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Case Number

Appeal No. 887 of 1971 and 523 of 1974

Attorney(S)

V.S Subramaniam and T. Narayanaswamy for Applt.
Mr. R. Thillai Villalan for Respt.

Judges

Ismail, J.

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

These two appeals arise from a common judgment of the learned Fifth Assistant Judge, City Civil Court, Madras, in O.S. No. 3631 of 1966 and O.S. No. 3466 of 1967. For convenience the parties are referred to only as the appellant and the respondent (the Corporation of Madras). Under the contract the appellant agreed to provide R.C.C. slabs covering a storm water drain on Habibullah Road, T. Nagar, Madras. The original completion date was 31 March 1965.

On 29 March 1965 the appellant informed the respondent that the work could not be completed in time due to non-availability of materials (Ex. A.13). The respondent extended time by two months, so completion became due on 28 May 1965. The appellant did not complete the work by that date.

Two suits were filed. In O.S. No. 3631 of 1966 the appellant (as plaintiff) claimed Rs. 1,109-85 on the ground that the contract had been rendered incapable of performance by the respondent's conduct — specifically, that defectively constructed side walls gave way and prevented performance. The appellant had deposited a security of Rs. 1,650 and the respondent had retained Rs. 525 from certain bills; the appellant claimed credit for Rs. 1,065-15 for materials supplied by the respondent and sued for the residual sum.

In O.S. No. 3466 of 1967 the respondent (as plaintiff) sought recovery of Rs. 6,898-58. The respondent alleged that due to the appellant's default it had to call fresh tenders and entrust the remaining work to another contractor, incurring a loss of Rs. 6,358-43; to this was added Rs. 1,065-15 (value of materials supplied) and after adjusting the retained Rs. 525 the total claimed was Rs. 6,898-58. The respondent also sought forfeiture of the appellant's security deposit of Rs. 1,650.

The trial court framed issues in both suits, found that the appellant was guilty of breach of contract, held the respondent entitled to damages and to forfeit the security deposit, dismissed O.S. No. 3631 of 1966 and decreed O.S. No. 3466 of 1967. The present appeals challenge that judgment.

[The published opinion notes that some detailed discussions of facts are omitted by the editor.]

Legal Issues Presented

Who was guilty of the breach of contract — the appellant or the respondent?
If the respondent was entitled to damages for breach, what was the correct quantum of damages?
Whether the respondent, in addition to claiming damages, could also forfeit the appellant's security deposit of Rs. 1,650 (i.e., whether the respondent must give credit for the deposit against damages claimed).

Arguments of the Parties

Appellant's Arguments

The appellant contended that she could not complete the contract because the side walls (constructed earlier) were defectively built and gave way, thereby preventing performance of her obligations under the contract.
The appellant claimed recovery of amounts held by respondent: the security deposit of Rs. 1,650 and Rs. 525 retained from bills, less a credit of Rs. 1,065-15 for materials supplied, resulting in a suit claim of Rs. 1,109-85.

Respondent's Arguments

The respondent denied that defective side walls prevented performance and asserted that the appellant failed to complete the work within the stipulated time.
Because of the appellant's default the respondent had to call fresh tenders and entrust the remaining work to another contractor, suffering a loss of Rs. 6,358-43. Adding Rs. 1,065-15 (value of materials) and adjusting Rs. 525 retained, the respondent claimed Rs. 6,898-58.
The respondent also sought forfeiture of the appellant's security deposit of Rs. 1,650.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Vellore Taluk Board, by its President v. Gopala Swami Naidu (Full Bench)	Where a contract gives the aggrieved party both a right to forfeit a deposit and a right to claim damages, the aggrieved party cannot recover the full damages in addition to retaining the deposit; the deposit must be credited against the loss — i.e., recovery cannot exceed the difference between loss and deposit.	The court treated this Full Bench decision as binding, followed its reasoning (via Sadasiva Aiyar, J.'s view) and held that the respondent must give credit for the appellant's Rs. 1,650 security deposit when assessing damages. Consequently the respondent's decree was reduced accordingly.
Ockenden v. Benly Essex v. Daniell	English case law referenced by the Full Bench (and by Sadasiva Aiyar, J.) supporting the principle that a deposit functions as security and that recovery beyond the difference between loss and deposit is not permissible.	The court noted that the Full Bench had referred to this English authority; the decision was relied on by the Full Bench and thus indirectly supports the court's conclusion to credit the deposit against damages.
Howe v. Smith	English authority cited by the Full Bench and Sadasiva Aiyar, J. in support of the same general principle regarding deposits and damages.	The court recorded that the Full Bench referred to this case; it formed part of the chain of authorities underlying the Full Bench's holding, which the court followed.
Mayne on Damages (textbook)	Textual authority cited by Sadasiva Aiyar, J. in support of the proposition that deposit money is security for due performance and should be accounted for when computing damages.	The court noted that Sadasiva Aiyar, J. relied on Mayne on Damages in reaching the conclusion that the plaintiff cannot recover more than the difference between loss and deposit; the court accepted that reasoning.

