Back
IN THE HIGH COURT OF ALLAHABAD
Nasirullah Beg, J.
KANPUR IRON BRASS WORKS AND FLOUR MILLS - Appellant
Versus
BANARSI DAS - Respondents
Second Appeal 922 Of 1950
Decided On : 12/04/1958
SALE OF GOODS ACT, 1930 - SECTION 54(2) - CONTRACT ACT, 1872 - SECTION 74 - EARNEST MONEY - ADVANCE - DEPOSIT - FORFEITURE - BREACH OF CONTRACT - REMEDY.
Fact of the Case:
The plaintiff placed an order with the defendant for the manufacture of 20 Bengal Type Kolhus. The plaintiff paid Rs. 3,000/- as an advance. The defendant manufactured the Kolhus and informed the plaintiff to take delivery. However, the plaintiff refused to take delivery of 12 Kolhus. The defendant sent a notice to the plaintiff stating that the Kolhus were ready and if the plaintiff did not take delivery within 15 days, the defendant would resell the Kolhus at the risk of the plaintiff. The defendant also stated that he would appropriate the sum of Rs. 3,000/- towards the losses, if any, sustained by the defendant and would claim the balance from the plaintiff. The plaintiff filed a suit for recovery of Rs. 3,000/-. The trial court held that the amount of Rs. 3,000/- was paid by way of earnest money and decreed a proportionate amount of Rs. 1,200/- in favor of the plaintiff. The lower appellate court reversed the decree of the trial court and allowed the plaintiff's appeal for recovery of Rs. 3,000/-.
Finding of the Court:
The court held that the amount of Rs. 3,000/- was in the nature of earnest money and not an advance payment of purchase price. The court further held that the defendant was entitled to forfeit the earnest money as the plaintiff had committed a breach of contract by refusing to take delivery of the Kolhus. The court also held that the defendant was not required to make a counterclaim or pay court fee in respect of the damages suffered by him as a result of the plaintiff's breach of contract.
Issues: 1. Whether the amount of Rs. 3,000/- was earnest money or an advance payment of purchase price? 2. Whether the defendant was entitled to forfeit the earnest money? 3. Whether the defendant was required to make a counterclaim or pay court fee in respect of the damages suffered by him as a result of the plaintiff's breach of contract?
Ratio Decidendi: 1. The court held that the amount of Rs. 3,000/- was earnest money and not an advance payment of purchase price based on the following factors: - The use of the word "deposit" in the contract, which has a legal significance and implies an agreement that the sum deposited may be forfeited in case of breach by the depositor. - The use of the word "advance" in the contract, which indicates that the payment was being made at the very inception of the contract and was meant to serve as a token of ratification of the contract and a guarantee of bona fide of the party making the payment. - The conduct of the parties, which showed that the amount was to be retained by the defendant upto the completion of the transaction. - The fact that the amount was not adjusted towards the price of the Kolhus supplied. - The oral statement of the defendant that the amount was given by way of earnest money. 2. The court held that the defendant was entitled to forfeit the earnest money as the plaintiff had committed a breach of contract by refusing to take delivery of the Kolhus. The court relied on the following legal principles: - Earnest money is a sum paid by the buyer in order to bind the seller to the terms of the agreement. - Earnest money can always be considered to be a part payment of the price, since in case the contract is fulfilled it will be appropriated and adjusted towards the price due at the time of the final settlement of accounts. - The primary purpose of earnest money is that it is a guarantee that the purchaser means business. - If the purchaser repudiates the contract, he cannot get back the earnest money. 3. The court held that the defendant was not required to make a counterclaim or pay court fee in respect of the damages suffered by him as a result of the plaintiff's breach of contract. The court relied on the following legal principles: - Under Section 74 of the Contract Act, a party complaining of the breach is entitled to a reasonable compensation even where no actual damage or loss is proved to have been caused thereby. - It is open to the court to award reasonable compensation even if the party has failed to provide actual proof of the damage.
