Natesa Aiyar And Ors. vs Appavu Padayachi 

FACTS OF THE CASE

This case included a buyer suing a seller for particular performance of a contract for the sale of immovable property, and alternatively, for the refund of the buyer’s 4,000 rupee deposit. The buyer did not complete within the allotted time, and the lower court, finding that time was of the essence of the contract and that the defendant had exercised his right to avoid the contract under Section 55 of the Indian Contract Act as a result of the plaintiff’s failure to complete, declined to grant the plaintiff specific performance but ordered the defendant to return the 4,000 rupee deposit that the plaintiff had paid at the time of signing the contract of sale, Exhibit A, Even though it was explicitly stated in the contract that the plaintiff would forfeit the money if he didn’t finish the deal by May 24th, 1903, it is undeniable that he did. This express provision, in the lower court’s opinion, is superseded by the provisions of Section 64 of the Indian Contract Act, which state that when a person at whose option a contract is voidable rescinds it, he must restore, to the extent possible, any benefit he has received under the contract to the other party.

The price was Rs. 41,000, of which Rs. 4,000 was paid in advance. The remaining Rs. 20,000 was to be paid through a mortgage, and the remaining Rs. 17,000 was to be paid before the 24th of May, when the conveyance was to be executed. If the vendee delayed, the remaining Rs. 4,000 was to be forfeited. The contract further said that the vendor had to carry out the conveyance either in the buyer’s favor or the beneficiaries he identified. This last clause had the sole purpose of requiring the vendor, upon receipt of the purchase money, to execute separate conveyances of various parcels of land, if the vendor so desired. 

On February 24, 1903, the plaintiff agreed to buy certain property from the defendant for Rs. 41,000, “out of which” Rs. 4,000 was given “as advance” to the defendant on that day. The sum of Rs. 17,000 has to be paid by May 24. The plaintiff agreed to sign a bond hypothecating these assets to the defendant for the remaining Rs. 20,000 in exchange for the defendant agreeing to execute the sale-deed in exchange for such payment. If the plaintiff didn’t pay by that date and acquire the sale-deed, he was supposed to forfeit the advance payment of the aforementioned sum. In the event that the defendant failed to complete the sale-deed “be fore the due date,” he was required to reimburse the deposit plus an extra Rs. 4,000. 

The plaintiff now demands specific performance or the refund of the deposit, thus the defendant filed an appeal. Because the Subordinate Judge determined that time was of the essence of the contract and that the defendant was consequently entitled to withdraw the contract at the expiration of the specified period and that he did so, the claim for particular performance was rejected. The request for the deposit’s refund has been granted.

ISSUES

1. Whether the vendor has the right to retain the amount of Rs. 4000 that had been paid as a part of consideration by the purchaser to the vendor?

ARGUMENTS 

Exparte Hulse (1873) 8 Ch. 1022, which is an example of a successful attempt to collect the deposit money, in Re Dagenham (Thames) Dock Company. In that instance, a company agreed to buy land for £4,000 and put down £2,000; the remaining £2,000 was to be paid on a specified date, with the stipulation that if the full £2,000 was not paid on that date, the vendors were free to seize the land without having to return the deposit. An arrangement that stipulated the £2,000 with all interest be fully paid and discharged by a specific date extended the time period. This was considered a punishment. The following is given as the reason: “When you look at the last agreement it provides that if the whole £2,000 with interest or any part of it, however small, remains unpaid after a certain day, then the Company shall forfeit the land and the portion of the purchase-money they have paid.” The rule that a clause that calls for payment of a quantity of money more than the amount payable by the defaulting party is a penalty is also applied in this circumstance, treating a deposit as damages paid by the defaulting party.

Regarding this case, Mr. Krishnaswamy Iyer argued that if it in any way contradicts the respondent’s argument, it is in contrast to more recent cases where it has been determined that a deposit is not only a part payment but also a security for the performance of the contract and is therefore subject to forfeiture upon failure to do so.

