Dasaratharaman vs Chandrasekara Sankaraiya Naidu and 3 others

K. Sampath, J.—The plaintiff is the appellant, He filed suit O.S. No. 2409/81 before the District Munsif''s Court, Cuddalore, for recovery

of Rs. 8,608/- with interest and costs alleging as follows:

There was an agreement entered into between the appellant and the respondent under Ex. A-2 on 19.1.1976 as per the terms of which the

appellant agreed to buy the property belonging to the respondents for a sum of Rs. 25,725/- and paid an advance of Rs. 6000/- On the same

date, under Ex. A-1 a sale deed was also prepared. The appellant was to pay Rs. 7.500/- in discharge of a mortgage over the property and the

balance of Rs. 12,225/- was to be paid at the time of registration before the Sub Registrar. At the time the agreement was entered into the first

respondent represented that there was some problem with regard to the ownership of the property and that he would get it solved and as security,

the first respondent had included the ''B'' schedule property in the sale deed. At that time, one Thirunavukkarasu was in enjoyment of the property

and the appellant had to pay Rs. 1000/- to the said Thirunavukkarasu. He also had to spend Rs. 400/- for measuring the property. These amounts

had also to be deducted from the total sale consideration. The appellant also took possession of the property and raised groundnut. There was

also an agreement between the appellant and the first respondent on the same day for irrigating the lands from the first respondent''s motor and

pump-set As undertaken by him, the first respondent did not clear the defect in the ownership. The first respondent caused a notice Ex. B-1 dated

11.5.1976 to be issued to the appellant to complete the sale. The appellant asked the first respondent to clear the defect. But the first respondent

represented that it would take time to do that and wanted the possession back and also Rs. 500/- as lease. After harvesting the groundnut the

appellant handed back possession to the first respondent. The first respondent took proceedings regarding the title and ownership of the property.

However, he did not inform the appellant about the result of the proceedings. Though the appellant was ready and willing to complete the sale by

having the sale deed registered because of the conduct of the respondents, it could not be done. The suit had therefore to be filed.

The suit was resisted by the respondents as follows:

Only after scrutinizing the title deeds, Ex. A-2 agreement was entered into. It was true that a sum of Rs. 6,000/- was received as advance on that

day. The appellant promised to complete the sale within a period of two months therefrom. He also wrote to the respondents under Ex. B-2 dated

28.5.1976 and Ex. B-3 dated 7.6.1976 that he would attend registration, but he did not turn up. The first respondent never told the appellant at

any time that there was any defect in the title and that be would get it solved. The alleged payment of Rs. 1000/- to Thirunavukkarasu and the

payment of Rs. 400/- for measuring the property were false. There was no reply issued by the appellant to Ex. B-1 notice. As the appellant could

not make up the balance of consideration, the registration could not be completed. There was no payment of Rs. 500/- as lease to the first

respondent as alleged. The appellant had benefited in a sum of Rs. 5000/- by raising groundnuts in the property. He was never ready and willing to

complete the registration. If on account of the appellant''s default, the sale was not completed, the appellant had to lease the amount of Rs. 6000/-.

The trial court found that the appellant could not make up the amount and therefore the registration could not be completed. It was not because

there was any defect in the title of the respondents to the property. However, the learned District Munsif found that there was no agreement

between the parties that in case of default by the appellant, he should lose the sum of Rs. 6000/- paid as advance. In coming to that conclusion the

learned District Munsif relied on the judgment of this Court in Marimuthu Gounder v. Ramaswamy Gounder and others (92 L.W.3), which held

that proof of actual damage was a sine quo non and in the instant case, the respondents had not established actual damage. The trial Court by its

judgment and decree dated 2.2.1983 decreed the suit as prayed for with 9% interest from 22.3.1977. On appeal by the respondents in A.S. No.

42/83, the learned Subordinate Judge, Cuddalore, relied on the judgment of P. Gopalratna Iyengar v. A. Rajaratna Mudaliar (1937 Madras

Weekly Notes 1288), allowed the appeal and dismissed the suit. Aggrieved the present Second Appeal has been filed by the defeated plaintiff.

