# SHREE HANUMAN COTI'ON MILLS & ORS v. TATA AIR·CRAFf LTD

- **Citation:** [1970] 3 S.C.R. 127
- **Court:** Supreme Court of India
- **Decided:** 1969-10-28
- **Case number:** Civil Appeal No. 1122 of 1966
- **Bench:** J.M. Shelat, C. A. Vaidialingam, I. D. Dua
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shree-hanuman-coti-on-mills-ors-v-tata-air-craff-ltd-4893
- **Pages:** 20

## Headnote

Contract-Money deposited as earnest money-Breach committed by
buyer-Right. of seller to forfeit-Principles.
Contract Act (9 of 1872), ss. 64 and 74--Scope of.
1be respondent agreed to sell and the appellant agreed to buy some
aero-scrap for Rs. 10,00,000. The appellant paid Rs. 2,50,000 on the
date of the contract and it was agreed between the parties th~t the balance
should be paid in two instalments. It was also agreed
that the respondent's terms of business were made part of the terms and conditions governing the contract.
According to cl. 9 of the
respondent's
terms of
business the buyer has to deposit with the respondent 25% of the total
value and that deposit is to remain with the respondent as earnest money
to be adjusted in the final bills and no interest shall be payable to buyer on
the amount.
Under cl. 10 of the terms and conditions, if the buyer makes
default in making payment according to the contract, the respondent has
a right to cancel the contract and forfeit unconditionally the earnest money
without prejudice to any other rights of the respondent in law. The
appellant committed breach of the contract by refusing to pay the rest of
the money and to take delivery of the aero-scrap. The respondent the1e·
upon cancelled the contract and forfeited the deposit of Rs. 2,50,000.
A suit by the appellant for recovery of the amount was dismissed.
In appeal to this Court,
HELD : ( I) For a deposit by a purchaser to be treated a• earnest
money the foUowing conditions must be satisfied : (i) it must be given at
the m<>ment at which the contract is concluded;
(ii)
it represents a
guarantee that the ce>ntract will be fulfilled or, in other words, 'earnest' is
given to bind the contract; (iii) it is part of the purchase price when the
transaction is carried out; (iv) it is forfeited when the transaction
falls
through by reason of the default or failure of the purchaser; and (v) unless there is anything to the contrary in the terms of the contract, on default ce>mmitted by the buyer, the seller is entitled to forfeit the earnest.
[139 D-F]
In the present case, the payment of Rs. 2,50,000 could not be treated
merzly as part-payment towards the total price, because, the terms
of
business of the respondent applied to the contract, and under those terms,
since the conditions regarding earnest money are satisfied, the amount de·
posited by the appellant was earn""! money and the respondent was entitl·
ed to forfeit if. [140; 141 F]
H
Howe v. Smith L.R. (1884) Ch. 89, Soper v, Arnold, I.R.
(1889)
14 A.C. 429, Farr, Smith & Co. v. Messers, Ltd. L.R. [1928] I K.B.D.
397, Sumner and Leivesley v. John Brown & Co. 25 T.L.R. 745
and
Chiranjit Singh v. Har Swarup, A.LR. 1926 P.C. 1, applied.
128
SUPREME COURT REPORTS
[1970] 3 S.C.R.
Roland Burrows, Words and Phrases Vol. II, Benja,min on Sale. HalsA
bury's Laws of England (III Edition) Vol. 34, p. 118, para.
189 and
Jowitt's Dictionary of English Law, referred to.
(2) ln Fateh Chand v. Ba/kishan Das, [1964] 1 S.C.R. 515, this Court
recognised the
principle that earnest
money could be
forfeited, and
that s. 74 of the Contract Act applied only to the amount paid by the
buyer which was not earnest money.
In the present case, since the entire
B
amount paid by the appellant was earnest money under the contract, this
decision has no application. [145 H; 146 A]
(3) As the plea of misrepresentation was abandoned by the appellant
and the breach elf contract was admittedly committed by the appellant,
s. 64 of the Contract Act could not be invoked by the appellant. [146 DJ
Murlidhar Chatterjee v. International Film Co. L.R. 70 I.A. 35, not
C
applicable.
[The question as to whether ·the element of unreasonableness can ever
be taken into account when considering the forfeiture of an amount depo·
sited by way of earnest, and if ,so what factors should be taken into
account left open.] [142 F-G]
Mau/a Bux v. Union of India, [1970] I S.C.R. 928, explained.

## Text

_Characters 0–39,985 of 52,448. This is a partial read: ask again with offset=39985 for what follows._

•
A
B
c
D
E
F
G
127
SHREE HANUMAN COTI'ON MILLS & ORS.
v.
TATA AIR·CRAFf LTD.
October 28, 1969
[J.M. SHELAT, C. A. VAIDIALINGAM AND I. D. DUA, JJ.J
Contract-Money deposited as earnest money-Breach committed by
buyer-Right. of seller to forfeit-Principles.
Contract Act (9 of 1872), ss. 64 and 74--Scope of.
