1. ' MUHAMMAD SAYEED AKHTAR, J.--The facts culled from various petitions/applications are that the Registrar Companies moved a Petition C.O. No,45 of 1990 under section 290 of the Companies Ordinance, 1984 seeking the appointment of an Administrator of Taj Company Limited and its subsidiaries. The learned Company Judge appointed Board of Administrators. The Administrator invited the bids for sale of assets of Bahawalpur Board Mills Ltd., a Subsidiary of Taj Company Ltd.
2. The details of assets and terms and conditions for their sale are as follows:- "In the Lahore High Court at Lahore (Companies Division)
3. Civil Original 45 of 1990 In re: Taj company Limited and others Sale of Taj Companies Assets ' As per orders of the Lahore High Court (Companies Division) (Malik Muhammad Qayyum, J.), sealed Bids are invited for the immediate sale of Assets of Messrs Bahawalpur Board Mills ( a subsidiary of Taj Company Ltd.) as Machinery already installed and other Machinery awaiting installation and presently located as follows:-- No,_______ Particular /Description of Assets
(1) Installed Unit at 31 KM Lahore Sheikhupura Road.
(a) One Reconditioned Second Hand Unbit (Japanese) Straw Board Machine (60-250) Qm Sq.
4. Metre paper and Board) 20 tonnes per day production capacity.
(b) Two stand by Japanese Generators of total capacity 1300 KVA.
(c) Two Industrial Boilers, local machinery and other accessories.
5. Total area 12-1/2 acres (Approx) Covered area 1,14,130 sq. Ft. (Approx) Approved Electricity Load 950 KVA.
(2) Machinery lying in Taj Company Warehouse at 19 KM Lahnre Sheikhupura Road:--
(i) One coater Lamination Machine Type CCL 30 Multipurpose Coating Machine (German Origin)
6. Model 1987.
(ii) One 3 steps Washing and Bleaching Unit (Swedish Origin).
7. Terms and Conditions (As is where is)
(1) Bids accompanied by Bank Draft/Pay Order in favour of Taj Co. Ltd. As Security Deposit equivalent to 5% of the Bid amount and enclosed in a sealed envelope marked "Bid for Bahawalpur Board Mills Limited" and addressed to the undersigned should reach by or before 31st March, 1997, latest by 4 pm by Registered Post or may be delivered personally at the Registered Office of the Taj Company Limited noted below.
(2) All Bids will be placed before Mr. Justice Malik Muhammad Qayyum the Honourable Company Judge and opened on 2nd April, 1997, in the presence of the bidders or their authorized representatives, who may like to be present at the time of opening of the Bids.
(3) Bids not accompanied by the Security Deposit will not be entertained.
(4) The Lahore High Court may accept or reject any Bid(s) without assigning any reason therefore, and/or may pass any order in the interest of the Bahawalpur Board Mills Limited.
(5) Assets may be inspected at the sites (mentioned at 1 and 2 of their description above) by the interested Bidder(s) through prior arrangement with the undersigned for the purpose, well in time.
8. Successful Bidders will be asked to deposit the balance amount of the bid within such period as the High Court is pleased to determine failing which the Earnest Money deposited by the Bidder(s) subject to orders of the Court, shall stand forfeited to the Taj Company Ltd. (Underlining is ours).
9. ' Muhammad Naazar Khan ' Senior Advocate/Member ' Board of Administrator ' Taj Company Ltd."
10. ' Sealed bids were opened in the presence of all the bidders. The appellant offered the highest bid of Rs.7,50,00,000. The appellant offered to pay Rs.10 million immediately as down payment and balance amount to be paid in quarterly instalments of Rs.33,00,000 each. The learned counsel for Ravians Paper and Board Industry (the appellant) asked for nine months grace period for payment of first instalment. A revised offer for the purchase of the said mill was submitted by the appellant on which the Members of the Board filed the report which is as under:-- "In the revised offer brought to me they have reduced the grace period after the down payment of Rs.1 crore from 9 months to 6 months. This reduces the total period for full payments to 5-1/2 years and the total offer of Rs.75.0 million works out to an equivalent of down payment of Rs.50.367 million against the earlier calculated amount of Rs.48.338 million. This is an improvement over their prices offer both in time and money.
11. ' In the absence of any other offer if this party can satisfy the Honourable Court regarding the payment of the promised quarterly instalments stretched over a period of 5-1/2 years, their bid may be accepted."
12. ' The learned Company Judge approved the terms and conditions mentioned in the report submitted by Mr. Naazar Khan and Mr. Tariq Hamid, Members of the Board of Administration vide order dated 18-9-1997 which reads as under:- "The offer made by the purchasers is approved on the terms and conditions mentioned in the report submitted by Mr. Naazar Khan as also Mr. Tariq Hamid, Members of the Board of Administration. On the payment/deposit of Rs.1 crore the purchaser will be entitled to work the factory and to carry on business therein. The possession, however, shall remain vested in this Court till the final payment is made. Mr. Naazar Khan, Advocate is appointed as provisional manager to supervise the working of this arrangement.
(2) The pay order of Rs.35,50,000 has been handed over to Mr. Naazar Khan who shall deposit it in the account of Taj Company. The balance amount of Rs.64,50,000 shall also be paid to Mr. Naazar Khan in the form of pay order/bank draft within a week which shall also be deposited in the accounts of Taj Company. In case any terms of sale are violated or the subsequent instalments are not paid on the due date this arrangement shall stand cancelled and the sum of Rs.1 crore shall stand forfeited." (Underling is ours)
13. ' The appellant defaulted in payment of the very first two instalments. An application C.M. No,996-L of 1998 was moved by the O.L. On which the learned Company Judge passed the following order on 30-9-1998 and granted 15 days time for deposit of outstanding instalments:-- "It has been pointed out by the Official Liquidator that two instalments have not been deposited by the purchaser. In these. Circumstances, the sale in favour of the purchaser is liable to cancellation but taking lenient view of the matter and keeping in vicw the fact that the electricity supply has not been restored, I am allowing 15 days time to deposit the amount due failing which the sale in its favour shall stand cancelled."
