J.N. Bhatt, J.
1. A few vital and significant points have surfaced in this First Appeal, arising out of contractual relationship between the parties and alleged breach of the contract, and, therefore, submissions are made and heard at a Marathon length.
2. In this First Appeal under Section 96 of the Code of Civil Procedure ('Code' for short), the original plaintiff-appellant has assailed the judgment and decree passed in Special Civil Suit No. 46 of 1974 by the Civil Judge (Senior Division), Baroda, on 28th November, 1979.
3. A short resume of the facts leading to the rise of the present appeal, may be stated, at the out set so as to appreciate the merits of the appeal and the cross-objections and challenge against them.
4. The present appellant is the original plaintiff and the present respondent is the original defendant, who are hereinafter referred to as 'the plaintiff' and 'the defendant' for convenience sake.
5. The plaintiff instituted the above suit for the recovery of an amount of Rs. 24,000/- with running interest at the rate of 9% per annum from the date of the suit till the date of payment, alongwith cost. The plaintiff entered into an agreement of sale, dated 20-10-1971, with the defendant to purchase land situated, at Nagarvada, Baroda, admeasuring about 10,000 sq ft., being a part of the City Survey No. 2-3, 26, 75 & 135 of Tikka No. B 10/48 & 10/5 of Baroda District, at Baroda (hereinafter referred to as 'the suit land' for brevity sake). The plaintiff paid to the defendant an amount of Rs. 10,000 by way of earnest money. According to the terms of the agreement to sell, the defendant was to pass a sale deed, after making his title clear and marketable. The plaintiff, inter alia alleged that the defendant could not make his title clear and marketable in respect of the suit land and was unable to produce a certificate under Section 230-A of the Income-tax Act, 1961. As per one of the terms of the agreement to sell, the sale was to be completed within three months' time from the date of execution of agreement. The said agreement to sell, dated 28-10-1971, was produced at Ex. 38. The period of three months was to expire on 28-1-1972. The parties met, at Bombay, on 20-1-1972 and negotiated. Pursuant to the discussions and negotiations, the parties agreed for the extension of the date of final payment, by another three months, from the date of the first agreed date. In other words, final payment was now to be made by the purchaser within six months of the signing of the agreement to sell. However, the said extension of period for final payment, was subject to following two conditions:
(i) that the purchaser (plaintiff) shall pay Rs. 10,000/- by 29-1-1972 and that he shall further pay an amount of Rs. 10,000 by the end of February, 1972; and
(ii) that the amounts had to be adjusted towards the sale price of the suit land agreed between the parties.
This is very evident in the letter, Ex. 88, dated January 21, 1972, written by the seller (defendant) to the purchaser (plaintiff).
6. There is no dispute about the fact that an amount of Rs. 10,000 was paid by the purchaser to the seller before the stipulated date of 29-1-1972, as per the agreement for extension. It is also an admitted fact that the remaining amount of Rs. 10,000 was to be paid by the buyer to the seller on or before 28-1-1972, as per the agreement for extension but the same has not been paid so far. There was exchange of correspondence between the parties and each one tried to throw the blame on the other for breach of the contract. Later on, the purchaser-plaintiff communicated to the seller-defendant, by writing a letter dated 2-5-1972, produced at Ex. 73, that since the title in respect of the suit land was not clear and marketable, he (plaintiff) was not interested to buy the suit land. It was also requested by the purchaser, in the same letter, to return the deposited amount of Rs, 20,000 (Rs. 10,000 + Rs. 10,000) with interest. Subsequently, there was exchange of notices between the parties.
7. Though the purchaser-plaintiff was not a defaulter, according to him, the seller-defendant had forfeited an amount of Rs. 10,000 (earnest money) plus the remaining amount of Rs. 10,000 being the security deposit. Therefore, the plaintiff instituted the suit against the defendant for the recovery of the amount of Rs. 10,000 (earnest money) plus Rs. 10,000 (security deposit) plus Rs. 4,000 (interest) = Rs. 24,000 with interest and costs.