The other case that was referred to, Lord Macnaughten said the following in Soper v. Arnold (1889) 14 App. Chs. 429: “The deposit serves two functions. If the transaction goes through, the deposit will be applied to the purchase price, but its main function is to serve as a guarantee that the buyer is serious. If there is one circumstance in which a deposit is rightfully and properly forfeited, it is, in my opinion, when a man signs a contract to purchase real estate without first taking the time to consider whether he can afford it. In this instance, there was a requirement that the buyer forfeit the deposit.

JUDGEMENT

It is undeniably to the appellant’s advantage that, with one notable exception, the Contract Act is never even mentioned in Indian instances that analyze the issue purely in terms of the norms established in English cases. Judges cited a few cases, such as Srinivasa v. Rathnasabapathy (1892) I.L.R. 16 M. 474, where a contractor had deposited a certain amount of money with a Municipal Council as part of a contract that stated that the deposit would be forfeited if he failed to fulfill his obligations. The deposit was deemed forfeited since the contractor didn’t fulfill his obligations under the contract. In a lawsuit brought by the buyer, it was determined that the forfeiture clause was ineffective since it rendered the deposit subject to forfeiture regardless of how serious the violation was. The money was decreed to the buyer. The cases of Luchman Das v. Chaler (1887) I.L.R. 10 A. 29 and, ostensibly, Howe v. Smith (1884) 27 Ch. D. 89 (the Reporter may have referred to Soper v. Arnold (1889) 14 A.C. 429 incorrectly) were cited. It is significant that the Municipality did not make a claim for damages in this instance, and that claim was not taken into account.

The Madras Railway Company v. Manian Patter (1905) I.L.R. 23 M. 118 was the following case.  This also applied to a contractor who deposited money with the Madras Railway Company that was subject to forfeiture in the event of the contractor’s default. The ruling established in that case by Subramania Aiyar J. and J. Wailis was that if the sum deposited was fair in amount, the forfeiture will not be tampered with. As it did not look unreasonable, the forfeiture was upheld.

The Indian Contract Act’s guidelines were then taken into account by the judges. According to that Act, if a party doesn’t fulfill a promise before the deadline, the contract does not become voidable if time is not of the essential of the agreement; instead, the failure just makes the party responsible for compensation. Unless, of course, we accept the rule that, however harsh, the terms are to be faithfully followed in all situations of deposit, it appears inequitable to implement a forfeiture of deposit clause. When time is of the essence, the contract is only voidable at the other party’s choice; but, until that party exercises that option, the contract is still in effect as far as particular performance is concerned (Section 55). The purpose of Sections 73 and 74 is to do away with the distinction between fines and liquidated damages. In my opinion, Section 74, as it was revised by Act VI of 1899, makes it sufficiently clear that a deposit, taken only as a deposit, is not forfeited by any violation of contract. According to that clause, “reasonable compensation must be awarded in the event the contract contains any other provision by way of penalty, not to exceed the penalty provided for.” The authorities are clear that the deposit is not lost if it is only considered a portion of the total amount owed.

The forfeiture is upheld by the courts since it serves as a guarantee for the proper performance. In this section, the term “penalty” refers to any clause designed to compel the fulfillment of a contract, which includes a deposit. The notion that a deposit ceases to constitute security for the execution of any contract if it is not forfeited would hold true for any clause that is not enforced because it is a penalty.

If the damage can be evaluated and is less than the deposit, it won’t be forfeited. The Hon’ble court dismissed the appeal with costs since there was no claim of damage in this case and no evidence supporting it.

REFERENCES

• https://indiankanoon.org/doc/1079334/ 
• https://lawyerservices.in/Natesa-Aiyar-Versus-Appavu-Padayachi-1908-09-21 

Written by Pratyaksh Moitra, an intern at Legal Vidhiya from Aligarh Muslim University

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