SHREE HANUMAN COTI'ON MILLS & ORS. versus TATA AIR-CRAFT LTD.

Citation: [1970] 3 S.C.R. 127 · Decided: 28-10-1969 · Supreme Court of India · Bench: J.M. SHELAT · Disposal: Dismissed

Cited by 4 judgment(s) · cites 1 · see the full citation network in Lexace

Judgment (excerpt)

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127 
SHREE HANUMAN COTI'ON MILLS & ORS. 
v. 
TATA AIR·CRAFf LTD. 
October 28, 1969 
[J.M. SHELAT, C. A. VAIDIALINGAM AND I. D. DUA, JJ.J 
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. 
1be 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 th~t the balance 
should be paid in two instalments. It was also agreed 
that the respon-
dent'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 rights 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 the1e· 
upon 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 : ( I) For a deposit by a purchaser to be treated a• earnest 
money the foUowing conditions must be satisfied : (i) it must be given at 
the m<>ment at which the contract is concluded; 
(ii) 
it represents a 
guarantee that the ce>ntract 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) un-
less there is anything to the contrary in the terms of the contract, on de-
fault ce>mmitted 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 
merzly 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 de· 
posited by the appellant was earn""! money and the respondent was entitl· 
ed to forfeit if. [140; 141 F] 
H 
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] I K.B.D. 
397, Sumner and Leivesley v. John Brown & Co. 25 T.L.R. 745 
and 
Chiranjit Singh v. Har Swarup, A.LR. 1926 P.C. 1, applied. 
128 
SUPREME COURT REPORTS 
[1970] 3 S.C.R. 
Roland Burrows, Words and Phrases Vol. II, Benja,min on Sale. Hals-
A 
bury's Laws of England (III Edition) Vol. 34, p. 118, para. 
189 and 
Jowitt's Dictionary of English Law, referred to. 
(2) ln Fateh Chand v. Ba/kishan 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 
B 
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 elf contract was admittedly committed by the appellant, 
s. 64 of the Contract Act could not be invoked by the appellant. [146 DJ 
Murlidhar Chatterjee v. International Film Co. L.R. 70 I.A. 35, not 
C 
applicable. 
[The question as to whether ·the element of unreasonableness can ever 
be taken into account when considering the forfeiture of an amount depo· 
sited by way of earnest, and if ,so what factors should be taken into 
account left open.] [142 F-G] 
Mau/a Bux v. Union of India, [1970] I S.C.R. 928, explained. 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1122 of 
1966. 
Appeal from the judgment and decree dated January 29, 
1964 of the Calcutta High Court in Appeal from original order 
D 
No. 28 of 1960. 
E 
B. P. Maheshwari and Sobhag Mal Jain, for the appellant. 
Niren De, Attorney-General, N. S. Bi

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