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Suketu Jhaveri v/s K.U. Sodalamuthu & Co Private Limited, Coimbatore

    A.S. No. 32 of 2013
    Decided On, 02 November 2022
    At, Customs Excise And Service Tax Appellate Tribunal Regional Bench at Hyderabad
    By, THE HONOURABLE MR. JUSTICE D. BHARATHA CHAKRAVARTHY
    For the Appellant: R. Jayaprakash, Advocate. For the Respondent: M/s. P. Veena, Advocate.


Judgment Text
(Prayer: Appeal Suit filed under Section 96 read with Order XLI A Rule 1 & 2 of Civil Procedure Code, to set aside the Judgment and decree, dated 29.04.2011 passed by the learned Additional District and Sessions Judge, Fast Track Court No.1, Coimbatore in O.S.No.830 of 2008 and direct the respondent to pay the appellant a sum of Rs.13,98,600/- together with interest @ 18% per annum from the date of the suit till realization.)

The Question:

1. “In a contract for the purchase of machinery, if the sale is not complete, whether the advance consideration paid can be forfeited by the supplier?” is the question which begs this Appeal Suit.

Facts in Brief:

2. By and large, the facts are admitted in this case. The plaintiff is a proprietorship concern engaged in the business of production of various types of papers and related materials. The defendant, is a company incorporated under the Companies Act, and is engaged in the production and supply of various types of Machinery for paper and printing industries. The plaintiff was in requirement of an ‘Automatic Spiral Paper Tube making Plant’ (Single Belt upgradable Model) and an ‘Edge Protector Making Plant’. In the month of December 2007, the parties negotiated with each other and thereafter, the defendant made an offer by a communication dated 10.01.2007, in Ex.A-1, offering to supply the machinery for a total Sale Consideration of Rs.45,01,001/- (Rupees Forty Five Lakhs and One Thousand and One, only). The relevant clauses relating to delivery and payment in Ex.A-1, read thus:-

“DELIVERY: 14 To 16 weeks from the date of receipt of your confirmed order with advance. PAYMENT: 15% in advance by D/D alongwith confirmed order. 15% additional advance in 45 days from the receipt of first advance. 65% by D/D before dispatch against proforma invoice. 5% balance will be paid as soon as project is commissioned to the mutual satisfaction at thesite and after trial run production.”

The relevant clauses in the general terms and conditions in Ex.A-1, read thus:

“7. An order once confirmed with advance cannot be cancelled or withdrawn under any circumstances.

8. The machinery should be taken delivery within 15 days from the date or receipt of the intimation sent by us Otherwise the order will be treated as cancelled and the advance will be forfeited without any prior intimation.”

(Emphasis Supplied)

3. In response to Ex.A-1, the defendant placed a purchase order dated 11.12.2007 in Ex.A-2, and the total cost was agreed as Rs.45,00,000/- (Rupees Forty Five Lakh only) and the terms relating to delivery and payment terms in Ex.A-2, reads thus:-

“Delivery: By 15/April/2008 Payment Terms: We are enclosing herewith a cheque for Rs. 5 Lacs as Advance Payment (Which we will Courier to you by tomorrow along with Original Purchase Order), Balance Payment Schedule as Below:

-Rs. 1,75,000 By 18/Dec’07

-Rs. 6,75,000 By 12/Feb’2008

-Rs. 29,25,000 Before dispatch against Proforma Invoice

& Balance Rs. 2,25,000 After machine is commissioned to the mutual satisfaction at our site ad after successful trial run production.”