1be respondent agreed to sell and the appellant agreed to buy some
aero-scrap for Rs. 10,00,000. The appellant paid Rs. 2,50,000 on the
date of the contract and it was agreed between the parties th~t the balance
should be paid in two instalments. It was also agreed
that the respondent's terms of business were made part of the terms and conditions governing the contract.
According to cl. 9 of the
respondent's
terms of
business the buyer has to deposit with the respondent 25% of the total
value and that deposit is to remain with the respondent as earnest money
to be adjusted in the final bills and no interest shall be payable to buyer on
the amount.
Under cl. 10 of the terms and conditions, if the buyer makes
default in making payment according to the contract, the respondent has
a right to cancel the contract and forfeit unconditionally the earnest money
without prejudice to any other rights of the respondent in law. The
appellant committed breach of the contract by refusing to pay the rest of
the money and to take delivery of the aero-scrap. The respondent the1e·
upon cancelled the contract and forfeited the deposit of Rs. 2,50,000.
A suit by the appellant for recovery of the amount was dismissed.
In appeal to this Court,
HELD : ( I) For a deposit by a purchaser to be treated a• earnest
money the foUowing conditions must be satisfied : (i) it must be given at
the m<>ment at which the contract is concluded;
(ii)
it represents a
guarantee that the ce>ntract will be fulfilled or, in other words, 'earnest' is
given to bind the contract; (iii) it is part of the purchase price when the
transaction is carried out; (iv) it is forfeited when the transaction
falls
through by reason of the default or failure of the purchaser; and (v) unless there is anything to the contrary in the terms of the contract, on default ce>mmitted by the buyer, the seller is entitled to forfeit the earnest.
[139 D-F]
In the present case, the payment of Rs. 2,50,000 could not be treated
merzly as part-payment towards the total price, because, the terms
of
business of the respondent applied to the contract, and under those terms,
since the conditions regarding earnest money are satisfied, the amount de·
posited by the appellant was earn""! money and the respondent was entitl·
ed to forfeit if. [140; 141 F]
H
Howe v. Smith L.R. (1884) Ch. 89, Soper v, Arnold, I.R.
(1889)
14 A.C. 429, Farr, Smith & Co. v. Messers, Ltd. L.R. [1928] I K.B.D.
397, Sumner and Leivesley v. John Brown & Co. 25 T.L.R. 745
and
Chiranjit Singh v. Har Swarup, A.LR. 1926 P.C. 1, applied.
128
SUPREME COURT REPORTS
[1970] 3 S.C.R.
Roland Burrows, Words and Phrases Vol. II, Benja,min on Sale. HalsA
bury's Laws of England (III Edition) Vol. 34, p. 118, para.
189 and
Jowitt's Dictionary of English Law, referred to.
(2) ln Fateh Chand v. Ba/kishan Das, [1964] 1 S.C.R. 515, this Court
recognised the
principle that earnest
money could be
forfeited, and
that s. 74 of the Contract Act applied only to the amount paid by the
buyer which was not earnest money.
In the present case, since the entire
B
amount paid by the appellant was earnest money under the contract, this
decision has no application. [145 H; 146 A]
(3) As the plea of misrepresentation was abandoned by the appellant
and the breach elf contract was admittedly committed by the appellant,
s. 64 of the Contract Act could not be invoked by the appellant. [146 DJ
Murlidhar Chatterjee v. International Film Co. L.R. 70 I.A. 35, not
C
applicable.
[The question as to whether ·the element of unreasonableness can ever
be taken into account when considering the forfeiture of an amount depo·
sited by way of earnest, and if ,so what factors should be taken into
account left open.] [142 F-G]
Mau/a Bux v. Union of India, [1970] I S.C.R. 928, explained.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1122 of
1966.
Appeal from the judgment and decree dated January 29,
1964 of the Calcutta High Court in Appeal from original order
D
No. 28 of 1960.
E
B. P. Maheshwari and Sobhag Mal Jain, for the appellant.
Niren De, Attorney-General, N. S. Bindra and S. P. Nayar,
for the respondent.
The Judgment of the Court was delivered by
V aidialingam, J .-This appeal, by the plaintiffs-appellants, on
certificate granted by the Calcutta High Court, is directed against
the judgment and decree of the Division Bench of that Court,
dated January 29, 1964 in Appeal frcim Odginal Order No. 28
of 1960, affirming the judgment and decree, dated July 16, 1959
of the learned Single Judge in Suit No. 2745 of 1947.
The
circumstances leading up to the institution of the said suit may be
stated.
The appellants,. who were dealing also in the purchase ot new
and second hand machinery, on coming to know from an advertisement in a Daily that the defendant-respondent was offering
for sale aero-scrap, addressed a letter, dated November 6, 1946
to the respondent intimating their desire to purchase the materials
advertised for sale, and stating that one .of their representative:;
F
G
H
•
..
A
B
c
D
E
F
G
H
HANUMAN MILLS v. TATA AIR-CRAFT (Vaidialingam, J.)
129
would be contacting them shortly.
Obviously the parties must
have met and decided about the purchase, as is '£Cell from the
letter, dated November 18,
1946 addressed by the General
Manager of the respondent, to the appellants.
That letter refers
to a discussion that the parties had on that day and the respondents
confirmed having sold to the appellants the entire lot of aero-scrap
lying at Panagarh, on the terms and conditions mentioned in the
letter.
The material was stated to be in Dump No. 1 near the
flight line at Panagarh and the approximate quantity was 4000
tons of aero-scrap, more or less.
The letter refers to the appellants having agreed to pay Rs. 10 lakhs as price of the materials
in the said Dump No. 1, against which the receipt, by cheque, of
a sum of Rs. 2,50,000 was acknowledged by the respondent. There
is a further reference to the fact that :he appellants had agreed
to pay the balance of Rs. 7 ,50,000 that day itself.
The letter also
refers to the fact that the price mentioned does :not include salestax to be paid by the appellants and to certain other matters,
which are not relevant for the purpose of the appeal.
The letter
further says : "The company's terms of business apply to this
contract and a copy of this is enclosed herewith". We shall refer
to the relevant clauses in the company's terms of business, referred to in this letter, a little later. It is enough to note, at this
stage that those terms of business have been made part of the
terms and conditions governing the contract.
On the same day, the appellants sent a reply to the respondent,
acknowledging the letter.
The appellants said that they noted
that the respondent wants to sell the aero-scrap as it is and that it
wanted the appellants to pay the fu!J value, viz., the balance of
Rs. 7 ,50,000 at once.
The appellants confirmed the arrangement
contained in the respondent's letter; but regarding payment, the
appellants said that they agree to pay the balance amount in two
instalments viz., Rs. 2,50,000 on or before November 22, 1946
and the balance of Rs. 5,00,000 on or before December 14, 1946.
They also further stated that they shall commence taking delivery
after making full payment.
The respondent by its letter dated
November 20, 1946 acknowledged the receipt of the appellants'
letter dated Novembe~ 18, 1946 together with the modifications
contained therein.
But the respondent emphasised that the other
terms and conditions will be as mentioned in its letter of November 18, 1946.
On November 22, 1946, the appellants sent a communication,
purporting to be in continuation of their letter dated November
18, 1946. In this letter they state that the transaction has been
closed without inspecting the materials, merely on the assurance
of the respondent that the quantity of aero-scrap was about 4, 100
tons.
The appellants further state that they have since obtained
130
SUPREME COURT REPORTS
(1970] 3 S.C.R.
information that the quantity stated to be available "is not on the
A
spot and therefore they cannot do the business.
Under the circumstances, they request the respondent to · treat their letter,
dated November 18, 1946 as cancelled and to return the sum of
Rs. 2,50,000 already paid by them.
The respondent sent several letters to the appellants asking
B
them to pay the balance amount. and take delivery of the goods;
but the appellants refused to pay any further amount to the respondent.
The respondent ultimately forfeited the entire sum of
Rs. 2,50,000 which, according to it, was earnest money and then
cancelled the contract.
Now that we have referred to the material correspondence that
C
took place between the parties as well as the final action of the
defendant of forfeiting the amount, it is now necessary to advert
to certain . clauses in the Company's terms of business which, as
mentioned earlier, have been made by the defendant's letter dated
November 18, 1946 as part of the terms and conditions of the
contract.
We have also referred to the fact that the appellants
D
in their reply dated November 18, 1946 have accepted the same.
The respondent's terms of business contain various clauses, of
which clauses 9 and 10 are relevant for our purpose. They are :
"9. Deposits
The buyer shall deposit with the Company 25 % of
the total value of the stores at the time of placing the
order. The deposit shall remain with the ColI\pany as
earnest money and shall be adjusted in the final bills, no
interest shall be payable to the buyer by the Company
on such amounts held as earnest m01;1ey;
10. Time and method of payment.
(a) The buyer shall, before actual delivery is taken
or the ·stores. despatched under conditions, pay the full
value of the stores for which his offer has been accepted
less the deposit as hereinbefore contained after which a
Shipping Ticket will be issued by the Company in the
name of the buyer.
The buyer shall sign his copy of
the Shipping Ticket before the sanie is presented to the
Depot concerned for taking delivery of the stores cQ!b.
cerned.
(b) If the buyer shall make default in making payment for the stores in accordance with the provisions of
this contract the Compa:ny may ~ithout prejudice to its
rights under Clause II thereof or other remedies in law
E
F
G
H
A
B
c
D
E
F
G
H
HANUMAN MILLS v. TATA AIR-CRAFT (Vaidialingam, I.)
131
forfeit unconditionally the earnest money paid by the
buyer and cancel the contract by notice in writing to the
buyer and resell the stores at such timfl and in such
manner as the Company thinks best and recover from
the buyer any loss incurred on such resale.