At the time of admission the following substantial question of law was framed for decision in the Second Appeal:

Is not the plaintiff in a suit for recovery of the advance paid by him entitled to a decree in the absence of pleading and proof by the defendant that

he had sustained damages on account of the breach?

Mr. Peppin Fernando for Ms. P.V. Rajeswari, learned counsel for the appellant, contended that there was no pleading or proof of legal injury to

the respondents in the instant case and in the absence of the same the appellant had to succeed. The learned Counsel referred to the following

decisions:

(1) Fateh Chand Vs. Balkishan Das,

(2) Union of India (UOI) Vs. Rampur Distillery and Chemical Co., Ltd.,

(3) Bhagavathi Mudaliar Vs. N. Subramaniam,

(4) Sabina D''Costa Vs. Joseph Antony Noronha,

(5) PM. Naina Mohammed Rowther v. Kapperchand Jain (1988 - I L.W. 495)

(6) State of Rajasthan Vs. Botamal Sachdeva (Dead) through his Lrs., and

(7) M/s. Happy Home Builders (Karnataka) Pvt. Ltd. v. M/s. Delite Enterprises (1955 A.I.H.C. 1320).

Mr. M.N. Sundararajan, learned counsel for the respondents, submitted as follows:

Admittedly, pursuant to the agreement for sale, the appellant took possession of the property. He had the benefit of enjoyment. He raised crops

and it was only because of his default registration could not be completed. The entire amount of Rs. 6000/- was therefore liable to be forfeited and

the reliance placed by the lower Appellate Court on P. Gopalaratna Iyengar v. A. Rajaratna Mudaliar (1937 Madras Weekly Notes 1288) was

perfectly right and the appeal was therefore liable to be dismissed.

Indeed, there is no evidence as to the actual damage caused to the respondents. At the same time, it cannot be disputed that the appellant had

the benefit of possession. He raised groundnut and harvested it. Except for the decision of the Supreme Court in Fateh Chand Vs. Balkishan Das,

in no other case relied on by the learned Counsel for the appellant, possession was parted with by the vendor in favour of the purchaser. The

extent in the instant case is 3.43 acres. As per the agreement between the parties Ex. A-2, in case of default, the respondents were entitled to take

possession with the crops. As per the plaint, the appellant paid a sum of Rs. 500/- to the first respondent as lease though this was not accepted.

He could have made at least four or five times that amount during the time he was in possession of the property. This would come to about Rs.

2500/- and because of the default on the part of the appellant, the respondents were put to loss. The total consideration fixed under the agreement

was Rs. 25,725/-. In my view, a sum of Rs. 2500/- could be fixed as compensation to the respondents. I have already adverted to the fact that the

respondents were entitled to take possession of the property with the crops on default by the appellant. There is no evidence to show that at the

time the appellant handed back possession to the respondents, there were standing crops and that they had any particular value. So, we can safely

assume that the property was handed back to the respondents without any crops.

In Fateh Chand Vs. Balkishan Das, sale price, agreed was Rs. 1,12,500/-. Rs. 1000/- was paid as earnest money. On the vendee paying Rs.

24,000/- out of the sale price, the vendee would be given possession (emphasis supplied). If within a particular date sale was not completed by the

vendee paying the balance of sale price, the amount of Rs. 25,000/- would stand forfeited and the agreement would stand cancelled and the

possession would be handed over back to the vendor. In case of default on the part of vendor, Rs. 25,000/- plus a sum of Rs. 25,000/- as

damages would have to be paid to the vendee and the agreement would stand cancelled. There was default. Each party blamed the other. It was

found by the High Court that the vendee committed default. This finding was affirmed by the Supreme Court. The High Court found that the

amount of Rs. 24,000/- paid on the date the possession was given, was security amount for due performance. The Supreme Court differed saying

that if it was meant to be so, it would have been so mentioned in the agreement. But, as per the agreement it was out of balance sale price. In the

view of the Supreme Court, the matter had to be adjudged in the light of the provisions of Section 74 of the Contract Act. Section 74 of the

Contract Act runs as follows:

when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any

other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been

caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the

case may be, the penalty stipulated for.

The Supreme Court in the case already referred to observed with reference to Section 74 as follows:

The Indian Legislature has sought to cut across the web of rules and presumptions under the English Common Law by enacting a uniform principle

applicable to all stipulations naming amounts to he paid on case of breach and stipulations by way of penalty.

