1969 (10) TMI 68 - SC - Indian Laws

Whether the sum of ₹ 2,50,000 was paid by the plaintiffs as and by way of part payment or as earnest deposit? Whether the defendants were entitled to forfeit the said amount? Held that - In the case before us, the contract read with the Terms of Business of the company, clearly refers to the earnest money being paid and to the fact of ₹ 2,50,000 having been paid as earnest. Therefore, there is no ambiguity regarding the nature of the above payment and the right of the respondents to forfeit the same, under the terms of the contract, when the appellants admittedly had committed breach of the contract, cannot be assailed. The first contention for the appellants therefore fails. The question of the quantum of earnest deposit which was forfeited being unreasonable or the forfeiture being by way of penalty, were never raised by the appellants. The Attorney General also pointed out that as noted by the High Court the appellants led no evidence at all and, after abandoning the various pleas taken in the plaint, the only question pressed before the High Court was that the deposit was -not by way of earnest and hence the amount could not be forfeited. If the. appellants had proceeded on that basis, then the contract would have been voidable at their instance under s.19 of the Contract Act. But they have abandoned that plea and have admitted that the breach of contract was committed by them. Hence s. 64 cannot be invoked by the appellants. In this view, the second contention also fails. Appeal dismissed.

Summary

Issues Involved:
1. Whether the sum of Rs. 2,50,000 was paid by the plaintiffs as part payment or as earnest deposit.
2. Whether the defendants were entitled to forfeit the said amount.

Issue-wise Detailed Analysis:

1. Whether the sum of Rs. 2,50,000 was paid by the plaintiffs as part payment or as earnest deposit:

The appellants argued that the sum of Rs. 2,50,000 paid was part of the purchase price and not earnest money. They contended that the letter dated November 18, 1946, which acknowledged the payment of Rs. 2,50,000 against the total price of Rs. 10,00,000, did not indicate that this amount was earnest money. However, the letter also stated that the company's terms of business would apply to the contract, and these terms explicitly mentioned that 25% of the total value was to be deposited as earnest money. The court reviewed the relevant clauses in the company's terms of business, which clarified that the amount deposited was to remain as earnest money and would be adjusted in the final bills. The court concluded that the sum of Rs. 2,50,000 was indeed paid as earnest money, not as part payment.

2. Whether the defendants were entitled to forfeit the said amount:

The appellants contended that the forfeiture of the earnest money was not justified and that the defendants were only entitled to reasonable compensation under Section 74 of the Contract Act. They argued that the forfeiture clause in the contract should be treated as a stipulation by way of penalty, and the amount forfeited should be considered unreasonable. The respondents maintained that the earnest money was forfeited according to the terms of the contract, which allowed for such forfeiture in case of default by the buyer. The court referred to established legal principles regarding earnest money, which is forfeited if the transaction falls through due to the buyer's default. The court noted that the appellants had conceded their breach of contract and that the terms of the contract entitled the respondents to forfeit the earnest money. The court found no basis to apply Section 74 of the Contract Act, as the forfeiture of earnest money was not considered a penalty. Consequently, the court upheld the defendants' right to forfeit the sum of Rs. 2,50,000.

Conclusion:

The court dismissed the appeal, affirming that the sum of Rs. 2,50,000 was paid as earnest money and that the defendants were entitled to forfeit this amount due to the appellants' breach of contract. The court emphasized that the forfeiture of earnest money, as stipulated in the contract, was lawful and did not constitute a penalty under Section 74 of the Contract Act.