Supreme Court
Action No. 402 of 1997
6th April, 2000
Meerabux, J.

Mr. R. Williams S. C. for the Plaintiffs.
Mr. E. Flowers S. C. for the Defendant.

Contract for the sale of premises - Contract providing for the payment of a deposit - Whether deposit constitutes a penalty or liquidated damages - Whether deposit returnable upon default in payment of installments by purchaser.

J U D G M E N T

By this summons the Plaintiffs claim the following reliefs, namely:

THE FACTS

The undisputed facts in this case are as follows:-

The attorney for the Plaintiffs' written submissions may be summarised as follows:

1. 0.61 r.1 of the Supreme Court Rules permits this application to be commenced by Originating Summons.

2. The sum of US$100,000.00 is a penalty which should not be forfeited but returned to the deceased with interest.

3. Section 59 of the Law of Property Act, Chapter 154 gives the Court a discretion to order the repayment of the deposit and referred to the case of Universal Corporation v Five Ways Properties Ltd. (1979) 1 All E.R. 352 which gives the Court this power to be exercised when the justice of the case requires it.

4. At Common Law the general rule is that a sum deposited for breach of contract is to be forfeited.
   
   In equity, the agreed sum is recoverable only if it constitutes liquidated damages - a genuine pre-estimate of the damage which arises from the breach of contract, but not if it is a penalty which is in the nature of a threat fixed in terrorem of the other party.

The following cases were referred to in support of these submissions -

Dunlop Pneumatic Tyre Co. v New Garage & Motor Co. (1915) A.C. 79.

John H. Kilmer v British Columbia Orchard Lands Ltd. (1912) A.C. 319.

Commissioner of Public Works v Hills (1906) A.C. 368.

Steedman v Drinkle (1916) 1 A.C. 275.

Stockloser v Johnson (1954)1 Q.B. 476.

Smith v Jessef 1950 V.L.R. 230.

Workers Trust and Merchant Bank v Dujap Investments Ltd. (1993) 42 W.I.R. 253.

The attorney for the Defendant's written submissions may be summarised as follows:

The following cases were referred to as setting out the legal position as follows: Stockloser v Johnson (1954) 1 Q.B. 476 and also in
Mayne & McGregor on Damages 12th Ed. p.238.

Wallis v Smith (1882) 21 Ch. D.243.

Hinton v Sparks (1886) and Lock v Bell (1931).

The cases of Public Works Commissioner v Hills (1906)
A.C. 368; Barton v Capewell (1893) and Workers Trust &
Merchant Bank v Dujap Investment Ltd. (1993) 42 W.I.R.
253, are to be distinguished from the instant case.

"Any person claiming to be interested under a deed, will, or other written instrument, may apply by Originating Summons for the determination of any question of construction arising under the instrument, and for a declaration of the rights of the persons interested".

Furthermore, sec. 59 of the Law of Property Act provide that:

"(1) A vendor or purchaser of any legal estate or interest in land, or their representatives respectively, may apply in a summary way to court in respect of any question arising out of or connected with the contract (not being a question affecting the existence or validity of the contract), and the court may make such order upon the application as it thinks fit, and may order how and by whom all or any of the costs of and incidental to the application are to be borne and paid.

(2) Where the court refuses to grant specific performance of a contract, or in any Action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit.
.
(3) This section shall apply to contract for the sale or exchange of any interest in land."

I am therefore satisfied that this application by Originating Summons is properly before the Court and that by sec. 59 of the Law of Property Act the Court has jurisdiction to deal with this issue.

The learned author Ogus on the Law of Damages 1973 expressed this further issue on p.41 as follows:

"In the ordinary case where a sum of money is expressed to be payable on the breach of one or more obligations, the crucial question is whether such sum is to be regarded as "liquidated damages" or as "a penalty". In the former case, the Plaintiff can recover the sum; irrespective of his actual loss, while in the latter, he may recover only so much as will compensate him for his actual loss."

In Dunlop Pneumatic Tyre Co. Ltd. v New Garage & Motor Co. Ltd. (1915) A.C. 79 Lord Dunedin gave this classic distinction at p.86 as follows:

"The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage... The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract."

