Revision would be proper if the Judge had omitted to notice that their Lordships of the Privy Council had decided a question which frequently arises in money suits. In Chiranjit Singh v. Har Swarup, A. I. R. 1926 P. C. 1 , their Lordships of the Privy Council state:
Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through by reason of the default or failure of the vendee.
2. This remark however must be considered with reference to the facts of the case which their Lordships were considering. In that case the sum paid as earnest money was less than 5 per cent of the total sum to be paid. Their Lordships wore not considering a case in which a large proportion of the total sum due was paid. In such a case it is necessary to consider whether or not the payment, although termed earnest money is in reality earnest money. The facts considered in In re, Dagenham (Thames) Dock Co. Ex parte Hulse (1873) 8 Ch A 1022 , appear similar to the facts I am considering, A company agreed to purchase a piece of land for £4000 of which £2000 was to be paid at once and the remaining £2000 on a future day named in the agreement, with a provision that if the whole of the £ 2,000 with interest was not paid by that day, the vendors might re-possess the land' as of their former estate without any obligation to repay-any part of the purchase money. It was held that this stipulation was in the nature of a penalty. In the case I am considering it was understood that Rs. 530 out of Rs. 720 had been paid. The agreement was that if the balance was not paid, the plaintiff would have no title to the decree which was the subject of the proposed contract and would have no right to reclaim any part of the purchase money. In Sedgwick on Damages, 9th Edn., Vol. 1, Section 414, it is stated:
Where the instrument refers to a sum deposited as security for performance, or paid in advance to be forfeited on default, the forfeiture, if reasonable in amount, will be enforced as liquidated damages.
3. In my opinion the forfeiture of Rupees 530 was not a reasonable amount. The general rule laid down in Chiranjit Singh v. Har Swarup, A. I. R. 1928 P C 1 , is therefore not applicable to this case. The stipulation that the sum of Rs. 530 should be forfeited on default is of the nature of a penalty. The description of this sum as earnest money appears to be merely an amplification of the stipulation. The defendants then were entitled to reasonable compensation and such compensation has been allowed.
IN THE HIGH COURT OF NAGPUR
Decided On: 26.10.1932
Appellants: Kanhai Lal and Anr.
Vs.
Respondent: Lakshmichand Oswal and Anr.
Vs.
Respondent: Lakshmichand Oswal and Anr.
Citation: AIR1933Nag223
1. The plaintiffs agreed to purchase for the sum of Rs. 720 a money decree which the defendants obtained against one Chhakori. They made a payment of Rs. 280 in cash and gave a hawala for Rs. 250. The defendants passed a receipt for Rs. 530: the whole of this Rs. 530 was stated to be earnest money and the plaintiffs agreed that it should be forfeited if the contract was not carried out. It has been, held that the plaintiffs did not carry out their contract. They brought a suit in the Small Cause Court for return of Rs. 280 paid in cash along with Rs. 100 paid subsequently: the money due under the hawala had not been paid. The defendants claimed that the entire sum was paid as earnest money and was forfeited when the contract was broken. The learned Small Cause Court Judge has held that as Rs. 380 was a large proportion of the total sum to be paid, the defendants were entitled only to reasonable compensation under Section 74, Contract Act. He allowed reasonable compensation and gave the plaintiffs a decree for the balance. It is urged in revision that the whole sum of Rs. 280 paid as earnest money has been forfeited: in argument it was admitted that the plaintiff's are entitled to return of Rs. 100 paid subsequently. Revision would be proper if the Judge had omitted to notice that their Lordships of the Privy Council had decided a question which frequently arises in money suits. In Chiranjit Singh v. Har Swarup, A. I. R. 1926 P. C. 1 , their Lordships of the Privy Council state:
Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through by reason of the default or failure of the vendee.
2. This remark however must be considered with reference to the facts of the case which their Lordships were considering. In that case the sum paid as earnest money was less than 5 per cent of the total sum to be paid. Their Lordships wore not considering a case in which a large proportion of the total sum due was paid. In such a case it is necessary to consider whether or not the payment, although termed earnest money is in reality earnest money. The facts considered in In re, Dagenham (Thames) Dock Co. Ex parte Hulse (1873) 8 Ch A 1022 , appear similar to the facts I am considering, A company agreed to purchase a piece of land for £4000 of which £2000 was to be paid at once and the remaining £2000 on a future day named in the agreement, with a provision that if the whole of the £ 2,000 with interest was not paid by that day, the vendors might re-possess the land' as of their former estate without any obligation to repay-any part of the purchase money. It was held that this stipulation was in the nature of a penalty. In the case I am considering it was understood that Rs. 530 out of Rs. 720 had been paid. The agreement was that if the balance was not paid, the plaintiff would have no title to the decree which was the subject of the proposed contract and would have no right to reclaim any part of the purchase money. In Sedgwick on Damages, 9th Edn., Vol. 1, Section 414, it is stated:
Where the instrument refers to a sum deposited as security for performance, or paid in advance to be forfeited on default, the forfeiture, if reasonable in amount, will be enforced as liquidated damages.
3. In my opinion the forfeiture of Rupees 530 was not a reasonable amount. The general rule laid down in Chiranjit Singh v. Har Swarup, A. I. R. 1928 P C 1 , is therefore not applicable to this case. The stipulation that the sum of Rs. 530 should be forfeited on default is of the nature of a penalty. The description of this sum as earnest money appears to be merely an amplification of the stipulation. The defendants then were entitled to reasonable compensation and such compensation has been allowed. There is no reason for interference and the application is dismissed.
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