The
Company shall, in addition be entitled to recover from
the buyer any cost of storage, warehousing or removal
of the stores from one place to another and any expenses in connection with such a resale or attempted
resale thereof.
Profit, if any, on resale as aforesaid,
shall belong to the Company."
From the above clauses, it will be seen that a buyer has to deposit
with the company 25 % of the total value and that deposit is to
remain with the oompany as earnest money to be adjusted in the
final bills.
The buyer is bound to pay the full value less the
deposit, before taking delivery of the stores.
In case of default by
the buyer, the company is entitled to forefeit unconditionally the
earnest money paid by a buyer and cancel the contract
The appellants instituted suit No. 2745 of 1947 in the Original
Side of the Calcutta High Court against the respondents for
recovery of the sum of Rs. 2,50,000 together with interest.
The
plaintiffs pleaded that there had been no concluded agreement
entered into between the parties and even when the matter was in
the stage of proposal and counter-proposal, the plaintiffs had
withdrawn from the negotiations. They alleged that even if there
was a concluded contract, the same was vitiated by the false and
untrue representations made by the respondents regarding the
quantity of scrap material available a~ thr -\aintiffs had been
induced to enter into the agreement on such .. .ise representations.
Hence the plaintiffs were entitled to avoid the contract and they
have avoided the same.
They pleaded that the respondents were
never ready and willing to perform their part of the contract. Eve11
on the assumption that the plaintiffs had wrongfully repudiated the
contract, such repudiation was accepted by the defendant
by
putting an end to the contract.
The respondents were not entitled
to forfeit the sum of Rs. 2,50,000 as the latter cannot take advantage of their own wrongful conduct. In any event, the sum of
Rs. 2,50,000 represents money had and received by the defendants
to and for the use of the plaintiffs.
The plaintiffs, in consequence,
prayed for a decree directing the defendants to refund the sum of
Rs. 2,50,000 together with interest at 6% from November 18,
1946.
The defendants contested the claim of the plaintiffs.
They
pleaded that a concluded contract has been entered into between
132
SUPREME COURT REPORTS
[1970] 3 S.C.R.
the parties as per two letters dated November 18 and November
20, 1946.
The appellants had agreed to buy the lot of scraps
lying in Dump No. 1 for Rs. 10,00,000 of which Rs. 2,50,000 was
paid as deposit.
The defendants
had agreed to the
balance
amount being paid in instalments as asked for by the plaintiffs in
their letter of November 18, 1946.
The defendants further
pleaded that there has been no misrepresentation made by them
but the plaintiffs, without any justification, repudiated the contract
by their letter dated November 22, 1946. As the plaintiffs
wrongfully repudiated the contract, the defendants, as they are
entitled to in law, forfeited the sum of Rs. 2,50,000 paid by the
plaintiff as earnest money, under the terms of business of the
Company which· had become part of the contract entered into
between the parties.
The defendants further pleaded that they
have always been ready and willing to perform their part of the
contract and that they, in fact, even after the plaintiff repudia~ed
the contract, called upon them to pay the balance amount and take
delivery of the articles.
But the plaintiffs persisted in their wilful
refusal to perform their part and therefore the defendants had no
alternative but to forfeit the earnest money and conduct a resale
of the goods.
The defendants further pleaded that the appellants
had to pay them a sum of Rs. 42,499 for the loss and damage
sustained by the defendants.
They further urged that the plaintiffs were not entitled to claim the refund of the sum of
Rs. 2,50,000 or any part thereof which had been paid as earnest
money and forfeited according to law, and the terms of contract,
by the defendants.
Though the plaintiffs have raised various contentions in the
plaint, it is seen from the judgments of the learned Single Judge
and the Division " 'Ch, on appeal, that the appellants conceded
that they committea breach of contract and that the defendants
have been at all material times ready and willing to perform their
part of the contract. The plea that the plaintiffs entered into the
contract under a mistake of fact and that they were induced, to so
enter into the contract due to the misrepresentation of the defendants regarding the quantity of scrap available, was also given up.
The appellants have also accepted the position that there has been
a concluded contract between the parties and the said contract was
concluded by the corresponde,nce between the parties consisting
of the letters dated November 18, 1946 and November 20, 1946.
The plaintiffs have further abandoned the plea that the defendants were not ready and willing to perform their part of the contract.
Therefore the two questions that ultimately survived for
consideration by the Court were: (I) as to whether the sum of
Rs. 2,50,000 was paid by the plaintiffs as and by way of part
payment or as earnest deposit; and (2) as to whe:her the defendants were entitled to forfeit the said amount.
A
B
c
D
E
F
G
H
A
8
c
D
E
F
G
"
HANUMAN MILLS v. TATA AIR-CRAFT (Vaidialingam, J.)
133
The learned Single Judge and, on appeal, the Division Bench,
have held that the sum of Rs. 2,50,000 paid by the appellants
was so paid as and by way of deposit or earnest money and that it
is only when the plaintiffs pay the entire price of the goods and
perform the conditions of the contract that the deposit of
Rs. 2,50,000 will go towards the payment of the price.