14. ' A review of the order dated 30-9-1998 was sought vide R.A. No,4-L of 1998. The said review application was dismissed vide order dated 28-10-1998 which is as under:-- "In the order dated 30-9-1998, it was noted that the purchaser has failed to pay two instalments. At that time it was urged before this Court that as the electricity connection had not been restored, the purchaser could not deposit the instalments. That plea was not accepted. Taking a lenient view of the matter and keeping in view the fact that the electricity connection was not restored, 15 days time was allowed to the purchaser failing which sale in its favour would stand cancelled.
(2) The present application filed by the purchaser seeks review of the order dated 30-9-1998 on the ground that as the electricity connection was not restored, no instalment became due. The plea being raised is however, not correct inasmuch as there is nothing on the record on the basis of which it can be said that the payment of instalments of the sale price was dependent upon the restoration of the electricity connection. The order dated 17-9-1997 in this behalf is clear and explicit.
(3) It is to be noted that this Court while finalizing the sale had constituted a committee comprising of Mr. Aftab Ahmad Khan, the learned counsel for the purchaser and Mr. Naazar Khan, the then member of the Board of Administrators which had drawn up the terms of the sale which clearly show that the restoration of the electricity connection was not a condition precedent for payment of the instalments. It is also to be noted that the possession of the premises was handed over to the purchaser on 25-9-1997. In this view of the matter, on account of persistent defaults, the sale in favour of the purchaser is cancelled and R.A. No,4-L of 1998 is dismissed.
15. ' The Official Liquidators shall proceed to resume the possession of the factory premises without any further delay."
16. ' The order shows that the possession of the mill was delivered to the appellant on 25-9-1997.
17. ' Two I.C.As. Nos.11-L of 1998 and 13-L of 1998 were filed against the orders dated 30-9-1998 and 28- 10-1998 respectively which were disposed of vide order dated 27-9-2000. The relevant paras. Of the order are reproduced:- "4. Mr. Muhammad Naazar Khan, Administrator, however, pointed out that failure of the appellants to adhere to the payment schedule had resulted in loss to the company. He, therefore, contended that, at the very least, the appellants should be liable for the financial costs of the delay in making payments of the instalments of the purchase price. This contention appeared reasonable and was, therefore, considered by ourselves yesterday. Today, Mr. Muhammad Naazar Khan has presented a schedule of payments which takes into account the financial costs of the delay by the appellants in payment of the instalments ordered by the learned Company Bench. The financial cost has been worked out at the rate of 14% per annum. On the other hand, learned counsel for the appellants has made alternate proposal wherein the period for payment of the outstanding purchase price is sought to be extended by a further period of six months. Furthermore, the proposal on behalf of the appellants does not envisage any enhancement in the amount of each instalment. (Underline is ours).
(5) Having considered both proposals, we are inclined to adopt the proposed schedule of instalments submitted by Mr. Muhammad Naazar Khan as the same takes into account the total financial implications resulting from the delay on the part of the appellants in meeting the earlier payment schedule.
(6) In view of the above circumstances, we, therefore, order as under:--
(a) The appellants shall make payment in accordance with the following schedule:--- Quarterly instalment numberAmount of instalment originally payable.Amount of monthly loss @ 14% due to default in payment.Total amount of quarterly instalment payableDue date. Rs. Rs. Rs. 1-11-2000 1st 33,00,000 2,59,875 35,59,875 1-2-2001 2nd 33,00,000 2,59,875 35,59,875 1-5-2001 3rd 33,00,000 2,59,875 35,59,875 1-8-2001 4th 33,00,000 2,59,875 35,59,875 1-11-2001 5th 33,00,000 2,59,875 35,59,875 1-2-2202 6 th 33,00,000 2,59,875 35,59,875 1-2-2002 7 th 33,00,000 2,59,875 35,59,875 1-5-2002 8 th 33,00,000 2,59,875 35,59,875 1-8-2002 9 th 33,00,000 2,59,875 35,59,875 1-11-2002 10 th 33,00,000 2,59,875 35,59,875 1-2-2003 11 th 33,00,000 2,59,875 35,59,875 1-5-2003 12 th 33,00,000 2,59,875 35,59,875 1-8-2003 13 th 33,00,000 2,59,875 35,59,875 1-11-2003 14 th 33,00,000 2,59,875 35,59,875 1-2-2004 15 th 33,00,000 2,59,875 35,59,875 1-5-2004 16 th 33,00,000 2,59,875 35,59,875 1-8-2004 17 th 33,00,000 2,59,875 35,59,875 1-11-2004 "(b) if the appellants fail and/or refuse to make payment of any instalment within seven days of the due date specified in the last column of the above schedule, their right to purchase the assets shall automatically stand cancelled without further orders and in such circumstances, the Administrator shall become entitled to repossess the said assets."
18. (7)
(8) These appeals are, therefore, allowed and disposed of in the above terms."
19. ' The appellant again defaulted and eventually made an application No,681 of 2000 on 8-11-2000 (after one month and ten days of the decision of I.C.As.) for refund of down payment of Rs.1 crore stating:- "5. That besides the above during the pendency and hearing of the appeals of the applicant before the I.C.A. Bench circumstances have changed drastically. Moreover, there is economic stagnation and unfavourable market conditions prevailing in the country. In view thereof the applicant is unable to make any further payments towards the purchase of the assets of the B.B.M."
