Ratnavale v. Appuhamy
Ratnavalev.AppuhamyCOURT OF APPEAL,
SOZA, J„ and L. H. DE ALW1S, J„
S.C. (CA) 192/73IF),
D.C. COLOMBO 73095/M.,
NOVEMBER 22 AND 23, 1979.
Contract — Agreement to buy land on informal writing — Advance — Ai i ha(deposit or earnest money) — Recoverability — Illegal contract —Severabilityof legal part — Promise to repay Rs. 5,000/- with Rs. 250/- if sate failed.
The plaintiff paid the defendant Rs. 5,000/- on an informal agreement to buydefendant's land for Rs. 85,000/-. The sale fell through but plaintiff failed torepay the Rs. 5,000/-. At the time of payment the sum of Rs. 5,000/- wasdescribed as an advance but later as a deposit. In the issues it is described asan advance. At one stage the defendant agieed to repay the sum ofRs. 5,000/- with an additional sum of Rs. 250/–against expenses incurred bythe plaintiff. Later the defendant resisted the calim for repayment.
There is a distinction between money paid as a deposit and moneypaid as an advance.
Money paid as a deposit is an earnest, in Roman-Dutch Law calledarrha,to bind the bargain and is forfeited to the seller if the buyer defaults in goingthrough with the sale. If the seller defaults then the buyer is entitled toreceive back his money. If the sale goes through the deposit will beaccountable as part of the purchase price.
Where the money has been paid as an advance or part payment ofthe price it must be refunded if the sale falls through no matter whose thedefault was and irrespective of the reason for the failure of the sale. If the salegoes through the advance wiltebe accountable as part of the purchase price.
However, whether the money is a deposit or advance the agreedterms of the pact between the parties regarding its disposal will govern and byoperative as to its disposal.
Although the main agreement of sale is of no force or avail in lawbecause it was not notarially executed still the subsidiary parts of the agree-ment that are severable from the agreement to sell the land can be considered
Sri Lanka Law Reports
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and given effect to. Accordingly a claim for refund of an advance paid on aninformal agreement to sell the land can be maintained.
Cases referred to –
Cloetev, Union Corporation Ltd. (1929) TPD 508
Peris v. Vieyra (1926) 28 NLR 278, 280
Palaniappa Chetty v. Mortimer (1923) 25 NLR 209
Nagur Pitchi v. Usoo f (1917) 20 NLR /
Perera v. Abeysekera (1957) 58 NLR 505
Appuhamy v. Dissanayake (1921) 23 NLR 83
APPEAL from judgment of the District Court of Colombo.
Nimal Senanayake with Kithsiri P. Gunaratne and Miss. K. B. Dissanayake for
defendant — appellant
Ben Eliyathamby for plaintiff-respondem.
Cur. adv. vult.
December 20, 1979SOZA, J.
In this action the plaintiff, a landed proprietor, seeks to recover a sum ofRs. 5,000/- which he paid as an advance to form part of the consideration ofa land which he had agreed to buy from the defendant, a former top-rankingCivil Servant. It is admitted-'that the sale in respect of which the sum ofRs. 5,000/- was paid did not go through. It is also admitted that a sum ofRs. 5,000/-was paid by the plaintiff to the defendant but the defendant takesup the position that there was no promise by him to repay this money.
On an informal written document (PI) of 9.1.1970 the plaintiff enteredinto an agreement with the defendant to purchase a land called Rivera Estatewhich the defendant (qualified as. a member of the middle class) held underthe Land Development Ordinance. According to P1 there were the followingobligations between them:
The defendant to transfer the land called Rivera Estate in extent 56acres to the plaintiff.
The defendant to pay Rs. 85,000/- (inclusive of a loan of
Rs. 16,000/- payable to the Government Agent) as purchase price.
The defendant to apply for necessary sanction to the GovernmentAgent to have the transfer effected within one month of the date ofthe agreement.
The transfer to be effected after the full price is paid.
Ratnava/e v. Appuhamy (Soza, J.j
At the time the agreement P1 was entered into, the plaintiff paid thedefendant a sum of Rs. 5,000/- as an advance on the purchase price. On24.1.1970 there was a variation in the terms. The proposal to transfer wasmade subject to confirmation within seven days from 24th January 1970.
