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Security Money Vs Earnest Money

Forfeiture amount should be commensurate to losses if party not at fault

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18th-Jan-2020       
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Appellate Division  (Civil) :
Syed Mahmud  Hossain CJ
 Muhammad Imman Ali J
 Hasan Foez Siddique J
Mirza Hussain Haider J

Trading Corporation of Bangladesh……………………….Petitioner
Vs
Trio Hologram Industries Ltd….……………… Respondent.

Judgment
April, 12th, 2018

Security Money
Mere breach of contract would not entitle a party to forfeit the entire amount of security money. The amount of forfeiture should be commensurate to the losses suffered by the party not at fault. The petitioner by its conduct indicated that it would accept giving lower price to 10% of the masur dal as adequate damages, therefore, it cannot claim forfeiture of the deposit. .     (12)
Earnest Money
An amount deposited by the supplier as security for the performance of contract for supply of goods is not earnest money and hence the Court cannot give release to the supplier in case of default. . ..... (13)
Munshi Lai vs Ahmad Mirza Beg AIR 1933 Qudh 291; Province of West Pakistan vs Mis Mistri Patel Co. 21 DLR (SC) 132; Maula Bux vs Union of India, AIR 1970 (SC) 1955 and Kunwar Chiranjit Singh vs Har Swarup, AIR 1926 PC ref.
Kamal-ul-Alam, Smior Advocate instructed by Shahanara Begum, Advocate-on-Record-For the Petitioners.
Probir Neogi, Senior Advocate, instructed by Ibrahim Khali, Advocate-on-Record-For the Respondent.
Judgment
Syed Mahmud Hossain CJ: This civil petition for leave to appeal is directed against the judgment and order dated 7-12-2016 passed by the High Court Division in First Miscellaneous Appeal No 177 of 2015 allowing the appeal and setting aside the judgment and order dated 5-5-2015 passed by the learned District Judge, Dhaka in Arbitration Miscellaneous Case No. 227 of 2013 allowing the same and thereby setting aside Clause and part of clause III of the arbitration award dated 20-3-2013 passed by the learned Chairman of the Arbitral Tribunal in respect of Contract No, TCB/MP 2605/2010 dated 19-9-2010.
2. The case of the 1st party-respondent, in brief, is that the respondent on its own offered to make supply of 2,000 metric tons of masur dal and the petitioner TCB accepted the offer and both the parties entered into a contract for supply and sale of 2,000 metric tons of red lentils without husk of Nepal origin with certain terms and conditions specified in the Contract No.TCB/MP-2605/2010 dated 19-9-2010. The TCB opened L/C in favour of the respondent for importation of masur dal as specified in the contract entered into between the parties dated 19-9-2010. The duration of L/C was to expire on 5-12-2010 and subsequently at the request of the respondent this duration was extended up to 13-12-2010 and lastly this was again extended upto 20-1-2011. The respondent imported masur dal from Nepal under L/C and supplied 1,000 metric tons red whole lentils to the TCB in its first shipment. However, the respondent supplied masur dal, which was not in accordance with the specification of the contract. Failing to supply remaining 1,000 metric tons of red lentils, the respondent requested TCB by letter dated 18-1-2011 for permission to supply Dal with 2.50 to 3.60 mm diameter instead of 2 to 3 mm diameter instead of 2 to 3 mm diameter of grain as specified in the contract which was rejected.
Both the parties appointed their respective Arbitrators, who could not concur with each other in their opinion and gave different Awards. Thereafter, the Chairman of the Arbitral Tribunal finally arrived at his own decision with a completely separate award on 20-2-2013. In the above award, the learned Chairman of the Arbitral Tribunal accepted the price for 10% defective Dal at Taka 78 per kg as fixed by the Price Fixation Committee of TCB and also declared that the respondent is entitled to get refund of Taka 95,00,000 deposited by the respondent as performance security forfeited by the petitioner.
3. Against the decision Nos. II and part of iii of the Award passed by the learned Chairman of Arbitral Tribunal relating to refund of Taka 95,00,000 of performance guarantee, the petitioner TCB filed a case before the District Judge seeking to set aside the award and the learned District judge after hearing of both the parties allowed the Arbitration Miscellaneous Case No. 227 of 2013 and set aside Clause IT and part of Clause III of the Arbitration Award dated 20-3-2013 passed by the learned Chairman of the Arbitral Tribunal in respect of Contract No.TCB/MP-2605/2010 dated 19-9-2010.
4. Being aggrieved by and dissatisfied with the aforesaid judgment, the 1st party-appellant  (present respondent) preferred First Miscellaneous Appeal No.177 of 2015 before the High Court Division. The learned Judges of the High Court Division by the judgment and order dated  7-12-2016 allowed the appeal.
