Committee in 'Bhai Panna Singh v. Firm Bhai Abjan Singh', 33 Cal W N 949 (which I shall presently discuss) or with the case of 'Ballabhdas v. Paikaji', 38 Ind Cas 915 (Nag), where the learned Judges point out at page 922 of the Report that 'the principles applicable to earnest money..................cannot rightly be applied to' part payments of price, thus recognising the liability of 'earnest money' to forfeiture upon the purchaser's default. This latter case was dealt with as a case of part payment of price or purchase-money and the observations there on Sections 64, and 74 etc., of the Indian Contract Act must be read as limited to such cases.

21. It now remains for me to consider the decision of the Judicial Committee in the case of 'Bhai Panna Singh v. Firm Bhai Abjan Singh', 33 Cal, W N 949. That case, to my mind, contains nothing which conflicts with the views which I have expressed above. It is clear from the report that, in that case, there was a clause, providing for damages to the extent of Rs. 10,000/- against the defaulting party and the whole controversy really centred round the claim for such damages. There was, however, also in that case payment of earnest money of Rs. 501/- subject to a clause of forfeiture, - and it seems to me that Gentle J. was not strictly correct in saying in the case of 'W.J. Younie v. Tulsiram Jankiram', : AIR1942Cal382 that, in the above case before the Judicial Committee, 'no sum was payable as earnest money or as security or guarantee for performance of the contract'. Apparently, Gentle J. had in mind only the clause, referred to above, providing for damages against the defaulting party and his attention was not drawn to the clause about the earnest money. The purchaser in the case before the Judicial Committee was found guilty of breach of contract and the vendor was held entitled to damages but the Judicial Committee, although they referred several times to the forfeited earnest money, nowhere expressed themselves against the legality of this forfeiture, made by the vendor. It is true that the Judicial Committee applied Section 74 to the facts of that case but that application, to my mind, was limited to the clause, noticed above, which provided for payment of damages and, by applying Section 74, the Judicial Committee scaled down the amount of such damages to what appeared to them to be, in the circumstances of that case, reasonable compensation. It is true also that in calculating the net amount of reasonable compensation their Lordships took into account the 'forfeited earnest money but that is clearly explicable on the principle of assessment of reasonable compensation in such cases (vide Mcely v. Grew', (1836) 6 N & M 467 and 'Vellore Taluk Board v. Gopalasami Naidu', 38 Mad 801, and vide also Halsbury's 'Laws of England', Second Edition, Vol. 29, p. 378, Article 517). In the absence of any clear pronouncement against the legality of the forfeiture of the earnest money, I am not inclined to construe this decision of the Judicial Committee as an authority against such forfeiture. Such construction would not only interfere with a long series of judicial decisions in this country but would also be in conflict with the Judicial Committee's own decision, noticed above, namely, that reported in 'Chiranjit Singh v. Har Swarup', A I R (13) 1926 PC 1. I am not prepared to hold that the Judicial Committee meant, without an express word, - and there is no scope, in the light of what I have said above, also for any necessary implication, - to overrule the rule of law, uniformly laid down in a series of decisions in this country and unsettle the settled law which has been followed and applied here, almost without demur, for over half a century notwithstanding the existence of the Indian Contract Act and the presence of the above-quoted sections therein.

22. As a result of the above discussion, I have come to the conclusion that the earnest money, in the real sense of the term, as explained above, is, in the absence of a contract to the contrary, either express or implied, liable to be forfeited by the vendor when the contract goes off for default on the part of the purchaser and Such1 liability exists, notwithstanding Sections 64, 65 and 74 of the Indian Contract Act, and is not affected by any of the said provisions, although, when the vendor sues the purchaser for compensation for breach of the contract, in the matter of assessment of such compensation, the forfeited earnest money has to be taken into account and, there, the purchaser would get credit for the same.

23. In the above view of the matter the second contention, raised on behalf of the petitioner, also, fails and is, accordingly overruled.

24. The result, therefore, is that this Rule is discharged, but, having regard to the circumstances, I direct that the parties would bear their own costs throughout.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //