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Misuse of 498a – False 498A Legal Terrorism says Supreme Court in Sushil Kumar

IN THE SUPREME COURT OF INDIA

Civil appeal No. 4399 of 2005 (Arising out of SLP (C) no. 17656 of 2004

Decided On: 19.07.2005

Appellants: Sushil Kumar Sharma
Vs.
Respondent: Union of India (UOI) and Ors.

JUDGMENT:

By this petition purported to have been filed under Article 32 of the Constitution of India, 1950 (in short ‘the Constitution’) prayer is to declare Section 498A of Indian Penal Code, 1860 (in short ‘the IPC’) to be unconstitutional and ultra vires in the alternative

to FORMULATE GUIDELINES so that INNOCENT PERSONS ARE NOT VICTIMIZED by unscrupulous persons making false accusations

2. Further prayer is made that whenever, any court comes to the conclusion that the allegations made regarding commission of offence under Section 498A IPC are unfounded, stringent action should be taken against person making the allegations. This, according to the petitioner, would discourage persons from coming to courts with unclean hands and ulterior motives. Several instances have been highlighted to show as to how commission of offence punishable under Section 498A IPC has been made with oblique motives and with a view to harass the husband, in-laws and relatives.

 3. According to the petitioner there is no prosecution in these cases but persecution. Reliance was also placed on a decision rendered by a learned Single Judge of the Delhi High Court wherein concern was shown about the increase in number of false and frivolous allegations made. It was pointed out that accusers are more at fault than the accused. Persons try to take undue advantage of the sympathies exhibited by the courts in matters relating to alleged dowry torture.

 4. Section 498A appears in Chapter XXA of IPC.

 5. Substantive Section 498A IPC and presumptive Section 113B of the Indian Evidence Act, 1372 (in short ‘Evidence Act’) have been inserted in the respective statutes by Criminal Law ( Second Amendment) Act, 1983.

 6. Section 498A IPC and Section 113B of the Evidence Act include in their amplitude past events of cruelty. Period of operation of Section 113B of the Evidence Act is seven years, presumption arises when a woman committed suicide within a period of seven years from the date of marriage.

 7. Section 498A reads as follows: “498A: Husband or relative of husband of a woman subjecting her to cruelty- Whoever, being the husband or the relative of the husband of a woman, subjects such woman to cruelty shall be punished with imprisonment for a term which may extend to three years and shall also be liable to fine. Explanation – For the purpose of this section ‘cruelty’ means –

 (a) any wilful conduct which is of such a nature as is likely to drive the woman to commit suicide or to cause grave injury or danger to life, limb or health whether mental or physical of the woman; or

(b) harassment of the woman where such harassment is with a view to coercing her or any person related to her to meet any unlawful demand for any property or valuable security or is on account of failure by her or any person related to her to meet such demand.”

 Section 113B reads as follows:-

 “113B: Presumption as to dowry death- When the question is whether a person has committed the dowry death of a woman and it is shown that soon before her death such woman has been subjected by such person to cruelty or harassment for, or in connection with, any demand for dowry, the Court shall presume that such person had caused the dowry death.

 Explanation – For the purposes of this section ‘dowry death’ shall have the same meaning as in Section 304B of the Indian Penal Code (45 of 1860).”

 8. Consequences of cruelty which are likely to drive a woman to commit suicide or to cause grave injury or danger to life, limb or health, whether mental or physical of the woman is required to be established in order to bring home the application of Section 498A IPC. Cruelty has been defined in the explanation for the purpose of Section 498A. It is to be noted that. Sections 304B and 498A, IPC cannot be held to be mutually inclusive. These provisions deal with two distinct offences. It is true that cruelty is a common essential to both the Sections and that has to be proved. The explanation to Section 498A gives the meaning of ‘cruelty’. In Section 304B there is no such explanation about the meaning of ‘cruelty’. But having regard to common background to these offences it has to betaken that the meaning of ‘cruelty’ or ‘harassment’ is the same as prescribed in the Explanation to Section 498A under which ‘cruelty’ by itself amounts to an offence.

 9. The object for which Section 498A IPC was introduced is amply reflected in the Statement of Objects and Reasons while enacting Criminal Law (Second Amendment) Act No. 46 of 1983. As clearly stated therein the increase in number of dowry deaths is a matter of serious concern. The extent of the evil has been commented upon by the Joint Committee of the Houses to examine the work of the Dowry Prohibition Act, 1961. In some cases, cruelty of the husband and the relatives of the husband which culminate in suicide by or murder of the helpless woman concerned, which constitute only a small fraction involving such cruelty. Therefore, it was proposed to amend IPC, the Code of Criminal Procedure, 1973 (in short ‘the Cr.P.C.’) and the Evidence Act suitably to deal effectively not only with cases of dowry deaths but also cases of cruelty to married women by the husband, in-law and relatives. The avowed object is to combat the menace of dowry death and cruelty.

 10. One other provision which is relevant to be noted is Section 306 IPC. The basic difference between the two Sections i.e. Section 306 and Section 498A is that of intention. Under the latter, cruelty committed by the husband or his relations drag the women concerned to commit suicide,

 while under the former provision suicide is abetted and intended.

 11. It is well settled that mere possibility of abuse of a provision of law does not per se invalidate a legislation. It must be presumed, unless contrary is proved, that administration and application of a particular law would be done “not with an evil eye and unequal hand” (see: A. Thangal Kunju Musaliar v. M. Venkatachalam Potti, Authorised Official and Income-Tax Officer and Anr.)

 12. In Budhan Choudhry and Ors. v. State of Bihar a contention was raised that a provision of law may not be discriminatory but it may land itself to abuse bringing about discrimination between the persons similarly situated. This court repelled the contention holding that on the possibility of abuse of a provision by the authority, the legislation may not be held arbitrary or discriminatory and violative of Article 14 of the Constitution.

 13. From the decided cases in India as well as in United States of America, the principle appears to be well settled that if a statutory provision is otherwise intra-vires, constitutional and valid, mere possibility of abuse of power in a given case would not make it objectionable, ultra-vires or unconstitutional. In such cases, “action” and not the “section” may be vulnerable. If it is so, the court by upholding the provision of law, may still set aside the action, order or decision and grant appropriate relief to the person aggrieved.

 14. In Mafatlal Industries Ltd. and Ors. v. Union of India and Ors., a Bench of 9 Judges observed that mere possibility of abuse of a provision by those in charge of administering it cannot be a ground for holding a provision procedurally or substantively unreasonable. In Collector of Customs v. Nathella Sampathu Chetty (1962 (3) SCR 786) this Court observed:

 

 “The possibility of abuse of a statute otherwise valid does not impart to it any element of invalidity.” It was said in State of Rajasthan v. Union of India “it must be remembered that merely because power may sometimes be abused, it is no ground for denying the existence of power. The wisdom of man has not yet been able to conceive of a Government with power sufficient to answer all its legitimate needs and at the same time incapable of mischief.” (Also see: Commissioner, H.R.E. v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Meth (1954 SCR 1005).

 

 15. As observed in Maulavi Hussein Haji Abraham Umarji v. State of Gujarat. Unique Butle Tube Industries (P) Ltd. v. U.P. Financial Corporation and Ors. and Padma Sundara Rao (dead) and Ors. v. State of Tamil and Ors., while interpreting a provision, the Court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of the process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary.

 

 16. The judgment of the Delhi High Court on which reliance was made was rendered in the case of Savitri Devi v. Ramesh Chand and Ors. In that case while holding that the allegations regarding commission of offence punishable under Section 498A IPC were not made out. Certain observations in general terms were made about the need for legislative changes. The complainant had moved this Court against the judgment on merits in SLP(Crl)……of 2003 entitled Savitri Devi v. Ramesh Chand and Ors. By order dated 28.11.2003 this Court observed, as follows:

  “Heard learned counsel for the petitioner. Delay condoned.

  We do not see any merit in the challenge made to the order of the High Court in Criminal Revision No. 462 of 2002, on the facts of the case. The special leave petition is, therefore, dismissed.

  At the same time, we express our disapproval of some of the generalized views expressed in paragraphs 23 to 32 of the judgment of the High Court by the learned Single Judge. The learned Judge ought to have seen that such observations, though may be appropriate for seminars or workshops, should have been avoided being incorporated as part of a court judgment. Some of the views also touch upon Legislative measures and wisdom of legislative policy in substance, which according to the learned Judge need to be taken into account. There was no scope for considering all such matters in the case which was before the learned Judge. It is, therefore, appropriate that such generalized observations or views should meticulously avoided by Courts in the judgments.”

  17. Above being the position we find no substance in the plea that Section 498A has no legal or constitutional foundation.

  18. The object of the provision is prevention of the dowry menace. But as has been rightly contented by the petitioner many instances have come to light where the complaints are not bonafide and have been filed with oblique motive. In such cases acquittal of the accused does not in all cases wipe out the ignominy suffered during and prior to trial. Sometimes adverse media coverage adds to the misery. The question, therefore, is what REMEDIAL MEASURES can be taken to prevent abuse of the well-intentioned provision. Merely because the provision is constitutional and intra vires, does not give a licence to unscrupulous persons to wreck personal vendetta or unleash harassment. It may, therefore, become necessary for the legislature to find out ways how the makers of frivolous complaints or allegations can be appropriately dealt with. Till then the Courts have to take care of the situation within the existing frame work. As noted above the object is to strike at the roots of dowry menace. But by misuse of the provision a new

  LEGAL TERRORISM

 can be unleashed. The provision is intended to be used a shield and not an assassin’s weapon. If cry of “wolf” is made too often as a prank assistance and protection may not be available when the actual “wolf” appears. There is no question of investigating agency and Courts casually dealing with the allegations. They cannot follow any straitjacket formula in the matters relating to dowry tortures, deaths and cruelty. It cannot be lost sight of that ultimate objective of every legal system is to ARRIVE AT TRUTH, PUNISH THE GUILTY AND PROTECT THE INNOCENT. There is no scope for any pre-conceived notion or view. It is strenuously argued by the petitioner that the investigating agencies and the courts start with the presumptions that the accused persons are guilty and that the complainant is speaking the truth. This is too wide available and generalized statement. Certain statutory presumptions are drawn which again are rebuttable. It is to be noted that the role of the investigating agencies and the courts is that of watch dog and not of a bloodhound. It should be their effort to see that an innocent person is not made to suffer on account of unfounded, baseless and malicious allegations. It is equally undisputable that in many cases no direct evidence is available and the courts have to act on circumstantial evidence. While dealing with such cases, the law laid down relating to circumstantial evidence has to be kept in view.

 19. Prayer has been made to direct investigation by the Central Bureau of Investigation (in short the ‘CBI’) in certain matters where the petitioner is arrayed as an accused. We do not find any substance in this plea. If the petitioner wants to prove his innocence, he can do so in the trial, if held.

Held : The Writ Petition is accordingly disposed of.
 
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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.

Supreme Court of India

Shree Hanuman Cotton Mills & Ors vs Tata Air-Craft Ltd on 28 October, 1969
Equivalent citations: 1970 AIR 1986, 1970 SCR (3) 127
Bench: Vaidyialingam, C.A.

PETITIONER:

SHREE HANUMAN COTTON MILLS & ORS.

Vs.

RESPONDENT:

TATA AIR-CRAFT LTD.

DATE OF JUDGMENT:

28/10/1969

BENCH:

VAIDYIALINGAM, C.A.

BENCH:

VAIDYIALINGAM, C.A.

SHELAT, J.M.

DUA, I.D.

CITATION:

1970 AIR 1986 1970 SCR (3) 127

1969 SCC (3) 522

ACT:

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.

HEADNOTE:

The 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 that 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 gov- erning 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 Tights 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 thereupon 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 : (1) For a deposit by a purchaser to be treated as earnest money the ‘following conditions must be satisfied : (i) it must be given at the moment at which the contract is concluded; (ii) it represents a guarantee that the contract 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 committed 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 merely 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 deposited by the appellant was earnest money and the respondent was entitled to forfeit if. [140; 141 F]

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] 1 K.B.D. 397, Sumner and Leivesley v. John Brown & Co. 25 T.L.R. 745 and Chiranjit Singh v. Har Swarup, A.I.R. 1926 P.C. 1, applied.

128

Roland Burrows, Words and Phrases Vol. 11, Benjamin on Sale, Halsbury’s Laws of England (111 Edition) Vol. 34, p. 118, para. 189 and Jowitt’s Dictionary of English Law, referred to.

(2) In Fateh Chand v. Balkishan 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 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 off contract was admittedly committed by the appellant,s. 64 of the Contract Act could not be invoked by the appellant. [146 D] Murlidhar Chatterjee v. International Film Co. L.R. 70 I.A. 35, not applicable.

[The question as to whether the element of unreasonableness can even be taken into account when considering the forfeiture of an amount deposited by way of earnest, and if so what factors should be taken into account left open.] [142 F-G]

Maula Bux v. Union of India, [1970] 1 S.C.R. 928, explained.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1122 of1966. Appeal from the judgment and decree dated January 29, 1964 of the Calcutta High Court in Appeal from original order No. 28 of 1960.

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 Vaidialingam, 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 from Original 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 of new and second hand machinery, on coming to know from an adver- tisement 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 representatives

129

would be contacting them shortly. Obviously the parties must have met and decided about the purchase, as is seen 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 appel- lants 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 the 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 sales-tax 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 full 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 November 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

information that the quantity stated to be available is not on the 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 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 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 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 s hall 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 Company 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 money.

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 same is presented to the Depot concerned for taking delivery of the stores concerned.

(b) If the buyer shall make default in making payment for the stores in accordance with the provisions of this contract the. Company may without prejudice to its rights under Clause 11 thereof or other remedies in law

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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 time 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 company 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 forfeit 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 an true representations made by the respondents regarding the quantity of scrap material available and the plaintiffs had been induced to enter into the agreement on such false 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. Even 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

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 repudiated the contract, called upon them to pay the balance amount and take delivery of the articles. But the plaintiffs persisted in their wailful 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 Bench, on appeal, that the appellants conceded that they committed 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 correspondence 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: (1) 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 whether the defendants were entitled to forfeit the said amount. 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 forfeit the deposit amount when the plaintiffs have committed a breach of contract. In this view the defendant’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. 74 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 and 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

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 this case, was never raised by the appellant at any stage of the proceedings in the High Court. Therefore s. 74 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 law 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. 11, 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. If, 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

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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 as by way of deposit or guarantee in which case it is forfeited. It is further stated that an earnest does not lose its character because the same thing might also avail as a part payment.

Regarding “deposit”, the author states at p. 946, that a deposit is not recoverable by the buyer, for a deposit is a guarantee that the buyer shall perform his contract and is forfeited on his failure to do so and if a contract distinguishes between the deposit and installments 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 : “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 and 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 signifying assent to a contract of sale or the like, by 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(1) Fry, L.J., discussed the history of “earnest”, which is identical with a deposit. In that case, the plaintiff agreed to purchase a property for the price mentioned in the agreement and paid pound 500 on the signing of the agreement Al as a deposit and in part payment of the purchase-money.” There where 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 resell the property, brought an action against him for specific performance of the agreement; but the suit was dismissed on the ground

(1) L.R. [1884] Ch. D. 89.

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that there had been inordinate delay on the plaintiffs 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 pound 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. In 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 in making the contract, it goes in part, payment of the purchasemoney for which 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 meaning 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 interpre- tation 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 his own wrong”

Fry, L.J., at p. 101, observes

“Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must therefore inquire what 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

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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(1) 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 purchaser 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 given at the moment at which the contract is concluded,

(1) L.R. [1889]14 A.C. 429, (1)

L.R. (1928] 1 K.B.D. 397.

6Sup. CI/70-10

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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 Leivesley v. John Brown & Co.(1), observes at p. 409:

” Earnest’. . . meant something given for the purpose of binding a contract, something to be used to put pressure on the defaulter if he failed to carry out his part. If the contract went through, the thing given in earnest was returned to the giver, or, if money, was de- ducted 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 consider in Chiranjit Singh v. Har Swarup(2) the question as to whether a payment maade 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 namely earnest twenty thousand 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 ?hat 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-purchaser 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 Times L. R, 745.

(2) A.I.R. 1926 P.C. 1.

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fled 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 plaintiff, 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 the transetion 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 principles 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. 1. 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

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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 at 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 “on 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 clause 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 Nov- ember 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 the respondent company applied to the contract. This condition has also been accepted by the appellants; in their reply, 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.

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We have also earlier referred to clause 10 of the Terms of Business, which relates to the time and method of payment. Under clause 10(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 proudly 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 10(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. 20,000 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 the 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 the sum of Rs. 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 wilt 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. 2,50,000, referred to in the contract, must be treated as the amount to be paid in case of a breach. In the alternative, counsel also urged that the provision in the contract regarding the forfeiture of the said amount, should be treated as a term containing a stipulation by way of a penalty. Under any of

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these circumstances, the remedy of the aggrieved party would be to get compensation which is adjudged reasonable by the Court. Counsel also urged that “earnest money”, unless it is considered to be a reasonable amount, could not be forfeited in law.

The learned Attorney General very strongly urged that the pleas covered by the second contention of the appellant had never been raised in the pleadings nor in the contentions urged before the High Court. The question of the quantum of earnest deposit which was forfeited being unreasonable or the forfeiture being by way of penalty, were never raised by the appellants. The Attorney General also pointed out that as noted by the High Court the appellants led no evidence at all and, after abandoning the various pleas taken in the plaint, the only question pressed before the High Court was that the deposit was -not by way of earnest and hence the amount could not be forfeited. Unless the appellants had pleaded and established that there was unreasonableness attached to the amount required to be deposited under the contract or that the clause regarding forfeiture amounted to a stipulation by way of a penalty, the respondents had no opportunity to satisfy the Court that no question of unreasonableness or the stipulation being by way of penalty arises. He further urged that the question of unreasonableness or otherwise regarding earnest money does not at all arise when it is forfeited according to the terms of the contract.

In our opinion the learned Attorney General is well founded in his contention that the appellants raised no such contentions covered by the second point, noted above. It is therefore unnecessary for us to go into the question as to whether the amount deposited by the appellants, in this case, by way of earnest and forfeited as such, can be considered to be reasonable or not. We express no opinion on the question as to whether the element of unreasonableness can ever be considered regarding the forfeiture of an amount deposited by way of earnest and if so what are the necessary factors to be taken into account in considering the reasonableness or otherwise of the amount deposited by way of earnest. If the appellants were contesting the claim on any such grounds, they should have laid the foundation for the same by raising appropriate pleas and also led proper evidence regarding the same, so that the respondents would have had an opportunity of meeting such a claim.

In this view, it is unnecessary for us to consider the decision of this Court in Maula Bux v. Union of India(1) relied on by the appellants and wherein there is an observation to the effect :

“Forfeiture of earnest money under a contract for sale of property-movable or immovable-if the

(1) [1970] 1 S. C.R. 928.

amount is reasonable, does not fall within S. 74 (of the Indian Contract Act). That has been decided in several cases. Kunwar Chiranjit Singh v. Har Swarup (AIR 1926 P.C. 1); Roshan Lal v. The Delhi Cloth and General Mills Co. Ltd. Delhi (ILR 33 All. 166); Muhammad Habibullah v. Muhammad Shafi (ILR 41 All. 324); Bishan Chand v. Radha Kishan Das (ILR 19 All. 489). These cases are easily explained, for forfeiture of reasonable amount paid -as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, S. 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.”

The learned Attorney General has pointed out that the decisions referred to in the, above quotation do not lay down that the test of reasonableness applies to an earnest deposit and its forfeiture. He has also pointed out that this Court, in the above decision, did not agree with the view of the High Court that the deposit, the recovery of which was sued for by the plaintiff therein, was earnest money. The learned Attorney General also referred ‘Us to various decisions, wherein, according to him, though the amounts deposited by way of earnest were fairly large in proportion to the total price fixed under the contract, nevertheless the forfeiture of those amounts were not interfered with by the Courts. But, as we have already mentioned, we do not propose to go into those aspects in the case on hand. As mentioned earlier, the appellants never raised any contention that the forfeiture of the amount amounted to a penalty or that the amount forfeited is so large that the forfeiture is bad in law. Nor have they raised any contention that the amount of deposit is so unreasonable and therefore forfeiture of the entire amount is not justified. The decision in Maula Bux’s Case(1) had no occasion to consider the question of reasonableness or otherwise of the earnest deposit being forfeited. Because , from the said judgment it is clear that this Court did not agree with the view of the High Court that the deposits made, and which were under consideration, were paid as earnest money. It is under those circumstances that this Court proceeded to -consider the applicability of s. 74 of the Contract Act.

Mr. Maheshwari has relied upon the decision of this Court in Fateh Chand v. Balkishan Das(1) wherein, according to him, this

(1) [1970] 1 S.C.R. 928. (2) (1964) 1 S.C.R. 515.

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Court has held, under similar circumstances, that the stipulation under the conrtact regarding forfeiture of the amount deposited is a stipulation by way of penalty attracting s. 74 of the Contract Act. On this assumption, counsel urged that there is a duty, statutorily imposed upon Courts by S. 74 of the Contract Act not to enforce the penalty clause but only to award reasonable compensation. This aspect, he urges, has been totally missed by tile High Court.

We are inclined to accept this contention of the learned counsel. This Court had to consider, in the said decision, two questions : (i) Whether the plaintiff therein was entitled to forfeit a sum of Rs. 1,000 paid as earnest money on default committed by the buyer; and (ii) whether the plaintiff was further entitled to forfeit the entire sum of Rs. 24,000 paid by the buyer under the contract which recognised such right. This Court held that the plaintiff was entitled to forfeit the sum of Rs. 1,000 paid as earnest money, when default was committed by the buyer. But, regarding the second item of Rs. 24,000 this Court held that the same cannot be treated as earnest and therefore the rights of the parties would have to be adjudged under s. 74 of the Contract Act. In view of this conclusion the Court further had to consider the relief that the plaintiff had to get when breach of contract was committed by the buyer and, in dealing with this question, it observed at p. 526 “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 conrtact 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.”

Again, at p. 528 it observed

“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

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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.”

The Court further observed at p. 529 :

“There is no ground for holding that the expression ‘contract contains any other stipulation by way of penalty’ is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants. under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited.

Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. I The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for for- feiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the Court is not deter-mined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression ‘to receive from the party who has broken the contract” does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract.”

This Court applied s. 74 of the Contract Act, and ultimately fixed a particular amount which the plaintiff would be entitled to as reasonable compensation in the circumstances. Mr. Maheshwari placed considerable reliance on the above extracts in support of his contention and urged that the recitals regarding forfeiture of the amount of Rs. 2,50,000 shows that the contract contains a stipulation by way of penalty and therefore s.74 is attracted. It is not possible to accept this contention. As we have already pointed out, this Court, in the above decision,

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recognised the principle that earnest money can be forfeited, but in dealing with the rest of the amount which was not, admittedly, earnest money, s.74 was applied. In the case before us the entire amount, as evidenced by the contract and as held by us earlier, is earnest money and therefore the above decision does not apply. Mr. Maheshwari finally urged that s.64 of the Contract Act may apply and he also relied on the decision of the Judicial Committee in Murlidhar Chatterjee v. International Film Co.(1). On the basis of that ruling he urged that the respondents are bound to restore the benefit that they have obtained under the contract. In our opinion there is no scope for applying s.64 of the Contract Act and it follows that the decision of the Judicial Committee, referred to above, and dealing with s.64 has no relevance. We have already pointed out that the appellants raised a contention that they had been induced to enter into the agreement on a misrepresentation made by the respondents regarding the quantity of material available. If the. appellants had proceeded on that basis, then the contract would have been voidable at their instance under s.19 of the Contract Act. But they have abandoned that plea and have admitted that the breach of contract was committed by them. Hence s. 64 cannot be invoked by the appellants. In this view, the second contention also fails. In the result’, the appeal fails and is dismissed with costs.

V.P.S. Appeal dismissed.

(1) L. R. 70 I.A, 35.

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Uncategorized

Is criminal judgment binding on a civil case ?

Comment : We, therefore, are of the opinion that the judgment in a criminal case was not relevant in evidence for the purpose of proving a person’s civil liability and the other way round. 
 
Supreme Court of India
Seth Ramdayal Jat vs Laxmi Prasad on 15 April, 2009
Author: S.B. Sinha
Bench: S.B. Sinha, Mukundakam Sharma

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2543 OF 2009

[Arising out of SLP (Civil) No. 23441 of 2007] Seth Ramdayal Jat …Appellant Versus

Laxmi Prasad …Respondent JUDGMENT

S.B. SINHA, J :

 

1. Leave granted.

 

2. What would be the period of limitation for institution of a suit for recovery of `pledged ornaments’ is the question involved herein.

3. It arises in the following factual matrix: 2

On or about 26.06.1998, the respondent filed a civil suit against the appellant for recovery of certain items of jewellery allegedly pledged with him on 2.12.1987 for the purpose of obtaining loan of a sum of Rs. 7000/-. On the premise that the appellant had violated the provisions of the Madhya Pradesh Money Lenders Act, 1934 in relation to the aforementioned grant of loan, a criminal proceeding was initiated against him, which was marked as Case No. 511 of 1997. In the said criminal case, he admitted his guilt. A fine of Rs. 150/- was imposed on him. The charge was read over to him, which reads as under: "The charge on you is that before date 29.3.97 complainant Laxmi Prasad was paid borrowed money to you but even after that you were demanding interest at 5%. Your this act is criminal offence under section 3, 4 of Money Lenders Act. Therefore, show cause as to why you should not be held guilty of the said offence."

4. Respondent thereafter, as noticed hereinbefore, filed the aforementioned Civil Suit before the XIVth Civil Judge, Class II, Jabalpur being civil suit No. 4-A/1998 for recovery of the pledged jewellery. The 3

said suit was decreed directing the appellant to return the said jewellery or in the alternative a decree for a sum of Rs. 20,000/-.

5. Aggrieved by and dissatisfied therewith the appellant preferred an appeal thereagainst. The said appeal was allowed by the learned XVIth Additional District Judge, Jabalpur, holding: (i) The judgment of the criminal court rendered on the basis of the purported admission of guilt made by the appellant was not admissible in evidence.

(ii) An admission of the guilt on the basis of a wrong legal advice is not binding on the appellant.

(iii) The suit was barred in terms of Article 70 of the Limitation Act.