Final Decision: The appeal was allowed, the judgment of the lower appellate court was set aside, and the plaintiff's suit was dismissed in toto.
( 1 ) THIS second appeal has been filed by the Kanpur Iron Brass Works and Flour Mills.
( 2 ) THE appellant was the defendant in a suit brought by the plaintiff for recovery of Rs. 3,000/-, which was alleged by the plaintiff to have been advanced to the defendant towards the purchase of 20 Bengal Type Kolhus to be manufactured by the defendant and delivered to the plaintiff according to the agreement between the parties. The plaintiffs case was that the defendant had committed breach of contract by failing to supply the kolhus as stipulated, and hence he claimed a refund of the above amount. The plaintiff further claimed an amount of Rs. 810/- by way of interest.
( 3 ) THE suit was resisted by the defendant. The defendants case was that there was no breach of contract on his part. The defendant had manufactured the 20 kolhus which he had undertaken to construct, that the said kolhus were lying in his workshop, and that, in spite of repeated notices on his part the plaintiff had failed to take delivery of the same. The defendant therefore alleged that there was, on the other hand, a breach of contract on the part of the plaintiff. The defendants case was that the said amount of Rs. 3,000/- was earnest money, and was, therefore, liable to be forfeited on breach of contract by the plaintiff, and, in any case, the defendant had suffered damages, and, taking into consideration the reasonable compensation to which he was entitled, the decree for Rs. 3,000/-in favour of the plaintiff should not have been passed.
( 4 ) THE suit seems to have been hotly contested in both the Courts below. The trial Court came to the conclusion that the party guilty of committing the breach of contract was the plaintiff, and not the defendant. It was further of opinion that the amount of Rs. 3,000/- was paid by way of earnest money, and, as such, it was liable to be forfeited on breach of contract by the plaintiff. As however, eight kolhus had been delivered to the plaintiff, the trial Court split up this amount of rs. 3,000/-, and decreed a proportionate amount of this deposit, namely 8/20ths of Rs. 3,000/. e. , an amount of Rs. 1,200/- in favour of the plaintiff. It rejected the plaintiffs claim in respect of interest.
( 5 ) IN appeal the lower appellate Court reversed the decree of the trial Court. It upheld the finding of the trial Court to the effect that the party guilty of brace of contract was the plaintiff, as the plaintiff had refused to take delivery of 12 out of 20 kolhus, With regard to the question relating to the nature of Rs. 3,000/- said to have been advanced by the plaintiff to the defendant it observed is follows :
"the controversy between the parties about the deposit of Rs. 3,000/- having been made as an advance or as earnest money is superfluous. , because the amount whether called by the name of deposit or advance or earnest money cannot in the absence of clear contract, be made liable to forfeiture on the mere happening of a breach of contract by the purchaser. "
It further held as follows. "but notwithstanding the breach of contract on the part of the plaintiff he is entitled to recover the amount of Rs. 3,000/- from the defendant because of the absence of any forfeiture Clause in the contract. "
In this view of the matter the lower appellate Court allowed the appeal and decreed the plaintiffs claim for recovery of Rs. 3,000/- with proportionate costs of both the Courts against the defendant. It however dismissed the plaintiffs claim in respect of Rs. 810/- as interest by way of damages.
( 6 ) DISSATISFIED with the said judgment the defendant has filed this appeal.
( 7 ) HAVING heard learned counsel for the parties at length I am of opinion that this appeal should be allowed. I may, at the very outset, mention that in my opinion the view taken by the lower appellate Court that the question whether Rs. 3,000/- was merely an advance or earnest money was superfluous because neither could be recovered in the absence
An indispensable Tool for Legal Professionals, Endorsed by Various High Court and Judicial Officers
Please visit our Training & Support
Center or Contact Us for assistance
Scan Me!
India’s Legal research and Law Firm App, Download now!
For Daily Legal Updates, Join us on :
Back to top