4. Thereafter, by communication in Ex.A-3, a cheque for a sum of Rs.5,00,000/- (Five Lakh Rupees) was forwarded. By another communication in Ex.A-4, dated 20.12.2007, a Demand Draft for a sum of Rs.1,75,000/- (Rupees One Lakh Seventy-Five Thousand only) was forwarded by the plaintiff. Thereupon, vide Ex.A-5 dated 19.12.2007, the defendant issued an Order Acknowledgement-Cum-Technical Proposal. As per the same, it was agreed that the Plant and Machines will be delivered on or before April 15, 2008. It was further mentioned that, due to space and financial restrictions, the machines will be sent in two or three phases within the above stipulated delivery time. It is again mentioned that the payment schedule will be as follows:

“Payment: 15% in Advance by D/D along with confirmed order 15% additional advance in 60 days from receipt of first advance. 65% by D/D before dispatch against proforma invoice. 5% balance will be paid as soon as project is commissioned to the mutual satisfaction at the site and after trial run production.”

5. On 20.12.2007, the plaintiff sought certain clarifications about the configurations vide Ex.A-6. The said details sought for were furnished by a communication dated 24.12.2007 in Ex.A-7. Thereafter, on 24.12.2007, vide Ex.A-8, the defendant issued Quotation/Proforma Invoice, which again contained the clauses relating to delivery schedule, payment schedule and forfeiture of advance. By a communication Dated 28.12.2007, in Ex.A-9, the plaintiff returned a duly signed and stamped set of proforma invoice to the defendant. By a communication dated 07.02.2008, the plaintiff, forwarded the cheque towards the second installment of 15% being Rs.6,75,000/- (Rupees Six Lakh Seventy Five Thousand only). Vide Ex.A-11, a communication was issued by the defendant, informing the plaintiff that the work is in good progress and a trial run can be conducted on 18.04.2008, and asking for certain sizes of machine parts etc., and to provide details of Sales Tax Registration, Central Excise Registration etc.. Thereafter by a communication in Ex.A- 12, the plaintiff, requested the defendant to confirm whether each consignment of the machineries will contain the whole line setup, so that, the plaintiff will not waste on transportation, and also requested for the delivery schedule of the above machines.

6. It seems that, by a communication dated 27.02.2008, the plaintiff had sought for change in Payment Terms, which was refused by the defendant vide Ex.A-3, communication dated 28.02.2008 stating that the same is not possible in lieu of the escalation of costs and their suppliers demanding more. Thereafter, vide Ex.A-14, communication dated 03.03.2008, the defendant informed the plaintiff, that the first Phase of Machine will be tested on 30.03.2008, and will be dispatched on 04.04.2008., and the second Phase can be tried on 10.04.2008 and 18.04.2008 depending on the progress of work, trial run, etc. The defendants thereafter issued Ex.A-15 communication dated 20.03.2008, regarding, the trial run and other details of progress. On 21.03.2008, the plaintiff informed the defendants that there is some delay in the building construction and that they cannot unload the machine if it comes earlier, and requested whether both the machines could be dispatched together on 12.04.2008. In response to Ex.A-16, the defendant, wrote Ex.A-17, communication, agreeing to have trial run of both on 12.04.2008. Vide Ex.A-18, communication dated 24.3.2008, the plaintiff agreed to send its representative on 12.04.2008 to inspect the trial run of both the machines. Thereafter, on 01.04.2008, vide Ex.A-19, the defendant, wrote to the plaintiff, stating that since the despatches have been postponed at the instance of the plaintiff, a sum of Rs. 10,00,000/- as interim payment may be made before 04.04.2008. To the said communication, the plaintiff issued a reply vide Ex.A-20, dated 02.04.2008, replying that there was no delay on the part of the plaintiff and that, the payment will be released only at the time of dispatch. Thereafter, by a communication dated 09.04.2008, referring to conversation with the defendants, the plaintiff requested that all the machines can be despatched together on 05.05.2008. To this, the defendant agreed by their communication in Ex.A-22 dated 10.04.2008, that the machineries can be despatched on 05.05.2008, but an interim payment of Rs. 30,00,000/- maybe made before 16.05.2008.

7. To the said communication, the plaintiff replied by stating that while they agree there has been a delay which was mainly due to the shifting of the Electrical Pole by the Electricity Board, which is a government undertaking, the delay of two to three weeks should be agreed and the balance of 65% against delivery and 5% after erection will be made as per the original agreement. Thereafter by a communication in Ex.A-24, dated 16.04.2008, while agreeing to hold the machines upto 05.05.2008, the defendant insisted the plaintiff to pay the balance amount atleast on 03.05.2008, it was mentioned in the Ex.A-24, that if the dispatch is delayed beyond 05.05.2008, the defendant will have no other option than to divert the machines to some other customer and thereafter a new delivery schedule and a new price schedule will be applicable. To this, vide Ex.A-25, communication dated 17.04.2008, the plaintiff replied by stating that, there will not be any delay beyond 05.05.2008 and also stated that even if there is any delay of few days, the plaintiff cannot agree for new price or delivery schedule. Thereafter on 02.05.2008, by Ex.A-26, the defendants wrote to the plaintiff that, even though the plaintiff had confirmed positively that they will take delivery of the machines on 05.05.2008, they have not received any payments. To the said communication vide Ex.A-27, mail dated 05.05.2008, the plaintiff informed the defendant that the payment got delayed due to unexpected circumstances and promised that the defendant will receive the payment by 13th or 14th May, 2008. This was not accepted by the defendant, and vide Ex.A-28, communication dated 06.05.2008, the defendants informed the plaintiff that, having waited for more than a month after the machines being made ready, having incurred huge setbacks in their production schedule and fund flow, the plaintiffs have diverted the machineries to the next ready customer on 05.05.2008. The defendants informed that they will be sending fresh delivery schedule and the new applicable price for the plaintiff. Again rejecting the request of the plaintiff, the defendants also wrote Ex.A-29, dated 06.05.2008, stating that there was only repeated delays on the part of the plaintiff and that they have to wait for the new delivery schedule. On the same day, yet another communication in Ex.A- 30, reiterating that they had diverted the machines and that they will be sending fresh price and delivery schedule. It seems that the plaintiff had written an Email on 07.05.2008, to which the defendant had replied vie Ex.A-31, denying the allegations and decrying the lack of professional standards and that they have forfeited the advance. On 15.05.2008, the plaintiff vide Ex.A-32, wrote to the defendant stating that, they will forget the hard feelings created through correspondences by both sides and that they will send their representative along with the balance payment, so that, the problem be resolved.

8. In response thereof, vide Ex.B-3, the defendants intimated that if only the plaintiff had made the payment as agreed on or before 05.05.2008, the order would have been alive, and since the same had not been done, the plaintiff’s representative’s presence is not going to help. Thereafter, on 20.05.2008, a fresh proforma invoice was forwarded by the defendants to the plaintiff vide Ex.B-4, containing the new price schedule. The defendants again reiterated their new schedule, vide Communication Ex.B-5, dated 21.05.2008, and Ex.B-6 dated 27.05.2008. The plaintiff unwilling to go ahead with the fresh offer, issued a legal notice Dated 15.07.2008 in Ex.B-1, to which a reply was caused by the defendants on 30.07.2007 in Ex.B-2. Thereafter the plaintiff, filed the present suit directing the defendant to pay a sum of Rs.13,98,600/- together with interest at the rate of 18% per annum.

The facts in dispute:

9. While the above communications and the transactions are admitted by the parties, the plaintiff submits that the time was never adhered to even from the first payment of Rs.6,75,000/- and therefore, the time not being the essence of the contract, the defendant unable to wait for only a very reasonable and just period of two weeks, cannot forfeit the advance amount paid being the part sale consideration of the machineries. The plaintiff also disputes that the delay was only on account of the plaintiff, and states that the delay had also occurred on the part of the defendant.

10. Per Contra, it is the contention of the defendant, all along time is the essence of the contract and the plaintiff willfully defaulted in making payments and taking delivery and sticking to the schedule. From the terms of offer and the invoice, which is duly signed and returned by the plaintiff, the defendants is entitled to forfeit the advance amount. It is the further case of the defendant that, the Plant and Machinery occupies the entire space of the defendants premises and unless the machinery built is despatched, they cannot go ahead with the next production. And thus, there was huge loss to the defendant on account of the plaintiff’s action. And even the revised payment schedule was not accepted by the plaintiff and hence, they are justified in forfeiting the advance amount.

The issues and the Trial:

11. On the limited compass of the disputed facts, the trial court framed two issues:-

i) Whether the plaintiff is entitled to the suit claim?

ii) To what other reliefs?

12. On the said issues, the plaintiff/Suketu Jhaveri was examined as P.W.1 and Ex.A-1 to A-32, were marked, on behalf of the plaintiff side. On behalf of the Defendant's Company, one G.T.Murthy was examined as D.W.1, and Exs.B-1 to B-7 were marked.

13. The Trial Court, upon appraisal of the Evidence and considering the contentions of the parties, by its Judgment dated 29.04.2011, found that it is only the plaintiff, who was unable to make his factory ready and the same was the reason for the delay. Even after repeated requests of the defendant, the plaintiff did not take delivery. Therefore, as per the terms of contract between the parties, the plaintiff's advance is liable to be forfeited, and therefore answered the issues in favour of the defendant and dismissed the suit. Aggrieved by the same, the present Appeal Suit is filed.

The Submissions:

14. Mr.R.Jayaprakash, learned counsel appearing on behalf of the appellant, submitted a detailed Dates and Events and taking this Court through the Evidence on record, would submit that, though the parties initially fixed 14 to 16 weeks, as the time for delivery, as per the proforma invoice both sides did not adhere to the same. By their conduct, repeated changes and adjustments were made in the terms and therefore, time is not the essence of the contract. Once time is not the essence of the contract, when the plaintiff requested only for about two weeks time, that too considering the delay on the part of the Electricity Board, in shifting the electric poles, the defendant, ought to have awaited and supplied the machineries. In any event, the defendant is not entitled to forfeit the huge amount of Rs.13,98,600/- (Rupees Thirteen Lakhs Ninety Eight Thousand Six Hundred only). When the defendant sold the machinery to third parties, there was no loss and therefore, the Trial court erred in dismissing the suit for return of the advance amount. In support of his contentions, the learned counsel relied upon, the Constitutional Bench of the Hon’be Supreme Court of India, in Fateh Chand Vs. BalakishanDassAIR 1963 SC 1405 reported in AIR 1963 SC 1405, morefully relying upon Paragraph 10, which reads as hereunder:-

“(10) Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by S.74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach . Thereby it merely dispenses with proof of “actual loss or damage”; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach”

15. Per contra, Mrs.P.Veena, learned Counsel appearing on behalf of the respondent, would submit that, a perusal of the exhibits being the communications between the parties, clearly minute every step of the execution of the contract between the parties. When the defendant had invested huge amounts, got supplies from its vendors, and assembled the entire plant and machinery, every day delay in taking delivery thereof resulted in huge loss. From the beginning, the delay was caused only by the plaintiff and not by the defendant. Therefore, the plaintiff’s advance amount is liable for forfeiture.

16. Upon perusal of the material records of the case, and hearing the submissions of the learned counsel on either side, the following questions arise for considerations in the instant case:-

1. Whether time is the essence of the contract in the instant case ?

2. If so, whether the delay is attributable to the plaintiff ?

3. If so, whether the defendant is entitled to forfeit the entire advance amount of Rs.13,98,600/-?

Question 1:

17. It is well settled that ordinarily, in all contracts relating to movable properties, time is the essence of the contract unless specifically agreed otherwise by the parties. In order to determine whether time was the essence of the contract, useful reference can be made to the Judgment of the Supreme Court of India, in Welspun Speciality Solutions Ltd. Vs. ONGC(2022) 2 SCC 382 more specifically paragraph No.35 which reads as hereunder.

''(35) It is now settled that “whether time is of the essence in a contract”, has to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract. As the contract was spread over a long tenure, the intention of the parties to provide for extensions surely reinforces the fact that timely performance was necessary. The fact that such extensions were granted indicates ONGC's effort to uphold the integrity of the contract instead of repudiating the same.''

