AMBUNHI Vs. SHARADA AMMA

JUDGEMENT

(1.) S.74 of the Indian Contract Act, 1872 concerns compensation for breach of contract where the amount to be paid in the case of such breach is named or the contract contains any other stipulation by way of penalty. That Section reads:

(2.) Earnest money under a transaction of sale is something paid at the time of an agreement of sale in token of the earnestness of the party and it is generally a small sum. If the transaction goes through this sum is appropriated towards the price. But if it falls through the sum is forfeited. Normally, the earnest money may not be in excess of the reasonable compensation and therefore cannot be termed to be penalty. But there may be cases where under the guise of payment of earnest money, which is agreed to be forfeited in the event of breach, a sum much more than the reasonable compensation, is stipulated. In such an event even if it be named as earnest money S.74 may apply and the compensation will have to be limited to the amount determined as reasonable compensation.

(3.) In 1964 (1) SC Reports 315 (Psteh Chand v. Balakrishan Das), the court was dealing with a case of claim to forfeiture of a sum of Rs. 1,000/- paid as earnest money at the time of the execution of the agreement for sale of a land for Rs. 1,12,500/- and the forfeiture of a further sum of Rs. 24,000/- paid as part of sale price. The agreement provided that on the vendee's failure to pay the balance sale price this, sum of Rs. 25,000/- will stand forfeited. Before the Supreme Court the plaintiffs' claim of forfeiture of the sum of Rs 1,000/- which was expressly named and paid as earnest money was hot challenged. But with regard to the amount of Rs. 24,000/- the court took the view that it cannot be assumed that because there was a stipulation for forfeiture the amount paid must bear the character, of deposit for the due performance of the contract. The question of compensation for breach of contract was to be determined in accordance with S.74 of the Indian Contract Act and not by reference to the Common Law of England particularly the law as to liquidated damages. Under the English law a preestimate of the damages agreed between the parties is held to be binding while a stipulation in terrorem is not enforceable as it amounts to penalty. Referring to this the Supreme Court said: