Keri Venkoba Char v. Kuir Sanjeevappa

1. The main question argued In this second appeal is whether the plaintiff is entitled to retain the sum of Rupees 1,500 paid by the defendant under a contract of sale. The said contract was entered into on 19th September 1930, in and by which certain lands of the plaintiff were agreed to be sold to the defendants for a sum of Rs. 3,000. The terms of the contract were embodied in a karar between the parties. Ex. A was executed by the defendant in favour of the plaintiff and Ex. I which is a counterpart was executed by the plaintiff in favour of the defendant. There is no difference in regard to the terms in both these documents. Ex. A runs thus:

In the presence of some mediators I have settled the sale price of the land mentioned hereunder at Rs. 3,000 (Rupees three thousand). Out of the said amount, I have paid in cash this day a sum of Rs. 1,500 (Rupees fifteen hundred) as advance and I have taken possession of the said land from now. I shall pay the remaining entire amount of Jits. 1,500 (Rupees fifteen hundred) together with interest thereon from this day at Re. 1 (one Rupee) per cent, per mensem by 16th Vaisagha Suddha of the year Prajothpathi (2nd May 1931) and I shall get the deed of sale executed in respect of this land at my own expense. If I should fail to pay the said amount on the prescribed date, the amount of Rs. 1,500 paid as advance shall become forfeited and you shall be entitled to take possession of your land. I shall have no rights whatever to the said land.

2. In pursuance of the said agreement Rs. 1,500 was paid on the date of the contract and the lands were put in possession of the defendant. The defendant did not pay the balance of the purchase money Rs. 1,500 according to the plaintiff on 2nd May 1931, and therefore he sent a registered notice on or about 19th May 1931, in and by which he called upon the defendant to deliver possession of the land within eight days from the receipt of the notice. The defendant failed to deliver possession. Thereupon the plaintiff instituted the present suit, for recovery of possession of the lands and for damages for use and occupation for 1931-32 which was estimated at Rs. 50 and for damages till delivery of possession. The main defence of the defendant was that he did pay the balance of the purchase money by the execution of a mortgage of some of his lands to one Ramachar of Kosgi under an agreement with the said Ramachar that he should pay the said sum of Rs. 1,500 to the plaintiff within the time stipulated in the agreement, that the plaintiff obtained the transfer of the said mortgage and therefore he had fulfilled his part of the contract. A further plea was taken which is thus formulated in para. 9 of the written statement:

Without prejudice to the foregoing pleas, the defendant submits that the forfeiture clause in the said agreement is a penalty, and cannot therefore be enforced. The suit for the recovery of the land is therefore not maintainable.

3. The learned District Munsif who tried the suit came to the conclusion that the balance of the consideration was paid by the defendant as contended. Therefore he dismissed the plaintiff's suit. On appeal the learned District Judge did not give a definite finding as regards the transfer of the mortgage and was of the opinion that the transfer should not be held as equivalent to Rs. 1,500 payable in cash by the defendant. However, he held that the forfeiture clause was a penal one and that the amount forfeited was out of all proportion to the total consideration and therefore he gave a nominal compensation of Rs. 100 and gave a decree for possession of the lands subject to the payment by the plaintiff of Rs. 1,300 deducting the sum of Rs. 100 for compensation and Rs. 100 for mesne profits. When the matter came up for hearing before me on 10th March 1936, I called for a revised finding in regard to the transfer of the mortgage and the alleged payment of the balance of consideration as pleaded by the defendant. The learned District Judge has now returned a finding that the balance of consideration was not paid as contended by the defendant. This being a finding of fact it cannot be challenged in second appeal, But the question still remains whether the decree passed by the learned District Judge is correct. It is contended by Mr. Sampath Iyengar that the learned Judge ought not to have directed the return of the said sum of Rs. 1,500, as according to the terms of the contract it must be deemed to have been forfeited. His argument is that the said sum of Rs. 1,500 is by way of deposit and as the defendant has committed default in the performance of the contract, the plain. tiff is entitled to retain the same. It is a well understood principle of English law that where under a contract of sale of land a sum of money is paid as deposit the vendor is entitled to retain the same if the contract goes off by default of the purchaser.

4. This principle was laid down in Howe v. Smith (1884) 27 Ch D 89, this being considered as a leading decision on this branch of law. The basis of the decision is that a sum paid as a deposit is a guarantee for the performance of the contract. As explained by Bowen, L.J.:

A deposit, if nothing more is said about it, is, according to the ordinary interpretation of business men, a security for the completion of the purchase.

