Case Note & Summary
The plaintiff, Dr. Jagdish J.N. Counte, entered into a written agreement dated 13.4.96 with the defendant, M/s. Carl Estate Private Limited, for the purchase of a flat admeasuring 88 sq.mts. for Rs.5,50,000. The plaintiff paid Rs.4,00,000 as earnest money, with the balance payable at possession, which was to be completed within twelve months. Clause 4 of the agreement allowed the plaintiff to cancel by giving 30 days' notice, upon which the defendant was to refund the earnest money without interest; if the defendant failed to refund within 30 days, a daily fine of Rs.1000 and compound interest at 4% per month would apply. The plaintiff cancelled the agreement by letter dated 27.11.96 and sent a reminder on 4.12.96. The defendant issued several cheques which bounced, leading to criminal complaints under Section 138 of the Negotiable Instruments Act, 1881. The plaintiff filed Special Civil Suit No.45/99 on 5.4.99 for recovery of Rs.4,00,000 with daily fine and compound interest. The trial court decreed the suit for Rs.4,00,000 with interest at 6% per annum from the date of suit, rejecting the claim for daily fine and compound interest as penalty. Both parties appealed. The High Court held that clause 4 was not a penalty but a valid forfeiture clause under Section 74 of the Indian Contract Act, 1872, and the plaintiff was entitled to the agreed compensation. However, the court reduced the daily fine from Rs.1000 to Rs.500 per day and compound interest from 4% to 2% per month to prevent unjust enrichment. The appeals were partly allowed, modifying the decree accordingly.
Headnote
A) Contract Law - Forfeiture Clause - Section 74 Indian Contract Act, 1872 - Clause 4 of agreement for construction and sale provided that if plaintiff cancelled agreement, defendant would refund earnest money with daily fine of Rs.1000 and compound interest at 4% per month on failure to refund within 30 days of notice - Court held that clause 4 is not a penalty but a valid forfeiture clause, and plaintiff is entitled to refund of earnest money with daily fine and compound interest as agreed, subject to reduction of daily fine to Rs.500 per day and compound interest to 2% per month to avoid excessive compensation (Paras 7-10).
Issue of Consideration
Whether clause 4 of the agreement providing for refund of earnest money with daily fine and compound interest upon cancellation by the plaintiff is a valid forfeiture clause or a penalty under Section 74 of the Indian Contract Act, 1872, and whether the plaintiff is entitled to the amounts claimed.
Final Decision
Both appeals are partly allowed. The decree of the trial court is modified. The defendant is directed to pay the plaintiff Rs.4,00,000 with daily fine of Rs.500 per day from 28.12.96 (expiry of 30 days notice) till payment, and compound interest at 2% per month on the earnest money from the same date till payment. The plaintiff is also entitled to costs throughout.
Law Points
- Interpretation of forfeiture clause
- Section 74 Indian Contract Act 1872
- penalty vs liquidated damages
- earnest money refund
- daily fine and compound interest as compensation