6. The second appeal preferred by the respondent herein has been allowed by the High Court by reason of the impugned judgment. The High Court formulated the following substantial questions of law:

4

"1. Whether the suit filed by the appellant was barred by limitation while the suit was filed within 3 years from the date of demand and refusal by the respondent?

2. Whether the admission of guilt in criminal case in respect of some transaction made by respondent is admissible in the present case to the extent of fact that there was transaction between the parties?"

By reason of the impugned judgment, the High Court opined that the suit had been filed within the prescribed period of limitation having been brought within a period of three years from the date of refusal of the demand to return the pledged ornaments. The question No. 2 was also determined in favour of the respondent holding that admission of guilt in a criminal case would be admissible in evidence being relevant to the fact in issue.

 

7. Mr. Anurag Sharma, learned counsel appearing on behalf of the appellant would urge:

(i) The alleged pledge of jewellery having admittedly been made in the year 1987 and the suit filed on 26.06.1998, the same must be held to be barred by limitation.

5

(ii) No document of pledge having been produced, service of notice by itself cannot give rise to a cause of action for filing a suit for recovery of the pledged ornaments.

 

8. Mr. Rohit Arya, learned senior counsel appearing on behalf of the respondent, on the other hand, would contend: (i) in view of Article 70 of the Limitation Act, 1963, the suit has rightly been found to have been instituted within the period of limitation.

(ii) Having regard to the provisions contained in Section 43 of the Indian Evidence Act, the judgment of the criminal court was admissible in evidence.

(iii) In terms of Section 58 of the Indian Evidence Act, things admitted need not be proved. The suit filed by the respondent has rightly been decreed.

 

9. Before adverting to the rival contentions of the parties raised before us, we may notice that the purported pledge of jewellery was made by the respondent herein for taking a loan of Rs. 7,000/- on 2.12.1987. Appellant 6

indisputably is a money lender. A criminal case for charging excess interest was instituted against him on 29.03.1997. On or about 29.11.1997, he pleaded guilty by reason whereof a fine of Rs. 150/- was imposed on him. Respondent thereafter served a notice upon the appellant asking him to return the pledged jewellery. As neither the said noticed was replied to nor the jewellery was returned, he filed the suit on 26.06.1998.

10. The cause of action for filing the suit was stated in para 3 of the plaint, which reads as under:

"3. The plaintiff through counsel sent registered notice dated 12.5.98 and demanded the pledged jewels. Still the defendant has not returned the jewels of the plaintiff. Therefore, this suit is being preferred. The aforesaid notice sent by the counsel of the plaintiff was received by the defendant on 14.5.98."

 

11. Respondent examined himself as a witness in the suit. He stated that the appellant being his cousin brother, no document was executed. He also testified that in the criminal case, appellant having admitted his crime and 7

pledge of jewellery with him, a fine of Rs. 150/- was imposed and on in default thereof, imprisonment of five days was ordered.

12. Indisputably, the judgment in the criminal case was marked as an exhibit. Appellant also in his deposition stated as under: "…This is correct that plaintiff filed a complaint against me before police and case was registered. This is also correct that I confessed upon advise from my advocate. This is correct that fine of Rs. 150/- was imposed on me in that case. This is correct that I do the money lending." He admitted that even one Chandra Kumar had borrowed money from him.

It was furthermore admitted by him that he received the notice (Exhibit P1) from the plaintiff but he had not replied thereto.

13. Indisputably, the law relating to the admissibility of a judgment in a criminal proceedings vis-`-vis the civil proceedings and vice-versa is governed by the provisions of the Indian Evidence Act. 8

 

14. Section 43 of the Indian Evidence Act reads, thus: "43. Judgments, etc., other than those mentioned in Sections 40, 41 and 42, when relevant – Judgments, orders or decrees other then those mentioned in Sections 40, 41 and 42 are irrelevant, unless the existence of such judgment, order or decree, is a fact in issue, or is relevant, under some other provision of this Act."

In terms of the aforementioned provision, the judgment in a criminal case shall be admissible provided it is a relevant fact in issue. Its admissibility otherwise is limited.

It was so held in Anil Behari Ghosh v. Smt. Latika Bala Dassi and others [AIR 1955 SC 566] in the following terms: "The learned counsel for the contesting respondent suggested that it had not been found by the lower appellate court as a fact upon the evidence adduced in this case, that Girish was the nearest agnate of the testator or that Charu had murdered his adoptive father, though these matters had been assumed as facts. The courts below have referred to good and reliable evidence in support of the 9

finding that Girish was the nearest reversioner to the estate of the testator. If the will is a valid and genuine will, there is intestacy in respect of the interest created in favour of Charu if he was the murderer of the testator. On this question the courts below have assumed on the basis of the judgment of conviction and sentence passed by the High Court in the sessions trial that Charu was the murderer. Though that judgment is relevant only to show that there was such a trial resulting in the conviction and sentence of Charu to transportation for life, it is not evidence of the fact that Charu was the murderer. That question has to be decided on evidence."