18. In the instant case from the offer, acceptance, and the proforma invoice, it is clear that the entire contract was to be with strict adherence of time. The general terms and conditions extracted supra, clearly mandate the timeline and forfeiture of advance in the event of the cancellation of the order. The communication between the parties clearly reinforces the timeline. As a matter of fact, though finally vide Ex.A-25 & A-26, the parties have agreed to extend the time till 05.05.2008, it is also clear that the parties have agreed on the extended time limit and therefore that by itself, will not in any manner, amount to the parties agreeing that the time is not the essence of the contract. A cumulative reading of the communication between the parties, it cannot also be construed that merely because the first 15% of the amount was split up as Rs.5 lakhs and Rs.1,75,000/-, paid in two installments, the parties have given a go by to the time schedule.

19. As a matter of fact even when additional payment was demanded by the defendant on account of the request for postponement of delivery time, the plaintiff insisted on the terms of delivery, and therefore, in any view of the matter, the contention of the learned counsel for the appellant that the time is not an essence of the contract cannot be agreed and I accordingly answer the question No.1 that time is the essence of the suit contract.

Question 2:

20. While narrating the facts above, it can be seen that the conduct of the parties is clearly borne out in the email communications which are admitted documents marked and specifically referred to above. From the same, it would be clear that, the plaintiff himself has admitted that the delay was on its part on account of its premises being not ready (Ex.A-23). Similarly, it can be seen that it has requested time citing financial crunch (Ex.A-27), it has expressly acknowledged about the delay on its part (Ex.A-23 & Ex.A-25). Therefore, the contention of the appellant that there was no delay on the part of the plaintiff is without any substance and I answer the question No.2 that, there is a clear delay on the part of the plaintiff, and the plaintiff has violated the terms of contract as they were unable to take delivery and make payment as per the schedule being agreed from time to time by the parties.

Question 3:

21. Having held that, time is the essence of the contract, and that the plaintiff/appellant has violated the time schedule, the question is whether the defendant can be permitted to forfeit the entire amount paid by the plaintiff. The total sale consideration is Rs.45,00,000/-. The first installment of 15% and the second installment of 15% in all totaling to Rs.13,78,600/- is admittedly paid by the plaintiff and received by the defendant. In this case, the original date of delivery was to be 4th April, 2008, for the first set of machineries, and 18th April 2008, for the second set of machineries. It was, thereafter, finally agreed that both machineries will be taken delivery on 05.05.2008. Even as on 05.05.2008, the plaintiff prayed for another two weeks and therefore, the defendant sold the same to the next awaiting customer on 05.05.2008, and initially offered to supply on revised rates by giving a due discount for a portion of the advance amount and thereafter, since the plaintiff did not accept the said offer, forfeited the said advance amount.

22. In this connection, the learned counsel for the appellant relied on the Judgment of Fateh Chand extracted supra. The law on this question has been dealt with by the Judgment of the Hon’ble Supreme Court of India in Shree Hanuman Cotton Mills & others Vs. TATA Aircraft, Ltd.,(1969) 3 SCC 522, Delhi Development Authority v. Grihstrapana Cooperative Group Housing Society Ltd.,1995 Supp (1) SCC 751 : Manu/SC/0247/1995, V. Lakshmanan v. B.R. Mangalgiri and Others1995 (2) SCC (Suppl.) 33, Satish Batra -Vs- Sudhir Rawal2013 (1) SCC 345, Fateh Chand Vs. Balkishan DassAIR 1963 SC 1405, Maula Bux v. Union of India (UOI)1970 (1) SCR 928, Kailash nath Associates Vs. Delhi Development Authority(2015) 4 SCC 136. After considering the said Judgments referred to supra, a Division Bench of this Court(of which I was a part), in A.S.No. A.S.No.567 of 2018, had an occasion to encapsulate the legal position in respect of forfeiture and it is useful to extract the Paragraph No.19 of the said Judgment where this court has crystallised the law regarding forfeiture of earnest money which reads as hereunder.

