Janki Nath Wazir, C.J:— This is an appeal by Sardar Sulakhan Singh plaintiff against the decision of the learned District Judge, Jammu dismissing his suit for the recovery of Rs. 6220.40 nP out of the deposit of Rs. 9980/- made by him with the defendant.
2. The plaintiff secured a contract from DDSTXV Corps for supply of meat on roof and purchase of skins of goats and sheep for a Period extending from 26th October, 1957 to 19th November, 1957. An informal agreement was entered into and the terms agreed upon were incorporated in that agreement. The plaintiff wrote a letter on 21st October, 1957 repudiating the contract which was received by the defendant on 24th October, 1957. But on 23rd October the plaintiff deposited an amount of Rs. 9980/- with the defendant as security for performing the contract. He did not supply meat to the Army and the Brigadier in charge Administration informed the plaintiff that his security deposit had been forfeited and that he would be liable to make good the difference between the price fixed under the contract and the price which the defendant had to pay to buy meat in the open market which amounted to Rs. 5110.64 nP. The plaintiff brought the present suit in which he allowed the defendant to deduct Rs. 5110.64 nP as excess price paid for purchase of meat in the open market and claimed Rs. 1351.4 nPs which the defendant had earned as profit by the sale of goat and sheep skins which should have been earned by the plaintiff under the contract. Deducting Rs. 5110-64 nP. from Rs. 9980/- and adding Rs. 1351-4 np the plaintiff claimed Rs. 6620.40 np, from the defendant. The plaintiff alleged that the defendant was not entitled to forfeit the deposit amount, but could only recover damages incurred on account of excess price paid for the purchase of meat in the open market. The defendant resisted the suit on the ground that according to the terms of the contract the amount of deposit which was a security for the performance of the contract was liable to be forfeited on account of breach of contract on the part of the plaintiff. It was further alleged that the defendant had incurred a loss of Rs. 5110.64 nP. on account of excess price paid for the meat purchased in the open market which was also recoverable from the plaintiff. The defendant's pleas found favour with the trial Court and the plaintiff's suit was dismissed. Hence this appeal.
3. It is contended by the learned counsel for the plaintiff appellant that the case falls under Section 74 of the Contract Act and though a specific sum was named as payable in case of breach, the Court had discretion to allow any reasonable compensation not exceeding the amount so named and that as the defendant had incurred loss to the extent of Rs. 5110.64 nP. only as admitted by them, that amount alone was deductible from the security deposit. Section 74 of the Contract Act reads as under:
“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 stipulation 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 Page: 78party who has broken the contracts reasonable compensation not exceeding the amount so named, or, the case may be, the penalty stipulated for. The question that arises or consideration is whether Section 74 of the Contract Act is applicable to a deposit made for due performance of a contract.
The principle embodied in S. 74 is that where a penalty or liquidated damages is fixed under a contract to be paid in case of its breach the Court has to give reasonable compensation to the aggrieved party not exceeding the amount mentioned in the contract as penalty and liquidated damages. In the present case it is argued on behalf of the appellant that the security deposit of Rs. 9980/- was merely an estimated damage to be paid in the event of the plaintiff failing to perform the contract and under Section 74 of the Contract Act, the trial Court could not forfeit the amount but could allow compensation to the extent of damages actually incurred by the defendant and not exceeding the amount deposited.
We are unable to accept this contention of the learned counsel. On going through the provisions of S. 74 it will be clear that this section has no application to the present case. It does not contemplate cases of deposits made for due performance of the contract. There is a marked difference between the deposit made for the due performance of a contract and a penalty or liquidated damages named in the contract itself to be recovered in the event of breach of the contract. In Dinanath Damodar v. Mody Ranchhoddas and Co., AIR 1930 Bom 213 this distinction has been fully explained. It is held therein:
“There is a distinction between the penalty for breach of a contract and the forfeiture of a deposit of earnest money. While the latter is a payment actually made, the former is compensation sought for breach of contract. Section 743 Contract Act, contemplates the case of recovery of compensation for breach of a contract and not a case in which money has been paid by way of earnest”.
4. In Howe v. Smith, (1884) 27 Ch D 89, Lord Justice Cotton observed as follows:
“…What is the deposit? The deposit as I understand it and using the words of Lord Justice James, ls a guarantee that the contract shall be performed. If the sale goes on, of course, not only in accordance with the words of the contract, but in accordance with the intention of the parties in making the contract, it goes in part payment of the purchase money for which it is deposited; but if on the default of the purchaser lie contract goes off, that is to say, If he repudiates the contract, then, according to Lord Justice James, he can have no right to recover the deposit”.