It is the
further view of the Courts that the amount representing earnest
money is primarily a security for the performance of the contract
and, in the absence of any provision to the contrary in the contract,
the defendants are entitled to for.feit the deposit amount when
the plaintiffs have committed a breach of contract.
In this view
the def~dant's right to forfeit the sum of Rs. 2,50,000 was accepted
and it has been held that the plaintiffs are not entitled to claim
refund of the said amount.
The plaintiffs' suit, in the result, was
dismissed by the learned Single Judge and, on appeal, the decree
of dismissal has been confirmed.
On behalf of the appellants Mr. Maheshwari, learned counsel,
has raised two contentions : (1) That the amount of Rs. 2,50,000
paid by the plaintiffs and sought to be recovered in the suit is not
by way of a deposit or as earnest money and that, on the other
hand, it is part of the purchase price and therefore the defendants
are not entitled to forfeit the said amount.
(2) In this case, it
must be considered that the sum of Rs. 2,50,000 has been named
in the contract as the amount to be paid in case of breach or in the
alternative the contract contains a stipulation by way of penalty
regarding forfeiture of the said amount and therefore the defendants will be entitled, if at all, to receive only reasonable compensation under s. 7 4 of the Contract Act and the Courts erred in not
considering this aspect.
Under this head, the counsel also urged
that even a forfeiture of earnest money can only be, if the amount
is considered reasonable and in this case the amount which represents 25 % of the total price cannot be considered to be reasonable
an.d hence the appellants are entitled to relief in law.
The learned Attorney General, on behalf of the respondents,
pointed out that the material correspondence between the parties,
by which the contract was concluded read along with the terms of
business will clearly show that the sum of Rs. 2,50,000 paid by the
appellants was as earnest. It was further pointed out that the
position in. law is that the earnest money is part of the purchase
price when the transaction goes through and is performed and that
on the other hand it is forfeited when the transaction falls through
by reason of the fault or failure of the vendee.
The learned Attorney General invited us to certain decisions laying down the salient
features of 'earnest deposit' and the right of the party to whom the
amount has been paid to forfeit when the opposite party has committed a breach of contract.
Regarding the second contention of
134
SUPREME COURT REPORTS
[1970) 3 S.C.R.
the appellant, the learned Attorney General pointed out that the
appellants never raised any contention that the amount of
Rs. 2,50,000 deposited by the appellants is to be treated as a sum
named in the contract as the amount to be paid in case of breach.
or that the contract must be considered to contain any stipulation
by way of penalty.
He also pointed out that the question of
reasonableness or otherwise of the earnest deposit forfeited in thi~
case, was never raised by the appellant at any stage of the proceedings in the High Court.
Therefor~ s. 7 4 of the Contract Act has
no application.
The first question that arises for consideration is whether the
payment of Rs. 2,50,000 by the appellants was by way of deposit
or earnest money.
Before we advert to the documents evidencing·
the contract in this case, it is necessary to find out what in Jaw
constitutes a deposit or payment by way of earnest money and
what the rights and liabilities of the parties are, in respect of such
deposit or earnest money.
Borrows, in Words & Phrases, Vol. II, gives the characteristics
of "earnest".
According to the author,
"An earnest must be a tangible thing.. . That thing
must be given at the moment at which the contract is
concluded, because it is something given to bind the
contract, and, therefore, it must come into existence at
the making or conclusion of the contract. The thing
given in that way must be given by the contracting party
who gives it, as an earnest or token of good faith, and
as a guarantee that he will fulfil his contract, and subject
to the terms that if, owing to his default, the contract
goes off, it will be forfeited. II', on the other hand, the
contract is fulfilled, an earnest may still serve a further
purpose and operate by way of part payment."
Benjamin, in his book on 'Sale', 8th Edition, after referring to
clause 17 of the Statute of Frauds and s. 4(1) of the Sale of Goods
Act, 1893 providing for giving "something in earnest to bind the
contract, or in part payment", says, at p. 219:
" 'give something in earnest' or 'in part payment,'
are often treated as meaning the same thing, although
the language clearly intimates that the earnest is
'something to bind the bargain,' or, 'the contract,' whereas
it is manifest that there can be no part payment till after
the bargain has been bound, or closed."
The author further states that there are two distinct alternatives,
viz., a buyer may give the seller money or a present as a token or
evidence of the bargain quite apart from the price, i.e., earnest, or
A
B
c
D
E
F
G
H
8
c
HANUMAN MILLS v. TATA AIR-CRAFT (Vaidialingam, J.)
135
he may give him part of the agreed price to be set off against the
money to be finally paid, i.e., part payment and that if the buyer
fails to carry out the contract and it is rescinded, cannot recover
the earnest, but he may recover the part payment.
But this does
not affect the seller's right to recover damages for breach of contract unless it was by way of deposit or guarantee in which case
it is forfeited.
It is further stated that an earnest does not lose its
charactec because the same thing might also avail as a part payment.
