The Judgment of the Court was as follows:—
This appeal arises out of a suit for refund of Rs. 700 paid by the Plaintiff to the Defendant as earnest money for the purchase of certain land.
It appears that under a bainapatra, dated November 1914, the Defendant agreed to sell to the Plaintiff 1 bigha 4 cottas of land together with permanent structures thereon for Rs. 4,400. Out of the purchase money so settled, Rs. 700 was paid by the Plaintiff to the Defendant as earnest money and it was agreed the on receipt of the purchase money within three months, the kobala would be executed. There was an express provision in the agreement that in case the Plaintiff failed to pay the balance of the purchase money within the time fixed, he would forfeit the earnest money and would have no right to claim a refund of the same.
The Defendant pleaded that the transaction fell through owing to the failure of the Plaintiff to pay the balance of the purchase money. It is found that the Plaintiff was not in a position to pay the balance of he purchase money, namely, Rs. 3,700 within the time fixed, and the Plaintiff never offered to pay the balance of the purchase money to the Defendant.
The Court of first instance dismissed the suit but on appeal the learned Subordinate Judge was of opinion that as time was not of the essence of the contract in the present case, the Plaintiff was entitled in equity to obtain a refund of the earnest money although he failed to pay the balance of the purchase money within the time fixed.
The learned Subordinate Judge relied upon the case of Jamshed Khodaram v. Burjorji Dhunjibhai . But we do not think that case has anything to do with the present. There, in a suit for specific performance of a contract for sale of certain property, the Judicial Committee held that time was not of the essence of the contract and the Plaintiff was entitled to specific performance. Here it is found that not only was the Plaintiff not in a position to pay the money but that he never offered to pay, either within the time fixed or at any time afterwards, the balance of the purchase money and to complete the contract.
The question therefore is whether, under these circumstances, the Plaintiff is entitled to a refund of the purchase money.
As pointed out by Lord Macnaghten in Soper v. Arnold “the deposit serves two purposes, if the purchase is carried out, it goes against the purchase money, but its primary purpose is this, it is a guarantee that the purchaser means business.” The law on the point is thus stated in Fry on Specific Performance, 5th Edn., para. 1878:—“The deposit unless paid on special terms is not merely part payment but is an earnest: so that if the contract is performed, it is brought into account at part payment: On the other hand, if the purchaser makes default, it is to be retained by the vendor. The deposit is therefore a security for the performance of the purchaser's part of the contract. The authorities have not been uniform on this question but the weight of authority is in favour of the statement above made.” It is pointed out in the case of Nabab Khaja Habibulla v. Arman Dewan . “The test in each case is did the parties mutually agree expressly or by implication that the sum paid was to be treated not merely as part payment but as a guarantee for the performance of the contract?”
It was contended that, the amount paid (Rs. 700) was a large sum of money and is more than what is usually advanced as earnest money, that therefore the Court should treat it as a case of penalty and that the Defendant is not entitled to get anything unless it is found that he has suffered any less.
No hard and fast rule, however, can be laid down as to what constitutes “earnest money.” In the present case, it is about 1/6th of the amount agreed upon to be paid. We have also to consider the fact that the Defendant had not a title to the whole of 1 bigha 4 cottas which he agreed to convey to the Plaintiff and had to purchase 1 cotta of land from his brother to whom it belonged.
In these circumstances, we are unable to hold that there was any equitable consideration in favour of the Plaintiff and we are of opinion that the Plaintiff is not entitled to recover the earnest money, the result being that the decree of the lower Appellate Court is set aside and that of the Court of first instance restored.
Each party to bear his own costs throughout.
S.C.C