Meenakshinada Deikshtar vs Murugesa Nadar and Another

T. Ramaprasada Rao, J.—The plaintiff is the revision petitioner. Under Exhibit A-2 dated 27th April. 1963, the plaintiff agreed to purchase

the land belonging to the 1st defendant through the 2nd defendant who was the accredited power-of-attorney holder of the 1st defendant. The

plaintiff paid a sum of Rs. 225 as advance towards the total price of Rs. 1,537, which advance, in terms of the agreement, was liable to be

forfeited in case the sale was not completed within the prescribed time and due to the plaintiff''s default. The term of the contract ran as under;

If you (the plaintiff) fail to complete the sale within the aforesaid time, you (the plaintiff) shall lose the said advance. If I (the 1st defendant through

the 2nd defendant) fail to get the said sale deed registered within the aforesaid time, I (the 1st defendant through the 2nd defendant) will give you

(the plaintiff) two times above the said advance.

In short, for a breach of the contract on the part of either the plaintiff or the defendants, one has to pay to the other a sum of Rs. 225/- as damages

and the defendants had the additional privilege for forfeiting the sum of Rs. 225/- if the plaintiff commits a breach of contract. The transaction did

not go through and the plaintiff filed a suit for the return of the advance. The defendants solely relied upon the above clause relating to the forfeiture

and contended in the lower Court that they were entitled to forfeit the same. The defendants'' contention found favour with the learned District

Munsif of Chidambaram though the defendants did not aver or prove damages having been sustained by them in consequence of the breach of the

contract by the plaintiff. Thus the plaintiffs suit was dismissed. Against this the plaintiff has preferred the present Civil Revision Petition u/s 25 of the

Madras Provincial Small Cause Courts Act

Mr. M. Srinivasan, learned counsel for the petitioner, contended that the defendants did not primarily discharge their burden by alleging in the

pleadings that the money though named as ''advance'' was in the nature of deposit for the due performance of the contract and that in any event

there is no proof that the defendants suffered actual damages by reason of the alleged breach of contract by the plaintiff. The sheet-anchor of his

case is the ratio in Fateh Chand Vs. Balkishan Das, . He contended that in the absence of such proof of actual damages, the normal presumption is

that the defendants are not entitled to any reasonable compensation and the plaintiff is therefore entitled to the decree as prayed for, Mr. Ratnam,

learned counsel for the respondents, however, based his case on Howe v. Smith, (1884) 27 Ch D 89 referred to in Kuri Venkoba Char Vs. Kuri

Sanjivappa, , and argued that the real intention of the parties has to be gathered from the terms of the contract and the surrounding circumstances.

According to him, though the money paid under Exhibit A-2 is termed as ''advance'', it is really earnest money guaranteeing the performance of the

contract and as the lower Court found as a fact that the plaintiff is in default he should fail. He urged that Fateh Chand Vs. Balkishan Das, , has not

made any departure from the ratio in Natesa Aiyar v. Appavu Padayachi, ILR(1915) Mad 178 : 24 MLJ 488 : AIR 1915 Mad 896. He would

say that any payment made contemporaneously with an agreement from which springs a contract, should be deemed to be a deposit or earnest

money. He placed reliance on Puran Chand Vs. The Official Liquidator, Simla Banking and Industrial Co. Ltd. and Another, and vehemently

argued that the plaintiff has to be non-suited because of his own default. He would also maintain that different considerations ought to weigh with

Courts while considering the import of mercantile contracts as opposed to other contracts involving sale of land, etc. He relied on Manepalli

Satyanarayanamurthi Vs. Thommandra Erikalappa, , for the purpose. According to him, the principle laid down in ILR Mad 178 : 1915 24 MLJ

488 : AIR 1915 Mad 896 , is still good law and the plaintiff is not entitled to the return of the deposit notwithstanding absence of pleading by the

defendants as to the loss sustained by them or proof of the same.

