MAULA BUX versus UNION OF INDIA

MAULABUX

UNION OF INDIA

August 19, 1969

[J.C. SHAH, ACTING C.J., V. RAMASWAMI AND A. N. GROVER, JJ.)

Indian Contract ct (9 of 1872), s. 14-Deposit of money a.r guarantee for due performance of contract for mpply of goods-Breach of contract-Forfeiture of deposit-Proo/ of Joss suffered when necessary-Scope of :'iection-"Whether or not actual damage or loss is proved to have been caused thereby'', meaning of-Earnest money, lvhat is. The appellant entered into contract with the respondent to supply some goods and deposited certain amount as security for due perfor-mance of the contract. It was stipulated that the amounts were to stand forfeited in case the appellant neglected to perform his part of the con-tract. When the appellant made defaults in the supply, the respondent rescinded the contract and forfeited the amount deposited. The appellaJt filed ·3 suit for recovery of the amount with interest. The trial court decreed the suit, holding that the respondent was justified in rescinding the contracts, but could not 'forreit the deposit, for, it had not suffered any loss in consequence of the default committed by the appellant. The High Court modified the decree and av.·arded the respondent major po~tion of the amount deposited as damages. ~Ine High Court took the vic\V that the forfeiture or sum deposited by \\'ay of security for due performance cil contract, \\'here the amount forreited wa.<: not unreasonable s. 74 of the Contract Act had no application and that the deposit~ so made coc1d be regarded as earnest money.

HELD : The High Court was in error in disallowing the appellant's claim.

(i) Earnest money is deposit made by purchaser to be a;ir~:..:d toward~ part pavment of the price when the contract is completed and 1il1 then as evidcnclnJ? an intention on the part of the purchaser to buy pr<>-perty or goods. Forfeiture of earnest money under contract for sate of property, if the amount is reasonable, docs not fall within s. 74 of the Contract Act. [ 933 ).

Kunwar Chiraniit Singh v. Har Swarup, A.l.R. 1926 P.C. I, relied on.

(ii) Where under the terms cif the contract the party in breach has undertaken to pay sum of money or to forfeit sum of money which he has already paid to the party complaining of breach of contract, the undertak~g is in the nalure of penalty and, s. 74 applied thereto. [933 E.FJ

Faith Chand v. Balkishan Dass, [1964] l S.C.R. 515, relied on.

Contrary view in Natesa Aiyar v. Appavu Padayachi, (1913) J.L.R. 38 Mad. 178, Singer Manufacturing Co. v. Raia Prosad, (1909) I.LR. 36 Cal. 960 and Manian Parter v. Madras Railway Comparry, (1906) I.LR. i 9 Mad. 188, disapproved.

The exprc5sion 11whcthcr or not actua1 damage or loss is proved to have been caused thereby" in 5. 74 is intended to cover different classes of contracts which come before the courts. Jn ca5e of breach of some con-tracts it may be imp<>sSihte for rhe court to assess compensation arising from breach, while 1n other cases, compensation can be calculated in

accordance with esfllblfshed rules. Where the court is unable to assess the compensation, tbs sum named by the parties, if it be regarded as genuine pre-estimate, may be taken into consideration as the measure of reasonable compens1.tion, but not if the sum named is in the nature of penalty. [934 A-C]

In the present caae it was possible for the, respondent-Government to lead evidence to prove the loss suffered but it did not attempt to do so. CIVIL APPELLATE JURISDICTION : Civil Appeal No. 851 of 1966.

Appeal by special leave from the judgment and order dated December 20, 1963 of !lie Allahabad High Court, Lucknow Bench in First Civil Appeal No. 28 of 1954.

Jagdish Swarup, Solicitor-General, Yogeshwar Prasad, C. M. Kohli and G. R. Chopra, for the appellant.