8. The defendant appeared and resisted the suit by filing written statement, at Ex. 13. It was admitted that the agreement to sell the suit land was executed, on 28-10-1971 and the plaintiff had paid Rs. 10,000 by way of earnest money. The defendant, however, denied that he was unable to make his title clear and marketable and produce a certificate under Section 230-A of the Income-tax Act. On the contrary, he alleged that breach was committed by the plaintiff. It was contended that the provisions of Section 230-A of the Income-tax Act did not apply. He also denied to have given promise to return Rs. 20,000 with interest to the plaintiff. It was also denied by the defendant that at no stage he had undertaken to enter into an agreement of sale with Baroda Automobiles or for getting permission under Section 7 of the said Act or return of the earnest money to the plaintiff with interest. He, on the contrary, contended that all the relevant documents were shown to the plaintiff and his Advocate friend Mr. N. A. Shah of Bombay. The defendant had also given the title clearance certificate, duly issued by M/s. Bhaishanker Kanga and Girdharlal. It is the case of the defendant that the plaintiff failed to get the deed executed before the stipulated date. It is also the case of the defendant that at the time of the execution of the agreement to sell, Ex. 38, a sum of Rs. 10,000 was only paid to him, at Bombay, by way of earnest money and the plaintiff requested the defendant to extend the time for completion of sale by further three months, i.e., upto 28th April, 1972, and on the plaintiff agreeing to pay to him further amount of Rs. 10,000 by two instalments, first being payable by 29-1-1972 and another by the end of February, 1972, as a guarantee for the performance of the contract, he acceeded to the said request of the plaintiff for extension of time. It is admitted that the plaintiff, accordingly, paid Rs. 10,000 only on 29-1-1972 by way of a Bank Draft but did not pay the remaining amount of Rs. 10,000 by the end of February, 1972. It is further say of the defendant that, however, on account of the good relations with the plaintiff, he had informed that the title of the suit land was clear and marketable and documents were ready. In short, the contention of the defendant is that the plaintiff himself committed breach of the contract and did not get the sale deed registered. The defendant also contended the proposal to sell the suit land to Baroda Automobiles was rejected by him. Therefore, it was contended that the plaintiff was not entitled to recovery of the amount of Rs. 24,000. Thus, the suit was resisted on all counts.
9. In view of the facts and circumstances of the case and pleadings of the parties, issues came to be framed, at Ex. 18, in the trial Court.
10. On appreciation of the evidence on record, the trial Court found that the Court has jurisdiction to try the suit and that the plaintiff had committed breach of the contract. The trial Court also found that the time was the essence of the contract. It was held by the trial Court that the plaintiff is not entitled to the recovery of the amount of Rs. 10,000 paid to the defendant and forfeited by him, being the amount of earnest money. Thus, the act of the defendant of forfeiting the amount of Rs. 10,000, being the earnest money, was upheld. However, the trial Court reached to the conclusion that the plaintiff is entitled to remaining amount of Rs. 10,000 paid by him to the defendant. Therefore, the trial Court decreed the suit, in part, holding that the plaintiff is entitled to recover an amount of Rs. 10,000 only with running interest at the rate of 6% per annum from the date of the suit till payment.
11. Being aggrieved by the said judgment and decree against the plaintiff, he has come up in this First Appeal, challenging its legality and validity, by invoking the aids of provisions of Section 96 of the Code, and the original defendant has also challenged the decree to the extent of granting the amount of Rs. 10,000 to the plaintiff with interest at the rate of 6% per annum from the date of the suit till the payment, by filing cross-objections.
12. Having heard the learned Counsels for the parties and having examined the facts and circumstances emerging from the evidence on record, the following question emerge for appreciation and adjudication in this appeal and cross-objections:
(A) Whether or not the time was the essence of the contract ?
(B) Whether the plaintiff or the defendant was the defaulter ?
(C) Whether the defendant was justified in forfeiting the earnest money of Rs. 10,000 ?
(D) Whether the purchaser-plaintiff was entitled to the full decree, as prayed for ?
(A) Whether or not the time was the essence of the contract ?
The trial Court has decided that the time was the essence of the contract. The trial Court's finding on this score is, seriously, challenged. The trial Court has broadly held that the time was the essence of the contract on following circumstances:
(1) As the time was fixed for performance (3 months in this case) by virtue of Clause 5 of the agreement for sale. Ex. 38.
(2) On the fact that the plaintiff went to Bombay from Baroda and mutually got the time extended for further period of three months on two conditions.
(3) On the fact that the plaintiff declined to purchase the suit land, on 2-5-1972, after expiry of the extended period and demanded the return of Rs. 20,000 with interest.
Relying on the aforesaid three circumstances, the trial Court reached to the conclusion that the plaintiff was, consciously, keen to treat the time as an essence of the contract. Under these circumstances, the contention of the plaintiff that time was not the essence of the contract was not accepted by the trial Court. The finding of the trial Court on this point is, seriously, criticised. Having examined the facts and circumstances and the relevant proposition of law, this Court has no hesitation in holding that the trial Court committed, serious, error, in finding that the time was the essence of the contract.
13. It will be necessary, at this stage, to refer to the relevant proposition of law, on this point. Section 55 of the Indian Contract Act, 1872 ('Contract Act' for short) makes the provision with regard to the effect or failure to perform the contract at the fixed time, in which time is essential. No doubt time of performance is one of the important factors. Section 55 of the Contract Act reads as under:
55. Effect of failure to perform at fixed time, in contract in which time is essential:
When a party to contract promises to do a certain thing at or before a specified time, or certain things at or before specified time, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed becomes voidable at the option of the promise, if the intention of the parties was that time should be of the essence of the contract.Effect of such failure when time is not essential:
If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.Effect of acceptance of performance at time other than that agreed upon:If, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than that agreed, promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor of his intention to do so.
