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Judgment
Natesan, J.—The State of Madras has preferred this second appeal from the judgment of the Additional Judge, City Civil Court, Madras on
appeal from the judgment of the IV Assistant City Civil Judge Madras, the decision on appeal going against the State. The suit was filed by the
plaintiff, Rohtas Industries Ltd, against the State for the recovery of a sum of Rs. 1,514 with interest and costs. The plaintiff, a limited company
engaged in the manufacture of paper, cement etc, at Dalmianagar in Bihar State, claimed under this action, return of a sum of Rs. 1000 deposited
as security amount and a sum of Rs. 300 deposited along with tender which the plaintiff made in terms of the provisions as to the submission of the
tender. The tender was for the purchase and removal of waste paper accumulations in Government offices and press cutting accumulations in
Government Press, Madras and its branches for the year 1955-56. On 10th June 1955, the Controller of Stationery and Printing, Madras called
for the tenders. Clause 2 of the tender provided that the tenders must be accompanied by a deposit of Rs. 300 which should be paid in the
Reserve Bank of India and the relative chalan should be enclosed with the tender. Clause 4, an important clause, in the tender notice provided that
if a tender withdrew his tender before settlement, his tender deposit would be for feinted to Government. Clause 5, equally important, said that in
the case of unsuccessful tenderers, the tender deposit would be returned to them. Clause 6 which has been the subject matter of construction by
the courts below may better be set out fully. It runs thus:--
The successful tenderer will be required to execute an agreement for the faithful performance of the contract within seven days from the date on
which the acceptance of his tender is intimated to him and deposit a sum of Rs. 1,000 in the shape of post office savings bank pass book as
security deposit. The amount should be pledged to the Controller of Stationery and Printing Madras for the faithful performance of the contract. A
sum of Rs. 1.80 in cash towards stamp duty for the agreement to be executed will have to be paid by the contractor.
Under Clause 8, the contractor will have to make his own arrangements to collect the waste paper accumulations in various Government offices
in Madras State both in the city and mofussil within 15 days from the date of receipt of intimation from the officers concerned. The cost of waste
paper was payable to the officers from whose office the waste paper or the press cuttings were collected at the time of taking delivery. There is no
dispute that the plaintiff became the successful tenderer and his tender was accepted by the Government. Ex. B-6 is the order of the Government
wherein it is stated that the Controller of Stationery and Printing who had called for tenders recommended to the Government, for acceptance, the
tender of the plaintiff for the purchase and clearance of waste paper, the rates quoted are shown. Clause 3 of this order dated 18th October
provides inter alia:-
The company should pay in advance the entire cost of waste paper and press cuttings to the head of the concerned office before actual removal,
together with the sales tax and also pay in addition to the Controller of Stationery and Printing, Madras, a security deposit of Rs. 1000 in respect
of all Government offices.
The agreement, it is stated, was to be in force from 1-4-1955 to 31-3-1956. It is also an admitted fact that on the acceptance of his tender in
terms of clause 6, the plaintiff provided the deposit of Rs. 1000 and a sum of Rs. 1.80 in cash for stamp duty on the agreement to be executed.
But the agreement was not executed despite repeated requests by the plaintiff. It is seem from the judgments of the courts below, that on several
occasions, the plaintiff called upon the State, of course through the Controller of Stationery and Printing, to send, the agreement referred to in
clause 6 of Ex. A. 5 and that reply was always to the effect that the matter was under consideration. Under Ex. A. 50 dated 23-12-1955, the
plaintiff wrote to the Controller of Stationery and Printing referring to the delay in sending a copy of the agreement and stating that the plaintiff did
not know where it stood and what its obligations were under the contract. In Ex. A. 52 dated 21-12-1955, it is stated by the Controller that the
draft agreement had been submitted to the Government for approval and that it would be sent in due; course, But it is common ground that no
agreement eventually came to be executed. It is seen that the plaintiff had also been repeatedly requesting the government to intimate the various
officers where from he could get these accumulations. Ultimately, nothing transpiring by his correspondence, on 6-1-1956 the plaintiff withdrew his
tender and refused to carry out any more work. The plaintiff had removed certain quantity of waste paper, but there is no dispute that these were
paid for. It is seen that it was after 6-1-1956, the Government authorities began to intimate the plaintiff of the accumulations of stocks.
The courts below took the view that there was a concluded contract between the parties and that the plaintiff had no justifications for rescinding
the contract on 6-1-1956. Two grounds were relied upon by the plaintiff for rescinding the contract: (1) failure on the part of the Controller of
Stationery and Printing to give the plaintiff a list of the offices from which it was required to clear the waste paper and (2) failure to execute the
agreement provided for in Ex, A. 5 in spite of repeated requests. So far as the first ground is concerned, I am in entire agreement with the courts
below that it is not a substantial ground for withdrawing from the contract. The second ground requires careful consideration.