A modern view on the contractual provision of forfeiture for non-payment of the balance of the purchase price was set out by the learned law Lords in the Privy Council in the case of Workers Trust & Merchant Bank Ltd. v Dujap Investments Ltd. (1993) 42 W.I.R. 253 at pages 256 - 257 as follows:

"In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10 per cent of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract."

This exception is anomalous and at least one textbook writer has been surprised that the Courts of Equity ever countenanced it: see Farrand Contract and Conveyancing (4th Edn.) page 204. The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money. The history of the law of deposits can be traced to the Roman law of arra, and possibly further back still: see Howe v Smith (1884) 27 Ch D 89, per Fry LJ at pages 101, 102. Ever since the decision in Howe v Smith, the nature of such a deposit has been settled in English law. Even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser's failure to complete in accordance with the terms of the contract, the deposit is forfeited, equity having no power to relieve against such forfeiture.

However, the special treatment afforded to deposits is plainly capable of being abused if the parties to a contract, by attaching the label "deposit" to any penalty, could escape the general rule which renders penalties unenforceable. There are two authorities which indicate that this cannot be done. In Stockloser v Johnson [1954] 1 QB 476, Denning LJ in considering the power of the court to relieve against forfeiture said, obiter (at page 491):

"Again, suppose that a vendor of property, in lieu of the usual 10 per cent deposit, stipulates for an initial payment of 50 per cent of the price as a deposit and part payment; and later, when the purchaser fails to complete, the vendor resells the property at a profit and in addition claims to forfeit the 50 per cent deposit. Surely the court will relieve against the forfeiture. The vendor cannot forestall this equity by describing an extravagant sum as a deposit, any more than he can recover a penalty by calling it liquidated damages."

In Linggi Plantations Ltd v Jagatheesan (1972)1 M L J 89 Lord Hailsham of St. Marylebone delivered the opinion of the Board which upheld the claim to forfeit a normal 10 per cent deposit even though the vendor had in fact suffered no loss. He referred on a number of occasions to a requirement that the amount of a deposit should be "reasonable" and said this (at page 94):

"It is also no doubt possible that in a particular contract the parties may use language normally appropriate to deposits properly so called and even to forfeiture which turn out on investigation to be purely colourable and that in such a case the real nature of the transaction might turn out to be the imposition of a penalty, purporting to render forfeit something which is in truth part payment. This no doubt explains why in some cases the irrecoverable nature of a deposit is qualified by the insertion of the adjective 'reasonable' before the noun. But the truth is that a reasonable deposit has always been regarded as guarantee of performance as well as a payment of account, and its forfeiture has never been regarded as a penalty in English law or common English usage.

In the view of their lordships these passages accurately reflect the law. It is not possible for the parties to attach the incidents of a deposit to the payment of a sum of money unless such sum is reasonable as earnest money. The question therefore is whether or not the deposit of 25 per cent in this case was reasonable as being in line with the traditional concept of earnest money or was in truth a penalty intended to act in terrorem."

The facts of the Workers Trust case were as follows:

"The bank (as mortgagee) agreed at an auction to sell certain land to D. A deposit of 25 per cent ($2,875,000) was required and paid. The rest of the purchase price was to be paid within fourteen days and time was expressly made of the essence. The contract also provided for the forfeiture of the deposit for any failure to comply with the terms of the contract sale. D failed to make payment of the rest of the purchase price on the due date and the bank notified it that the contract had been rescinded and the deposit forfeited. D instituted proceedings (inter alia)) for relief against the forfeiture of its deposit. Zacca CJ dismissed D's claim. The Court of Appeal, however, ordered the bank to repay 15 per cent out of the 25 per cent deposit, but refused to make an order as to interest. The bank appealed to the Privy Council against the order of the Court of Appeal giving relief against the forfeiture of the deposit. D cross-appealed claiming that it should have been awarded relief against the forfeiture of the whole of the 25 per cent deposit and also claiming interest on such sum.

