1925 JTR(SC) 58
1926 AIR(PC) 1
Privy Council
Salvesen, Ameer Ali, Sir John Edge, Phillimore, Justice Shaw, JJ.
(Kunwar) Chiranjit Singh -Appellant
Versus
Har Swarup -Resopndent
Privy Council Appeal No. 80 of 1923, from Allahabad Appeal No.44 of 1921
Decided On : 01-12-1925
Earnest money is part of the purchase price if the transaction is completed but is forfeited if the transaction fails due to the fault or failure of the purchaser. Financial modifications to payment terms do not supersede the original contract unless explicitly agreed.
Act
Referred
:CONTRACT ACT
: S.74
(A) Contract Law - Earnest Money - Forfeiture - Earnest money is part of the purchase price when the transaction goes forward; it is forfeited when the transaction falls through by reason of the fault or failure of the vendee. (Para 10)
(B) Contract Law - Modification vs. Supersession - A payment made towards the purchase price to accommodate the financial difficulties of a purchaser does not constitute a supersession of the original contract of sale, but is merely a financial modification in the interests of the purchaser, unless there is evidence that the seller agreed to sacrifice the stipulated earnest. (Paras 6-7)
Facts of the case:
A contract for the sale of an estate was entered into with terms specifying a fixed amount as earnest money and the balance payable in moieties. After accepting the proposal, the purchaser encountered financial difficulties and made a payment exceeding the earnest money, which was credited towards the total sale price. Subsequently, the purchaser's representative informed the seller that the purchaser was unable to complete the purchase and that the seller was free to bargain with other purchasers. The purchaser sought the refund of the entire amount paid, including the earnest money.
Findings of Court:
The court held that the original contract of sale was not superseded by the subsequent payment, which was a financial modification for the purchaser's benefit. As the purchaser broke the contract, the earnest money was forfeited, and only the balance of the payment was to be refunded.
Issues: Whether the subsequent payment of a sum exceeding the earnest money superseded the original contract of sale and whether the earnest money is refundable when the purchaser defaults on the contract.
Ratio Decidendi: The court ruled that earnest money is forfeited when a transaction fails due to the fault or failure of the vendee. A modification in payment terms to assist a purchaser does not automatically wipe out the original contract or the right to forfeit earnest money unless specifically agreed upon.
Result: Appeal dismissed.
(B) Contract Law - Modification vs. Supersession - A payment made towards the purchase price to accommodate the financial difficulties of a purchaser does not constitute a supersession of the original contract of sale, but is merely a financial modification in the interests of the purchaser, unless there is evidence that the seller agreed to sacrifice the stipulated earnest. (Paras 6-7)
Facts of the case:
A contract for the sale of an estate was entered into with terms specifying a fixed amount as earnest money and the balance payable in moieties. After accepting the proposal, the purchaser encountered financial difficulties and made a payment exceeding the earnest money, which was credited towards the total sale price. Subsequently, the purchaser's representative informed the seller that the purchaser was unable to complete the purchase and that the seller was free to bargain with other purchasers. The purchaser sought the refund of the entire amount paid, including the earnest money.
Findings of Court:
The court held that the original contract of sale was not superseded by the subsequent payment, which was a financial modification for the purchaser's benefit. As the purchaser broke the contract, the earnest money was forfeited, and only the balance of the payment was to be refunded.
Issues: Whether the subsequent payment of a sum exceeding the earnest money superseded the original contract of sale and whether the earnest money is refundable when the purchaser defaults on the contract.
Ratio Decidendi: The court ruled that earnest money is forfeited when a transaction fails due to the fault or failure of the vendee. A modification in payment terms to assist a purchaser does not automatically wipe out the original contract or the right to forfeit earnest money unless specifically agreed upon.
Result: Appeal dismissed.
T.L. Wilson and Co., H. Polak, J.M. Parikh, L.De Gruyther, B. Dube, K.C., A.M. Dunne
Lord Shaw. -
The main appeal has reference to a contract of sale of the Markham Grant Estate belonging to the defendant Jyotish Sarup. The contract was entered into with the plaintiff-appellant. The High Court, reversing the judgment of the Subordinate Judge, held that there was a complete contract of sale. In the opinion of the Board the High Court, in this particular, as in the others aftermentioned, was right.
One of the terms of this contract of sale was as follows :
28th July 1914, from defendant to the plaintiff :
"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 laks 76,000."
On the 2nd August a reply was sent accepting the proposal.
From that point forward, however, the appellant appears to have encountered financial difficulties in carrying out the contract. He set about endeavouring to secure the property on modified and easier terms. He did not pay the earnest money eo nomine, but on the 28th August 1914, he sent two cheques, amounting in cumulo to Rs. 1,65,000, the receipt being granted for these sums "towards the sale price of the Markham Grant Estate out of the consideration of Rs. 4,76,000."
It is contended that this formed a supersession of the former contract. The Board agree with the opinion of the High Court that this is not so. It was merely a financial modification in the interests of the purchaser, who appeared to be unable or unwilling fully to meet the terms of the contract.
Then came, on 6th September 1914, a letter from the purchaser's representative in these terms :
In continuation of my telegram, dated the 3rd instant from Simla, I have to inform you that, owing to certain unavoidable circumstances Kunwar Chiranjit Singh of Kapurthala, is quite unable to purchase the Markham Grant in the Dehra Dun district. You are hence quite at liberty to settle your terms and make up the bargain with any other purchaser.
It is accordingly plain that the pur chaser was unable or unwilling to complete the contract, even in its modified terms.
According to the judgment of the High Court, which again, in their Lordships' view, is correct, the purchaser must, having broken the contract, lose his earnest money of Rs. 20,000, but must be repaid Rs. 1,45,000, the balance of his payment to account. The appeal is brought with the object of his also obtaining repayment of the earnest money.
In the opinion of the Board, as men tioned, the original contract of sale was not superseded. It was carried forward with the modifications alluded to, and in particular there is nothing to suggest that the owner of the estate agreed to sacrifice the stipulated earnest.
Earnest money is part of the purchase price when the transaction goes forward : it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee.
The application of this principle to the contract in question settles the case.
A cross-appeal was presented truly for the purpose of endeavouring to meet circumstances which have not arisen, namely, the Board's possibly coming to an opinion that the original contract of sale had been wiped out.
Their Lordships will humbly advise His Majesty that the main appeal fails with costs. As to the cross-appeal there will be no order except that there be no costs to either side.
Appeal dismissed.