On 29.1.1970 the defendant in the exercise of his option to cancel theagreement, sent a telegram P2 to the plaintiff stating he was not confirmingthe sale and both by this telegram and a letter P3 of 31.1.1970 offered toreturn the Rs. 5,000/- describing it as a deposit. The plaintiff however wasstill keen on the land and at first rejected the offer of repayment of themoney. Yet later on the persuasion of his Directors Mr. Prematilleke de Silvahe agreed to receive back the money but with an additional sum of Rs. 250/-on account of the expenses he had incurred. The question of the return of themoney however was not pursued by the defendant because the plaintiffagreed to go through with the sale at the higher price of Rs. 87,500/- — seenote P10 written by the defendant to the plaintiff on 8.2.1970. By P10 thedefendant fixed 11th February 1970 for finalising the sale. The note D4addressed by the defendant to one Mr. Peiris a District Lands Officer alsoshows that the sale was expected to be finalised by the 11th February. ByD4 Mr. Pieris is requested to accept the plaintiff's application for the transferof the land and obtain the Government Agent's approval subject to therepayment of the outstanding loan. Apparently the sale did not go thgoughon the 11th February. The Government Agent's sanction had not yet beenobtained. On 16th February the defendant wrote letter D5 to Mr. Pierisfixing 3rd March for the sale as his wife too had to obtain the sanction of theGovernment Agent for the transfer of a five acre extent which appears tbhave been included.in the extent promised to be transferred to the plaintiff—see D5A. In D5 Mr. Pieris is requested to obtain the Government Agent'ssanction for the tarnsfer to the plaintiff and the defendant promises that onthe 3rd March the outstanding loan also would be paid. There is also mentionin this letter of the defendant's visit to India. In the event of the defendantdelaying to return from India, Mr. Pieris is asked to fix a date before 10thMarch for the sale. At this stage reference must be made to the letter D1 of26.2.1970 which defendant says plaintiff wrote to him. The plaintiff deniesauthorship of this letter and by so doing gains nothing but puts his credibility'under a cloud. The same observation applies to the plaintiff's story that hetook the purchase money to Kurunegala in February. In fact D1 seems quitea natural letter for the plaintiffoto write and refers to the new date of sale,namely, 3rd March 1970.
On 21.2.1970 the defendant wrote letter P4 to the plaintiff that 3rdMarch would not be suitable for concluding the sale as he (i.e. defendant) hadto delay his intended visit to India and it was doubtful whether he would beable to return by the 3rd March. Flowever, as soon as he retruned, he wouldsend the plaintiff a telegram and the sale could be completed by 10th Marchthe latest. Hence the postponement of the sale from 11th February to 3rdMarch and later to 10th March was, it is obvious, necessitated by the
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defendant's visit to India and the delay in obtaining sanction from theGovernment Agent and settling an outstanding loan.
On the 10th March the sale did not take place. The telegram which thedefendant had promised he would send to the plaintiff as soon as he returnedfrom India, was not sent. On the other hand the defendant appears to havebeen exploring other avenues for the sale of the land and he had written toone Mr. Jayawardena about this on 20.3.1970 and again on 24.3.1970 — seeP5 and P6.
It is true that in the oral evidence of the plaintiff there are severalinconsistencies, even falsehoods, but the truth can be gathered from thecorrespondence. Without openly jettisoning the plaintiff, the defendant waslooking for another buyer and, no doubt, a better price. Apparently theplaintiff did not want- to be a pawn in the defendant's hands until a betterbuyer turned up. On learning of the defendant's overtures to Jayawardena,the plaintiff on 24.3.70through his lawyer sent letter P7/D6 to the defendantby registered post (see P7(a) of 24.3.70) accusing him of violating the agree-ment and calling off . the transaction and demanding the return of theRs. 5,000/-. There was however no reply from the defendant. On 9.4.70 theplaintiff's lawyer sent a reminder to the defendant by registered post (see P8and P8a) and still there was no reply . On 23.3.70 the plaintiff and his wifewho were to be the transferees wrote letter D3 to the District Land Officersaying that the proposed transfer had been called off. The plaintiff’s witnessJayakody had met the defendant on 13th March and learnt that the defen-dant was not going through with the sale.