Held, advising that the appeal be dismissed and the cross-appeal allowed, that it was well established that forfeiture of a deposit paid under a contract for the sale of land fell outside the general rule prohibiting the forfeiture under contractual provisions of a sum of money (penalty) for breach of contract; but it would be abusive to attach the incidents of a deposit to the payment of a sum of money unless such sum was reasonable as earnest money; the customary practice in Jamaica of a 10 per cent deposit in respect of a sale of land had been replaced since the introduction of the transfer tax (7.5 per cent of the consideration on the sale of land) in 1984 and in practice the contractual deposit was now normally at least 17.5 per cent; on the facts of the present case, however, there was no requirement for the deposit to include any sum in respect of transfer tax (and in practice it was unconscionable to forfeit deposits to the extent of 7.5 per cent, so far as that represented transfer tax); the evidence in the present case fell short of showing that a forfeitable deposit of 25 per cent was reasonable and the provisions for the forfeiture of such a sum, not being a true deposit by way of earnest, was plainly a penalty and the full sum (less any damage actually suffered by the bank by breach of contract) should be refunded by the bank; interest having duly been claimed by D, it should be paid at the contractual rate from the date of rescission)."

I find that this case is to be distinguished from the present case in that the deposit although it was 25 per cent was $2,875,000.00 whereas the deposit in the instant case was approximately 33 per cent or $100,000.00. Further, whereas in the above case the Plaintiff was a bank which "exercises considerable financial muscle", whereas in the present case the Defendant is a businessman lacking the financial muscle of a bank which the learned law Lords emphasized in their judgment at p.257 as follows:

"In order to be reasonable a true deposit must be objectively operating as "earnest money" and not as a penalty. To allow the test of reasonableness to depend upon the practice of one class of vendor, which exercises considerable financial muscle would be to allow them to evade the law against penalties by adopting practices of their own." (my emphasis)

The learned authors of Mayne & McGregor on Damages 12th Ed. under the caption "Money paid or payable before breach: deposits and forfeiture clauses" state lucidly the legal principles on p.237, paras. 235, 256 as follows:

"The use of the term "deposit" is not conclusive to support an implication of an agreement that money shall be forfeited on default, but in the particular case of sale of land it is now so commonly understood that by a deposit to nomine the parties intend to indicate forfeiture on default as to be always acted upon. This has been so ever since the crucial case of Howe v Smith where the Court of Appeal exhaustively considered the earlier, but rather uncertain authorities and held that the deposit was paid as earnest and as a guarantee of the performance of the contract, the parties intending that the Plaintiff on default should have no right to its return."

If there is no agreement, whether express or implied, that money paid shall not be returnable on default, then nothing in the nature of agreed liquidated damages exists in the contract and the defaulter is entitled, if the other party rescinds on the basis of the default and does not keep the contract open and available for performance, to recover the money he has paid over in part performance in an action for money had and received. Clear decisions to this effect are Mayson v. Clouet and Dies v. British and International Mining Corporation where a buyer of land and a buyer of goods respectively defaulted in their installments of the purchase price, and the law is so stated by Somervell and Denning L.JJ. in the Court of Appeal in Stockloser v. Johnson.