According to the Supreme Court, in that case the clause in the agreement providing for forfeiture of Rs. 24,000/- was manifestly a stipulation by

way of penalty. If the contract contained a stipulation by way of penalty, in the view of the Supreme Court, the measure of damages by way of

penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has jurisdiction, subject

to the limit of the penalty stipulated, to award such compensation as it deems reasonable having regard to all the circumstances of the case. But, it

has to be according to settled principles. No doubt, the section says that whether or not actual damage had been proved to have been caused by

the breach, it does not mean that if no legal injury is caused, no compensation should be awarded.

Duty not to enforce the penalty clause but only to ward reasonable compensation is statutorily imposed upon Courts by Section 74.... The

jurisdiction of the Court is not determined by the accidental circumstances of the party in default being a plaintiff or a defendant in a suit.... The

Court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such

compensation has to be ascertained having regard to the conditions existing on the date of the breach.

In the Supreme Court case it was found that there was no evidence that any loss was suffered by the plaintiff in consequence of the default save as

to the loss suffered by him by being kept out of possession of the property. It was reasoned that the plaintiff in that case had use of Rs. 24,000/-

and that it could be rightly presumed that he must have been deriving advantage from the amount throughout the period. Rs. 1000/- being the

earnest money deposited plus the benefit derived from Rs. 24,000/- was in the opinion of the Supreme Court, sufficient compensation to the

aggrieved party. In that case, the plaintiff had obtained a decree for mesne profits for being kept out of possession. The Supreme Court modified

the quantum.

The Supreme Court did not hold that the aggrieved party was not entitled to claim any amount at all. In fact to repeat, the Supreme Court

accepted the position that the plaintiff had obtained a decree for mesne profits and that together with the sum of Rs. 1000/- paid at the time of

entering into the agreement and the benefit derived from Rs. 24,000/- during the period the amount was with the aggrieved party, would be

sufficient compensation to the aggrieved party.

In Bhagavathi Mudaliar Vs. N. Subramaniam, it was held that,

Mere nomenclature of the amount paid at the lime contract was entered into or the absence of any forfeiture clause, may not be decisive and that

the character of a deposit or earnest money could be spelt out from the circumstances and the evidence.

In Kunwar Chiranjit Singh v. Har Swarup (AIR 1926 Privy Council 1= 23 LW.172), it was held that earnest money became part of the

purchase price for consideration when the transaction went forward, but it was liable to be forfeited when the transaction fell through by reason of

the fault or the failure of the vendee.

Union of India (UOI) Vs. Rampur Distillery and Chemical Co., Ltd., ) related to the supply of liquor by the respondents to the appellants

before the Supreme Court. It was found that the breach of the contract did not cause any loss to the appellants and further that the stipulated

quantity was subsequently supplied to the appellants by the respondents themselves at the old rate. There was also no attempt by the appellants to

establish that they suffered any loss or damage on account of the breach committed by the respondents. The forfeiture claim was negatived.

In Sabina D''Costa Vs. Joseph Antony Noronha, the facts were as follows:

An agreement for sale contained a stipulation that purchaser shall on date of agreement deposit certain sum as advance towards consideration. It

was further stipulated that seller would be entitled to forfeit the sum paid as advance in case of breach of agreement by purchaser. A suit came to

be instituted at the instance of purchaser for return of advance deposited on the ground that seller had committed a breach. It was further found

that the purchaser and not the seller had committed the breach. The disputed question was whether the purchaser was entitled to the refund of the

advance. It was contended by the seller that what was forfeited by him was in reality earnest money though described as advance towards

consideration in the agreement and as such Section 74 had no application.

The High Court of Karnataka held that what was contemplated by the agreement was forfeiture by way of penalty and that being so, Section 74

applied. It held further that as the seller had not proved any special damages caused to him by the breach, the fact that he was paid advance

amount on the date of the agreement, which he retained was sufficient to compensate him for the breach and hence he was obliged to return that

amount to the purchaser;

It should be noted that in the Karnataka case, possession was not handed over to the purchaser.