5. Moreover, it is the party aggrieved that can recover compensation for damages from another party who breached the contract. But a party who himself has not fulfilled his obligations under the contract cannot invoke Section 74 of the Contract Act and claim refund of the amount deposited by him for due performance of the contract. In the present case the plaintiff had himself failed to perform the contract and he was not entitled to claim refund of the deposit which was made for the Performance thereof. Section 74 of the Contract Act, therefore, does not apply to the present case. In this view we are fortified by various authorities of the Bombay, Madras, Nagpur and Calcutta High Courts. In Abdul Gani and Co. v. Trustees of the Port of Bombay, AIR 1952 Bom 310 it has been laid down:
“If the deposit is for the due performance of the contract, then on failure to perform the contract and on the contract being repudiated by & party to the contract, the other party becomes-entitled to forfeit the deposit. Indeed it is this very purpose that the deposit fulfils. It is a guarantee for the performance, of the contract, and, it supplies a motive to the parties to fulfffi their obligations under the contract. It acts “in terrorem” and by reason of fear that the deposit might be forfeited if the contract is not performed the parties are induced to carry out their obligations under the contract. Deposits made for due performance of a contract do not fall within the ambit of S. 74. The section clearly contemplates that the party aggrieved has to receive from the party in default some amount for something in the nature of a penalty. It clearly rules out the possibility of the amount which has already been received or the penalty which has already been provided for. Such deposits cannot be considered to be amounts to be paid in case of a breach, nor can it be considered to the any other stipulation by way of penalty. Further under S. 74 only an aggrieved party can claim the benefit conferred under that section, but a party who is in default can never claim any relief against penalty or against the payment of liquidated damages as provided in that section.”
6. The Same view has been taken in, Natesa Aiyar v. Appavu Padayachi, ILR 38 Mad 178 : (AIR 1915 Mad 896) in which it was held:
“The plaintiff was not entitled to a return of the deposit. Neither Section 64 nor Section 74 of the Indian Contract Act (IX of 1872) is applicable to such a deposit, and a stipulation for its forfeiturs in case of breach is not one by way of penalty.”
7. Bhalchandra Pandurang v. Mahadeo Laxminarayan, AIR 1947 Nag 193 in, which it has been laid down:
“There is a distinction between a penalty for breach of contract and the forfeiture of deposit by way of earnest money. The latter is a payment actually made by the vendee whereas the penalty is the compensation sought for the breach and yet to be recovered. Deposit is a plain advance to which both Sections 73 and 74 of the Contract Act do not apply. The fact that there is no forfeiture clause in respect of the deposit in the agreement is immaterial as the principle of forfeiture applies whether there is such a clause or not. Similarly whether the deposit is described as earnest money or part payment is immaterial. The proportion it bears to the sum contracted for is equally irrelevant. The advance cannot be regarded as penalty merely because its proportion is large.”
and W.J Younie v. Tulsiram Jankiram, AIR 1942 Cal 382 in which it was held:
“A deposit in the nature of a guarantee for Page: 79performance of a contract is forfeitable upon default made by the depositor, and the forfeiture is justified if the amount is reasonable or not unreasonable and the provisions of S. 74 do not apply to such case.”
8. The learned counsel for the appellant relied upon Satyanarayan Amolakchand Bhut v. Vithal Narayan Jgmdan, AIR 1959 Bom 452 in which it has been held that if the sum mentioned in the contact as damages payable by the defendant to the plaintiff in case of breach is pre-estimated sum by the parties, Section 74 of the Contract Act would apply and would entitle the plaintiff to reasonable damages not exceeding the amount so named in case there was a breach of the contract by the defendant. This case has no application as this is not a case in which there was a deposit made for the performance of the contract; but pre-estimated damages were provided to be paid by the defendant to the plaintiff in case the defendant committed breach of the contract and it was held that Section 74 of the Contract Act would clearly apply to such a case.
9. The other cases which have been cited at, the bar by the plaintiff appellant's counsel are those in which penalty was provided in case there was a breach of the contract and all those cases clearly came within the ambit of Section 74 of the Contract Act.
10. In the instant case Sec. 74 has no application because the deposit for due performance of the contract does not fall within the purview of that section and the party in default is not entitled to sue for the refund of the deposit under the said section.
11. No other point has been pressed by the counsel for the appellant.
12. The District Judge, in our opinion, has rightly dismissed the plaintiffs suit and no good ground has teen suggested to us for setting aside that decree. This appeal is dismissed but in the circumstances of the case we leave the parties to bear their own costs in this Court.
13. Murtaza Fazl Ali, J.:— I agree.
CF/I/D.V.C
14. Appeal dismissed.