Law:

Section:

(a) Contract Act (IX of 1872), S. 74--Earnest money, forfeiture or recovery of-Covenant for forfeiture of earnest money or deposit actually made or amount recoverable on failure to perform con­tract-Covered by expression "if the contract contains any other stipulation by way of penalty" - Despite express stipulation in contract, Court, on equitable principles, can relieve defaulting buyer from forfeiture of earnest money if circumstances of case justify such a course-Difference in English law between liquidated damages and penalty. M agreed to purchase from S 4000 tons of rice and in pursuance of one of the terms of contract, instead of depositing any earnest money with the seller gave in lieu thereof a Bank guarantee to pay the amount of earnest money on his failure to fulfill his obligations under the terms of the contract. On failure of M to lift the goods within the stipulated time S sold the goods to a third party and by that transaction instead of suffering any loss, made a profit of Rs. 10,000. Thereafter, S filed a suit against M for recovery of the amount of earnest money on the basis of the Bank guarantee. On the question whether in view of the guarantee given by the Bank S was entitled to forfeit the amount covered by the guarantee and recover the same. On behalf of plaintiff S it was argued that he was entitled to claim the amount of earnest money irrespective of fact whether he suffered loss or not in the transaction in question: Held, it will be wrong to argue that since the firm had agreed to deposit a sum as earnest money and in lieu there of furnished Bank guarantee for the said amount the Government would be entitled to claim the whole of this amount simply because there was a breach of the contract by the firm. Such a contention does not even receive support from the cases where the view taken was that the forfeiture clause of a deposit in a contract does not come within the purview of section 74 of the Contract Act. In these cases also forfeiture was held to be justified if the amounts were found to be reasonable. Section 74 of the Contract Act does not recognize the difference that exists in the English law between liquidated damages and…

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