“The Hon'ble Supreme Court of India in the recent judgement of Kailash nath Associates Vs. Delhi Development Authority10 considered all the earlier judgements and had by detailed discussions in paragraphs 30 – 40 stated the the law that for the forfieture of the earnest money deposit so long as it is reasonable, it will not come within the purview of Section 74, if the sum is higher in nature it would be penal and then would be within the purview of Section 74. If it is within the purview of Section 74 the Court would only award or permit to forefiet a reasonable sum, the reasonableness or otherwise has to be by way of specific pleadings and wherever possible to prove the actual loss, the actual loss to be proved and in other cases, it would be based on the exercise of discretion by the Court. Thus the law relating to forfeiture of advance amount can be summarised as follows:

(a) the advance amount can be forfeited by the vendor, if it is the earnest money;

(b) if the advance amount is also paid as the guarantee for the performance of the contract, it takes the character of the earnest money and it can be forfeited, if the transaction falls through and it becomes the part of the sale consideration, if the transaction goes through;

(c) It should have been paid only at the time of entering into the contract; 10 (2015) 4 SCC 136

(d) to justify the forfeiture of advance money being part of 'earnest money', the terms of the contract should be clear and exlplicit.

(e) the Court may also take into consideration the intention of parties and surrounding circumstances also in determining which the money is given in earnest;

(f) As long as the amount is reasonable and does not amount to penality, the court will allow to forfeit as per the stipulation in the agreement;

(g) If the amount is on the higher side, then it would be penal in nature a

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nd fall within the purview of Section 74 of the Contract Act and in which case, the Court will go into whether the sum is reasonable or not and determined on the basis of actual loss if the loss can be proved or on the basis of its discretion if it cannot be specifically proved; (h) In order to take up the exercise of reasonableness, there must be specific pleadings by the parties and in the absence of the same, the Court will not go into the question of reasonableness.” Thus it can be seen that, not all the advance amount can be forfeited without proof of actual damages and only the earnest money deposit can be forfeited. The quantum of such earnest money deposit may vary from case to case, but generally can be 10 to 15% of the total contractual amount. And if the advance amount exceeds the same, the whole amount cannot be forfeited without proof of actual damages as per Section 74 of the Indian Contract Act. 23. Thus, upon considering the facts and circumstances of the instant case, I hold that the initial 15% of the amount being a sum of Rs. 6,75,000/- paid by the plaintiff, can alone be termed as the earnest money deposit liable for forfeiture without any proof of actual damages. It can also be seen the payment terms, the first 15% is only for the confirmation of the order and thus, for ensuring the performance of the contract. The second 15% is termed as additional advance. Thus, permitting the defendant to forfeit the entire 30% of the sale consideration paid as an advance is on the higher side and would be punitive and thus will come within the purview of Section 74 of the Contract Act. Therefore, the defendant will be entitled to forfiet only the first intallment of 15% being, Rs.6,75,000- paid by it. Therefore, the plaintiff will be entitled for the balance sum of Rs. 6,75,000/- with further interest at the rate of 9% per annum from the date of plaint till the date of realization. Accordingly, both the issues framed by the trial court are answered. 24. In the result, i) The Appeal Suit in A.S. No. 32 of 2013 is partly allowed; ii) The Judgment and Decree dated 29.04.2011 in O.S. No. 830 of 2008 on the file of the Additional District and Sessions Judge – Fast Track Court No 1, Coimbatore is set aside; iii) The O.S. No. 830 of 2008, on the file of the Additional District and Sessions Judge – Fast Track Court No 1, Coimbatore is decreed in part on the following terms. (a) That the defendant do pay to the plaintiff a sum of Rs. 6,75,000/-, with further interest at the rate of 9% per annum from the date of plaint till date of realization; (b) And that the plaintiff be entitled to the proportional costs. iv) That the plaintiff/appellant shall also be entitled to the proportionate costs in this Appeal suit.
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