In Perumal v. Devarajan and others [AIR 1974 Madras 14], it was held:

"2. Even at the outset, I want to state that the view of the lower appellate court that the plaintiff has not established satisfactorily that the first defendant or the second defendant or both were responsible for the theft is perverse and clearly against the evidence and the legal position. The lower appellate Court refused to rely on Exhibit A- 3 which is a certified copy of the judgment in C.C. No. 1949 of 1965. It is true that the evidence discussed in that judgment and the fact that the first defendant had confessed his guilt in his statement is not admissible in evidence in the suit. But it is not correct to state that even the factum that the first and the second defendants were charged under Sections 454, and 380, I.P.C. and they were convicted on those charges could not be admitted. The order of the Criminal Court is, in 10

my opinion, clearly admissible to prove the conviction of the first defendant and the second defendant and that is the only point which the plaintiff had to establish in this case…" A similar issue is dealt in some details in Lalmuni Devi and Ors. v. Jagdish Tiwary and Ors. [AIR 2005 Patna 51] wherein it was held: "14. Relying on the judgment of the Supreme Court inAnil Behari Ghosh v. Smt. Latika Bala Dassi and Ors., (supra), a Division Bench of this Court in its judgment reported in 1968 BLJR 197, Mundrika Kuer v. President, Bihar State Board of Religious Trusts, and 8 others, has laid down to the same effect. Paragraph 7 of the judgment is set out hereinbelow for the facility of quick reference :-

"7. It is true that, if the Board acted capriciously and arbitrarily without any material whatsoever and attempts to administer private property, saying that it is a public religious trust, this Court may have to interfere in appropriate cases; but it cannot be said here that there were no prima facie materials to show that the trust is a public religious trust. The acquittal of the petitioner in the criminal case (Annexure-A) was very much relied upon; but it is well settled that acquittal or conviction in a criminal case has no evidentiary value in a subsequent civil litigation except for the limited purpose of showing that there was a trial resulting . in acquittal or conviction, as the case may be. The findings of the criminal Court are inadmissible."

11

 

15. A judgment in a criminal case, thus, is admissible for a limited purpose. Relying only on or on the basis thereof, a civil proceeding cannot be determined, but that would not mean that it is not admissible for any purpose whatsoever.

 

16. Mr. Sharma also relies upon a decision of this Court in Shanti Kumar Panda v. Shakuntala Devi[(2004) 1 SCC 438] to contend that a judgment of a civil court shall be binding on the criminal court but the converse is not true. Therein it was held:

"(3) A decision by a criminal court does not bind the civil court while a decision by the civil court binds the criminal court. An order passed by the Executive Magistrate in proceedings under Sections 145/146 of the Code is an order by a criminal court and that too based on a summary enquiry. The order is entitled to respect and wait before the competent court at the interlocutory stage. At the stage of final adjudication of rights, which would be on the evidence adduced before the court, the order of the Magistrate is only one out of several pieces of evidence." 12

With respect, the ratio laid down therein may not be entirely correct being in conflict with a Three-Judge Bench decision of this Court in K.G. Premshanker vs. Inspector of Police and anr. [(2002) 8 SCC 87].

17. A civil proceeding as also a criminal proceeding may go on simultaneously. No statute puts an embargo in relation thereto. A decision in a criminal case is not binding on a civil court. In M.S. Sheriff & Anr. v. State of Madras & Ors. [AIR 1954 SC 397], a Constitution Bench of this Court was seized with a question as to whether a civil suit or a criminal case should be stayed in the event both are pending. It was opined that the criminal matter should be given precedence. In regard to the possibility of conflict in decisions, it was held that the law envisages such an eventuality when it expressly refrains from making the decision of one Court binding on the other, or even relevant, except for certain limited purposes, such as sentence or damages. It was held that the only relevant consideration was the likelihood of embarrassment. If a primacy is given to a criminal proceeding, indisputably, the civil suit must be determined on its own keeping in view the evidence which has 13

been brought on record before it and not in terms of the evidence brought in the criminal proceeding.

The question came up for consideration in K.G. Premshanker (supra), wherein this Court inter alia held:

"30. What emerges from the aforesaid discussion is — (1) the previous judgment which is final can be relied upon as provided under Sections 40 to 43 of the Evidence Act; (2) in civil suits between the same parties, principle of res judicata may apply; (3) in a criminal case, Section 300 CrPC makes provision that once a person is convicted or acquitted, he may not be tried again for the same offence if the conditions mentioned therein are satisfied; (4) if the criminal case and the civil proceedings are for the same cause, judgment of the civil court would be relevant if conditions of any of Sections 40 to 43 are satisfied, but it cannot be said that the same would be conclusive except as provided in Section 41. Section 41 provides which judgment would be conclusive proof of what is stated therein.

31. Further, the judgment, order or decree passed in a previous civil proceeding, if relevant, as provided under Sections 40 and 42 or other provisions of the Evidence Act then in each case, the court has to decide to what extent it is binding or conclusive with regard to the matter(s) decided therein. Take for illustration, in a case of alleged trespass by A on B’s property, B filed a suit for declaration of its title and to recover possession from A and suit is decreed. Thereafter, in a criminal prosecution by B against A for trespass, judgment passed between the parties in civil proceedings would be relevant and the court may 14

hold that it conclusively establishes the title as well as possession of B over the property. In such case, A may be convicted for trespass. The illustration to Section 42 which is quoted above makes the position clear. Hence, in each and every case, the first question which would require consideration is — whether judgment, order or decree is relevant, if relevant — its effect. It may be relevant for a limited purpose, such as, motive or as a fact in issue. This would depend upon the facts of each case.

