(Per : HONOURABLE MR.JUSTICE JAYANT PATEL) 1. As both the appeals arise from common judgment and decree passed by the Lower Court, they are being considered simultaneously. In the present judgment, for the sake of convenience, the parties shall be referred to as per their original status of the plaintiff or the defendant, as the case may be, since there are two Cross Appeals, one is by the original defendant being First Appeal No. 2972 of 2000 and the another is by the plaintiff being First Appeal No. 1635 of 2001.
2. Short facts are that the original defendant invited tender for purchase of used/obsolete Drill pipes of various specifications. The plaintiff, in response to the said tender notice, submitted its offer. Ultimately, the offer of the plaintiff was accepted and the earnest money of the tender amount as per the conditions of tender was treated as the Security Deposit. Total amount was approximately Rs.32,65,500.00, since the material was about 10000 meters Drill Pipes and agreed price was Rs.311.00+taxes per meter. As per the plaintiff, after physical verification, it was found that the goods did not confirm to the description made in the tender notice as well as in the acceptance letter dated 19.11.1988, therefore, the plaintiff did not perform contract after performing part of it. The plaintiff demanded refund of the amount of security deposit but the same was also not refunded by the defendant and the plaintiff was conveyed that the said security deposit is forfeited on account of non- performance of the contract by the plaintiff. There was correspondence between the parties and ultimately, the plaintiff filed the suit being Civil Suit No. 1818 of 1989 before the City Civil Court at Ahmedabad for recovery of the amount of Rs.26,06,000.00 which included the refund of the security deposit of Rs.1,56,000.00.
3. The defendant resisted the suit and contended inter alia that the sale of drill pipes was on the basis of the term “as is where is basis” and it was only after inspection, the tender was submitted and there was breach by the plaintiff for performance of the contract and, therefore, the defendant had forfeited the security deposit of Rs.1,56,000.00. It was also stated that the plaintiff is not entitled to any relief.
4. The learned Judge thereafter framed issues. The parties were given opportunity to lead evidence and ultimately passed the judgment and decree whereby the suit is partly allowed to the extent that the defendant was directed to pay a sum of Rs.1,56,000.00 (which was security deposit) with interest at the rate of 6 per cent per annum from the date of decree till the date of payment. It is against the said judgment and decree of the lower Court, the defendant has preferred the appeal contending inter alia that the suit ought to have been dismissed whereas the plaintiff has preferred the appeal contending that the damages and other reliefs prayed in the suit also ought to have been granted in addition to the refund of the amount of security deposit. Hence both the appeals before this Court.
5. We have heard the learned Senior Counsel Mr.R.R. Marshall appearing for the O.N.G.C. - original defendant in the respective appeals and learned Advocate Mr. K.G. Sukhwani appearing for the Nobel Steel – original plaintiff in both the respective appeal. We have considered the judgment and the reasons recorded by the learned Judge and the record and proceedings.
6. Upon appreciation of the evidence read with the express condition of sale/tender notice as that of “as is where is basis”, it was not open to the original plaintiff to raise the dispute for the goods not meeting with the specifications either as per the tender notice or as per the description mentioned in the intimation for acceptance of the tender. Aforesaid is coupled with the evidence on record that as per the terms of tender, inspection was made permissible to the original plaintiff before submission of the tender and thereafter, the tender was accepted. Once a party to the contract agreed to purchase a particular lot with the express stipulation “as is where is basis”, the burden would be upon the purchaser to know the quality for the specifications of the goods and to verify the goods and it was not open to the plaintiff to avoid performance on the ground that the remaining material did not meet with the specifications of the goods. Under the circumstances, it appears that the finding recorded by the lower court that the plaintiff has abandoned the contract and thereby committed breach of the contract does not deserve to be interfered with. Once it was found that there was no breach of the contract by the defendant or the plaintiff abandoned the contract, naturally the plaintiff would not be entitled to claim any damages from the defendant, therefore, the learned Judge appears to have rightly denied the claim of the plaintiff for damages.
7. Aforesaid brings us to examine the aspects for refund of the security deposit allowed by the lower Court. Shri Marshall, learned Senior Counsel appearing for the ONGC has contended that when there was express stipulation provided which has been reproduced by the learned Judge at paragraph 11, and once there was failure to perform the contract on the part of the plaintiff, the defendant was justified in forfeiting the amount of security deposit, therefore, the Court ought not to have allowed the suit of the plaintiff by directing refund of the security deposit. In his submission, said express clause of forfeiture of security deposit is not barred by the provisions of section 74 of the Contract Act since it was open and it was for both the sides to abide by the particular condition and the Court should not have enforced otherwise.
8. Whereas Mr. K.G. Sukhwani,learned counsel appearing for the plaintiff supported the judgment of the lower court by contending that the Court on the said aspect has properly considered the provisions of section 74 read with express condition of contract for forfeiture of the security deposit and, therefore, the learned Judge has not committed any error.