The contention of the plaintiff has been that there was no valid contrast between the parties and that, in those circumstances, he entitled to a
refund of the two sums of Rs. 300 and Rs. 1000. The State conceded to the plaintiff''s having refund of Rs. 300, the tender deposit. As regards
the sum of Rs. 1000, the State''s contention was that it was entitled to forfeit it as there was breach of contract on the part of the plaintiff The trial
court accepted this defence of the State and granted a decree in favour of the plaintiff for the sum of Rs 300, in respect of which there was
concession by the state. On appeal, the Additional Judge has decreed the claim of the plaintiff for this sum of Rs. 1000, also. He would also
uphold the validity of the contract between the plaintiff and the defendant. But in the learned judge''s view, the defendant would be entitled to
appropriate the sum of Rs. 1000 only to the extent, the defendant had been dandified by the branch of contract by the plaintiff. He found that there
was no proof of any damages suffered by the defendant. He, therefore, held that no deduction could be made from the security deposit or any
adjustment made for damages and that the plaintiff was entitled to return of the entire amount of Rs. 1000.
In this second appeal before me, it is contended for the State, that the learned Additional Judge erred in his view that an entirety of the amount
of Rs. 1000, could not be forfeited, having held that the breach of contract was not on the part of the defendant as alleged by the plaintiff, but that
it was the plaintiff who broke the contract. It is not the case of the State before me that they have sustained damages. This has been found against.
With reference to the present contentions of the State there are two aspects of the tender notice, Ex. A. 5, which have to be considered. First in
regard to the sum of Rs. 300, the deposit that had to accompany any tender, there is specific provision for the forfeiture of the deposit in the
Government if the tenderer withdrew the tender before settlement. There is also the provision that in the cast of an unsuccessful tenderer, the
tender deposit would be returned. Nothing is said in this agreement as to what should happen to this tender deposit if the contract proceeded
forward and the tender was accepted. All that we find is provision for a further deposit of a sum of Rs. 1000. This need not necessarily be by way
of cash. So far as the tender deposit is concerned, the deposit is to be made in the Reserve Bank of India and she relative chalan sent with the
tender. As regards the deposit of the sum of Rs. 1000 for the faithful performance of the contract, if might be in the shape of post office savings
bank pass book; the amount is to be pledged to the Controller of Stationery and Printing, Madras for the faithful performance of the contract.
There is absolutely no provision for forfeiture of the amount and it is difficult to imply such a provision as the tender notice refers to the amount
being pledged with the Controller. The legal incidents of a pledge are well known. Admittedly even a savings bank pass book may be pledged, for
the due performance of the promise. In the case of a pledge, on default by the promisor, the pledgee''s right to sell the pledged thing for any
amount that may be due. The surplus would go to the promisor. The pledged object cannot be forfeited by the pledgee. The pledgee is given only
a power of sale. In the present case, actual cash appears to have been deposited, but that cannot make any difference in principle for inferring the
true character and purpose of the deposit. Only there need be no sale on default, to convert the pledged article into cash by sate, for appropriation
towards money due on account of the default. The intention is clear; the amount is given its security for the faithful performance of the contract and
would be available to satisfy any damages that may be suffered by the State, in default of faithful performance of the contract. On my reading of
this agreement, it would not open to the State to forfeit the amount even if the State has not suffered any damages. Though the subsequent
correspondence may not be of any use in interpreting the agreement, the learned Additional Judge refers to a letter, Ex. A-93, written by the
Controller of Stationery and Printing to the plaintiff wherein it is stated that the Government had sustained a loss of Rs. 750 on account of the non-
fulfilment of the contract by the plaintiff and that if the plaintiff failed to remit the sum of Rs. 750, within a week, the tender deposit would be
forfeited.
Learned counsel for the State would contend that a right to forfeit the amount on breach of the contract, could be implead. As authority for the
position, he refers me to a decision in Mohammad Dalil Khan Vs. State of Hyderabad now Andhra Pradesh, . In that case, the plaintiff, a
contractor entered into contract with the Government for taking some construction work and deposited certain amount of earnest money and
certain amounts as further security returnable upon the completion of the work. The contract not having been completed within time, the
Government cancelled the contract and forfeited the deposit. On the legality of the forfeiture being questioned, it was observed, at page 220.