Before the contentions of the parties are adverted to, it is convenient to note Fateh Chand Vs. Balkishan Das, , and analyse its import.

According to the Supreme Court, Section 74 of the Indian Contract Act made an inroad into refinements of English Common Law, which always

maintain a marked distinction between liquidated damages and penalty. In the case of breach of contracts, even where a certain sum is named as

the predetermined damages and in case of breach of the same by either of the contracting parties, the Court has jurisdiction to find in a lis involving

adjudication of the rights and obligations of parties to such a contract, as to who is in default and what is the reasonable compensation payable by

the party in default to the other. It does not matter which party to the contract, initiates the proceedings and the Court is not bound by the

quantified estimate of damages provided for in the contract itself. It is salutary however for the Courts not to exceed the quantified damages so

named in a contract. To quote the Supreme Court in Fateh Chand Vs. Balkishan Das, .

Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties pre-determined, 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....."".

It is however significant to find that the Supreme Court was not concerned in that case to decide whether a contract containing a covenant of

forfeiture of deposit for due performance of a contract falls within the clause described by the Court as ""whether the contract names a sum to be

paid in case of breach."" In fact, the Supreme Court observed that Section 74 of the Indian Contract Act dealt with the measure of damages in two

classes of cases, (1) where the contract names a sum to be paid in case of breach, and (2) where the contract contains any other stipulation by

way of penalty. The ratio of the above decision, however, is sufficiently indicative that any sum named in a contract to be paid by one to the other

in case of a breach, is susceptible to judicial probe by Courts and its reasonableness tested before awarding the same to the affected party. In the

instant case, therefore, the questions'' to be resolved are: (a) whether the advance of Rs. 225 paid by the plaintiff to the defendants was as security,

earnest money or deposit for the due performance of the contract and (b) if so, is the amount a genuine pre-estimate of reasonable compensation

to be paid by the defaulting party to the party complaining of breach of the contract?

I shall now deal with the meaning of the words ''deposit'' or ''earnest money''. It will be convenient at this stage to dispose of the argument of

Mr. Ratnam that a distinction has to be kept up in explaining those words while considering mercantile contracts as opposed to contracts for sale

of immovable properties. He relied on the observations of Muthuveeraswami Nayudu and Others Vs. V.T.A.L. Annamalai Chettiar and Others, ,

reading as under:

I can content myself with saying that it is never the practice in mercantile contracts, to hold that whatever be the damage suffered or not suffered

the seller is to be entitled to keep the deposit.

I do not think that any such broad distinction as contended is warranted. The above observation was made in the particular circumstances of that

case which related to a mercantile contract. The quotation ought not to be understood as laying down any dichotomy as pleaded. The cases in

Fateh Chand Vs. Balkishan Das, , and Bhagavathi Mudaliar v. Subramaniam, C.R.P. 2058 of 1965 of this Court -- unreported (reported in

Bhagavathi Mudaliar Vs. N. Subramaniam, are all cases where contracts to sell and purchase lands were interpreted; but yet no such refined

distinction as is sought to be made by the learned counsel for the respondents, was accepted or even referred to. There is, therefore, no

justification for different principles of law being applied to mercantile contracts alone. The law has been declared uniformly by the Indian Contract

Act and is applicable to contracts involving sale of land as also to agreements in the nature of ordinary commercial contracts. Very few exceptions

are available to make a distinction as claimed by Mr. Ratnam.

I therefore come to the question as to what is a ''deposit''. Cotton LJ in (1884) 27 Ch D 89, 95 and 101 observed:--

.....What is the deposit? The deposit as I understand it, and using the words of Lord Justice James, is a guarantee that the contract shall be

performed. If the sale goes on, of course, not only in accordance with the words of the con-tract, but in accordance with the intention of the parties

in making contract, it goes in partpayment of the purchase money for which it is deposited but if on the default of the purchaser the contract goes

off. that is to say, if he repudiates the contract then, according to Lord Justice James, he can have no right to recover the deposit.