20. ' It was prayed:-- "That in view of the applicant's inability to make any further payments due to reasons given hereinabove the applicant wishes to withdraw its bid for purchase of assets of B.B.M. And submits that down payment of Rs.1 crore made by it be refunded/reimbursed to it."
21. ' This application was dismissed by the learned Company Judge vide order dated 20-11-2000. The same is assailed in the present appeal.
2. Learned counsel for the appellant contended that the forfeiture of Rs.1 crore is a penalty for which there is no sanctity in law. There is no provision of law in the Companies Ordinance, 1984, Transfer of Property Act, 1882, Sale of Goods Act, 1930 or Contract Act, 1872 for forfeiture of the amount. Learned counsel argued that the forfeiture of the down payment was in terrorem and could not be upheld. Reliance was placed on Abdullah v. Karim Haider PLD 1975 Karachi 385; Mst. Khalida Bai and others v. Muhammad and others FLD 1994 Karachi 233; Raja Nasir Khan v. Abdul Sattar Khan and another PLD 1998 Lahore 20 and Province of West Pakistan v. Messrs Mistri Patel & Co. And another PLD 1969 SC 80. Conversely the learned counsel for the respondent submitted that the respondent was estopped by his conduct from claiming the refund of the down payment. Reliance was placed on Order XXI, rule 86, C.P.C. Under which the deposit may be forfeited.
3. We have perused the record and considered the arguments of the learned counsel for the parties. It goes without saying that when a bid is accepted a valid contract comes into existence between the parties and they are bound by the terms and conditions of the same. In the instant case the Board of Administrators of Taj Company Ltd. Entered into a contract with the appellant for the sale of properties of Bahawalpur Board Mills Ltd. The terms and conditions of the sale were approved by the learned Company Judge vide order dated 18-9-1997 (reproduced above). The learned Company Judge has been empowered under the Companies (Court) Rules, 1997 to sanction the sale of the property belonging to the Company and every such sale shall be subject to confirmation by the Court. Every such sale shall be held by the Official Liquidator or if the Judge so directs, by an agent or an auctioneer approved by the Court, and subject to such terms and conditions including the fixation of a reserve price, if any, as may be approved by the Court. The rules 236 and 237 of the Companies (Court) Rules, 1997 are reproduced as under:- "236 Sale to be subject to sanction and to confirmation by Court.---Unless the Court otherwise orders, no property belonging to company which is being wound up by the Court shall be sold by the official liquidator without the previous sanction of the Court, and every sale shall be subject to confirmation by the Court."
22. "237 Procedure at Sale.---
(1) Every sale shall be held by the official liquidator, or, if the Judge so directs, by an agent or an auctioneer approved by the Court, and subject to such terms and .Conditions including fixation of a reserve price, if any, as may be approved by the Court.
(2) All sales shall be made by public auction or by inviting sealed tenders or in such manner as the Judge may direct."
23. The learned Company Judge authorized the sale of the property of the Company and approved/confirmed the same on 18-9-1998 as stated above. In our view the agreement between the parties does not cease to be a contract because it bears the stamp of the Court. The offer made by the appellant was approved subject to the condition that "in case any terms of sale are violated or the subsequent instalments are not paid on the due date this arrangement shall stand cancelled and the sum of Rs,1 crore shall stand forfeited". The appellant deposited Rs,1 crore as down payment which stands forfeited as per terms of the contract. The consequences of breach of contract are governed by sections 73 and 74 of the Contract Act, 1872. Under section 73 on a breach of contract, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Section 73 of the Contract Act covers cases of breach of contract where no amount of compensation is stipulated in the agreement itself, and the compensation has to be assessed strictly on the basis of loss which has accrued to either of the contracting parties in the usual course of things on account of such breach.
24. ' Section 74 of the Contract Act, 1872 reads as under:- "74. Compensation for breach of contract where penalty stipulated for.---When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damages or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."
25. ' This section has two limbs. The parties to the contract may agree before hand as to the amount payable by way of damages in the event of its breach. It will be covered by expression, "if the sum is named in the contract as the amount to be paid in case of such breach" and would entitle the party complaining of the breach to reasonable damages not exceeding the amount so named.
26. The sum so mentioned in the contract may be genuine covenanted pre-estimate of loss caused by the Contractor-Breaker to the other party. In English Common Law it is known as liquidated damages. Under the second head, i.e. "any other stipulation by way of penalty" may be in the nature of threat held over to the other party in terrorem. A sum of this nature is called a penalty.
27. Section 74 provides for cases where a sum is named in the contract itself as the amount to be paid in the case of breach of the contract, or if the contract contains any other stipulation by way of penalty. Under this section whether actual loss or damage is proved or not the Court is unfettered in awarding reasonable compensation not exceeding the maximum fixed by the parties. See Syed Sibte Raza and another v. Habib Bank Ltd. PLD 1971 SC 743 at 749. Our apex Court in the case Province of West Pakistan v. Messrs Mistri Patel & Co. And another PLD 1969 SC 80 observed as under:- "Section 74 of the Contract Act does not recognize the difference that exists in the English law between liquidated damages and penalty. Under the Common Law a genuine pre-estimate of damages agreed upon by the parties is regarded as liquidated damages. But a stipulation in a contract in terrorem is a penalty. In the case of liquidated damages the contract is binding upon the parties. In the rase of penalty, however, the Court refuses to enforce it and awards to the aggrieved party reasonable compensation.
28. ' The argument that section 74 of the Contract Act deals only with the right to receive from the party who has broken a contract reasonable compensation and not the right to forfeit what has already been received by the aggrieved party cannot be accepted in view of the terms of the section. The cases in which such a view has been taken appear to have ignored the expression "the contract contains any other stipulation by way of penalty" in the section. This expression is comprehensive enough to include cases of forfeiture of money or any property already delivered as well as cases of recovery of money or any property on the basis of a promise to pay."