L. M. Singhvi and S. P. Nayar, for the respondent.

The Judgment of the Court was delivered by

Shah, Ag. C.J, Maula Bux-hereinafter called 'the plaintiff D. -entered into contract No. C/74 with the Government of India on February 20, 194 7, to supply potatoes at the Military Head-quarters, U. P. Ar~a, and deposited an amount of Rs. 10,000 as security for dUEi!! performance of the contract. He entered into another contraet with Government of India on March 4, 194 7 No. C/120 to supplv at the same place poultry, eggs and fish for one year and depoSlted an amount of Rs. 8,500/- for due per-formance of the contract. Claus~ 8 of the contract ran as follows :

"The officer sanctioning the contract may rescind

his contract by notice to me/us in writing :-

(iii) (iv) If I/we;.decline, neglect or delay to comply with any demand or requisition or in any other way fail tc.r;lij\erform or observe anv condition of the contract.

(vi) ... In case of such rescission, my/our security deposit (or such portion thfreof as the officer sanctioning the con-tract shall consider fit or adequate) shall stand forfeit-ed and be absolutely at the disposal of Government, without prejudii::e to any other remedy or action that the Goverrunent m!fy have to take . . . .

In the case of such rescission, the Government ;hall be entitled to recover from me/us on demand any extra expense the Government may be put to in obtain-ing supplies/services hereby agreed to be supplied, from elsewhere in any manner mentioned in clause 7 (ii) hereof, for the remainder of the period for which this contract was entereu into, without prejudice to any other remedy the Government may have." The plaintiff having made persistent default in making "regular and full supplies" of the commodities agreed to be supplied, the Gcwcrnm~nt of India rescinded the contracts-the first on Nov-ember 23, 194 7, and the ;econd on December 2, 194 7, and forfeited the amounts deposited by the plaintiff.

The plaintiff commenced an action against the Union of lndia in the Court of the Civil Judge, Lucknow, for decree for Rs. 20,000 ·. being the amounts deposited with the Government of India for due performance of the contracts and interest there-on at the rate .of 6 per cent. per annum. The Trial Court de-crec<i the suit. The Court held that the Government of India was ju;tilicd in rescindinl! the contracts, but they could not for-feit the amounts of deposit, for they had not suffered any loss in consequence of the default committed by the plaintiff. The High Court of Aliahabad in appeal modified the decree, and awardeJ Rs. 416.25 only with interest at the rate of 3 per cent from the date of th~ suit. The plaintiff has appealed to this Court with special lea 1c.The ') cial Court found in decrecin~ the plaintiff's suit that there was no evidence at all to prove that loss, if any, was suffered by the Government of India in consequence of the plaintiff's de-fault. and on that account amounts deposited as security were not liable to be forfeited. Jn the view of the High Court, to for-feiture of sum deposited by way of security for due perform-ance of contract. wher.~ the amount forfeited is not unreason-able, s. 74 of the Contract Act has no application. The Court observed that the decision of this Court in Fateh Chand v. Balk isha11 Dass ( [1 ]) did not purport to overrule the previous "trend of authorities" to the effect that earnest money deposited by way of security for the due performance of contract docs not constitute penalty contemplated under s. 74 of the Indian C0n-tract Act. that even if it be held that the security deposited in the case was stipulation hy way of penalty. the Government was entitled to receive from the plaintiff reasonable compensation not exceeding that amount. whether or not actual dcmage or loss was proved to have been caused. and that even in the absence of evi-dence to prove the actual damage or loss caused to the Gcwern-11%41 I S.CR. lll.

ment "there were circumstances in the case with indicated that the amount of Rs. 10,000 in the case of potato contract and Rs. 8,500/- in the case of poultry contract may be taken as not exceeding the reasonable compensation for the breach of con-tract by the plaintiff." The High Court further observed that the contract was for supply of large quantities of potatoes, ll poultry and fish, which would not ordinarily be available in the market, and "had to be procured in case of breach of contract everyday with great inconvenience," and in the circumstances the Court "could take judicial notice of the fact that 194 7-48 was the period when the prices were rising and it would not have been easy to procure the supplies at the rates contracted for". The High Court concluded :

" ...... taking into consideration the amount of in-convenience and the difficulties and the rising rate of prices, it would not be unfair if in case of such IJreach for the supply of such huge amounts of potatoes and poultry, we consider an amount of Rs. 18,500/- by way of damages as being not unreasonable."