It is, however, significant to notice a decision of this Court in M/s Karam Chand Ganga Prasad & Anr. etc. v. Union of India & Ors. [(1970) 3 SCC 694], wherein it was categorically held that the decisions of the civil court will be binding on the criminal courts but the converse is not true, was overruled, stating:

"33. Hence, the observation made by this Court in V.M. Shah case that the finding recorded by the criminal court stands superseded by the finding recorded by the civil court is not correct enunciation of law. Further, the general observations made in Karam Chand case are in context of the facts of the case stated above. The Court was not required to consider the earlier decision of the Constitution Bench in M.S. Sheriff case as well as Sections 40 to 43 of the Evidence Act."

[See also Syed Askari Hadi Ali Augustine Imam and Anr. v. State (Delhi Admn.) and Anr. 2009 (3) SCALE 604] 15

Another Constitution Bench of this Court had the occasion to consider the question in Iqbal Singh Marwah & Anr. v. Meenakshi Marwah & Anr. [(2005) 4 SCC 370]. Relying on M.S. Sheriff (supra) as also various other decisions, it was categorically held: "32. Coming to the last contention that an effort should be made to avoid conflict of findings between the civil and criminal courts, it is necessary to point out that the standard of proof required in the two proceedings are entirely different. Civil cases are decided on the basis of preponderance of evidence while in a criminal case the entire burden lies on the prosecution and proof beyond reasonable doubt has to be given." The question yet again came up for consideration in P. Swaroopa Rani v. M. Hari Narayana @ Hari Babu [AIR 2008 SC 1884], wherein the law was stated, thus :

"13. It is, however, well-settled that in a given case, civil proceedings and criminal proceedings can proceed simultaneously. Whether civil proceedings or criminal proceedings shall be stayed depends upon the fact and circumstances of each case."

16

 

18. It is now almost well-settled that, save and except for Section 43 of the Indian Evidence Act which refers to Sections 40, 41, and 42 thereof, a judgment of a criminal court shall not be admissible in a civil suit.

19. What, however, would be admissible is the admission made by a party in a previous proceeding. The admission of the appellant was recorded in writing. While he was deposing in the suit, he was confronted with the question as to whether he had admitted his guilt and pleaded guilty of the charges framed. He did so. Having, thus, accepted that he had made an admission in the criminal case, the same was admissible in evidence. He could have resiled therefrom or explained away his admission. He offered an explanation that he was wrongly advised by the counsel to do so. The said explanation was not accepted by the trial court. It was considered to be an afterthought. His admission in the civil proceeding was admissible in evidence.

 

20. Section 58 of the Indian Evidence Act reads as under: "58 – Facts admitted need not be proved No fact need to be proved in any proceeding which the parties thereto or their agents agree to admit at the hearing, or which, before the hearing, 17

they agree to admit by any writing under their hands, or which by any rule of pleading in force at the time they are deemed to have admitted by their pleadings:

Provided that the court may, in its discretion, require the facts admitted to be proved otherwise than by such admission."

In view of the aforementioned provision, there cannot be any doubt or dispute that a thing admitted need not be proved. [See Vice-Chairman, Kendriya Vidyalaya Sangathan and Another v. Girdharilal Yadav (2004) 6 SCC 325, L.K. Verma v. HMT Ltd. and Another (2006) 2 SCC 269,Avtar Singh and Others v. Gurdial Singh and Others (2006) 12 SCC 552, Gannmani Anasuya and Others v. Parvatini Amarendra Chowdhary and Others (2007) 10 SCC 296]

 

21. We, therefore, are of the opinion that although the judgment in a criminal case was not relevant in evidence for the purpose of proving his civil liability, his admission in the civil suit was admissible. The question as to whether the explanation offered by him should be accepted or not is a matter which would fall within the realm of appreciation of evidence. The Trial Court had accepted the same. The first appellate court refused to consider the effect thereof in its proper perspective. The appellate court 18

proceeded on the basis that as the judgment of the criminal court was not admissible in evidence, the suit could not have been decreed on the said basis. For the said purpose, the admission made by the appellant in his deposition as also the effect of charge had not been taken into consideration. We, therefore, are of the opinion that the High Court cannot be said to have committed any error in interfering with the judgment of the first appellate court.

 

22. So far as the question of the applicability of the period of limitation is concerned, Article 70 of the Limitation Act would be applicable. It reads as under:

"Description of suit Period of Time from which period limitation begins to run

70. To recover movable Three years The date of refusal after property deposited or demand." pawned from a depository

or pawnee.

In terms of the aforementioned provision, the period of limitation, thus, begins to run from the date of refusal after demand. 19

 

23. Appellant did not respond to the notice issued by the respondent asking him to return the pledged jewellery. The date of receipt of such a notice is 14.05.1998. The suit having been filed on 26.06.1998, thus, must be held to have been filed within the prescribed period of limitation.

24. Having regard to the fact that the averments contained in the paragraph 3 of the plaint were not traversed, the same would be deemed to have been admitted by him in terms of Order VIII, Rule 5 of the Code of Civil Procedure.

In Gautam Sarup v. Leela Jetly [(2008) 7 SCC 85], this Court held: "14. An admission made in a pleading is not to be treated in the same manner as an admission in a document. An admission made by a party to the lis is admissible against him proprio vigore." [See alsoRanganayakamma and Another v. K.S. Prakash (D) By LRs and Others 2008 (9) SCALE 144]

 

25. For the reasons aforementioned, there is no merit in this appeal, which is dismissed accordingly. However, in the facts and circumstances of this case, there shall be no order as to costs. 20

………………………….J.

[S.B. Sinha]

…………………………..J.

[Dr. Mukundakam Sharma]

New Delhi;

April 15, 2009