29. ' The said case was followed in Syed Sibte Raza and other v. Habib Bank Ltd. (supra) and it was held that the Bank had spent more than Rs,2,000 on the training of each of its employees to qualify them as trained auditors to discharge their duties. The breach on their part gave a right to the Bank to forfeit security deposit viz. Rs,2,000.
30. ' In a very recent case 2003 SOL Case No,175 Civil Appeal No,7419 of 2001 dated 17-4-2003 Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd. While explaining section 73 and section 74 of the Contract Act the Supreme Court of India observed as under:-- "61. From the aforesaid discussion, it can be held that:---
(1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same.
(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that since estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in section 73 of the Contract Act.
(3) Section 74 is to be read with section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damages suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damages is proved to have been suffered in consequences of the breach of a oontract.
(4) In some contracts, it would be impossible for the Court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, Court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation.
62. For the reasons stated above, the impugned award directing the appellant to refund the amount deducted for the breach as per contractual terms requires to be set aside and is hereby set aside."
31. ' It is for the Court to determine what amount would be reasonable compensation in the circumstances of the case. If the Court considers that the sum mentioned is not excessive or unreasonable, it shall allow it otherwise will reduce it to the figure it considers reasonable. If on the other hand the F stipulated amount is by reason oppressive and burdensome in character and may operate in terrorem so as to drive the party to complete the contract, the stipulation is a penalty and the Court can relieve the party of the penalty clause. See Messrs Khanzada Muhammad Abdul Haq Khan Khattak & Co. v. WAPDA through Chairman WAPDA and another 1991 SCMR 1436. In the case of Ramalinga Adaviar and others v. Meenakshisundaram Pillai and others AIR 1925 Madras 177 it was stated:-- "If in making provision for breach of contract the promisee stipulates from the promisor on the breach only for such compensation as the Court would deem reasonable in the circumstances, then there is no penalty and the stipulation is not penal. But if, on the other hand, the Court would on a proper consideration come to the conclusion that the stipulation was put in not by way of reasonable compensation to the promisee but in order that by reason of its burdensome or oppressive character it may operate in terrorem over the promisor so as to drive him to fulfil the contract, then the stipulation is one by way of penalty."
32. ' The aforementioned principle was reproduced in D.K. Aswathanarayanaish v. Nallapula Sanjeviah AIR 1965 Andra Perdesh 33.
33. ' The forfeiture clause stand on a different footing, the forfeited amount is generally not recoverable but if the condition of forfeiture carries with it an element of punishment, it will be in the nature of penalty. See Mushi Lal and others v. Ahmad Mirza Beg and others AIR 1933 Oudh.
291. Forfeited amount/ instalments cannot be retained by the seller if the same is unreasonable, exorbitant or extravagant and unconscionable. See Clydebank Engineering and Shipbuilding Company, Limited and others v. Don Jose Ramos Yzquierdo Y Castaneda and others (1905) AC 6; Mussen v. Van Diemen's Land Co. (1938) Ch. 253; Stockloser v. Johnson (1954) 1 QB 476; Workers Trust of Mercant Bank Ltd. v. Dojap Investment Ltd. (1993) AC 573; Dharam Chand Soni and another v. Sunil Ranjab Chakrabarty and another AIR 1981 Calcutta 323; Syed Sibte Raza and another v.
34. Habib Bank Ltd. (supra); The Trustees of the Port of Karachi v. Ghulamali Habib Rawjee PLD 1961 Karachi 623 and Province of West Pakistan v. Messrs Mistri Patel & Co. And another (supra).
35. ' A contract may provide that a sum already paid shall be forfeited upon breach by the party who paid it. The Courts have treated such a forfeiture clause as different from a sum payable upon breach if under contract to purchase land by instalment payments, the purchaser defaults in payment of an instalment of the price. The Courts have exercised jurisdiction in a proper case to relieve him against a clause providing for forfeiture of instalments already paid, by granting him an extension of time within which he could pay the instalments due. Se Dagenham (Thames) Dock Co.
36. (1873) LR 8 Ch. Appellant 1022; John H. Kilmer v. British Columbia Orchard Lands Ltd. (1913) AC 319; Steedman v. Drinkle (1916) 1 AC 275 and Starside Properties Ltd. v. Mustapha (1974) 1 WLR 816.
37. ' Equity has come to the rescue of purchaser and granted relief to him if he is able and willing to perform the contract after the agreed time. See Steedman v. Drinkle (supra) and Mussen v. Van Diemen's Land Co. (1938) Ch.
253. It is doubtful whether it could be ordered in equity for payment of forfeited instalments to a vendee who is not able and willing to perform the contract. Relief against forfeiture is restricted to cases where the party in breach would be deprived of possessory rights. See Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana The Scaptrade (1983) 2 All ER 763. In a recent case, Workers Trust of Mercant Bank Ltd. v. Dojap Investment Ltd. (1993) 2 All ER 370, Privy Council in a contract for sale of land left open the question whether relief against forfeiture of instalments can be granted to a purchaser who has been let into possession.
38. ' The learned Company Judge granted 15 days time to the appellant in order to make good his default. Second time Division Bench of this Court also gave the fresh schedule of payment under the equitable principle and rightly so vide order dated 27-9-2000 passed on I.C.A. No,13-L of 1998 because he was let into possession. The appellant is still unable and unwilling to perform the contract and is clamouring for the return of the deposit.