Regarding "deposi(', the author states at p. 946, that a deposit
is not recoverable by the buyer, for a deposit is a guarantee that
tl.te J>uyer shall perform his contract and is forfeited on his failure
to do so and if a contract distinguishes between the deposit and
instalments of price and the buyer is in default, the deposit is
forfeited.
Halsbury, in "Laws of England", Vol.
34, III Edition, in
paragraph 189 at p. 118, dealing with deposit, states :
D
"Part of the price may be payable as a deposit.
A
part payment is to be distinguished from a deposit or
earnest.
A deposit is paid primarily as security that the buyer
will duly accept 3J1d pay for the goods, but, subject
thereto, forms part of the price.
Accordingly, if the
buyer is unable or unwilling to accept and pay for the
goods, the seller may repudiate the contract and retain
the deposit."
Earl Jowitt, in his Dictionary of English Law, says :
"Giving an earnest or earnest-money is a mode of
r
signifying assent to a contract of sale or the like, 1'y
giving to the vendor a nominal sum (e.g., a shilling) as a
token that the parties are in earnest or have made up
their minds."
In Howe v. Smith(') Fry, L.J., discussed the history of
"earnest", which is identical with a deposit. In that case, the
G
plaintiff agreed to purchase a property for the price mentioned in
the agreement and paid £500 on the signing of the agreem~
"as a deposit and in part payment.of the purchase-money." There
were other stipulations in the agreement regarding title to the
property and the payment of the balance of the purchase money.
The plaintiff, apprehending that the defendant-vendor would re-sell
H the property, brought an action against him for specific performance of the agreement; but the suit was dismissed on the ground
(I) L.R. [18841 Ch. D. 89.
136
SUPREME COURT REPORTS
[ 1970] 3 S.C.R.
that there had been inordinate delay on the plaintiff's part in insisting on the completion of the contract.
The plaintiff appealed.
Before the Court of Appeal a request was made on his behalf for
leave to amend the plaint that if specific performance could not
be decreed, he should get a return of the deposit of £ 500.
Leave
was granted by the Appellate Court and the question hence arose
as to whether the plaintiff was entitled to get a refund of the said
amount. fo dealing with the deposit claimed back by the plaintiff, Cotton, L.J., at p. 95, observes :
"What is the deposit ? The deposit, as I understand
it, and using the words of Lord Justice James (in L. R.
10 Ch. 512), is 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 \n making
the contract, it goes in part, payment of the purchasemoney for \Vhich it is deposited; but if on the default of
the purchaser the 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."
Bowen, L.J., at p. 98, states :
"We have therefore to consider what in ordinary
parlance, and as used in an ordinary contract of sale,
is the meani11g which business persons would attach to
the term 'deposit'.
Without going at length into the
history, or accepting all that has been said or will be
said by the other members of the Court on that point,
it comes shortly to this, that 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.
But in what sense is it a security for
the completion of the purchase ? It is quite certain
that the purchaser cannot insist on abandoning his
contract and yet recover the deposit, because that
would be to enable him to take" advantage of Iris own
wrong."
Fry, L.J., at p. IOI, observes : "
"Money paid as a deposit must, I conceive, be paid
on some terms implied or expressed.
In this case JllO
terms are expressed, and we must therefore inquire wh11t
terms are to be implied.
The terms most naturally to
be implied appear to me in the case of money paid on
the signing of a contract to be that in the event of the
contract being performed it shall be brought into
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
HANUMAN MILLS v. TATA AIR-CRAFT (Vaidialingam, J.)
137
account, but if the contract is not performed by the
payer it shall remain the property of the payee.
It is
not merely a part .payment, but is then also an earnest
to bind the bargain so entered into, and creates by the
fear of. its forfeiture a motive in the payer to perform
the rest of the contract."
Ultimately, the Court of Appeal rejected the claim of the plaintiff
for refund of the deposit.
In Soper v. Arnold(') the House of Lords had to consider the
right of the plaintiff therein to claim a refund of the deposit made
by him.
In that case the plaintiff had contracted to purchase a
piece of land and entered into an agreement with the vendee.
The agreement provided that the purchaser viz.,
the plaintiff,
should make a deposit and it further provided that if the vendee
failed to comply with the conditions, the deposit should be forfeited. - The plaintiff, accordingly, paid the deposit but as he
was not in a position to complete the contract by paying the
balance
purchase money, the contract could not be fulfilled.
When in another litigation it was subsequently found that the
vendor's title to the property was defective, the plaintiff brought
an action to recover his deposit on the ground of mistake and ·
failure of consideration.
The suit was dismissed and the Court
of Appeal also confirmed the said decision.
The House of Lords
also finally rejected the plaintiff's claim.
In discussing the nature
of the deposit made by the plaintiff under the agreement,
Lord
Macnaghten at p: 435 observes :
"The deposit serves two purpose-if the purchase is
carried out it goes against the purchase-money, but its
primary purpose is this, it is a guarantee that the pur-
. chaser means business; and if there is a case in which a
deposit is rightly and properly forfeited it is, I think,
when a man enters into a contract to buy real property
without taking the trouble to consider whether he can
pay for it or not."
