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PATNA HIGH COURT
K.Ahmad, J.
Jagdishpur Metal Industries
Versus
Vijoy Oil Industries Ltd.
Appeal from Original Decree No. 283 of 1950 ;
Decided On : JULY 01, 1958
EARNEST MONEY - REFUND - BREACH OF CONTRACT - DEFAULT OF VENDEE - FORFEITURE - PART PAYMENT - DISTINCTION - INDIAN CONTRACT ACT, SECTIONS 64, 65, 73, 74.
Fact of the Case:
The plaintiff, a limited company, entered into an agreement with the defendants to purchase their business for a sum of Rs. 1,00,000 in cash and Rs. 25,000 worth of shares. The plaintiff paid a sum of Rs. 5,000 on the same day and got exclusive possession of the concern. Later, the plaintiff made another part payment of Rs. 3,000. The contract fell through due to the default of the plaintiff. The plaintiff claimed a refund of the entire amount of Rs. 10,000, including Rs. 2,000 incurred as liabilities while in possession of the concern. The trial court decreed the claim as to the balance of Rs. 8,000, but held that the plaintiff was not entitled to a refund of the Rs. 2,000.
Finding of the Court:
The High Court held that the plaintiff was not entitled to a refund of the Rs. 5,000 paid as earnest money, as it was forfeited due to the plaintiff's default. However, the court held that the plaintiff was entitled to a refund of the Rs. 3,000 paid as part payment of the purchase price.
Issues: 1. Whether the plaintiff is entitled to a refund of the earnest money paid to the defendants? 2. Whether the plaintiff is entitled to a refund of the part payment made to the defendants?
Ratio Decidendi: 1. The court held that the earnest money was forfeited due to the plaintiff's default. The court relied on the principle that earnest money is a deposit made as a guarantee for the fulfilment of a contract and that it is liable to forfeiture on breach. The court further held that the forfeiture of earnest money is not dependent on whether the agreement provides for it or not. 2. The court held that the part payment was not forfeited, as it was not paid as a guarantee for the fulfilment of the contract but merely as a part payment of the purchase price. The court relied on the principle that a sum received by the vendor for the use of the plaintiff is refundable if the contract fails.
Final Decision: The High Court modified the trial court's judgment and decree. The plaintiff's suit was decreed to the extent of Rs. 3,000 with proportionate costs throughout, while the rest of the claim advanced by the plaintiff with regard to Rs. 5,000 was dismissed with proportionate costs throughout.
K.Ahmad, J.
1. The only important consideration that is raised in this case is: How far an earnest money or money paid in advance in part satisfaction or the total consideration of a contract of sale of immoveable property is liable in law to be refunded by the vendor to the vendee in case that contract falls through due to default on the part of the vendee?
2. The subject matter of sale in the present case was the sixteen anna interest of the defendants in their business carried at Ghaghidih in the name and style of Jagdishpur Metal Industries including all its immoveable assets and moveables standing thereon. It is not denied that on the 17th July, 1949, the plaintiff, a limited company, Vijoy Oil Industries Limited, which is respondent in this Court, entered into an agreement (Exhibit I) with the defendants whereunder it agreed to purchase the entire aforesaid concern or the defendants for a sum of Rs. 1,00,000.00 in cash and Rs. 25,000.00 worth of shares in any company.
Further, it is also agreed between the parties that on the same day when the aforesaid agreement was executed, the plaintiff paid a sum of Rs. 5,000/-to the defendants and on the day following, that is, on the 18th of July, 1949, the plaintiff got exclusive possession over the entire concern. Then it is also not denied that thereafter on the 27th of July, 1949, the plaintiff made another part payment of Rs. 3,000.00 towards the total consideration. So far therefore there is no controversy on facts, but the claim of the plaintiff is, which is strongly disputed, that apart from these admitted payments it had to incur some other liabilities ad well while it was in possession of the concern. That, according to it, covered a total sum of Rs. 2,000.00 which was spread over the four following items: (i) Rs. 535/5/- as payment made to the workmen;
(ii) Rs. 425/- as cost of materials supplied to the concern;
(iii) Rs. 500.00 as payment made towards pay and costs of the Darwans; and
(iv) Rs. 539/11/- as damages.
Thus, according to the plaintiff, it had been in all put to a total loss of Rs. 10,000/-.
Unfortunately, however, for reasons which I shall state presently, the contract fell through and On the 24th of August, 1949, the plaintiff gave a notice to the defendants, the relevant portion of which is as follows:-
- "My clients have been informed that you are removing materials from the factory without the knowledge and consent of my clients; although you sold the factory and the materials to my clients and took advance for the same. On account of your not registering the sale deed and delivering possession of the property my clients are being put to serious loss and inconvenience. My clients have further been informed that you are negotiating with other parties for the sale of the property that you contracted to sell to my clients. I, therefore, on behalf of my said clients give you notice that if you fail to register the sale deed immediately on receipt of this notice, you are to return the money advanced to you by my clients with all loss and damages caused to my clients for your non-performance of the contract, within three days from the date, as otherwise my instructions are to take legal steps both civil and criminal in the matter and that without any further reference."
Thereafter on the 1st of September, 1949, the present suit was instituted and on the day following i.e. on 2nd September, 1949 it gave up its possession over the concern.
3 Its allegation is that the contract was broken by the defendants and it was they who in spite of repeated demands made by it failed to execute the sale deed as agreed upon between the parties. Therefore, It is claimed that the plaintiff is entitled to the refund of the entire aforesaid amount of Rs. 10,000.00 along with interests and costs.
4. In answer thereto the plea of the defendants is that they had done all that they could. For example, they had already applied for and obtained permission from their landlord D
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