39. ' A deposit is a sum of money paid as a "guarantee that the contract shall be performed". It is distinguishable from the penalty, in that, it is payable before, and not after the breach. The only difference between "guarantee that the contract shall be performed" and a payment of money stipulated as in terror= of the offending party lies in the emotive force of the words used. A penal deposit must be paid back. In contracts for sale of land, it is the normal practice for the purchasers to pay a certain 'deposit' or 'earnest money' and for the contract to provide for forfeiture of that deposit in the event of purchaser's default. The same is recoverable if it is unconscionable for the vendor to keep the money. In the case of Howe v. Smith (1884) 27 Ch. D. 89, it was observed as under:-- "... What is the deposit? The deposit, as I understand it, and using the word of Lord Justice James, 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 purchase money 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."
40. "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 prayer to perform the rest of the contract."
41. ' The Privy Council in the case of Chiranjit Singh v. Har Swarup AIR 1926 PC 1 stated:-- "Earnest money is part of the purchase price when the transaction goes forward. It is forfeited when the transaction falls through by reason of fault or failure of the vendee."
42. ' In the case of Krishna Chandra Rudrapal v. Khan Mamud Bepari and others AIR 1936 Calcutta 51 it was held as under:-- "It is well-settled on the authorities that earnest money is a guarantee for the performance of the contract.
43. ' If the transaction goes forward it is part of the purchase price, but if it falls through on account of default of or breach by the vendee, it is forfeited, in the absence of a contract either express in its terms or to be inferred from the whole contract. 1926 PC 1(1), 24 CWN 324 (4). If the purchaser says that the earnest has not been forfeited, though the breach is on his part, he has to show that the agreement prevents the forfeiture. This he can do, if the contract says so in plain terms, if the same can be inferred from all the terms of contract itself.
44. ' In the case of Dinanath Damodar Kale v. Malvi Mody Ranchhoddo s & Co. AIR 1930 Bombay 213 it was laid down that there is a distinction between penalty for breach of contract and the forfeiture of a deposit of earnest money. While the latter is a payment actually made, the former is compensation sought for breach of contract. Section 74 of the Contract Act contemplates the case of recovery of compensation for breach of contract and not a case in which money has been paid by way of earnest. The aforementioned principle has been followed in the case of Pasumarti Seethanna v. Thammandra Yasikalappa AIR 1926 Madras 117; Desu Rattamma v. Kakaraparthi Krishna Murthi and another AIR 1928 Madras 326; Bhalchandra Pandurang Rajandekar v. Mahadeo Lazminarayan Shraogi and others AIR 1947 Nagpur 193; Kanpur Iron Brass Works and Flour Mills v.
45. Banarsi Das and others AIR 1959 Allahabad 755 and Ram Lal Puri v. Gokalnagar Sugar Mills Co., Ltd.
46. AIR 1967 Delhi 91.
47. ' However, in Fateh Chand v. Balkishan Dass AIR 1963 SC 1405 it was stated:-- "The expression "if the contract contains any other stipulation by way of penalty" widens the operation of the section so as to make it applicable to all stipulations by way of penalty, whether the stipulation is to pay an amount of money, or is of another character, as, for example, providing for forfeiture of money already paid."
48. ' In this case the plaintiff made a claim to forfeit a sum of Rs,25,000 consisted of two items Rs,1,000 as "earnest" and Rs,24,000 paid by the defendant as out of sale price against the delivery of possession of the property. The Court held that the plaintiff was entitled to forfeit the earnest money. With regard to the claim of remaining amount of Rs,24,000 it was held that plaintiff was entitled to compensation @ 140 per mensum and interest of that sum @ 6% as it accrues due month after month.
49. ' In the case of Maula Bux v. Union of India AIR 1970 SC 1955, the Supreme Court of India laid down:-- "Forfeiture of earnest money under a contract for sale of property, moveable or immoveable, if the amount is reasonable, does not fall within section 74. But if the forfeiture is of the nature of penalty, section 74 applies."
50. ' Dharam ' Chand Soni and another v. Sunil Ranjan Chakrabarty and another AIR 1981 Calcutta 323 elucidated:- "It is held that the provisions of section 74 of the Indian Contract Act do not apply to the present case of refund T of earnest and since that sum was reasonable one, the prayer for refund was rightly rejected by Courts below."
51. In Shree Hanuman Cotton Mills and another v. Tata Air Craft Ltd. AIR 1970 SC 1986 it was stated in para.24 of the judgment:--
24. 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 transaction 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."
52. ' The payment of earnest money, as the expression itself shows, is intended to serve as a proof of bona fides of the vendee.
53. ' Whether deposit is described as earnest money or as part-payment is immaterial. The mere nomenclature "earnest" or "advance" in the document, or the absence of any forfeiture clause, may not be decisive and the character of a deposit or earnest money could be spelt out from the circumstances. See Bhalchandra Pandurang Rajandekar v. Mahadeo Lazminarayan Shraogi and others AIR 1947 Nagpur 193; Bhagavathi Mudaliar v. N. Subramaniam AIR 1969 Madras 317 and Pye v.
54. British Automobile Commercial Syndicate, Limited (1906) 1 KB 425. In the case of Chunnilal Onkarmal Ltd. And another v. Mohanlal Balakrishna Agarwal and another AIR 1964 MP 126 it was observed as under:-- "(12) The crucial test is that a security payment of earnest money proper should be in accordance with the term of the contract to that effect. Whether it is written or oral, it should be ascertainable with reasonable precision that when the parties entered into the agreement, it was understood by both of them, that a specific amount must be paid by one of them to the other, as guarantee of his performance of the contract and therefore, liable to be retained by the latter on a breach by the former. When the amount is paid at the time of the agreement itself, other things being the same, a condition of this nature is more probable than when the amount is paid some time afterwards.
55. Similarly, when the amount is paid in lump, it is more probable that it is the earnest money guaranteeing performance. In the event of its being paid in two or more instalments, the probability is in the other direction. Of course, even when the payments are made some time after the agreement, and in more than one instalments, any condition already in the agreement, that within such and such date, such and such amount should be paid in one or more specified instalments, would obviously and to the probability of its being earnest money. In all cases, one has to take all the circumstances into account, this is particularly so in the absence of a written instrument."
