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Madras High Court
T. RAMAPRASADA RAO
Meenakshinada Deikshtar - Appellant
Versus
Murugesa Nadar - Respondent
Decided On : 10/18/1968
CONTRACT - DEPOSIT - FORFEITURE - REASONABLE COMPENSATION - SECTION 74 OF THE INDIAN CONTRACT ACT - INTERPRETATION - ADVANCE - EARNEST MONEY - DISTINCTION - BURDEN OF PROOF - PLEADING AND PROOF OF DAMAGE - PROCEDURE.
Fact of the Case:
The plaintiff agreed to purchase land from the defendants through a power-of-attorney holder. He paid an advance of Rs. 225, which was to be forfeited if the sale was not completed within the prescribed time due to the plaintiff's default. The transaction did not go through, and the plaintiff sued for the return of the advance. The defendants relied on the forfeiture clause and contended that they were entitled to forfeit the advance.
Finding of the Court:
The court held that the defendants were not entitled to forfeit the advance without pleading and proving the damage suffered by them due to the plaintiff's default. The court also held that the defendants had the burden of proving that the amount paid was a deposit or earnest money for the due performance of the contract.
Issues: 1. Whether the defendants were entitled to forfeit the advance without pleading and proving the damage suffered by them due to the plaintiff's default? 2. Whether the defendants had the burden of proving that the amount paid was a deposit or earnest money for the due performance of the contract?
Ratio Decidendi: 1. Section 74 of the Indian Contract Act 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. 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. 2. The defendants had the burden of proving that the amount paid was a deposit or earnest money for the due performance of the contract. The court held that the mere use of the word 'advance' in the contract did not necessarily mean that the amount was not a deposit or earnest money.
Final Decision: The court allowed the civil revision petition and remanded the case to the lower court for a fresh trial in the light of the observations in the judgment. The defendants were given leave to amend their written statement and plead that the amount was a 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.
JUDGMENT :- 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 plaintiff's suit was dismissed. Against this the plaintiff has preferred the present Civil Revisi on Petition under Section 25 of the Madras Provincial Small Cause Courts Act.
2. 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 v. Balkishan Dass, (1964) 1 Mad LJ (SC) 60 : (1964) 1 Andh WR (SC) 60 : (1964) 1 SCR 515 : (1964) 1 SCJ 187 : (AIR 1963 SC 1405). 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 Venkoba Char v. Sanjivappa, AIR 1937 Mad 681, 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 (1964) 1 Mad LJ (SC) 60 : (1964) 1 Andh WR (SC) 60 : (1964) 1 SCJ 187 : (1964) 1 SCR 515 : (AIR 1963 SC 1405), has not made any departure from the ratio in Natesa Aiyar v. Appavu Padayachi, (1915) ILR 38 Mad 178 : 24 Mad LJ 488 : (AIR 1915 Mad 896) (FB). 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 v. Official Liquidator, AIR 1960 Punj 51, 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 contract
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