14. Where no time for performance is fixed by the contract, the law implies an undertaking by each party to perform his part of the contract within a time which is reasonable having regard to the circumstances of the case. Where the contract provides that it shall be performed 'as soon as possible' or 'forthwith' or uses similar expressions the particular stipulation will be construed by reference to what is reasonable in the circumstances. Words such as 'immediately' or 'directly' import a more stringent requisition than is., ordinarily, implied by 'reasonable time'.
15. It will be interesting to mention at this stage that at common law stipulations as to time in a contract were, as a general rule, and particularly in the case of contracts for the sale of land, considered to be of the essence of the contract, even if they were not expressed to be so, and were construed as conditions precedent; therefore, one party could not insist on performance by the other unless he could show that he had performed, or was ready and wiling to perform, his part of the contract within the stipulated time. However, in English Courts, in exercise of its jurisdiction to decree specific performance, the Court of Chancery adopted the rule, especially, in the case of contracts for the sale of land, that stipulations as to time were not to be regarded as of the essence of the contract unless either they were made so by express terms, or it appeared from the nature of the contract, or the surrounding circumstances, that such was the intention of the parties; and, unless there was an express stipulation or clear indication that time should be of the essence of the contract, specific performance would be decreed even though the plaintiff failed to complete the contract or take the various steps towards completion by the date specified. By statute, wherever stipulations as to time are not according to the rules of equity, deemed to be or to have become of the essence of the contract, the same rule prevails at law. The modern law, in the case of contracts of all types, may be summarised as follows:
(1) Time will not be considered to be of the essence unless:
(a) the parties, expressly, stipulate that conditions as to time must be strictly complied with, or
(b) the nature of the subject-matter of the contract or the surrounding circumstances show that time should be considered to be of the essence; or
(c) a party who has been subjected to unreasonable delay gives notice to the party in default to making time of the essence.
Needless to mention that even if time is not of the essence a party who fails to perform within the stipulated time may be liable in damages.
16. In India also, in a contract in respect of immovable property, it may, normally, be presumed that the time is not the essence of the contract. Mere incorporation in the written agreement of a clause imposing penalty is not the case of the time being the essence of contract. The intention to make time of the essence, if expressed in writing, must be in language which is unmistakable. Simply because a specific date is mentioned in the agreement for completion of contract and a party to that contract commits a mistake to complete the work on the stipulated date, it does not give option to the other party to avoid contract. Merely the interpretation in the written agreement of a clause imposing penalty in case of default does not by itself evidence an intention to make time of essence. Default in performance of the contract within the specified time would disentitle the party, to a decree for specific performance of contract only if it was intended by the parties that time was the essence of the contract.
17. Intention to make the time to be of essence may be gathered if expressed in writing by the language of the agreement. The language of the agreement must show in unmistakable terms that the intention of the parties was to make their rights dependent upon the observation of the time limit. Intention may also be inferred from the nature of the property to be sold and conduct of the parties and the surrounding circumstances at or before the contract. Where the property to be sold is immovable property it would normally be presumed that the time was not essence of the contract. The conduct of the parties and the surrounding circumstances would depend upon the facts and circumstances of each case. Intention from the conduct of the parties and surrounding circumstances of the parties must appear at or before the contract and not what takes place after it has been entered into. Even where the parties have expressly provided that time is of the essence of the contract such a stipulation will have to be read alongwith other provisions of the contract and such other provisions may, on construction of the contract, exclude the inference that the completion of the work by a particular date was intended to be fundamental, for instance, if the contract were to include clauses providing for extension of time in certain contingencies or for payment of fine or penalty for every day or week the work undertaken remains unfinished on the expiry of the time provided in the contract such clauses would be construed as rendering ineffective the express provision relating to the time being of the essence of contract.
18. Similarly it is found in the case on hand that there are several such clauses and provisions in the agreement to sell, Ex. 38, for example, making of joint survey. Extension of time is also granted and in the facts and circumstances there was no intention of the parties to make time as essence of the contract.