Court's Reasoning and Analysis

The court proceeded in three analytically distinct steps corresponding to the three issues framed on appeal.

On breach of contract: the court found on the evidence that the appellant alone was guilty of breach. The appellant's asserted ground for non-performance — collapse of the side walls — was not proved. Thus the court concluded that non-performance was not caused by any actionable conduct of the respondent and that the appellant was in default.
On quantum of damages: the respondent's evidence that it had to call fresh tenders and engage another contractor to complete the works, and that it thereby incurred a loss of Rs. 6,358-43, was not contradicted. The court accepted that figure as the loss suffered by the respondent as a consequence of the appellant's breach.
On whether the respondent could both forfeit the deposit and recover full damages: the court examined binding precedent. A Full Bench decision of this court (Vellore Taluk Board v. Gopala Swami Naidu) had concluded that where a contract provides for both forfeiture of a deposit and the right to recover loss, the aggrieved party cannot recover more than the difference between the loss and the deposit (i.e., must give credit for the deposit). That Full Bench had relied on English authorities (including Ockenden and Howe) and Mayne on Damages. The present court found no higher authority overruling that Full Bench and therefore treated the principle as binding. Applying it, the court held that the respondent must give credit for the appellant's Rs. 1,650 security deposit when assessing recoverable damages.

Following that legal principle, the court computed the respondent's entitlement: the trial court had decreed Rs. 6,898-58 (which comprised the loss plus material value etc.). Subtracting the Rs. 1,650 security deposit yields Rs. 5,248-58. The court therefore modified the trial court's decree accordingly.

The court further reasoned that because the security deposit was taken into account in reducing the respondent's recovery, the appellant could not obtain a separate decree for return of the deposit in her own suit.

Holding and Implications

Holding:

The appeals resulted in a modification of the trial court's judgment. The court held that:

DISMISSAL of O.S. No. 3631 of 1966 (the appellant's suit) — the appellant was not entitled to recover the claimed sum because she was held to be in breach of contract.
MODIFICATION / DECREE in O.S. No. 3466 of 1967 (the respondent's suit) — the respondent is entitled to recover Rs. 5,248-58 (being the aggregate claimed by the respondent less credit for the appellant's Rs. 1,650 security deposit), instead of Rs. 6,898-58 as originally decreed by the trial court.
There will be no separate decree in favour of the appellant for return of the deposit because that deposit has been credited in reduction of the respondent's decree.
There will be no order as to costs in either appeal.

Implications:

The direct consequences are the dismissal of the appellant's claim and a reduced monetary recovery for the respondent (Rs. 5,248-58). The court followed an existing binding Full Bench decision of this court on the point of crediting security deposits against damages and did not purport to create new precedent. The opinion records that no decision of a higher court was shown to overrule the Full Bench; accordingly the court applied that Full Bench principle as binding authority.

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Messrs. Sudhakar & Co., By Propr. M. Sivagnanambai v. The City Municipal Corporation Of Madras, By Its Chief Executive Authority, The Commissioner.