Feeling aggrieved  by and  dissatisfied with the judgment and order passed by the High Court Division the leave-petitioner filed this civil petition for leave to appeal before this Division.
5. Mr. Kamal-ul-Alam, learned Senior Advocate, appearing on behalf of the 2nd party-petitioner, submits as under:
'The High Court Division failed to appreciate that TCB very explicitly stated in its letter dated 27-2-2011 that amendment of the size of masur dal, extension of L/C would not be accepted. By this letter, TCB has rescinded the contract from legal point of view. After this letter, M/s TRIO Hologram Industries Ltd. (in short, TRIO) was not allowed any further shipment of masur dal. Since the TRIO breached the contract at the very beginning, there was, therefore, no question of novation of contract and, as such, the impugned judgment should be set aside.
The TCB after investigation by its letter dated 9-3-2011 made very clear to the 1st party that as it rescinded the contract, it was up to the 1st party to take back the whole consignment of the masur dal on its own risk: or to accept the price fixed by TCB as the First Party was to clear violation of the terms of the contract and, as such, the impugned judgment should be set aside."
6. Mr. Probir Neogi, learned senior Advocate appearing on behalf of the 1st party respondent (TRIO), on the Other hand, supports the impugned judgment delivered by the High Court Division.
7. We have considered the submissions of the learned Senior Advocates of both the sides, perused the impugned judgment and the materials on record.
8. Record reveals that the TCB opened L/C in favour of the respondent for importation of masur dal as specified in the contract entered between the parties on 19-9-2010. The duration of L/C was to expire on 5-12-2010 and subsequently, at the request of the respondent, the duration was extended up to 13-12-2010 and lastly time was extended up to 20-1-2011. Admittedly, the respondent imported masur dal from Nepal under L/C and supplied 1,000 metric Tons red lentils to the TCB in its first shipment. However, the respondent supplied masur dal which was not in accordance with the specification of the contract and could not supply half of the total quantity of the contracted goods within specified period.
9. In the case in hand, the leave-petitioner did not terminate the contract. The leave-petitioner was adequately compensated for loses it had suffered by paying Taka 78 per kg. Since the leave-petitioner has been compen-sated by paying a lesser price for 10% of masur dal, it is not entitled to forfeit the performance guarantee.
10. In the case of Munshi Lai vs Ahmad Mirza Beg AIR 1933 Oudh 291, it has been held that where a condition in a contract carries with it an element of punishment, it is in the nature of a penalty.
11. In the case of West Pakistan vs/Ms/ Miistri Patel & Co. 21 DLR (SC) 132, it has been held as under :
"………………..It will be wrong to argue that since the firm had agreed to deposit a sum as earnest money and in lieu thereof 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."
12. What is important to mention here is that mere breach of contract would not entitle a party to forfeit the entire amount of security money. The amount of forfeiture should be commensurate to the losses suffered by the party not at fault. The leave-petitioner by its conduct indicated that it would accept giving lower price to 10% of the masur dal as adequate damages, therefore, it cannot claim forfeiture of the deposit.
13. An amount deposited by the supplier as security for the performance of contract for supply of goods is not earnest money and hence the Court cannot give release to the supplier in case of default.
14. In this connection, reliance may be placed on the case of Maula Bux vs Union of India, AIR 1970 SC 1955 wherein paragraph-4, it I has been stated as under:
"4. Under the terms of the agreements the amounts deposited by the plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The High Court observed that the deposits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in "The Dictionary of English Law" at P.689: "Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by giving to the vendor a nominal sum (e,g, a shilling)  as token that the parties are in earnest or have made up their minds" As observed by the Judicial Committee in Kunwar Chiranjit Singh as Har Swarup, AIR 1926 PCl;
"Eanest-money is part of the purchase price when the translation goes forward : it is forfeited when the translation falls through, by reason of the fault or failure of the vendee."
In the present case the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be regarded as earnest-money".
15. In the light of the findings made before, we do not find any substance in the submissions made by the learned Counsel for the leave-petitioner.
The findings arrived at and the decision made by the High Court Division having been made on proper appreciation of law and fact do not call for interference. Accordingly, this civil petition is dismissed.

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