5. As he again observes:

The question as to the right of the purchaser to the return of the deposit money must, in each case, be a question of the conditions of the contract.

6. In principle it ought to be so, because of course persons may make exactly what bargain they please as to what is to be done with the money deposited. In Natesa Iyer v. Appavu Padayaohi AIR 1915 Mad 896, the question arose whether this principle of English law should be applied to India. The majority of the Judges who composed the Full Bench, Sir Arnold White, C.J. and Miller, J. took the view that it would apply, but Sadasiva Iyer, J. took a different view. I am therefore bound by the decision of the majority. I may in passing observe that this principle was applied by Lord Shaw to a case which went up to the Privy Council from India: Vide Chiranjit Singh v. Har Swarup AIR 1926 PC 1. In the said Full Bench decision which related to a contract for sale of lands a sum of Rupees 4,000 was paid as advance, the purchase price being Rs. 41,000 and one of the terms of the contract was that in default by the purchaser the deposit should be forfeited. When the matter came before a Bench, Wallis and Sankaran Nair, JJ. differed, Wallis, J. holding that the deposit is liable to be forfeited, Sankaran Nair, J. taking a different view. The Full Bench by a majority affirmed the decision of Wallis, J., following the principle of the decision in Howe v. Smith (1884) 27 Ch D 89. But they also enunciated another principle. It is thus stated by Miller, J., at p. 187:

There may be oases where the Courts may find that the amount of the deposit or payment in advance is so great in comparison with the amount payable under the contract, that the parties cannot have intended it as a mere security for performance, but rather as a punishment for non-performance of the contract, and in those cases the Court may doubtless refuse to allow the retention of the whole of the deposit; but where there is no such disproportion and nothing unreasonable in regarding the deposit as security, then the defaulter will not be allowed to recover back what he has paid on an express stipulation that it shall be forfeited in the event of default. This is the rule which was accepted in Manian Patter v. Madras Railway Co., (1906) 29 Mad 118 as being in accordance with the English oases, and it is a rule which I am prepared to accept as being obviously calculated to do justice.

7. Arnold White, C.J. at p. 186 observes:

In In re Dagenham (Thames) Dock Co.; Ex parte Hulse (1873) 8 Ch A 1022, where it was held the vendor could not retain the deposit, the deposit was half the purchase money. There, as Wallis, J. points out, the amount was so large as to take it out of the ordinary class of deposits. There is certainly nothing extraordinary in a 10 per cent, deposit under an agreement for the sale of land.

8. The view of Wallis, J. is found stated in Natesa Iyer v. Appavu Padayaohi (1910) 33 Mad 376 at p. 380. Seshagiri Iyer, J. in Orr v. Chitha Chinna Yegappa Chetti AIR 1916 Mad 584 understood the Full Bench decision as laying down the said principle. At p. 320 of 28 IC he observes thus:

The reference to In re Dagenham (Thames) Dock Co.; Ex parte Hulse (1873) 8 Ch A 1022 shows that the reasonableness of the amount is one of the factors in determining whether there was a deposit in reality, although it goes by that name in the contract. If the amount is very large, naturally the Courts would be unwilling to hold that it was by way of deposit that the money was originally paid.

9. This also accords with the rule of English law as stated in Leake on Contracts, Edn. 7 at pp. 70 and 71:

So long as the vendor is willing to complete and the purchaser is not entitled to rescind, the former may retain the deposit; or if the purchaser is in default, and the vendor rescinds on that ground or if by the terms of the contract it is forfeited by an event which puts an end to the contract. Where the sum liable to forfeiture bears an excessively high proportion to the total purchase money, the Court will treat it as a penalty and grant relief accordingly.

10. It is therefore thus clear that for the application of the rule of English law as to forfeiture of deposit, it? must be unmistakably clear from the contract that the sum forfeited was paid or deposited as a deposit, "it must be a deposit proper" to use the language of Lord Dunedin in Mayson v. Olouet (1924) AC 980 at p. 986 where the learned Lord referring to Howe v. Smith (1884) 27 Ch D 89, observes:

If the learned Judges had held that the deposit was only part payment and not a deposit proper, they would have ordered its return.

11. Therefore the question in this case is, was the sum of Rs. 1,500 paid as a deposit? No doubt the term used is 'advance' but that does not conclude the matter though it may go a long way in determining the intention of the parties. Still it has to be ascertained what the intention of the parties was. Dealing with reference to a contract for the sale of goods, Jackson, J. remarked on the use of the word in the contract before him thus, in Rattamma v. Krishnamurthy AIR 1928 Mad 326 at p. 42:

It would be indeed hazardous to infer that in the Kistna District where a vendor accepts what he calls 'advance' he is taking a deposit clothed will all the implications which that term has acquired in the West through the course of European civilization.

