1969 (10) TMI 68 - SC - Indian Laws

Appellants lose Rs. 2,50,000 earnest money after contract breach, forfeiture upheld as valid deposit

The SC upheld forfeiture of Rs. 2,50,000 paid as earnest money by appellants who breached contract. The court found contract terms clearly established ... 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. The core legal questions considered by the Court in this appeal were twofold: first, whether the sum of Rs. 2,50,000 paid by the plaintiffs-appellants constituted part payment of the purchase price or was a deposit paid as earnest money; and second, whether the defendants-respondents were entitled to forfeit this amount upon the appellants' breach of contract.Regarding the first issue, the Court examined the nature of the payment of Rs. 2,50,000 in the context of the contract and the incorporated terms of business. The relevant legal framework includes established principles concerning earnest money and deposits in contracts of sale, as elucidated in authoritative texts and precedents. The Court relied on definitions and characteristics of 'earnest' as a tangible token given at the conclusion of a contract to bind the parties and guarantee performance, which, if the buyer defaults, may be forfeited. It distinguished earnest money from part payment, noting that earnest money serves primarily as security for performance and only becomes part of the purchase price if the contract is completed.Precedents such as Howe v. Smith, Soper v. Arnold, and Chiranjit Singh v. Har Swarup were analyzed, which uniformly held that earnest money is forfeitable upon the purchaser's default, serving as a guarantee rather than a mere installment of price. The Court also referred to clauses 9 and 10 of the respondent's terms of business, which were incorporated into the contract by reference. Clause 9 explicitly required a 25% deposit as earnest money, non-interest bearing and to be adjusted against the final payment, while clause 10(b) provided the right to forfeit the earnest money unconditionally upon the buyer's default.Applying these principles to the facts, the Court found that the Rs. 2,50,000 deposit corresponded exactly to 25% of the total price of Rs. 10,00,000 and was expressly described as earnest money in the contract terms. The appellants' own correspondence acknowledged the applicability of the terms of business, including the earnest money clause. The Court rejected the appellants' contention that the amount was merely part payment, emphasizing that the contract's express terms and the commercial context clearly indicated the payment's character as earnest money. Consequently, the Court held that the respondents were entitled to forfeit the earnest money upon the appellants' admitted breach.The second issue pertained to whether the forfeiture of the earnest money was subject to the provisions of sections 73 and 74 of the Indian Contract Act, 1872, which govern damages and penalty clauses in contracts. The appellants argued that the forfeiture clause should be construed as a penalty and that the Court should therefore award only reasonable compensation as per section 74. They also contended that the forfeited amount, representing 25% of the contract price, was excessive and unreasonable.The Court noted that these contentions were not raised in the pleadings or before the High Court and that no evidence was led to establish unreasonableness or penalty. The Court emphasized that the appellants had abandoned earlier pleas of misrepresentation and non-performance by the respondents, conceding their own breach. It held that the question of reasonableness or penalty could not be entertained at this stage without proper pleading and evidence. The Court further distinguished the present case from precedents where section 74 was applied, noting that those cases involved sums not characterized as earnest money. Here, the entire amount was expressly earnest money, which by established law is forfeitable upon breach without invoking section 74.Additionally, the Court rejected the appellants' reliance on section 64 of the Contract Act, which concerns restitution when a contract is rescinded due to fraud or misrepresentation. Since the appellants had abandoned their claim of inducement by misrepresentation, section 64 was inapplicable. The Court reaffirmed that earnest money is forfeitable when the buyer defaults and that the forfeiture clause in the contract was valid and enforceable.The significant holdings of the Court include the following:'An earnest must be a tangible thing... given at the moment at which the contract is concluded... as a guarantee that he will fulfil his contract, and subject to the terms that if, owing to his default, the contract goes off, it will be forfeited. If, on the other hand, the contract is fulfilled, an earnest may still serve a further purpose and operate by way of part payment.''A deposit is paid primarily as security that the buyer will duly accept and pay for the goods, but, subject thereto, forms part of the price. Accordingly, if the buyer is unable or unwilling to accept and pay for the goods, the seller may repudiate the contract and retain the deposit.''The terms most naturally to be implied [in the case of a deposit] appear to me... that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee... It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.''Earnest money is part of the purchase price when the transaction goes forward; it is forfeited when the transaction falls through, by reasons of the fault or failure of the vendee.''Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.''The appellants deposited the sum of Rs. 2,50,000 under clause nine, representing 25% of the purchase price... it is therefore clear that this amount deposited by the appellant is a deposit 'as earnest money'.''Under clause 10(b) a right is given to the respondents when the buyer makes default in making payment according to the contract, to forfeit unconditionally the earnest money paid by the buyer... the appellants conceded that they had committed a breach of the contract. If so... the respondents were entitled to forfeit the earnest money of Rs. 2,50,000.''The pleas covered by the second contention of the appellant had never been raised in the pleadings nor in the contentions urged before the High Court... It is therefore unnecessary for us to go into the question as to whether the amount deposited by the appellants... can be considered to be reasonable or not.''The appellants raised no such contentions... If the appellants were contesting the claim on any such grounds, they should have laid the foundation for the same by raising appropriate pleas and also led proper evidence regarding the same.''Earnest money can be forfeited, but in dealing with the rest of the amount which was not, admittedly, earnest money, s. 74 was applied. In the case before us the entire amount... is earnest money and therefore the above decision does not apply.''Section 64 of the Contract Act has no application... the appellants raised a contention that they had been induced to enter into the agreement on a misrepresentation... but they have abandoned that plea and have admitted that the breach of contract was committed by them.'In conclusion, the Court affirmed the findings of the High Court that the Rs. 2,50,000 was earnest money and that the respondents were entitled to forfeit it upon the appellants' breach of contract under the express terms of the contract. The appellants' subsequent contentions regarding penalty and reasonableness of forfeiture were not entertained for lack of pleading and evidence. The appeal was dismissed with costs.