The following observations of Lord Justice Fry in (1884) 27 Ch D 89 are also appropriate:--

It is not merely a part-payment, but is 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.

Touching upon the observations of Fry L. J. Sadasiva Ayyar J., ILR Mad 178 : 24 MLJ 488 : AIR 1915 Mad 896 , is of the view:--

Even according to Howe v. Smith, (1884) 27 Ch D 89 , earnest money is intended to create by the fear of its forfeiture, a motive in the purchaser

to fulfil the contract. Just as the word ''forfeiture'' inevitably raises the idea of ''penalty'' in my mind, the word ''fear'' raises the very same idea.

Whatever may be the view of the other High Courts, Srinivasa Pillai Vs. P. Rathnasabapathi Pillai, Chairman, Municipal Council, , decided by this

Court treats such stipulations as stipulations by way of penalty.

The Privy Council in Chiranjit Singh v. Har Swarup, 1926 50 MLJ 629 : AIR 1926 PC 1 observed:--

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.

The above citations have been referred to by Venkataramana Rao J., in Kuri Venkoba Char Vs. Kuri Sanjivappa, , Thus ''deposit'' or ''earnest

money'' is not part of the price bargained for, but it is unambiguously money paid for the due performance of the contract. I am unable to accept

the wide proposition of Mr. Ratnam that any money paid contemporaneously with the execution of a contract has to be treated as ''deposit''.

If this is the content of the word ''deposit'' or ''earnest money'', then is it forfeitable without proof of damage whether or not expressed in a

contract. Incidentally in some contracts the word ''advance'' is used. Mere misdescriptional nomenclature will not conclude matters. What may be

called ''advance'' may be deposit'' and what may be termed ''deposit'' may ultimately be proved to be ''advance''. In either case it is the intention of

the parties that governs. The cardinal rule of interpretation of contract, whether mercantile or otherwise, is to find out the intention of the parties.

Such an intention could be gathered by the express terms of the contract or from the conduct and by the surrounding circumstances incidental to

such a contract. The expression adopted may be a guide to find out such an intention. But it is not al-ways the sole guide. In the instant case the

parties used the word ''advance'' in the earlier part of Exhibit A-2, but stipulated for its forfeiture in case of breach, later. If, therefore, it is

established by pleadings and proof that the amount given by the depositor was earnest money for the due performance of the contract, then it can

be forfeited by the depositee notwithstanding the breach of the contract by the depositor; this proposition, however, is subject to the doctrine of

reasonableness which I shall presently deal with. Forfeiture of deposit or earnest money by reason of default on the part of the purchaser is not

necessarily a penalty. Though the observations of Sadasiva Ayyar, J., in ILR Mad 178= 1915 24 MLJ 488 : AIR 1915 Mad 896 , referred to

above lend support to this; in view of the later pronouncement of the Supreme Court in Fateh Chand Vs. Balkishan Das, , it is difficult to sustain

that such forfeiture of deposit is invariably on the basis that it is a penalty. The following passage in Jagdishpur Metal Industries and Others Vs.

Vijoy Oil Industries Ltd., is very apposite:

.....In the case of an earnest money the doctrine of forfeiting is not based either on the principle of penalty or on the principle of recompense for

the loss incurred by one party to a contract as a result of any breach of it by the other. In my opinion, the doctrine of forfeiture in the case of an

earnest money Is based on a principle completely independent of the considerations that are laid down in Sections 64, 65, 73 or 74 of the Indian

Contract Act.

In fact, an earnest money, belonging as it does to a class of its own, namely, that of deposit, is regulated and controlled by considerations which

are peculiar to that class alone. Therefore where the agreement is unequivocal and it is specifically agreed upon thereunder that what has been paid

in advance towards contract is nothing but an earnest money, as understood in law, then it has to be dealt with in the light of the principles which

apply to such deposits and not in the light of those that generally apply to restitution, penalty or liquidated damages.