1. These two appeals arise out of a common judgment of the learned 5th Asst. Judge, City Civil Court. Madras, rendered in O.S Nos. 3631 of 1966 and 3466 of 1967. For the purpose of this judgment, the parties will be referred to only as the appellant and the respondent. The appellant was the sole plaintiff in O.S No. 3631 of 1966 and the sole defendant in O.S No. 3466 of 1967, while the respondent was the sole plaintiff in O.S No. 3466 of 1967 and the sole defendant in O.S No. 3631 of 1966. Admittedly the appellant herein entered into a contract with the respondent, the Corporation of Madras, for providing R.C.C slabs covering the storm water drain in Habibullah Road, T. Nagar, Madras, on the side walls which had been constructed earlier. Under the original contract entered into between the parties, the work was to be completed before 31st March 1965. However, the appellant herein wrote to the respondent on 29th March 1965 under Ex. A. 13, stating that the work could not be completed within the prescribed period due to non-availability of materials in time. Under those circumstances, the respondent extended the time for performance of the contract for a period of two months from 29th March 1965. Consequently, the appellant had to complete the work before 28th May 1965. Admittedly, the appellant did not complete the work on or before 28th May 1965. After series of correspondence that passed between the parties, the appellant instituted the former suit, namely, O.S No. 3631 of 1966 for recovery of a sum Rs. 1109-85. This sum was claimed on the basis that the contract was rendered incapable of performance by the conduct of the respondent itself, since the side walls were defectively constructed and they gave way preventing the appellant from performing her obligation under the contract. The appellant had made — security deposit of Rs. 1650 and on certain bills submitted by the appellant, a sum of Rs. 525 had been retained by the respondent herein. Thus, according to the appellant, her moneys amounting to Rs. 2179 (Rs. 1650 + 525) were with the respondent herein. At the same time, the appellant conceded that for the value of certain materials supplied by the respondent, credit must be given for a sum of Rs. 1065-15 and after deducting the said sum, the suit was instituted for recovery of Rs. 1109-85.

2. The respondent herein resisted the suit patting forward the contention that the appellant did not complete the work as per the terms of the contract within the time stipulated, that therefore the respondent had to take steps to complete the remaining work by entrusting the same to another contractor after calling for fresh tender, and that on account of the failure of the appellant to complete the work as per the terms of the contract, the respondent incurred heavy less and damages to the tone of Rs. 6358-43. The respondent denied that the non-performance of the contract by the appellant was due to any defective side walls which prevented the appellant from performing her contract.

3. On the above pleading of the parties, the trial court framed the following issues—

1. Whether the plaintiff is entitled to recover the suit amount from the defendant?

2. whether the security: deposit made by the plaintiff has been for feared for the reasons stated in para 3 of the written statement?

3. To what relief, if any. is the plaintiff entitled

O.S No. 3466 of 1967 was instituted by the respondent herein for recovery of a sum of Rs. 6898—58 on the same allegations referred to already. According to the respondent, it suffered loss to the extent of Rs. 6358—43, on account of the default committed by the appellant and the necessity for entrusting the work to another contractor. To this sum of Rs. 6358-43 was added a sum of Rs. 1065-15 being admittedly the value of the materials supplied to the appellant by the respondent. Consequently, after adjusting the retention amount of Rs. 525, the amount the respondent was entitled to was Rs. 6898-58. It is for this amount that the latter suit was instituted by the respondent. The respondent also claimed that it was entitled to forfeit the security deposit of Re. 1650 admittedly made by the appellant herein.

4. The appellant resisted the above suit putting forward the same case as she put forward in her plains. On the basis of the above pleadings, the trial court framed the fallowing issues in this suit:

1. Who committed the breach of the contract, the plaintiff or defendant?

2. To what amount it the plaintiff entitled?

3. To what relief is plaintiff entitled?

5. The learned Fifth Asst. Judge, City Civil Court, Madras, by his judgment and decree dated 5th April, 1969, came to the conclusion that it was the appellant who was guilty of the breach of contract and that therefore she was liable to pay damages to the respondent herein. He also held that the respondent was entitled to forfeit the security deposit of Re. 1650 made by the appellant herein, with the result the suit instituted by the appellant, namely, O.S No. 3681 of 1966 was dismissed and the suit instituted by the respondent; namely. O.S No. 3466 of 1967 was decreed, K is against the above judgment and decree that the present appears have been preferred.

6. In these two appeals, the points that arise for consideration are:

(1) Who was guilty of the breach of contract: whether it was the appellant or the respondent? (2) if the respondent was entitled to damages for the breach of contract, what is the quantum of damages to which it was entitled; and (3) Whether the respondent in addition to claiming damages can also forfeit the security deposit of Rs. 1650 made by the appellant herein?

7. As far as the first point is concerned, the evidence absolutely makes it clear that it was the appellant who was guilty of the breach of contract.