In Farr, Smith & Co.
v.
Messrs, Ltd.(2) dealing with the
question as to whether the payment was by way of earnest given
to bind the contract, or it was a part payment towards the price.
Wright J., observes at p. 408 :
"Certain characteristics, however, seem to be clear,
An earnest must .be a tangible thing, in which definition
it may be that a deposit is included, but in the old cases
it was always some tangible thing.
That thing must be
gi.'ven at the moment at which the contract is concludetl,
ti) L.R. [1889] 14 A.C. 429.
6Sup. Ci/70-10
(I) L.R. [1928] I K.B.D. 397.
. 138
SUPREME COURT REPORTS
[ 1970]3 S.C.R .
because. it is something given to bind the contract, and,
therefore, it must come into existence at the making or
conclusion of the contract.
The thing given in that
way must be given by the contracting party who gives
it, as an earnest or token of good faith, and as a guarantee that he will fulfil his contract, and subject to the
terms that if, owing to his default, the contract goes
off, it will be forfeited. If on the other hand, the contract is fulfilled,
an earnest may still serve a further
purpose and operate by way of part payment."
The learned Judge, quoting the observations of Hamilton, J., in
Sumner and Leives/ey v. John Brown & Co. (1), observes at
p. 409:
" 'Earnest' .... meant_ so_mething given for the purpose of binding a contract, something to be used to put
pressure on the defaulter ii he failed to c3rry out his
part. If the contract went through, the thing given in
earnest was returned to the giver, or, if money, was deducted from the price. If the contract went off through
the giver's fault the thing given in earnest was forfeited.•·
The Judicial Committee had to consid~r in Chiranjit Singh v.
Har Swarup ( 2 ) the question as to whether a payment made by
way of earnest money by a buyer could be recovered. when the
buyer had committed breach of contract.
In that case the plaintiff had entered into a contract with the defendant for purchase
of a property.
One of the terms of the contract of sale was :
"Willing on old terms i'iamely earnest twenty ihou-.
sand balance in two moieties. first payable on executing
conveyance, last within six months net cash we receive
4 lakhs 76,000."
The plaintiff did not pay the earnest money eo nomine but sent
two cheques amounting to Rs. 1,65,000 and obtained a receipt
that this amount was paid towards the sale. price of the estate in
question out of the total consideration of Rs. 4,76,000.
Later
the plaintiff informed the defendant that he was not in a position
to complete the purchase and gave opportunity to the latter to sell
the property to any other party.
Therefore it was clear that the
plaintiff-purcha~er was unable or unwilling to complete the contract of purchase.
The plaintiff, notwithstanding his default,
sued to recover the entire sum of Rs. 1,65 ,000 paid by him. The
High Court held that as the plaintiff had broken the contract, he
must lose the earnest money of Rs. 20,000 but was entitled to a
refund of the balance amount of Rs. 1,45,000 from and out of
the amounts paid by him on that account.
The plaintiff, dissatis-
(1) 25 Tim" L. R. 745.
U) A.LR. 1926 P.C. I.
A
B
c
D
E
F
G
H
A
B
c
D
E
G
HANUMAN MILLS v. TATA AIR-CRAFT (Vaidialingam, J.)
139
,
fied with the decision of the High Court, carried the matter in
.appeal to the Judicial Committee for obtaining relief of repayment of earnest money also. The Judicial Committee agreed with
the High Court that from and out of the amounts paid by the
plainitff, a sum of Rs. 20,000 was earnest money and there was
nothing in the contract to suggest that the seller had agreed to
sacrifice the stipulated earnest.
Regarding the legal incidents of
earnest money, the Judicial Committee stated :
"Earnest money is part of the purchase price when
the transaction goes forward; it is forfeited when the
transaction falls through, by reasons of the fault or failure
of the vendee."
Holding that the above principle applied squarely to the contract
before them, they dismissed the paintiff's appeal for refund of
earnest.
From a review of the decisions cited above, the following
principles emerge regarding "earnest":
(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 part of the purchase price when hte transction
is carried out.
(4) It is forfeited when the transaction falls through
by reason of the default or failure of the
purchaser.
(5) 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.
Having due regard to the principies enunciated above, we
shall now consider, the relevant claims in the contract between
the parties in the case before us, to ascertain whether the amount
of Rs. 2,50,000 paid by the appellant constitutes earnest money
and if so whether the respondents were justified in law in forfeiting the same.
We have already referred to the letter. dated November 18.
1946 written by the respondents to the appellants confirming the
sale of scrap lying in Dump No. I. That letter states that the
total price for which the appellants agreed to purchase the scrap
material is Rs. 10,00,000 against which a sum of Rs. 2,50,000
had been paid and the balance amount was to be paid that day
itself.