19. In the opinion of this Court, the trial Court committed, serious, error in holding that time was the essence of the contract, on the aforesaid three grounds. The fixation of period within which the contract is to be performed does not make stipulation as to time of the essence of the contract. This aspect is, unfortunately, with due respect, the trial Court has failed to examine and appreciate. The fact that the plaintiff sought extension and the stipulation of the time after the time prescribed in the contract and sending of a draft of remaining amount of Rs. 10,000 by the plaintiff would not be suggestive of the fact that the time was the essence of contract or that time was intended to be made as essence of contract. No doubt, time is of essence if the parties intended it to be so and intention may be evidenced either by express stipulations or by circumstances which are sufficiently strong to displace ordinary presumption that in contract for sale of land stipulation as to time is not of essence. In Gomathinayagam Pillai v. Palaniswami Nadar : [1967]1SCR227 , the Apex Court has ruled that not merely because of specification of time at or before which the thing to be done under the contract is promised to be done and default in compliance therewith, that the other party may avoid the contract. Such an option arises only if it is intended by the parties that time is of the essence of contract, if expressed in writing, must be in language which is unmistakable; it may also be inferred from the nature of the property agreed to be sold, conduct of the parties and the surrounding circumstances at or before the contract. Specific performance of a contract will ordinarily be granted, notwithstanding default in carrying out the contract within the specified period, if having regard to the express stipulations of the parties, nature of the property and the surrounding circumstances, it is not inequitable to grant the relief. It was also held in the aforesaid case that if the contract relates to sale of immovable property, it would normally be presumed that lime was not of the essence of the contract. Mere incorporation of time for performance in the written agreement of a clause imposing penalty in case of default does not by itself evidence an intention to make time of the essence.
20. It will be interesting to mention that in Jamshed Kodaram Irani v. Burjorji Dhunjibhai AIR 1915 PC 83, the Judicial Committee of the Privy Council observed that the principle underlying Section 55 of the Contract Act did not differ from those which obtained under the law of England as regards contracts for sale of land. The Judicial Committee in the said case observed as follows:
Under the law equity, which governs the rights of the parties in cases of specific performance of contracts to sell real estate, looks not at the letter but at the substance of the agreement in order to ascertain whether the parties, notwithstanding that they named a specific time within which completion was to take place, really and in substance intended more than that it should take place within a reasonable time. Their Lordships are of the opinion that this is the doctrine which the section of the Indian Statute adopts and embodies in reference to sale of land.
It will be also interesting to mention the observations of Lord Cairns in Tilley v. Thomas 1867 (3) Ch A 61, in this context:
The construction is, and must be, in equity the same as in a Court of law. A Court of equity will indeed relieve against, and enforce, specific performance, notwithstanding a failure to keep the dates assigned by the contract either for completion, or for the steps towards completion, if it can do justice between the parties, and if (as Lord Justice Turner said in Roberts v. Berry 1853 (3) De G. M. and G 284) there is nothing in the express stipulations between the parlies, the nature of the property, or the surrounding circumstances, which would make it inequitable to interfere with and modify the legal right. This is what is meant, and all that is meant, when it is said that the equity time is not of the essence of the contract. Of the three grounds mentioned by Lord Justice Turner 'express stipulations' requires no comment. The 'nature of property' is illustrated by the case of reversions, mines, or trade. The 'surrounding circumstances' must depend on the facts of each particular case.
21. The trial Court relied upon the three circumstances in support of its conclusions that the time was the essence of contract of sale and committed, serious, error in reaching the conclusion as observed hereinbefore. The trial Court, in holding that time was of the essence of the contract of sale, precisely relied on the following circumstances:
1. Stipulation of time of three months in the contract for performance.
2. Plaintiff sought and got extension of further three months on expiry of first three months, and
3. Plaintiff sending a draft of Rs. 10,000 in the extended time and declined to purchase the suit land after expiry of the extended time.
These three circumstances would not indicate that the parties intended to treat time as essence of contract. Fixation of period within which the contract is to be performed does not make stipulation as time of the essence of contract. Mere factum that the plaintiff sought and got time prescribed extended is not indicative of the intention of the parties to treat time as essence of contract. On the contrary, extension of time prescribed in contract would go to show that the parties did not intend to treat time as essence of contract. Likewise, sending of draft of Rs. 10,000 in the extended time by the plaintiff and declaring to repudiate the contract after expiry of the extended time on his part would not, ipso facto, go to show that the parties intended to treat time as essence of contract. Intention to make time as the essence of the contract may be evidenced by other express stipulation or by circumstances which are sufficiently strong to displace the normal presumption that in a contract of sale of land stipulation as to time is not the essence of the contract. In the case on hand, there are no circumstances indicating that it was the intention of the parties that the time was intended to be the essence of the contract. On the contrary, some of the clauses in the agreement of sale, at Ex. 38, would go to show that the parties did not intend to treat time as essence of the contract. For example, clause 3, in Ex. 38, provides that the area of the piece of land agreed to be sold shall be ascertained by the survey to be made jointly by the architect or surveyor of vendor and the architect or surveyor of the purchaser and the purchase price will be calculated at the rate aforesaid on the area ascertained on such survey. Clause 7 is pertinent to make the suit land clear and marketable and free from all encumbrances, is also suggestive of the fact that the parties did not intend to make time as the essence of contract. Not only that, the conduct of the parties also indicates that they had not treated time as. essence of contract. Even after expiry of the extended period of 3 months the title clearance certificate was obtained from a firm of solicitors and parties negotiated. Therefore, considering the circumstances of the case and the terms and conditions of the agreement to sell, at Ex. 38, the conduct of the parties would not go to show that the intention of the parties was to make time as essence of contract in respect of the suit land. With due respect, the learned trial Court Judge has committed, serious, error in holding that the time was the essence of contract.