[The discussion of facts omitted:—Ed.]

Consequently, the only ground put forward by the appellant for non-performance of the contract, namely, collapse of the side walls, had not been established and hence the appellant alone was guilty of the breach of contract and not the respondent and that is my conclusion on point No. 1.

8. As far as the second point is concerned, there had been no evidence contrary to the evidence let in on behalf of the respondent herein that in view of the failure of the appellant to fulfil the contract, the work had to be entrusted to another person after calling for tenders and that as a result of the completion of the work by that person, the respondent suffered loss to the extent of Rs. 6358—43.

[The discussion of facts is omitted:—Ed.)

9. As far as the third point is concerned, the question to be considered is, whether the respondent was entitled to claim the loss suffered by it by having the work completed by another person, in addition to forfeiting the earnest deposit of Rs. 1650 admittedly made by the appellant herein. In other words, even if the terms of the contract grant two rights to a party like the respondent, namely, to forfeit the earnest deposit and also to claim damages, the question is, in arriving at the quantum of damages, should not credit be given to the defaulting party for the earnest deposit made by that party. This question has been concluded as far as this court is concerned by a Full Bench decision of this court in the Vellore Taluk Board, by its President v. Gopala Swami Naidu(1). The opinion of the Full Bench is very short and the Full Bench after referring to the decitione in Ockenden v. Benley Essex v. Daniell(2) and Howe v. Smith(3) stated—

“We accordingly agree with Sadasiva Aiyar, J. and dismiss the appeal with costs.”

Therefore, we have to go back to the view of Sadasiva Aiyar, J. to find out as to what exactly was the decision of the Full Bench. The learned Judge posed the question and answered the same as follows:—

“But the question in the present case is whether, if the person for whose benefit the forfeiture clause was entered in the contract did not content himself with retaining the deposit as a forfeiture but send for the actual loss incurred by him through the default of the other party on the ground that the deposit amount (Which according to all the English cases was security for the due performance of the contract by the defaulter) was insufficient to cover such a loss or on the ground that the contract provided for both the forfeiture of the deposit and also for the right to recover the loss, whether in such a case the plaintiff was not legally bound to give credit to the deposit money and whether he could recover more than the difference between the damages incurred and the deposit money. I am inclined to bold that the plaintiff in such a case cannot recover more than the difference between the loss incurred by him and the deposit money.”

The learned Judge in support of the above opinion of his referred to Mayne on Damages as well as so the decision of Ockenden v. Benly referred to already.

10. The obvious rationale behind such judgment is, where a breach of contract has been committed, the party not in default is entitled only to receive damages or compensation for the loss which he or it suffered as a consequence of the other party committing default and the very notion of damages or compensation for the loss suffered will exclude the idea of the said party making any profit out of the breach committed by the other party. If it is to be held that the party not in default is entitled to claim the whole of the toss it suffered and also to forfeit the security deposit, he will be getting more than the compensation to which he is entitled or in other words, he will be making a profit out of the breach committed by the other party. That is the reason why the Full Bench of this court took the above view. The said decision is binding on me. The learned counsel for the respondent was not able to bring to my notice any decision of the Privy Council or the Supreme Court overrating the above decision or a decision of a Fuller Beach of this court taking a view different from the view of the Full Bench referred to already. Under these circumstances, following the judgment of the Full Bench, I must hold that the respondent herein, while claiming damages from the appellant herein by way of compensation for the loss suffered by it, as a result of the breach of contract committed by the appellant, must give credit for the suns of Rs. 1630 deposited by the appellant as security deposit. If so, in O.S No. 3466 of 1967, the respondent herein would be entitled to a decree for Rs. 6898-85 minus Rs. 1650 that if, Rs. 5248-58 only.

11. Since the security deposit made by the appellant had been taken into account in arriving at the amount to which the respondent was entitled, the appellant herein will not be entitled to obtain a separate decree for the return of the said security deposit in the sail filed by her.

12. The result is, the judgment of the trial court is modified to the extent indicated above and O.S No. 3631 of 1966 instituted by the appellant herein will stand dismissed nod O.S No. 3466 of 1967 will stand decreed for Rs. 5248-58 instead of Rs. 6898-58 as prayed for and decreed by the trial court. There will be no order as to costs in either appeal.

V.C.S

Messrs. Sudhakar & C... v. The City Municipal C...