In the reply sent by the appellant on the same day, they
SUPREME COURT REPORTS
[1970] 3 s.c.R.
confirmed the arrangement referred to by the respondents but,
regarding the payment of the balance amount, they agreed to pay
the same in two instalments.
The letter of November 18, 1946
to the appellants clearly refers to the fact that the Company's
Terms of Business applied to the contract and a copy of the said
terms was also sent to the respondents.
The respondents, by
confirming the arrangement, by their letter of November 18, 1946
were fully aware that the terms of business of the respondent
company formed part of the contract entered into between the
parties.
We have also referred, earlier, to clauses 9 and 10 of the
Terms of Business of the respondents.
Clause 9 requires
the
buyer to deposit 25 % of the total value of the goods af the time
of placing the order.
That clause also further provides .that the
deposit shall remain with the company "as earnest money", to be
adjusted in the final bills.
It further provides that no interest is
payable to the buyer by the company "nn such amounts held as
earnest money".
There is no controversy in this case that the
appellants deposited the sum of Rs. 2,50,000 under this climse
nine, representing 25 % of the purchase price of Rs. 10,00,000.
It is therefore clear that this amount deposited by the appellant is
a deposit "as earnest money".
Mr. Maheshwari drew our attention to the letter, dated November 18 .. 1946 sent by the respondents to the appellants wherein
the respondents have stated that the appellants have agreed to pay
Rs. 10,00,000 for all the materials in Dump No. 1 against which
a cheque for Rs. 2,50,000 has been paid and that the appellants
further agreed to pay the balance of Rs. 7,50,000 that day itself.
This statement, according to the learned counsel, will clearly show
that the sum of Rs. 2,50,000 has been paid as
part payment
towards the total price, pure and simple, and there is no question
of any payment by way of earnest money.
But this contention
ignores the last recital in the said letter wherein it has been specifically stated that the terms of business of tht; respondent company
applied to the contract. This condition has also beein accepted
by the appellants in their repl:;c, dated November
18,
1946.
Therefore the position is this, that the terms of business of the
respondent company have been incorporated as part of the letter
and has been embodied in the terms of contract between the
parties.
Clause 9; to which we have already referred, clearly
shows that 25 % of the total value is to be deposited and that
amount is to remain with the respondents as
earnest money.
It is again emphasized in clause 9 that the amount so
deposited as earnest will not bear any interest, but will be only
adjusted in the final bills. Therefore the amount of Rs. 2,50,000
deposited by the appellants, representing 25 % of the total of
Rs. 10,00,000, is "earnest money" under clause 9 of the Terms
of Business.
A
B
c
D
E
F
G
H
'
A,
c
D
E
F
G
H
HANUMAN MILLS v. TATA AIR-CRAFT ( Vaidialingam, J.)
141
We have also earlier referred to clause 10 of the Terms of
Business, which relates to the time and method of payment.
Under clause lO(b) a right is given to the respondents when the
buyer makes default in making payment according to the contract, to forfeit unconditionally the earnest money paid by the
buyer:
That clause further provides that this forfeiture of earnest money is without prejudice to the other rights of the respondents in law. We have referred to the fact that though the appellants raised pleas that they have not committed any breach of
contract and that on the other hand the respondents were the parties
in breach, these contentions were not pursued and had been abandoned before the High Court. Further, as noted by the High Court.
the appellants conceded that they had committed a breach of the
contract. If so, as rightly held by the High Court, under clause
lO(b) the respondents were entitled to forfeit the earnest money of
Rs. 2,50,000.
Before closing the discussion on this aspect, it is necessary to
note that in the case before the Privy Council, in Chiranjit Singh's
Case, though the contract stipulated that a sum of Rs. 10,000
should be paid as earnest, the buyer did not pay any amount by
way of earnest, as such, but he paid by two cheques the sum of
Rs. 1,65,000 against the purchase price of Rs. 4,76,000.
The
receipt of the sum of Rs. 1,65 ,000, granted by tl;ie seller was also
stated to be only towards the sale price.
But, nevertheless, the
High Court, as well as the Judicial Committee, treated a sum of
Rs. 20,000 out of lhe sum of R~. 1,65,000, as earnest money paid
under the terms of the agreement, and a claim to recover that
amount of earnest money was negatived.
In the case before us,
the contract read with the Terms of Business of the company,
clearly refers to the earnest money-being paid and to the ·fact of
Rs. 2,50,000 having been paid as earnest. Therefore, there is no
ambiguity regarding the nature of the above payment and the right
of the respondents to forfeit the same, under the terms of the
contract, when the appellants admittedly had committed breach
of the contract, cannot be assailed.
The first contention for the
appellants therefore fails.
The second contention of Mr. Maheshwari, noted earlier, is
really based upon ss. 73 and 74 of the Contract Act.
According
to the learned counsel, under s. 73; the respondents will be entitled
only to compensation for any loss or damage caused to them by
the breach of the contract, committed by the appellants. Counsel
very strongly relied upon s. 74 of the Contract Act.
According
to him, the sum of Rs.