56. ' In the case of Bhalchandra Pandurang Rajandekar v. Mahadeo Lazminarayan Shraogi and others (supra) it was stated as under:-- "Earnest money or deposit is a payment actually made and penalty is compensation sought, and the fact that in this particular case the words in part payment' were used is ineffectual to attract the provisions of section 74, Contract Act. The fact that there was no forfeiture clause in the agreement, a point which is insisted on by the learned counsel for the appellant is attempting to draw a distinction, is immaterial as it is plain that the learned Judges held that the principle applied whether there was a forfeiture clause or not. Whether a deposit is described as earnest money or part-payment is immaterial and the proportion that it bears to the sum contracted for is equally irrelevant."
57. ' The Court may find that the amount of deposit or payment in advance is so great in comparison that the amount payable under the contract that the parties could not have intended it as a mere security for performance but a punishment for non-performance. In such circumstances the Court will relieve against the penal clause and will not permit the party to keep the entire amount. The description does not matter it should be ascertainable with reasonable precision that when the parties entered into the agreement, it was understood by both of them that a specific amount must be paid by one of them to the other as guarantee of his performance of the contract and liable to be retained by the latter on breach by the former. It is the intention of the parties that governs which could be gathered by the express terms of the contract or by surrounding circumstances thereof. A penalty is in the nature of a threat held over to the other party in terrorem by reason of its burdensome or oppressive character. In the case of Dunlop Pneumatic Tyre Company, Limited v. New Garage and Motor Company, Limited (1915) AC 79, the following principles were laid down: --
(i) "It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
(ii) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.
(iii) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of breach are such as to make precise pre-estimation an impossibility. On the contrary, that is just the situation when pre-estimated damage was the true bargain between the parties.
(iv) Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages.
58. ' The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine pre-estimate of damage."
59. ' In the Workers Trust of Mercant Bank Ltd. v. Dojap Investment Ltd. (supra) the Privy Council held that law on penalties applies to 'deposit' and to a clause 'forfeiting' money B held on behalf of Contract-Breaker.
60. ' In the English case of Mussan v. Can Dienman's Land Co. (1938) Ch. 253 the land was sold for 321000 payable in instalments and the contract provided that the vendor was to have the right to rescind, and to forfeit any money paid in the event of the purchaser's default. The default occurred after the purchaser had paid 40020. His claim for return of money was rejected. It was held:-- "In order to entitle a plaintiff to relief from a penalty, it is necessary in my judgment for him to show that there is some ground upon which it would be unconscionable in the defendants to retain the money or the whole of the money. I find it difficult to see why, in a case of this kind, it should be unconscionable on the part of the vendor, who has contracted to part with his land on agreed terms, to enforce the contract if he so desires. There may be special circumstances in some cases, in which the Court would take the view that it was unconscionable, and that the plaintiff was accordingly entitled to relief, but unless I can be satisfied that in this case there is something unconscionable in what the defendants seek to do, in my judgment I have no jurisdiction to grant any relief whatsoever. It should be observed that this is not strictly a case of a penalty at all since the payment in question was an integral part of the principal contract."
4. In another English case Stockloser v. Johnson (1954) 1 QB 476 purchaser agreed to purchase from the vendor plant and machinery on royalty basis. The contract provided that payment of the purchase price should be made by instalments and that should the purchaser make default in any instalment for a period exceeding 28 days, the vendor should be entitled to rescind the contract, forfeit the instalments already paid and retake possession of the plaint and machinery. The purchaser having made default in the payment of instalments the vendor rescinded the contract and forfeited the instalments paid. The purchaser who was financially unable and unwilling to complete the contract claimed the return of the paid instalments on the ground that forfeiture clause was penal and unconscionable. The learned trial Judge refused the purchaser relief claimed. The vendor appealed and the purchaser cross appealed. The Court of appeal held that the insistence by the vendor upon his contractual right to retain instalments of purchase money already paid did not, in itself constitute an unconscionable conduct.
61. ' In the case of Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana (1983) 2 AC 694 which was a Charter party case, the Charterers failed to pay on time the hire instalment that fell due, the owners sent a telex withdrawing the vessel. The owners subsequently sought a declaration that they were entitled to withdraw vessel from the Charterer's service. The Charterers asked for relief against forfeiture. The House of Lords held that no such jurisdiction existed. In a very recent case Union Eagle Ltd. v. Golden Achievement Ltd. (1997) 2 All ER 215 the appellant purchaser entered into a contract to buy a flat in Hong Kong from the. Respondent vendor and paid 10% deposit. The contract provided that completion was to take place before 5:00 P.M. On 30th December, 1991 and that time was of the essence in every respect of the contract and in case of failure by the purchaser to comply with any terms and conditions of the contract, the deposit would be absolutely forfeited. The purchaser was ten minutes late for tendering cheques for the purchase money. The vendor rescinded the contract, returned the cheques and forfeited the deposit. The purchaser commenced proceedings for specific performance but his action failed and on appeal the decision was affirmed by the Court of Appeal. The Privy Council held that in the absence of conduct amounting to a waiver or estoppel the Courts would not intervene to provide an equitable remedy. In cases of rescission of an ordinary contract of sale of land for failure to comply with an essential condition as to time, E since the purpose of right to rescind was to free the property for resale and to enable the vendor to know with certainty that he was entitled to resell, which, in a rising market, could be both a valuable and volatile right. Their Lordships also were of the view that the deposit was an earnest of performance and liable to forfeiture on rescission.