Under the terms of the agreements the amounts deposited by the plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The High Court observed that the depo-sits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in "The Dic-E tionary of English Law" at p. 68'.l : "Giving an earnest or earnest-money is 'a mode of signifying assent to contract of sale or the like, by giving to the vendor nominal sum (e.g. shilling) as token that the parties are in earnest or have made up their minds." As observed by the Judicial Committee in Kun war Chiranjit Singh v. Har Swarup (') :

"Earnest money is part of the purchase price when the transaction goes forward : it is forfeited when the transaction falls throug.1, by reason of the fault or failure of the vendee."

In the present case the deposit was made not of sum of monev by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be regarded as earnest money.

Section 7 4 of the Contract Act provides : "When contract has been broken, if sum is named in the contract as the amount to be paid in case

(!) A.l.R. 1926 P.C. I .

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 Joss 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.

as the case may be, the penalty stipulated for. " There is authority, no doubt coloured by the view which was taken in English cases, that s. 74 of the Contract Act has no application to cases of deposit for due perfonnance of contract which is stipulated to be forfeited for breach : Natesa Aiyar v. Appavu Padayachi( [1]); Singer Man11/ac111ri111: Company v. Raja Prosad('); Manian Pall er v. The Madra.1· Railway Company('). But this view is no longer good Jaw in view of the judgment of this Court in Fateh Chand's case'.'). This Court observed at p. 526 :

"Section 7 4 of the Indian Contract Act deals with the measure of damag.~s in two classes of cases (i) where the contrnct names sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty. . . . The measure of damages in the case of breach of stipulation by way of penalty is by s. 74 reasonabl.e compensation not exceed-ing the penalty stipulated for."

The Court also observed :

"It was urged that the section deals in tenns with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party ag-F grieved. There is however no warrant for the assump-tion made by some of the High Courts in India, that s. 74 applies only to cases where the aggrieved party is seeking to receive som~ amount on breach or contract and not to cases whereupon breach of contract an amount received under the contract is sought to be for-G feited. In our judgment the expression "the contract contains any other stipulation by way of penalty" com-prehensively applies to every covenant involving penalty whether it is for payment on breach of contract of money or delivery of property in future, or for for-feiture of right to money or other property already delivered. Duty not to enforce the penalty clause but (I) (1913) I.LR. JR Mad. 178, (2) {!909) l.L.R. 36 Cal. 960. CJ) [1906J 1.L.R. 19 Mad. 188. (4) [19641 1 S.C.R. SIS.

CJ) [1906J 1.L.R. 19 Mad. 188.

cinly to awa«J: reasonable compensation is statutorily imposed upon: courts by s. 74. In all cases,_ therefore, where there is stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it con-siders reasonable but not exceeding the amount speci-fied· in the c,ontract as liable to forfeiture.", and that,

"There is no ground for holding that the expression "contract contains any other stipulation by way of penalty" is .limited to cases of stipulation in the nature of an agteement to pay money or deliver property on breach and-Ooes not comprehend covenants under which amounts paid or property delivered l1nder the contract, which by 'the terms of the contract expressly or by clear implication are liable to be forfeited."

Forfeiture of earnest money under contract for sale of pro-perty-movable or,immovable-if the 'amount is reasonable, does not fall within s. 74. That has been decided in several cases : Kunwar Chiranjit Singh v. Har Swarup('); Roshan Lal v. The Delhi Cloth and General Mills Company Ltd., Delhi([2]); Muhammad Habibtillah v. Muhammad Shafi('); Bishan Chand v. Radha Kishan D(ZS(4); These cases are easily explained, for forfeiture of reasonable amount paid as earnest money does not amount to imposing penalty. But if forfeiture is of the nature of penalty, s. 7 4 applies. Where under the terms of the contract the patty in breach has undertaken to pay sum of money or to forfeit sum of money which he has already paid to the party complaining of breach of contract, the undertaking is cf the nature of penalty.