22. Section 55 of the Contract Act postulates that:
(i) where the contractor promises to do certain thing at certain time,
(ii) time is the essence of the contract according to the intention of the parties,
(iii) and if the contractor fails to do it on the appointed date or prescribed time, the contractor or defaulter of it has not been performed his part of contract and it becomes voidable. If time is not the essence of the contract, then the contract does not become voidable on failure to perform the contract within the fixed time and the defaulting party is not liable for compensation of any loss caused thereto.
So the entire genesis under Section 55 of the Contract Act is to determine first whether under the contract time is of the essence. In the present case, this Court has no hesitation in holding that there was no intention on the part of the parties to treat time as essence of the contract. The conclusion of the trial Court on the aforesaid three circumstances that time was essence of the contract is not only erroneous but is illegal. Again it is nobody's case that it was a commercial transaction. It may be mentioned that in so far as commercial transactions are concerned time may be of the essence of contract generally having regard to the facts and circumstances of the case. This Court has no hesitation in holding that the conclusion of the trial Court on this point is, totally, wrong and this Court is of the opinion that time was not essence of the contract in the circumstances.
(B) Whether the Plaintiff or the Defendant was the defaulter ?
23. The trial Court has held that the original plaintiff-purchaser was defaulter and he committed breach of the contract. This contention is, seriously, criticised and challenged. Having regard to the facts and circumstances emerging from the evidence on record, the conclusion reached by the trial Court that the plaintiff was defaulter is, fully, justified. The contention of the plaintiff was that the title of the suit land was not clear and marketable. However, nowhere he has stated as to how it was not clear and marketable. No specific plea in this behalf was raised. No clear evidence is produced by the plaintiff in this connection. Therefore, the trial Court has, rightly, held that the plaintiff-purchaser was a defaulter. The original defendant-owner of the suit land had purchased the land under registered sale deed, dated 25-1-1947. Original Sanad in respect of the suit survey numbers are produced on record. Certified true copies of the entries from the property register cards are produced, at Exs. 59 to 65 and 67. All these documents clearly show that the defendant alone had been the owner of the suit land and he was entitled to sell it.
24. It is also very clear from the evidence on record that the plaintiff and his Advocate friend Mr. N. A, Shah had first met the defendant at his residence and had negotiation for sale of the suit land. The negotiations took place, on 26-10-1971, and the defendant had shown all the relevant documents relating to the suit land to the plaintiff and his friend, Advocate Mr. N. A. Shah. Those documents included the original sale deed, Ex. 87, and the original Sanad, Ex. 53 to 58, and the entries from the extract of property card from the City Survey Department and also certified copies of municipal site plan. Not only that the said plan was attached to the agreement to sell (Banakhat), at Ex. 38. It is also found from the evidence that Advocate Mr. N. A. Shah, the friend of the plaintiff, had taken away all the documents from the defendant on 26-10-1971 and thereafter the plaintiff met the defendant again on 27-10-1971, with a draft of agreement for sale, which was approved and excecuted, at Bombay, on 28-10-1971. It becomes explicit from the evidence on record that the plaintiff and his friend. Advocate Mr. N. A. Shah, were shown all the documents relevant for preparing the agreement to sell, Ex. 38. The fact that the plaintiff paid the amount of Rs. 10,000 by way of earnest money is also suggestive of the fact that there Was no defect in the title as all the documents Were seen by the plaintiff in consultation with his Advocate friend Mr. N. A. Shah. If the titles were not clear the plaintiff would not have parted with such a big amount. The plaintiff who is a medical practitioner was also a senior and leading member of the Congress Party. He was the Vice-President of the Gujarat Pradesh Congress Committee. He also held the responsible post of Health Minister in the year 1973. Subsequently, all the relevant documents were also examined by Advocate Shri V.D. Patel, at Baroda, and the plaintiff and Advocate Mr. Patel were also satisfied. Had there been any defect as suggested by the plaintiff, he would not have agreed to pay the amount of Rs. 20,000 by two instalments on getting the time extended.
25. In view of the facts and circumstances narrated hereinbefore and emerging from the evidence, this Court has no any hesitation in holding that the plaintiff-purchaser of the suit land was the defaulter and he committed breach in performance of his part of the agreement. It is also not in dispute that the plaintiff-purchaser had not paid the second instalment of Rs. 10,000 on or before 28-2-1972 for which no explanation has been placed on record. Under these circumstances, the trial Court has, rightly, concluded that the plaintiff was responsible for breach of the contract. This Court agrees with this conclusion as it is, fully, justified in the facts and circumstances of the case.