62. ' In the case of Galbraith v. Mitchenall Estates, Ltd. (1964) 2 All ER 653 a Caravan was hired and under the contract the hirer was to make an initial payment of 550 10s. Followed ,y sixty rentals of 12 10s. The retail price of the caravan was 1050. The hirer made the initial payment and had the delivery of the caravan. The hirer failed to pay rentals. The contract provided that the owners could both retain the initial payment and have repossession of the caravan. The hirer brought an action for recovery' of the initial payment. It was held that although the clause in the agreement enabling the owners to retain both the initial payment and the caravan was one of undue harshness yet there was no equity to remodel a contract freely negotiated and entered into without either fraudulent or unconscionable conduct by the other party thereto. The owners were entitled to retain a sum of 550, the money paid under the contract which was about 50% of the retail price of the caravan.
63. ' In a very recent Indian case Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd. (Supra) the respondent company was engaged in the business of supplying equipment for offshore oil exploration. It offered to supply on agreed terms 26' diameter and 30' diameter casing pipes. The respondent company was unable to deliver the material for various reasons, the company requested for 45 days extension. The time was extended subject of the statement that an amount equivalent to liquidated damages for delay in supplying of pipes would be recovered from respondent company. An amount of US $ 304970.20 and Rs,15,75,559 were deducted. The dispute was referred to Arbitral Tribunal, it arrived at the conclusion that the amount was wrongly withheld.
64. It was for the appellant to establish that they had suffered any loss because of the breach. It also declared that respondent company was entitled to recover the said amount with interest @ 12% per annum till the date of filing of the statement of claim and thereafter having regard to the commercial nature of the transaction @ 18% per annum till payment is made. The Supreme Court struck down the award.
5. The principles that emerge from the study of the aforementioned cases can be summarized as follows:-
(i) The 'deposit' or 'earnest' money paid as "guarantee that the contract shall be performed" is generally irrecoverable unless the contract provides to the contrary.
(ii) A contract may provide that advance payment shall be made, without specifying what is to happen in the case of breach of the contract. The advance payment is generally recoverable.
(iii) Nomenclature used is immaterial. The phrases or expression generally used are 'advance', 'deposit' or `earnest'. The intention of the parties is to be ascertain from the circumstances.
(iv) The presence or absence of forfeiture clause in the agreement is irrelevant. The aforementioned principle applies.
(v) The sum forfeited must be reasonable, the same cannot be retained if it is extravagant and unconscionable.
(vi) The condition of forfeiture carrying with it an element of punishment will be in the nature of penalty.
6. In the instant case the appellant made the total offer of Rs,75 million and made a down payment of Rs,10 million (one crore). The offer was accepted subject to the term that if the appellant fails to pay subsequent instalments on due dates, "the arrangement shall stand cancelled and the sum of Rs,1 crore shall stand forfeited." We have perused the grounds of appeal and the prayers of I.C.As.
65. Nos.11-L of 1998 and 13-L of 1998, the forfeiture clause incorporated in the order dated 18-9-1997 (reproduced above) was not challenged, only prayer for extension of time was made which was granted and a fresh schedule for payments was given. It is thus clear that the forfeiture clause was accepted by the appellant. The order on I.C.As. Dated 27-9-2000 attained finality.
7. To our mind the down payment of Rs,1 crore was a "deposit" or "earnest" as a guarantee that the contract shall be performed as such irrecoverable. The condition No,6 of the terms and conditions of the bid reads as under:-- "6. Successful Bidders will be asked to deposit the balance amount of the bid within such period as the High Court is pleased to determine failing which the Earnest Money deposited by the Bidder(s), subject to orders of the Court, shall stand forfeited to the Taj Company Ltd." (Underline is ours)
66. ' The bare reading of the same reveals that the deposit made by the Bidder was treated as earnest money. This stipulation cannot be held as in terrorem of the offending party and is not a penalty.
67. The amount forfeited is reasonable. It is about 13.33% of the total price. In the case of Union Eagle Ltd. v. Golden Achievement Ltd. (1997) 2 All ER 215 Privy Council upheld forfeiture of 10% deposit.
68. Similarly in the case of Mussan v. Van Diemen's Land Co (Supra) 12.53% forfeiture was not disturbed.
69. We are also of the view that forfeiture in the instant case is not unconscionable and extravagant in particular when the purchaser is unable and unwilling to complete the contract. The appellant prayed for enlargement of the time which was granted twice, firstly by the learned Company Judge, secondly, by a Division Bench of this Court. Notwithstanding he has failed to perform his obligation under the contract and is a persistent defaulter. He did not pray for the refund of the "earnest" at the time of his earlier appeal. He cannot now be allowed to have a volte face and be heard to say that the said amount of Rs,10 million out of Rs,75 million is a penalty. He as a contract- breaker is estopped by his conduct to claim the refund of the "earnest". After the disposal of I.C.As.
70. The appellant at no time expressed readiness or ability to make further payments, but brought an application claiming the return of the deposit made under the agreement, which the respondent claims the right to forfeit. The appellant has no equity in his favour. He remained in possession of the mill for a substantial length of time.
71. ' The authorities relied upon by the learned counsel for the appellant are not applicable to the facts of the instant case. In the case Province of West Pakistan v. Messrs Mistri Patel & Co. And another (supra) the vendor instead of suffering any loss, made a profit of Rs,10,000. Thereafter he filed a suit against the purchaser for recovery of the amount of earnest money on the basis of bank guarantee. In the particular circumstances it was held that the forfeiture of the bank guarantee was a penalty. Similarly Abdullah v. Karim Haider (supra) the plaintiff had purchased the truck for Rs,66,000, paid a sum of Rs,15,000 by way of advance towards price of the truck and agreed to pay the balance by monthly instalments of Rs,2,500. The truck met an accident and the plaintiff abandoned the truck where it met the accident. The defendant spent about Rs,20,000 on its repair and payment of taxes. The plaintiff had already paid to the defendant Rs,45,000 leaving a balance of Rs,21,000. Clauses of agreement created a kind of hypothecation on truck in favour of the defendant. He had a charge on the truck and was entitled to take over the possession of the same for non-payment of the remaining price. The defendant had already received Rs,45,000 out of Rs,66,000 in these circumstances it was held that the forfeiture of Rs,45,000 was in the nature of penalty. These cases are distinguishable. The other cases relied upon by the learned counsel for the appellant are not applicable to the facts of the instant case.