The defendant's version that it was the plaintiff who was playing for timeas he had not all the purchase money ready is not borne out by any of thecorrespondence. The defendant it was who failed to get the sanction of theGovernment Agent for the sale and put off settling his outstanding loan. Onthe correspondence alone it is clear that the defendant was the defaulter.This conclusion is supported also by the evidence of Mr. Prematilleke de. Silva and Jayakody. The original agreement was varied once by giving aweek's time to confirm the sale and again by pushing up the purchase priceto Rs. 87,500/- (sometimes quoted as Rs. 87,000/- —see paragraph 4(c)(i) ofthe answer). That there was a promise to repay the advance if the sale failed isevidenced by the writing P3 of 31.1.19^0 and telegram P2 of 29.1.1970(wrongly dated in the issue No. 1(b) as 7.2.1970). This promise was repeatedin the presence of Proctor Prematilleke de Silva by the defendant in earlyFebruary. Proctor de Silva states the plaintiff was reluctantly prepared toaccept the repayment of Rs. 5,250/- and the plaintiff too agrees that this wasso.
It is argued on behalf of the defendant that the promise contained in P2and P3 is a new promise which plaintiff refused to accept and thereforecreated no contract. But the fact is that later when plaintiff's Proctor inter-
wpnpri the ntaintifftn r«rp!i/n hart- thp mrtnm/ »«ith an aririitinnal
Ratnava/e v. Appuhamy (Soza, J.)
Rs. 250/-. Hence the issue as to whether plaintiff accepted the offer of thedefendant to repay the money was correctly answered in the affirmative bythe learned trial Judge.
Quite apart from the defendant's promise to pay back the money, theplaintiff's claim is supportable on a consideration of the issues relating to thevalidity of the agreement and the responsibility for the default which causedthe transaction to fall through. Here it is necessary to explain the legalprinciples involved.
The sum of Rs. 5,000/- paid by the plaintiff at the time the agreement P1was signed was described as an advance though in the letter P3 and telegramP2 it was described as a deposit. When issues were framed at the trial, in issueNo. 6 raised by learned Counsel for the defendant, it was described as anadvance.
In considering the destination of the sum of Rs. 5,000/-, the distinctionbetween money paid as a deposit and money paid as an advance should beborne in mind. Money paid as a deposit is an earnest, in Roman and Roman-Dutch Law called arrha, to bind the bargain. Arrha can consist of money orother things. When arrha consists of money, its destination can be determinedby the terms expressly agreed upon between the parties to the sale. Wherethere are no express terms arrha can be considered in two situations. Firstlyarrha may be in argumentum venditionis contractae, a token of a purchasecontracted and completed, that is, as evidence that the parties were ad idemand that the sale was completed. Neither party may resile from such acontract but the arrha in the hands of the vendor will be imputed to accountof the price at the time of fulfilment of the contract. Secondly, arrha may be •given poenitentiae causa in proof of an inchoate purchase to be furtherperfected in accordance with the intention of the parties. Here the purchasermay resile from the contract with only the loss of the arrha he paid while thevendor may, if he chooses, absolve himself by paying double the amount hehad received. For if the purchaser has been diligent in discharging the priceand keeping faith, his deligence should not be turned to his hurt. On theother hand if the default is by the vendor, it should not be turned to his ownprofit. It is not necessary that in such a pact of sale, a forfeiture clause shouldbe provided although frequently merely ex abundanti, and for the purpose ofremoving all doubt, provision® are inserted in pacts for what would havetaken place without any pact and in the ordinary course of the common law.Here too at the time of performance of the contract, the amount paid will bebrought into account as part of the purchase price — see Voet 18.1.25,18.3.3. (Berwick's Translation (1876) p. 31 and P. 47 or Gane's Translation(1956) voI. 3 pp. 279, 280 and pp. 293-295). Wessels: The law of Contractin South Africa 2nd Ed. (1956) Vol. 2 pp. 1094, 1095 paragraphs 4449 and4450 and’Cloete v. Union Corporation, Ltd.^
Sri Lanka Law Reports
(1978-79) 2 Sri L. R.
