Moot Proposition

1. The Life Care Company Pvt. Ltd. who were dealing also in the purchase of new and
second hand machinery, on coming to know from an advertisement in a Daily thatthe
KGMU was offering for sale of Medical-scrap, addressed a letter, dated November6,
2016 to the KGMU intimating their desire to purchase the materials advertised for
saleand stating that one of their representatives would be contacting them shortly.
Obviously, theparties met and decided about the purchase, as is seen from the letter,
datedNovember 18, 2016 addressed by the Registrar of the KGMU, to the Life Care.
2. That letter refers to a discussion that the parties had on that day and the KGMUconfirmed
having sold to the Life Care the entire lot of medical-scrap lying at Lucknow, on theterms
and conditions mentioned in the letter. The material was stated to be in Dump No. 1near
the flight line at Lucknow and the approximate quantity was 4,000 tons of medical-
scrap,more or less. The letter refers to the Life Care having agreed to pay Rs. 100crores
as price ofthe materials in the said Dump No. 1, against which the receipt, by cheque, of a
sum of Rs.25 Crores/- was acknowledged by the KGMU. There is a further reference to
the fact thatthe Life Care had agreed to pay the balance of Rs. 75 corers/- that day itself.
The letter also refers to the fact that the price mentioned does not include sales-tax to be
paid by theLife Care and to certain other matters, which are not relevant for the purpose
of this appeal.
3. The letter further says: “The company’s terms of business apply to this contract and a
copy ofthis is enclosed herewith.” Letter mentions so many terms and conditions and that
those terms of business have been made part of the terms and conditions governing the
contract.
4. On the same day, the Life Care sent a reply to the KGMU, acknowledging theletter. The
Life Care said that they noted that the KGMU wants to sell the medical-scrap as itis and
that it wanted the Life Care to pay the full value, viz., the balance of Rs. 75 Crores
atonce. The Life Care confirmed the arrangement contained in the KGMU’s letter;
butregarding payment, the Life Care said that they agree to pay the balance amount in
twoinstalments, viz. Rs. 25 Crores/- on or before November 22, 2016 and the balance of
Rs.50 crores/- on or before December 14, 2016. They also further stated that they
shallcommence taking delivery after making full payment. The KGMU by its letter,
 datedNovember 20, 2016 acknowledged the receipt of the Life Cares’ letter, dated
November 18,2016 together with the modifications contained therein. But the
KGMUemphasised thatthe other terms and conditions will be as mentioned in its letter of
November 18, 2016.
5. On November 22, 2016, the Life Care sent a communication, purporting to be
incontinuation of their letter, dated November 18, 2016. In this letter they state that
thetransaction has been closed without inspecting the materials, merely on the assurance
of theKGMU that the quantity of medical-scrap was about 4,100 tons. The Life Care
further statethat they have since obtained information that the quantity stated to be
available is not on thespot and therefore they cannot do the business. Under the
circumstances, they request theKGMU to treat their letter, dated November 18, 2016 as
cancelled and to return the sumof Rs. 25 Crores/- already paid by them.
6. The KGMU sent several letters to the Life Care asking them to pay the balanceamount
and take delivery of the goods; but the Life Care refused to pay any further amountto the
respondent. The KGMU ultimately forfeited the entire sum of Rs. 25 Crores/-
which,according to it, was earnest money and then cancelled the contract.
7. The KGMU’s terms of business contain various clauses, of which Clauses 9 and 10are
relevant for our purpose. They are:
“9. Deposits
The buyer shall deposit with the Company 25% of the total value of the stores atthe time
of placing the order. The deposit shall remain with the Company as earnestmoney and
shall be adjusted in the final bills, no interest shall be payable to the buyerby the
Company on such amounts held as earnest money.
10. Time and method of payment
(a) The buyer shall, before actual delivery is taken or the stores despatched
underconditions and pay the full value of the stores for which his offer has been
acceptedless the deposit as hereinbefore contained after which a Shipping Ticket will
beissued by the Company in the name of the buyer. The buyer shall sign his copy of
theShipping Ticket before the same is presented to the Depot concerned for
takingdelivery of the stores concerned.
 (b) If the buyer shall make default in making payment for the stores inaccordance with
the provisions of this contract the Company may without prejudiceto its rights under
Clause II thereof or other remedies in law forfeit unconditionallythe earnest money paid
by the buyer and cancel the contract by notice in writing tothe buyer and resell the stores
at such time and in such manner as the Companythinks best and recover from the buyer
any loss incurred on such re-sale. TheCompany shall, in addition be entitled to recover
from the buyer any cost of storage,warehousing or removal of the stores from one place
to another and any expenses inconnection with such a re-sale or attempted re-sale thereof.
Profit, if any, on re-saleas aforesaid, shall belong to the Company.”
From the above clauses, it will be seen that a buyer has to deposit with the Company
25%of the total value and that deposit is to remain with the company as earnest money to
beadjusted in the final bills. The buyer is bound to pay the full value less the deposit,
beforetaking delivery of the stores. In case of default by the buyer, the company is
entitled to forfeitunconditionally the earnest money paid by a buyer and cancel the
contract.