Counsel for, the Union, however, urged that in the present case Rs. 10,000/- in respect of the potato contract and Rs. 8,500 in respect of the poultry contract were genuine pre-estimates of damages which_ the Union was likely to suffer as result of breach of contract, and th_e plaintiff was not entitled to any relief against forfeiture. · Reliance in support of this contention was placed upon the expression (used in s. 74 of the Contract Act), "the party c~mplaining of the breach is entitled, whether or not actual damag ·or loss is proved to have been caused thereby, to receive from t party who has broken the contract reasonable compensation". · It ls true that in every case of breach of contract the person aggrievell by the breach is not required to prove actual loss or damage suffered by him before he can claim decree, and the Court is competent to award reasonable compensation in

(I) A.I.R. 1926 P.C. I.

(2) I.LR. 33 All. 166.

(4) l.D. 19 All. 490.

case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the ex-pression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach <)f some contr~ct; it may be impossible for the Court to assess com· pensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to aS5ess the compensation, the sum named by the parties if it be regarded as genuine pre-estimate may be taken into consideration as the measure of reasonable com-pensation, but not if the sum named is in the nature of penalty. Where loss in terms of money can be determined, the party claim· ing compensation must prove the loss suffered by him.In the present case, it was possible for the Government of India to lead evidence to prove the rates at which potatoes, poultry, eggs and fish were purchased by them when the plaintiff failed to dehver "regularly and fully" the quantities stipulated under the terms of the contracts and after the contracts were terminated. They could have proved the rates at which they had to be purchased and also the other incidental charges incur-red by them in procuring the goods contracted for. But no such attempt was made. Counsel for the Union, however, contended that in the Trial Court the true po<ition in law was not appreciated am.: the parties proceeded to trial on the question whc1'hcr the Government was entitled in the circumstances of the case to forfeit under cl. 8 of the terms of the contracts the deposits made for securing due performance of the contracts. Since there was no pleading and no issue on the question of reasonable compensation, an opportu· nity should be given to the parties to lead evidence on this point. But with the suit out of which this appeal arises was tried an-other suit filed by the plaintiff Maula Bux against the Union for decree for Rs. 53.000 odd being the price of goods sJpplied under the terms of another contract with the Government of India. Jn that suit the Union claimed that it had set off the amount due to the plaintiff. amounts which the plaintiff was liable to pav as compensation to the Union for loss suffered hecause of the plaintiff's failure to carry out the terms of the contracts /74 and C/ 120. The Trial Court held in that case that the Union failed ta nrove that anv loss was suffered by it in consequence of the default by Maula Rux to supply potatoes. poultry, e~gs and fish as stipulated hv him. Against the judgment of that Court Appeal No. 2001 of 1966 is filed in this Court and is decided today. The Hi~h Court of Allahabad having confirmed the decree passed by the Trial Court, no useful purpose will be served by directing fresh enquiry into the question whether the Union

of India is entitled to recover from the plaintiff any reasonable compensation for breach of contracts and whether that compeil.-sation is equal to or exceeds the amounts deposited. Evidence on that question has already been led and findings have been re-. corded. In dealing with the Appeal No. 2001 of 1966 we have held that the Union has failed to establish by evidence that any damage or Joss was suffered by them which arose out of the de-fault committed by the plaintiff. We decline therefore to afford another opportunity for leading the evidence as to the loss suffer-ed by the Union on account of the failure on the part of the plain-tiff to carry out the contracts.

On the view taken by us it must be held that the High Court was in error in disallowing the plaintiff's case.

The High Court has held that the plaintiff is not entitled to any interest prior to the date of the suit. No argument has bt:en advanced before us cha!lenging that view. Since interest was not recoverable under any contract or usage or under the provisions of the Interest Act, 1838 the High Court allowed interest at the rate of 3% per annum on Rs. 416.25 from the date of the suit, the rate of interest allowed on the claim decreed also should not exceed 3 per cent per annum.

We set aside the decree passed by the High Court and substi-tute the following decree :

"The Union of India do pay to the plaintiff Rs. 18,500/- with interest at the rate of 3% per annum from the date of the suit till payment."

The plaintiff was guilty of breach of the contracts. Considerable inconvenience was caused to the Military authorities because of the failure on the part of the plaintiff to supply the' food-stuff contracted to be supplied. Even though there is no evidence of the rates at which the goods were purchased, we are of the view, having regard to the circumstances of the case, that the fairest order is that each party do bear its own costs throughout.