In the modern law as developed .by judicial decisions in Sri Lanka, if nocontrary terms are expressly set down, arrha or deposit impliedly means thatit is a security or guarantee for the performance of the contract by thepurchaser which is forfeited if he repudiates the contract but which goestowards payment of the purchase money if the contract is performed. Ofcourse if terms are expressly set down they will govern the disposal of thepayment — see Peris v. Vieyra.^
If the seller defaults he must pay the deposit back with any other sumlegally recoverable imposed by the terms of the contract. An advance on theother hand is a payment or instalment of the purchase money. In the absenceof express terms to the contrary, the advance is refundable if the contract,no matter owing to whose default, fails. This is because there would then be afailure of consideration — see Peris v. Vievra (supra) at pp. 280—282. In thecase of Palaniappa Chetty v. Mortimer ' the principle was laid down thatmoney of the purchaser lying in the hands of the vendor and not given as adeposit or agreed to be treated as a deposit, cannot be regarded as a deposit(that is, as earnest or arrha) given on the occasion of an agreement topurchase being entered into. Such money can be recovered by the purchasereven if he was the defaulting party — see also Dr. G. L. Peiris: The Law ofProperty Vol. II (1976) pp. 210-212.
• Our law then is that where the money has been paid as an advance orpart payment of the price it must be refunded if the sale falls through. This isirrespective of who is responsible for the default. But in the instant case thedefaulter is, as I have said before, the defendant. Even if the money is adeposit, if the sale has failed because the seller refused or neglected toconclude the sale or is incapable of concluding the sale, the money must bepaid back to the buyer. Hence the plaintiff is entitled "to receive hisRs. 5,000/- back from the defendant.
But will a cruise of action to recover the money accrue to a purchaserwhere the payment of the money is part of an agreement which not beingnotarially executed is of no force or avail in law in view of the provisions ofsection 2 of the Prevention of Frauds Ordinance No. 7 of 1840? In the caseof Nagur Pitchi v; Usoof^ a Full Bench of the Supreme Court held that aparty who advances money on an informal'agreement is entitled to a refundonly if the other party refuses or is incapable of completing the transactionand the consideration for the advance therefore fails. Although this case washeld by Basnayake C. J. to be wrongly decided in the course of his judg-ment in the Divisional Bench case of Perera v. Abeysekera,^ his was theminority view. Dalton, J. in the case of Peris v. Vieyra (supra) found diffi-culty in accepting the reasoning used in the decision of Nagur Pitchi v. Usoof(supra) but Bertram C. J. approved it in Appuhamy v. Dissanayake^.Further the majority view in the case of Perera v. Abeysekera (supra) was thatthQugh the agreement to sell is not notarially executed and therefore of no
CA Ramanathan Chettiar v. Wickramarachchi and Others (Soza, J.)395
force or avail in law in view of the provisions of Section 2 of the Preventionof Frauds Ordinance, still the subsidiary parts of the agreement that areseverable from the agreement to sell the land, can be considered and giveneffect to. That case was similar to the present one though not on all fourswith it. The Court considered the claim for refund of an advance paid on aninformal agreement to sell land and held it could be maintained.
In the instant case the transaction regarding the payment of Rs. 5,000/-is easily severable from the agreement to sell the land, though embodied inthe same document. The part of the agreement regarding the payment ofRs. 5,000/- is valid and legal and can be considered and given effect to. Themoney being an advance, the plaintiff is entitled to succeed. Even if it is adeposit, the defendant being the defaulting party, the plaintiff is entitled toreceive back the money.
As far as the claim in reconvention is concerned the defendant's claimfor expenses in settling certain losses, had no merit whatsoever. The expenseshave not even been proved. Such losses are illegal and a contraven-tion of the terms on which the defendant held the land under the LandDevelopment Ordinance. Hence the claim in reconvention was rightlydisallowed.
The judgment of the learned District Judge is therefore affirmed and thisappeal is dismissed with costs.
L. H. DE ALWIS, J.
Ratnavale v. Appuhamy