7. The Life Care instituted suit No. 2745 of 2017 in the Original Side of the
LucknowDistrict Court against the respondents for recovery of the sum of Rs. 25 crores/-
together withinterest. The Life Care pleaded that there had been no concluded agreement
entered intobetween the parties and even when the matter was in the stage of proposal
and counterproposal,the plaintiffs had withdrawn from the negotiations. They alleged that
even if therewas a concluded contract, the same was vitiated by the false and untrue
representations madeby the respondents regarding the quantity of scrap material available
and the Life Care hadbeen induced to enter into the agreement on such false
representations. Hence the plaintiffswere entitled to avoid the contract and they have
avoided the same. They pleaded that theKGMU was never ready and willing to perform
their part of the contract. Even on theassumption that the Life Care had wrongfully
repudiated the contract, such repudiation wasaccepted by the KGMU by putting an end to
the contract. The respondents were notentitled to forfeit the sum of Rs. 25 Crores/- as the
latter cannot take advantage of their ownwrongful conduct. In any event, the sum of Rs.
25 crores/- represents money had and receivedby the KGMU to and for the use of the
 Life Care. The Life Care, in consequence, prayedfor a decree directing the defendants to
refund the sum of Rs. 25 Crores/- together with interestat 6% from November 18, 2016.
8. The KGMU contested the claim of the Life Care. They pleaded that a concludedcontract
has been entered into between the parties as per two letters, dated November 18
andNovember 20, 2016. The Life Care had agreed to buy the lot of scraps lying in Dump
No. 1for Rs. 100 crores/- of which Rs. 25 Crores/- was paid as deposit. The KGMU had
agreed tothe balance amount being paid in as instalments asked for by the Life Care in
their letter ofNovember 18, 2016. The KGMU further pleaded that there has been no
misrepresentationmade by them but the Life Care, without any justification, repudiated
the contract by theirletter, dated November 22, 2016. As the Life Care wrongfully
repudiated the contract, theKGMU, as they are entitled to in law, forfeited the sum of Rs.
25 Crores/- paid by theLife Care as earnest money, under the terms of business of the
Company which had becomepart of the contract entered into between the parties. The
KGMU further pleaded that theyhave always been ready and willing to perform their part
of the contract and that they, in fact,even after the Life Care repudiated the contract,
called upon them to pay the balance amountand take delivery of the articles. But the Life
Care persisted in their wilful refusal to performtheir part and therefore the KGMU had no
alternative but to forfeit the earnest money andconduct a resale of the goods. The KGMU
further pleaded that the appellants had to paythem a sum of Rs. 42.499 Lakhs/- for the
loss and damage sustained by the KGMU. They furtherurged that Life Care was not
entitled to claim the refund of the sum of Rs. 25 Crores/- orany part thereof which had
been paid as earnest money and forfeited according to law, andthe terms of contract by
the KGMU.
9. Though the Life Care has raised various contentions in the plaint, it is seen from
thejudgments of the learned Single Judge and the Division Bench, on appeal of High
Court, that the Life Care conceded that they committed breach of contract and that the
KGMU has been at allmaterial times ready and willing to perform their part of the
contract. The plea that theLife Care entered into the contract under a mistake of fact and
that they were induced, to soenter into the contract due to the misrepresentation of the
KGMU regarding the quantity ofscrap available, was also given up. The Life Care has
also accepted the position that therehas been a concluded contract between the parties and
 the said contract was concluded by thecorrespondence between the parties consisting of
the letters, dated November 18, 2016 andNovember 20, 2016. The Life Care have further
abandoned the plea that the KGMUwerenot ready and willing to perform their part of the
contract. Therefore, the two questions thatultimately survived for consideration by the
Court are: (1) as to whether the sum of Rs.25 Crores/- was paid by the plaintiffs as and by
way of part payment or as earnest deposit; and(2) as to whether the KGMU were entitled
to forfeit the said amount.
10. The learned Single Judge and, on appeal, the Division Bench, have held that the sumof Rs.
25 Crores/- paid by the Life Care was so paid as and by way of deposit or earnestmoney and
that it is only when the Life Care pay the entire price of the goods and perform theconditions
of the contract that the deposit of Rs. 25 Crores/- will go towards the payment ofthe price. It
is the further view of the Courts that the amount representing earnest money isprimarily a
security for the performance of the contract and, in the absence of any provisionto the
contrary in the contract, the KGMUis entitled to forfeit the deposit amount whenthe plaintiffs
have committed a breach of contract. In this view, the KGMU’s right toforfeit the sum of Rs.
25 Crores/- was accepted and it has been held that the Life Care is notentitled to claim refund
of the said amount. The Life Care’s suit, in the result, was dismissedby the learned Single
Judge and, on appeal, the decree of dismissal has been confirmed.
11. An appeal has been preferred to Supreme Court wherein twocontentions were raised (1) That
the amount of Rs. 25 crores/- paid by the Life Care and sought to berecovered in the suit is
not by way of a deposit or as earnest money and that, on the otherhand, it is part of the
purchase price and therefore the KGMU is not entitled to forfeit thesaid amount, (2) In this
case, it must be considered that the sum of Rs.25 Crores/- has been named in the contract as
the amount to be paid in case of breach or in the alternative the contract contains a stipulation
by way of penalty regarding forfeiture of the said amount and therefore the defendants will
be entitled, if at all, to receive only reasonable compensation under Section 74 of the
Contract Act and the Courts erred in not considering this aspect.Under this head, the Life
Care also urged that even a forfeiture of earnest money can only be, if the amount is
considered reasonable and in this case the amount which represents 25% of the total price
cannot be considered to be reasonable and hence the Life Care is entitled to relief in law.