9. In our view, said aspect has been elaborately considered by the learned Judge but we find it proper to refer to two decisions of the apex Court on the said aspect which, of course, have been considered by the learned Judge. In case of Fateh Chand versus Balkishan Dass reported in AIR 1963 SC 1405 wherein at paragraph 8,10 and 11, the apex court has observed thus;
8. The claim made by the plaintiff to forfeit the amount of Rs.24,000/- may be adjudged in the light of s. 74 of the Indian Contract Act, which in its material part provides :-
"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 party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case maybe, the penalty stipulated for."
The section is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrors is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty. The second clause of the contract provides that if for any reason the vender fails to get the sale-deed registered by the date stipulated, the amount of Rs. 25,000/- (Rs. 1,000/- paid as earnest money and Rs. 24,000/- paid out of the price on delivery of possession) shall stand forfeited and the agreement shall be deemed cancelled. The covenant for forfeiture of Rs. 24,000/- is manifestly a stipulation by way of penalty.
10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and `ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by s.74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of tile case. jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according, to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages"; does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
11. Before turning to the question about the compensation which may be awarded to the plaintiff, it is necessary to consider whether s. 74 applies to stipulations for forfeiture of amounts deposited or paid under the contract. It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that s.74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. In our judgment the expression "the contract contains any other stipulation by way of penalty" comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by s. 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has " jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. We may briefly refer to certain illustrative cases decided by the High Courts in India which have expressed a different view.”
10. Subsequently, in the another decision of the apex court in case of Maula Bux v. Union of India reported in AIR 1970 SC 1955, in para 7 and 8, it was observed thus;
7. Forfeiture of earnest money under a contract for sale of property – movable or immovable – if the amount is reasonable, does not fall within section 74.That has been decided in several cases; AIR 1926 P. C. 1: Roshan Lal v. Delhi Cloth and General Mills CO. ltd., Delhi,(1911) ILR 33 All 166; Muhammad Habibullah v. Muhammad Shafi, ILR 41 All 324 – (AIR 1919 All 265); Bishan Chand v. Radha Kishan Das, (1897) ILR 19 All 489. These cases are easily explained for forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty.
8. Counsel for the Union, however, urged that in the present case Rs. 10,000/- in respect of the potato contract and Rs.8,500/-in respect of the poultry contract were genuine pre-estimates of damages which the Union was likely to suffer as a result of breach of contract, and the plaintiff was not entitled to any relief against forfeiture. Reliance in support of this contention was placed upon the expression (used in s. 74 of the Contract Act), "the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused there by, to receive from the party who has broken the contract reasonable compensation". It is true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree, and the Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him.”
11. Therefore, it is not a case where express liquidated damages were provided in a contract but it is a case where express forfeiture of security deposit upon failure to perform contract was provided. If the character of failure to perform contract is considered enabling the forfeiture of security deposit, it is to be treated as having penal character and could be termed as 'by way of penalty'. Even in those cases also as per the above referred observations made by the apex court, the court will have regard to the actual damage or the loss suffered by the parties with whom it was agreed that the penalty could be recovered. Therefore, it is not a matter where irrespective of quantum of damages suffered, the parties to the contract would be entitled to forfeit the amount of security deposit. Such is to be considered by having nexus and rather in comparison to the actual damages suffered. In the present case, the evidence has come on record that after the plaintiff abandoned the contract or as per the defendant, failed to perform the contract, remaining goods were sold by the defendant at higher prices than the prices agreed with the plaintiff, therefore, the defendant has been able to realize more amount and consequently could be termed as profit. Such totally rules out any loss suffered by the defendant after the plaintiff failed to perform the contract. Under the circumstances, since the failure to perform contract has not resulted into any loss or damages suffered by the defendant, the learned Judge was right in directing to refund the amount of security deposit. We are in agreement with the view taken by the learned Judge on the said aspects.
12. In view of the aforesaid observation and discussion, both the appeals are meritless and deserve tobe dismissed. It may be recored that pending the First Appeal No. 2972 of 2000, pursuant to interim order passed by this Court dated 23.7.2001 in Civil Application No. 10488 of 2000, undertaking was filed by the defendant that the defendant – appellant therein in the event the appellant loses in the appeal, sum of Rs.1,56,000.00 shall be paid to the original plaintiff with interest at the rate of 12 per cent per annum from the date of decree till realization. Since the appeals are dismissed today, the defendant shall pay the said amount as per the undertaking within the period of 8 weeks from today.
13. Both the appeals are dismissed with the aforesaid direction. Considering the facts and circumstances, no order as to costs.
Sd/- (Jayant Patel,J.) an vyas Sd/-
(C.L. Soni,J.)