72. ' Where the deposit is reasonable in relation to the loss likely to be suffered, it can be forfeited, particularly if the loss is such that it cannot be accurately assessed in advance. See Pye v. British Automobile Commercial Syndicate, Limited (1906) 1 KB 425.
73. ' The argument of the learned counsel for the respondent that the amount of Rs,1 crore can be forfeited under Order XXI, rule 86, C.P.C. Is devoid of any force. The said rule applies to the sale of the immovable property in execution of the decrees which is not the position in the instant case.
8. Looking at the case from other angle, the learned Company Judge approved the offer of the appellant subject to payment of Rs,1 crore. The said amount can be called as damages for breach of contract as the same was fixed by the Court itself at the time of formation of contract and that being so, no further determination by the Court regarding exact amount of damages suffered by the respondent was necessary. The appellant had voluntarily undertaken to deposit Rs,10 million (one crore) in the Court. Our august Supreme Court in the case of Messrs Khanzada Muhammad Abdul Haq Khan Khattak & Co. v. WAPDA through Chairman WAPDA and another 1991 SCMR 1436 laid down:-- "The contracting parties had determined the pre-estimate of the expected loss. As the appellant had failed to perform his part of the contract he was, therefore, obliged to make the payment to the respondents under the terms of the contract. Liquidated damages is not a punishment. The parties may by an agreement fix a specified amount as liquidated damages to avoid the difficulty that may be found in settling the actual damages that may accrue against the defaulting party on the breach of contract. The manifest intention is to get rid of future calculation and disputes. Where an amount is mentioned in the contract as penalty payable on breach of contract, the parties are entitled to recover actual damages not exceeding the amount mentioned in the contract but in case of liquidated damages, a party is entitled to recover the same from the opposite party in case of breach of contract." (Underlining is ours)
74. ' In another case Saudi-Pak Industrial and Agricultural Investment Company (Pvt.) Ltd. Islamabad v.
75. Messrs Allied Bank of Pakistan and another 2003 CLD 596 our august Supreme Court observed as under:-- "Liquidated damages, as a rule, require the positive evidence to show the actual loss was by the party claiming the damages. Even fixed amount stipulated for liquidated damages cannot be recovered if the quantum of actual loss is not proved. Under the circumstances, the plaintiff is neither entitled to any interest nor to any amount as liquidated damages."
76. ' It was a case of bank guarantee. The Bank irrevocably and unconditionally undertook to pay certain amount to the plaintiff on demand. The plaintiff had sustained damages on the ground of default and claimed liquidated damages. This case is distinguishable and in our view is not applicable to the facts of the instant case.
77. ' At any rate if the loss suffered by the respondent is to be proved, the record shows that the highest bid of Rs,75 million offered by the appellant was accepted on 18-9-1997. The Mill has been resoled for a consideration of Rs,70 million. The sale was confirmed by the learned Company Judge on 5- 12-2003. After six years the mill could fetch only Rs,70 million. There is a straight loss of Rs,5 million liable to be deducted from deposit of Rs,10 million. As far the remaining Rs,5 million they are payable as compensation i.e. Costs of delay on the defaulted amount. In this inflationary period the respondent has been deprived of mark-up on Rs,65 million and there is also a depreciation in the value of the money. The principal and the mark-up could be disbursed among the Taj Company affectees long ago. The breach has made them suffer for six yeaRs, The loss is not measurable in terms of money. The rate of mark-up was quite high in 1997 as compared to 2003.
78. The learned Division Bench while disposing of I.C.A. No,13-L of 1998 in para.4 of the order (reproduced above) worked out "the financial costs of the delay in making payments of the instalments of the purchase price" as "14% per annum". The appellant claims in its grounds of appeal that the order of the learned Division Bench "could be ignored at its own peril." If the same is ignored the position that emerges is that the possession of the mill was taken on 25-9-1997. The first instalment was due after six months. Thereafter the payments were to be made quarterly.
79. Awarding a moderate rate of mark-up @ 7% per annum from 1999 to December, 2003 (when the mill was resoled). The loss suffered by the respondent appears to be as follows:-- Year Ending The amount dueThe years for which amount dueCost of delayed payments for one year due to default in paymentLoss suffered 1998 Rs.99,00,000 5(1999 to2003)Rs.6,93,000 Rs.34,65,000 1999 Rs.1,32,00,000 4(2000 to2003)Rs.9,24,000 Rs.36,96,000 2000 Rs.1,32,00,000 3(2001 to2003)R9.9,24,000 Rs.27,72,000 2001 Rs.1,32,00,000 2(2002 and 2003)Rs.9,24,000 Rs.18,48,000 2002 Rs.1,32,00,000 1(2003) Rs.9,24,000 R9.9,24,000 Loss suffered:- Rs.1,27,05,000 Loss suffered in the sale price:- Rs. 50,00,000 Total Loss:- Rs.1,77,05,000 ' The total cost due from the appellant is Rs,1,77,05,000. The damages exceeding Rs,1 million can neither be claimed nor granted because the compensation cannot be granted exceeding the amount named in the contract. In these circumstances the appellant is not entitled to refund of any money.
9. The upshot of the above discussion is that this appeal has no merit and is dismissed leaving the parties to bear their own costs.