Notwithstanding the above principle that deposit or earnest money is outside the pale of Section 74 of the Indian Contract Act, yet does it

follow that a suitor in a case for the refund of deposit is entitled to a decree merely for the asking of it in spite of his own default or the defendants

are entitled to forfeit the deposit as a matter of course, in spite of absence of pleading and proof as to any damage suffered by the defendants? As

Section 74 is declaratory of the law as to liability of parties upon breach of contract, the principles enunciated by the Supreme Court in Fateh

Chand Vs. Balkishan Das, and extracted by me in this judgment would still apply. Thus in a given contract if a sum is paid under the caption of

deposit"" or ""earnest money"" or has to be interpreted as such according to the intentions of parties, and is made forfeitable in case of breach, even

then Courts have to adjudge the reasonable compensation to which a party would be entitled to, in such circumstances. Such determination of

reasonable compensation can be made either in a suit filed by the depositor (purchaser) against the depositee (vendor) or in a suit filed by the

depositee (vendor) complaining of such breach. Such adjustments which are necessary can and ought to be made in any one of the suits filed as

above. In the instant case, the purchaser who is in default filed the suit for recovery of the advance which is now urged by Mr. Ratnam as earnest

money which is also expressly forfeitable. Even in such a case the Court has to find whether the defendants have sustained the damage by reason

of the plaintiff''s default and award only a reasonable compensation.

The defendants (vendors) who interdict a claim for refund of deposit, have to plead and prove the damage suffered by them upon which the

Court will adjudicate as to what may be the reasonable compensation to which the defendants are entitled to and deduct the same and award a

decree in favour of the plaintiff only for the balance. Such is the onus cast on the vendors is an accepted proposition and is well established-- Desu

Rattamma Vs. Kakaraparthi Krishnamurthi and Another, , and M.P.V. Sundararama Iyer and Company Vs. V.V.C.R. Murugesa Mudaliar, . The

procedure which the defendants have to follow in such circumstances is that they are to allege and prove damage to themselves by either putting

forward a plea of set-off or of counterclaim against the plaintiff for damages for breach of contract-- vide Sri Lakshmi Talkies v. W. M. S.

Tampee (1961) 2 MLJ 349 .No doubt, an independent suit for the same purpose is also maintainable,

What has been done in the present case? The lower Court found as a fact that the plaintiff is in default. Regarding the suit claim, it non-suited the

plaintiff and observed that the defendants had the right to forfeit the sum of Rs. 225 paid as advance, as it is expressly provided for in Exhibit A-2.

It also added that the 2nd defendant is not bound to prove any special damage. It is not shown that the defendants at least pleaded that they

suffered damages. On the other hand, the plaintiff has pleaded that the defendants sold the property for a higher price. In these circumstances,

when there is a total absence of pleading regarding the character of the amount paid and when there is no iota of evidence that it was paid with the

intention of treating it as earnest money for due performance of the contract, and in any event when no attempt has been made by the defendants to

prove any damage sustained by them by reason of the plaintiff''s default, the conclusion of the learned District Munsif is erroneous and is the result

of wrongful exercise of jurisdiction. This has to be corrected by this Court u/s 25 of the Madras Provincial Small Cause Courts Act.

I am inclined in the instant case to remand the suit to the lower Court for fresh disposal in the light of my observations in this judgment. The

defendants-respondents are given leave to amend their written statement and plead that the amount is deposit and set out their right to claim

damages and to have it, on proof thereof, equitably set-off against the plaintiff''s claim in full or in part. The lower Court will assess the damage and

give such relief to either of the parties as circumstances require.

The Civil Revision Petition Is allowed; but the case is remanded to the lower Court for a fresh trial in the light of the observations in the

judgment. There will be no order as to costs.