(C) Whether the Defendant was justified in forfeiting the earnest money of Rs. 10,000 ?
26. In so far as this point is concerned, the trial Court has reached to the conclusion that the defendant-seller is entitled to forfeit the earnest money of Rs. 10,000. This conclusion is, seriously, challenged. The trial Court has, rightly, found that the plaintiff was the defaulter. As observed hereinbefore, this conclusion of the trial Court is fortified by the evidence on record. The plaintiff had paid Rs. 10,000, admittedly, by way of earnest money for the purchase of the suit land from the defendant-seller. The defendant has placed reliance on Clause 16 of the agreement for sale at Ex. 38. Clause 16 reads as under:
16. If the purchase be not completed due to any wilful default on the part of the Purchaser, the Vendor shall be entitled (a) to require specific performance of this agreement by the Purchaser and to claim all costs, charges and expenses incurred by the Vendor or (b) to forfeit the earnest money or deposit in lieu of (and also to claim) cost, loss, damages suffered and to the payment of all costs incurred by the Vendor.
It is an admitted fact that at the time of execution of agreement to sell, Ex. 38, the plaintiff paid Rs. 10,000 by way of a cheque as earnest money. The plaintiff thereafter had paid an amount, of Rs. 10,000 on 29-1-1972, at the time of extension of the time for performance. The plaintiff did not pay the remaining amount of Rs. 10,000 which was to be paid by him on 28-2-1972, as per the agreement for extension of time, produced, at Ex. 38. The plaintiff-purchaser filed the suit for the recovery of Rs. 10,000 being the amount of earnest money and remaining amount of Rs. 10,000 paid by him, on 29-1-1972, alongwith the interest amount of Rs. 4,000. The trial Court found that the plaintiff is not entitled to earnest money of Rs. 10,000 as the defendant-seller was entitled to forfeit the amount. This finding is, seriously, questioned in this appeal, on behalf of the appellant.
27. Earnest money is not merely a part-payment but is also earnest to bind bargaining. Whether the amount paid is the earnest money or advance deposit or part-payment is a question of fact in a given case. Where it is stipulated in the agreement that what has been paid in advance towards the contract is nothing but earnest as understood in law then the law governing earnest money alone would be applicable and not the principles of restitution or penalty or liquidated damages. As observed by the Judicial Committee in the case of Charanjit Singh v. Har Swarup reported in AIR 1926 PC 1 :
Earnest money is part of the purchase price when the transaction goes forward. It is forfeited when the transaction falls through, by reason of the fault or failure of the Vendee.
Under the terms of agreement for sale, the amount of earnest money of Rs. 10,000 deposited by the plaintiff-purchaser with the defendant-seller was to stand forfeited in case the plaintiff commits a default. It is found from the evidence on record that the plaintiff-purchaser committed breach of contract and failed to perform his part of the contract. In such a contingency, as provided in Clause 16 of the agreement for sale, Ex. 38, the defendant, vendor shall be entitled to forfeit the earnest money or deposit, in lieu of the cost, loss or damages suffered. That the trial Court found that since the plaintiff has committed breach of the contract and in view of the clear provisions in Clause 16 of the agreement for sale, at Ex. 38, the plaintiff was not entitled to recovery of the earnest money of Rs. 10,000 from the defendant as the defendant-seller was eligible to forfeit the said amount. This conclusion of the trial Court is, fully justified.
28. Forfeiture of earnest money under a contract for sale of property, movable or immovable, does not fall within the provisions of Section 74 of the Contract Act, if the amount so stipulated is reasonable. It has been concluded since long in the case of Roshan Lal v. Delhi Cloth and General Mills Co. Ltd. reported in (1911) ILR 33 All. 166, and in the case of Charanjit Singh v. Har Swamp reported in AIR 1926 PC 1. This decision of the Privy Council is also followed by the Supreme Court in the case of Maula Bux v. Union of India reported in : [1970]1SCR928 . It is also held in this decision that forfeiture of reasonable amount does not amount to imposition of penalty. However, if forfeiture is of the nature of penalty, then in that case, the provisions of Section 74 would be attracted.
29. It would be, therefore, appropriate to refer to Section 74 of the Contract Act at this stage. Section 74 of the Contract Act reads as under:
74. Compensation for breach of contract where penalty stipulated for: When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulations by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Thus, it becomes clear that the doctrine of forfeiture in the matter of earnest money is based on a principle, totally, different from the consideration that are laid down under Section 74 of the Contract Act. However, if the amount agreed to be forfeited in the case of breach of contract is unreasonable, then the provisions of Section 74, as aforesaid, would come into play. Where it is stipulated in agreement that what has been paid in advance towards the contract is nothing but the earnest money as understood in law then the law governing the earnest money alone is applicable and not the principles of restitution, penalty or damage, subject to the amount of earnest money being reasonable in the circumstances of the given case.