As discussed above, the earnest money and the further security deposit being a guarantee for the due performance of the contract, if the contract
goes off due to the fault of the contractor, the Government in our opinion, would be entitled to forfeit the amount even in the absence of an express
agreement. In instant case, the contract has not gone through and it was cancelled.
Learned counsel argues on the basis of his judgment that in the circumstances of this case it could be inferred that the deposit could be forfeited.
To see whether there is a right to forfeit, it is said, the nature of the deposit has to be examined. Learned counsel contends that it is a deposit here
for faithful performance of the contract. Mr. M.S. Venkatarama Aiyer, learned counsel appearing for the plaintiff would distinguish this decision
pointing out that there was provision for deposit of earnest money in that case and a further security was also treated as earnest. Learned counsel
contends that in fact in the cited case the entire amount was regarded as earnest, the incidents of which money are well-established. My attention is
drawn to the following observation of the learned Judge in that case:
From the above discussion, it follows that the deposit is a guarantee for the performance of the contract, and until the contract is performed the
earnest money remains a security or earnest for the performance of the contract. The moment he contract is performed it becomes a part of the
price of the purchase money. But it is liable to be forfeited if the contract does not go through due to the fault of the contractor.
Here there is be question of any purchase price. The plaintiff nag to pay every time he takes the waste paper from the office concerned. It is
merely a deposit made for the faithful performance of the contract. It is referred to as being pledged, and the necessary inference cannot be
brushed aside. It is not contended that it is not returnable when the contract has been faithfully performed. The submission in the circumstances, for
the respondents, that the only possible inference, is that this amount is retained by the State as against any damages that it may suffer by reason of
any default on the part of the plaintiff appears to me to be sound, in support of it is argument, my attention was drawn to a passage in Indian
Contract Act by Pollock and Mulla, 8th Edn. at page 499. The earned Editors remark--
Moneys are often deposited as security for the performance of a contract, without such moneys being earnest money. In such a case there may be
a forfeiture clause or not. Where there is no forfeiture clause, the party committing a breach of the contract is liable only to pay damages and is
entitle to the return of the remainder of the moneys deposited.
Two cases are cited under this proposition: Mayson v. Clonet 1924 A.C. 980 and Public Works Commissioner v. Hill 1906 A.C. 868. It is
admitted by counsel that the proposition as such in so many words is not laid down in the judgment. It may be that the learned authors, evidently
authors inferred that this must be the true position having regard to the discussion of general principles in those two cases.
Mr. M.S. Venkatarama Aiyar, learned counsel for the plaintiff, also referred to the decision in R.M.K. Venkataperumal Naidu Vs. The
Thiruppuvanam Panchayat Board, Thiruppuvanam, . In that case, the plaintiff agreed to construct a bus stand for the defendant and subsequently
deposited a sum of money with defendant for the due performance of that contract within the time allowed. There was nothing to show that the
amount of the deposit would be forfeited in case of the plaintiff''s failure to perform the contract. The plaintiff brought a suit for return of the deposit
even though he failed to any out the contract. The learned Judge, Govinda Menon J. after discussing the case law relating to earnest money and
Rattamma v. Krishnamurti observed:--
From this decision it is clear that there should be an agreement of forfeiture in default, and, such a thing cannot be implied from the fact of mere
failure to perform the contract. It is clear from the correspondence that there is no clause of forfeiture in case of failure to perform the contract.
Certainly if so advised, the defendant is at liberty to file a suit for damages against the plaintiff for the nonperformance of the contract. But the fact
that they have a remedy of filing a suit for specific performance or damages would not entitle them to keep in hand the money paid as advance
without a clause of forfeiture.
This case comes nearest to the ease now on hand. That was also a case where a deposit had been made for due performance of the contract
by a contractor. It was not a case of sale where earnest money was paid that when the contract went forward it became part of the price. The
learned Judge says that there should be an agreement of forfeiture in default, and such an agreement could not be merely implied. Having regard to
all the circumstances of the case on hand I should prefer to follow the principle of this judgment in preference to the judgment in Mohammad Dalil
Khan Vs. State of Hyderabad now Andhra Pradesh,
Mr. M.S. Venkatarama Aiyar contends also that in fact there is no valid contract between the plaintiff and the State Learned counsel refers to
Art. 299 of the constitution of India and points out that admittedly to formal contract has been entered into between the parties. Then tender notice
contemplates an agreement to be entered info between the parties. The plaintiff had deposited a sum of Rs. 1.80 to wards stamp duty for
agreement. A successful tenderer is required to execute an agreement for the faithful performance of the contract and it is against this agreement
that the deposit of Rs. 1000 in the shape of post office saving bank pass book has to be made. The plaintiff had repeatedly asked the Controller of
Stationery and Printing to bring about the agreement. On this part of the argument, Mr. Venkatarama Aiyar drew my attention to a statement of the
law in Indian Contract Act Pollock and Mullah, 8th Edn. page 54. It is therein stated :
Although there can be no contract without a complete acceptance of the proposal, it is not universally true that complete acceptance of the
proposal makes a contract; for one may agree to all the terms of a proposal, and yet decline to be bound until a formal agreement is signed, or
some other act is done. This is really a case of acceptance with an added consideration, but of such special importance as to call for separate
mention.