In State of Rajasthan Vs. Botamal Sachdeva (Dead) through his Lrs., contract of construction given by the State Government to a contractor,

excess cost incurred by the Government in completing the work left incomplete by the contractor was claimed. There was no term in the

agreement enabling the State Government to forfeit security deposit. The State Government neither proved the amount of damages incurred nor

proved the extra amount of cost incurred by it. There was no letter addressed to the contractor stating that the security deposit had been forfeited.

It was held that the State Government was not entitled to forfeit security deposit.

In PM. Naina Mohammed Rowther v. Kapperchand Jain (1988 -I. L.W. 495) there was a deposit made for supply of goods. It was for the

due performance of the contract and there was no stipulation that it was forfeitable. Even in cases where deposits made were forfeitable in case of

breach, it was held, Courts had to adjudge the reasonable compensation to which the party may be entitled in the circumstances of the case though

the determination of such reasonable compensation could be made either in a suit by the purchaser or even the vendor. There must be pending and

proof of the damages suffered upon which the Court would adjudicate the reasonable compensation to which the defendant/respondent might be

entitled and deduct the same and thereafter award a decree for the balance.

In Marimuthu Goundar v. Ramaswamy Gounder and others (92 L.W.3) relied on by the trial Court and distinguished by the lower Appellate

Court, the matter arose as follows:

Where in a suit for refund of advance of a sum of Rs. 10,000/- paid under an agreement of sale alleging breach on the part of the

defendants/vendors, it was contended for the latter that they were not in breach and that under the agreement the said amount was liable to be

forfeited.

It was held that:

the parties had expressly stipulated that what was paid under the agreement of sale was not earnest money, but advance. It is reasonable also to

characterise this amount as advance, since it bears a very great proportion to the totality of the considerations as well. In the absence of pleading

that the defendants had suffered damage to the tune of Rs. 10,000/- the plea that the entire amount paid by the plaintiff cannot be demanded and

that the defendants were not under an obligation to refund it, was an extreme contention.

The Bench relied on Fateh Chand Vs. Balkishan Das, and held that without reference to any actual damage, the amount referred to in the

agreement could not be forfeited, because it would be in the nature of penalty. Proof of actual damage was sine qua non to seek damage.

It should be pointed out that that was also not a case where possession of the entire property was handed over to the purchaser.

In P. Gopalaratna Iyengar v. A. Rajaratna Mudaliar (1937 Madras Weekly Notes 1288), it was held by a single Judge of this Court that,

It was a well known principle of law that if a purchaser, on agreeing to purchase any property, agreed to pay a deposit, that deposit was to be

regarded as security for the fulfillment of the contract and though nothing is said about the forfeiture, the mere fact that the deposit was demanded

carried with it the implication that it should be forfeited if the contract were broken, unless plaintiff proved an agreement to the contrary.

Except in Fateh Chand case referred to supra decided by Supreme Court in no other case was possession handed over by the vendor to the

purchaser. So far as the Supreme Court case is concerned, the Supreme Court observed as already stated that the plaintiff in that case had

obtained a decree for mesne profits and there was a sum of Rs. 1000/- paid as earnest deposit at the time the contract was entered into. In the

opinion of the Supreme Court, the amount of mesne profits decreed and the amount of Rs. 1000/- paid as earnest deposit would be adequate

compensation for any loss occasioned by reason of the default of the purchaser. In the present case, it is in evidence that the appellant had

benefited by taking possession of the property and in fact, he had stated in the plaint that he paid a sum of Rs. 500/- to the respondents as and by

way of lease, I have already fixed the probable benefit that the appellant had derived by taking possession of the property of a large extent. In my

view, the respondents would be entitled to retain that amount and refund the balance amount. I have already adverted to the fact that in case of

default by the appellant, the respondents were entitled to take back the property with the crops thereon. There is no evidence that the respondents

took possession with standing crops.

The substantial question of law will have to be answered partly in favour of the appellant and the decision of the lower Appellate Court will

stand set aside and the decision of the trial Court will stand restored with the modification that instead of a decree for Rs. 6000/-, there will be a

decree in favour of the appellant for a sum of Rs. 3,500/- with interest at 6% per annum. There will be no order as to costs in the Second Appeal.

In view of the disposal of the main Second Appeal, C.M.P. No. 12831/95 is dismissed.