12. As observed by Seshagiri Iyer, J. in Orr v. Chitha Chinna Yegappa Chetti AIR 1916 Mad 584, in spite of the use of the term 'deposit' the Court can come to the conclusion that it was not given as deposit in the strict sense of the term. It will be seen from this contract that what was paid as advance was half the purchase money and the reference to the payment is prefaced by stating that this sum is paid out of the total sum of the purchase money, Rs. 3000, and the balance of Rs. 1,500 is referred to as the remaining entire amount. The said balance is payable with interest. Possession has been delivered under the terms of the contract and the penalty for non-payment of the balance of purchase money is surrender of possession and forfeiture of the said sum of Rs. 1,500. Therefore on a fair construction of the contract it seems to be clear that the parties cannot have intended that the sum of Rs. 1,500 was a mere security for performance of the contract but that they intended the forfeiture rather as punishment for non-performance of the contract. The case in In re Dagenham (Thames) Dock Co.; Ex parte Hulse (1873) 8 Ch A 1022, is very analogous to the present save for the fact that the term 'advance', does not occur in the contract in that case. There was a contract of sale under which the Dagenham Dock Co. agreed to purchase certain properties from Hulse. Under the terms of the contract, £4000 was the sale price of which £2000 was to be paid on the execution of the agreement whereupon the company must be let into possession and the remaining £2000, with interest from the date of the agreement, was to be paid on 1st November 1865, when the purchase was to be completed. The agreement further contained a clause providing that on failure to pay on the due date the vendor has the right to reenter and repossess the land without the obligation to return any portion of the £2000 paid or interest thereon which should be absolutely forfeited to the vendor £2000 was paid on the execution of the agreement and the company was let into possession. The company committed default in the payment of the purchase money and the vendor sued for possession. James, L.J. was of the opinion that it was a clear case of a mere penalty for nonpayment of the purchase money and Mellish, L.J. concurred in the said opinion and observed thus:

When you look at the last agreement, it provides that if the whole £2000 with interest, or any part of it, however small, remains unpaid after a certain day, then the company shall forfeit the land and the portion of the purchase money which they have paid. It appears to me that this is clearly in the nature of a penalty, from which the Court will relieve.

13. As in that case, there can be no doubt that the forfeiture clause in the contract Ex. A in this case is in the nature of a penalty, from which the defendant is entitled to be relieved. Mr. Sampath Iyengar relied on some cases to show that the amount of money deposited ought not to be taken into consideration in determining the question whether it is liable to be forfeited in default by the purchaser. I quite agree. But it is an element to be considered in determining whether under the contract the sum was paid as deposit, And if after such consideration it is unmistakably clear that the amount paid was paid only as a deposit with the intention that it should serve as security for the performance of the contract, the parties must be held to be bound to their bargain. In Sprague v. Booth (1909) AC 576, one of the oases relied on by Mr. Sampath Iyengar, there was a deposit of £250,000 but it will be seen that the purchase price was 10 million pounds. Therefore there was no such disproportion to the purchase money and nothing unreasonable in regarding the deposit as security. Similarly in Mayson v. Olouet (1924) AC 980 the deposit was a sum of £25,000 and the price was £250,000. Thus the deposit was only 10 per cent, of the purchase money. In Bishenchand v. Radha Kishan (1897) 19 All 489, no doubt the sum deposited was more than half the purchase money. But the learned Judges construed the said amount as a deposit and not as a mere part payment. Mr. Sampath Iyengar has since brought to my notice a decision of Madhavan Nair and Stodart, JJ. in A.S. No. 489 of 1930 and 159 and 212 of 1931. It will be seen on a reference to the facts of the case that the amount was expressly deposited as security "for acting in all things under the Karar" in that suit and it was expressly stipulated that "the whole of the deposit or the portion that may be necessary therefor be taken either as fine or loss". There was thus an express stipulation that the amount was mainly intended as security for the performance of the contract and it therefore came within the principle of Howe v. Smith (1884) 27 Ch D 89. It seems to me therefore that the decision of the learned District Judge is correct. In the result the second appeal fails but I make no order as to costs. As per the order of Burn, J. the sum of Rs. 800 or such sum as may be payable has to be paid with interest at 6 per cent, from 1st April 1934. Leave refused.