Learned Counsel contends that here was a contract to be entered into with the State and of the contrast does comply with the requirements of
Art. 229 of the Constitution, it might net be possible for the plaintiff, if the occasion required, to enforce it. Learned Counsel submits that therefore
it was quite an essential pre-requisite in the instant case for an enforceable contract to come into existence that there must be an agreement as
contemplated in the tender notice. It is a condition precedent for a valid contract to come into existence that it must comply with the requirement of
Art. 299 of the Constitution. My attention is drawn by learned Counsel to some of the cases in this regard. In Seth Bikhraj Jaipuria Vs. Union of
India (UOI), it was observed at p. 119 :
It is in the interest of the public that the question whether a binding contract has been made between the State and a private individual should not
be left open to dispute and litigation ; and that is why the legislature appears to have made a provision that the contract must be in writing and must
on its face show that it is executed for and on behalf of the head of the State and in the manner prescribed.... It is true that in some cases, hardship
may result in a person not conversant with the law who enters into a contract in a form other than the one prescribed by law it also happens that
the Government contracts are sometimes made in disregard of the forms prescribed; but that would not in our judgment be a ground for holding
that departure from a prevision which is mandatory and at the same time salutary to be permitted.
Learned Counsel appearing for the State submits that if the requirements of Art. 229of the Constitution could be found satisfied in the
correspondence relating to the contract, then that would be sufficient to satisfy the requirement of the Article. True, that is so. A Division Bench of
this Court in S. Rajam, Proprietor, Murray and Co. Vs. The Indian Union, states the position thus:
It is, therefore, well settled now that while the requirements of Art. 299whose terms are identical with those of S.175(3) (of the Government of
India Act), are mandatory and should be complied with in order that an agreement entered into by a private party with the Central or State
Government in the exercise of their executive power be enforceable, it is not necessary that there should be drawn up a formal agreement as such,
but there could be a valid contract entered into by correspondence provided the two requirements, pointed out by the Supreme Court la
Karmabshi Jethamabai v. State of Bombay (1964) 2 S.C. 984 are complied with.
In Karmabshi Jethamabai v. State of Bombay (1964) 2 S.C.C 984 Subba Rao, J. as he then was, of the Supreme Court observed :
This section (S. 175 (3) of the Government of India Act) laid down two conditions for the validity of such a contract, namely, (i) it should be
expressed to be made by the Governor of the Province and (ii) it should be executed on behalf the Governor by such persons and in such manner
as he might direct or authorise.
It was found in that ease that the contract by correspondence did not satisfy the requirements. Learned Counsel for the State is not able to
point out anything in the correspondence in this case to satisfy the two requirements of Art. 299of the Constitution. This point for the plaintiff, it
cannot be said, is taken for the first time in this Court. It was manifestly and in specific terms taken at any rate before the learned Additional Judge.
The learned Judge disposed of the argument with a reasoning which the learned Counsel appearing for the State finds it difficult to even adopt. The
reasoning is so palpably untenable that it is better I set it out in his own language:
I must refer also to an argument advanced by the learned Counsel for the plaintiff that there has been no valid contract between the parties in as
much as the contract has not been entered into according to the provisions of the Constitution. I do net think that this argument can have any
substance. If the plaintiff''s agreement was with the Controller or Stationery and Printing, the plaintiff had no cause of action against the defendant
which is the State Government. Beth parties therefore understood, rightly in my opinion, that it was the defendant who was the contracting party
and that the Controller of Stationary was acting on behalf of the defendant. If it were otherwise, the plaintiff will have to be non-suited.
It is not necessary for me to comment on this reasoning of the learned Additional Judge. It wholly misses the point; an answer is avoided.
Clearly there is no enforceable contract in this case. If the contract goes, then on that ground, the plaintiff would be entitled to the return of the sum
of Rs. 1000. It follows, therefore, there is no case for varying the decree of the Additional Judge, City Civil Court. In the result, the second appeal
falls and is dismissed with costs. No leave.