30. The following broad propositions would emerge from the plain perusal of the provisions incorporated in Section 74 of the Contract Act:
1. Where a sum is named in the contract as payable on breach of contract, it may be taken as by way of penalty,
2. No compensation can be given in excess of the named amount, if there is penal provision against the default, and the same compensation is to be given irrespective whether the damage has actually suffered or not.
What is reasonable compensation is clearly a question of fact which can be ascertained from the evidence on record. Section 74 of the Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for, as held by the Apex Court in the case of Fateh Chand v. Balkishan Dass reported in : [1964]1SCR515 . It is further held in the said case that Section 74 of the Contract Act is clearly an attempt to eliminate the somewhat elaborate refinements made under the English Common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the Common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties, a stipulation in a contract 'in terrorem' is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English Common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.
31. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Authority of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated, but the compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The Section, undoubtedly, says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of actual loss or damage. However, it does not justify the award of compensation when the consequence of the breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things or which the parties knew when they made the contract, to be likely to result from the breach. The decision in Fateh Chand's case (supra) was followed by the Supreme Court in Maula Bux's case (supra).
32. Damages for breach of contract are given by way of compensation for loss sufferred and not by way of punishment for wrong inflicted. Moreover, the measure of damages is not affected by the motive or the manner of the breach. Damages are compensatory and not psnal. One who has suffered loss from a breach of contract must take any reasonable steps that are available to him to damage caused or likely to be caused by the breach. He cannot claim to be compensated by the party in default for loss which is really due not to the breach but to his own failure to behave reasonably after the breach. Likewise, parties to a contract not infrequently assess the damages at which they rate a breach of the contract by one or both of them and introduce their assessment into the terms of the contract. By so doing however, they do not exclude the application of the rule that damages for a breach are to be compensatory and not penal and it is a question of the proper construction of the contract to decide whether a sum fixed in this way, however the parties may have described it, is a penalty, in which case it cannot be recovered, or a genuine attempt to liquidate, that is to say, to reduce to certainty, prospective damages of an uncertain amount, in which case the sum will be recoverable, if the amount is reasonable. If the sum so specified is a genuine pre-estimate of the damage which judged of as at the time of the making of the contract, seems likely to be caused if the breach provided for should occur; or again, if, though not an estimate of the probable damage, the parties have fixed it because they were agreed in limiting the damages recoverable to an amount less than that which a breach would probably cause, the Court will accept the sum fixed by the parties. If, on the other hand, the sum was fixed in terrorem, that is to say, in order to prevent or penalise a breach, the Court will not accept it, and the damages actually incurred must be assessed in the usual way. In construing the terms 'penalty' and 'liquidated damages' the Court will not be bound by the phraseology of the parties; they may call the sum specified 'liquidated damages', but if the Court finds it to be a penalty, it will be treated as such.
33. The amount of Rs. 10,000 paid by the vendee/plaintiff to the vendor/ defendant is, admittedly, an amount of earnest money and earnest money is nothing but a part of purchase price when the transaction goes forward. It is forfeited when the transaction falls through by reason of the fault or failure of the vendee. This proposition is very well settled in Maula Bux's case (supra).
34. In the present case. Clause 16 of the agreement for sale, at Ex. 38, clearly provides that the seller shall be entitled to forfeit the amount of earnest money in case of breach on the part of the buyer (plaintiff). There is clear evidence on record to show that the plaintiff-buyer is defaulter. Therefore, the amount of Rs. 10,000 being the earnest money under the contract for sale of the suit land is liable to be forfeited and the plaintiff is not entitled to recovery thereof. The said amount stipulated in Clause 16 cannot be said to be unreasonable in the circumstances of the case. Once the Court finds that the amount of earnest money involved in a contract of sale of property, movable or immovable, is justified and reasonable, the provisions of Section 74 of the Contract Act would not be attracted. The question of appreciation of the provisions of Section 74 of the Contract Act will come into play only in case of unreason-ableness of the amount stipulated in the agreement. The trial Court has found that the amount of Rs. 10,000 stipulated in the agreement for sale, Ex. 38, as earnest money cannot be recovered by the plaintiff-purchaser as he is a defaulter. There is nothing on record to show that the said amount is unreasonable. No such specific plea was raised in the trial Court. Consequently, no any specific issue is framed in this behalf. In absence of any specific plea regarding the unreasonableness of the amount to be forfeited in the event of breach of contract and also in absence of any other evidence on record, there is no reason to interfere with the finding of the trial Court that the plaintiff is not entitled to recover the said earnest money of Rs. 10,000 as he committed breach of the contract.
35. No doubt, if the forfeiture is of the nature of penalty or whatever the nomenclature the parties have given, the provisions of Section 74 of the Contract Act would be attracted. In every case of breach of contract the person aggrieved by the breach, is not required to prove the actual damages or loss before he can claim a decree and the Court is competent to award reasonable compensation in case of breach even if no actual damage is established. But the expression 'whether or not actual damage or loss is proved to have been caused thereby', is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with the rules. Where the Court is unable to assess the compensation the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation but not if the sum named is in the nature of penalty. Apart from that, in the present case, there appears to be no any plea that the amount forfeited by the defendant being in the nature of penalty or unreasonable in the circumstances. Needless to reiterate that earnest money must be given at the moment at which the contract is concluded. It represents a guarantee that the contract will be fulfilled or, 'earnest' is given to bind the contract. It is a part of the purchase price when the transaction is carried out. It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. 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. This proposition is very well settled by the Apex Court in the case of Shree Hanuman Cotton Mills and Anr. v. Tata Air Craft Ltd. reported in : [1970]3SCR127 . In view of the aforesaid settled proposition of law and considering the facts and circumstances emerging from the evidence on record and appreciating Clause 16 in the agreement for sale, Ex. 38, this Court has no hesitation in holding that the defendant-seller was entitled to forfeit the amount of Rs. 10,000 being the earnest money and the plaintiff was not entitled to recover the same. Therefore, the contention that the plaintiff ought to have been granted decree in respect of Rs. 10,000 being the earnest money deposited by him with the defendant is, totally, meritless and requires to be rejected.
(D) Whether the purchaser-plaintiff was entitled to the full decree, as prayed for ?
36. The decree passed in favour of the plaintiff in respect of Rs. 10,000 is also challenged by the original defendant by filing cross-objections. The subsequent amount of Rs. 10,000 paid by the plaintiff-buyer on 29-1-1972 was also withheld by the defendant. It will be interesting to note at this stage that in fact the defendant-seller has clearly written in the letter, Ex. 88, dated 21-1-1972 that the subsequent payment of Rs. 10,000 being the 2nd instalment would be adjusted towards the sale price of the suit land agreed to be sold to the plaintiff. This amount cannot be said to be an amount of earnest money. Apart from that there is no stipulation or any agreement between the parties with regard to the forfeiture of the amount in case of breach on the part of the plaintiff-purchaser. In the circumstances of the case, the trial Court came to the conclusion that the plaintiff is entitled to recover the said amount and the defendant is not eligible to withhold the said amount. Therefore, decree in respect of that amount came to be passed. It is contended that this amount is forming part of the consideration as it was to be adjusted against the sale price should not have been decreed. The subsequent amount of Rs. 10,000 cannot be said to be an earnest money. It was paid by the plaintiff-purchaser by way of demand draft on 21-1-1972 which was agreed to be adjusted towards the sale price of the suit land as evidenced from the letter of the defendant-seller, at Ex. 88. Under these circumstances, the remaining amount of Rs. 10,000 was a part-payment of the consideration in respect of the suit land and was not an earnest money. Admittedly, there is no evidence to show that the defendant-seller had suffered actual loss or damage of more than Rs. 10,000 on account of the breach committed by the plaintiff-purchaser. Under these circumstances, the defendant was not eligible or entitled to withhold the subsequent amount of Rs. 10,000.
37. It would be interesting to refer to the decision of the Supreme Court in Shree Hanuman Cotton Mill's case (supra), wherein, the Supreme Court has laid down principles regarding earnest money:
(1) It must be given at the moment at which the contract is concluded.
(2) It represents a guarantee that the contract will be fulfilled or, in other words, 'earnest' is given to bind the contract.
(3) It is a part of the purchase price when the transaction is carried out.
(4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. 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 money.
Reliance is also placed on the decision of the Supreme Court in Fateh Chand's case. Having examined the ratio of the said decision, it becomes clear that it helps the contention of the original plaintiff. In the said case, there was a covenent in the contract for sale of immovable property that if for any reason the vendee failed to get the sale deed registered by the date stipulated, the amount of Rs. 25,000 (Rs. 1,000 paid as earnest money and Rs. 24,000 paid out of the price on delivery of possession) shall stand forfeited and the agreement shall be deemed cancelled. It was held in the said case that the covenant for forfeiture of the amount of Rs. 24,000 is manifestly a stipulation by way of penalty. This decision applies with all force to the facts of the present case on hand and there is no stipulation for forfeiture of the remaining amount of Rs. 10,000 which had to be adjusted towards the sale price.
38. In view of the facts and circumstances of the case, there appears to be no substance in the present appeal and the cross-objections. Therefore, both the appeal and the cross-objections are required to be dismissed while confirming the impugned judgment and decree of the trial Court.
In the result, the First Appeal and Cross-objections are dismissed with no order as to costs.