If, on the other hand, there is such an agreement that money paid shall not be returnable upon default, then the common law adheres to this expressed intention and will refuse any redress to the Plaintiff payer. This is so whether the payments to be forfeited or the moneys deposited are or are not out of all proportion to the actual or probable loss accruing to the payee; in other words, whether they are in the nature of a penalty or of liquidated damages paid before the event. The law was settled in this way by the Court of Appeal in the important case of Stockloser v. Johnson where the facts were these. In two contracts for the sale of plant and machinery between the same parties it was agreed by them that, if the buyer defaulted for a period of twenty-eight days in the payment of any installment of the purchase price, the seller would be entitled to rescind the contract, forfeit the already paid installments, and retake possession of the plant and machinery. The purchase price was in each contract £11,000, and the Plaintiff defaulted in his installments after he had paid £4,750 on one contract and £3,500 on the other and after he had received royalties which the Court of Appeal held that he was not due to pay back under the agreement properly construed. The Plaintiff was unable and unwilling to complete the performance of the contract and he sued to recover the amount of the installments he had paid. The court held that, even if the Plaintiff could show that the forfeiture clause had a penal character, he could not argue that it should be ignored so as to enable him to recover the money at common law by an action for money had and received. If this applies where the parties' intention to allow forfeiture is express, it will apply a fortiori where such an intention is to be implied from the language of deposit, and indeed Denning L.J. included both in his unequivocal statement of the rule. He said: "When there is a forfeiture clause or the money is expressly paid as a deposit (which is equivalent to a forfeiture clause), then the buyer who is in default cannot recover the money at law at all." Before this decision the law had not been stated clearly and there were strands of authority moving in either direction; in the cases using the language of deposit rather than of forfeiture the courts tended to concentrate upon the prior question of whether or not the parties intended that the money should not be recoverable on default. On the one side was a strong dictum of Jessel M.R. in Wallis v. Smith that "where a deposit is to be forfeited for the breach of a number of stipulations, some of which may be trifling, some of which may be for the payment of money on a given day, in all those cases . . . the bargain of the parties is to be carried out." Combined with this were two cases, Hinton v. Sparkes and Lock v. Bell, in which recovery on default, was refused. These descisions, both of which concerned a sale of a public-house and a deposit by the buyer, are particularly strong because they also contained a provision that a further sum should be paid upon default by the buyer, and the Court in both, while allowing the seller to forfeit the deposit, refused to allow him to recover the further sum on the ground that it was a clear penalty. Stockloser v. Johnson thus supports and confirms these authorities. On the other side were the cases of Public Works Commissioner v. Hills in the Privy Council and Barton v. Capewell Continental Patents Co. In the former the Plaintiff, who had contracted to carry out construction work for the Defendants, deposited £50,000 as security and also allowed the Defendants to retain, as agreed, 10 per cent, from the payments which they made under the contract to the Plaintiff as the construction work progressed. Upon the Plaintiff's default he successfully sued to recover both amounts from the Defendants, the court holding that each constituted a penalty. In the latter a contract for the sale of patent rights, in which the purchase price was to be paid in installments, provided that if the Plaintiff buyer should default either in paying the installments or in certain other ways all payments already made to the seller should be forfeited. Again the sums paid before default were treated as a penalty and the buyer recovered them. These two cases were summarily dealt with in Stockloser v. Johnson, Denning L.J. saying briefly that the point was not argued in either. It seems they may now be disregarded.

Guided by the above authorities I find that the position at common law is that a party who has agreed that money paid as deposit shall not be returnable on default even if that amount is penal in nature has no redress in law.

What is the position in equity?

In the said Stockloser v Johnson (1954)1 Q.B. 476 (C.A.) Denning L.J. at p.490 recognised that equity has a general right to grant relief against such forfeitures.

"He may, however, have a remedy in equity, for, despite the express stipulation in the contract equity can relieve the buyer from forfeiture of the money and order the seller to repay it on such terms as the court thinks fit. That is, I think, shown clearly by the decision of the Privy Council in Steedman v Drinkle, where the Board consisted of a strong three, Viscount Haldane, Lord Parker and Lord Sumner.

The difficulty is to know what are the circumstances which give rise to this equity, but I must say that I agree with all that Somervell J. has said about it, differing herein from the view of Romer L.J. Two things are necessary; first, the forfeiture clause must be of a penal nature, in this sense, that the sum forfeited must be out of all proposition to the damage, and, secondly, it must be unconscionable for the seller to return the money."

In that judgment Denning L.J. pointed out that Steedman v Drinkle (1916)1 A.C. 275 (J.C.) is the only case in which the equitable jurisdiction of the court was exercised and the Court of Appeal examined this decision exhaustively in interpreting that judgment.
Steedman v Drinkle was a decision of the Privy Council in which the facts were as follows:

"By an agreement in writing dated December 9, 1909, land in the province of Saskatchewan was sold for 16,000 dollars, of which 10,000 dollars were paid on signing the agreement and the balance was payable by six annual installments on December 1 of each year. The agreement provided that, if the purchaser should make default in any of the payments, the vendor should be at liberty to cancel the agreement and to retain, as liquidated damages, the payments already made, and that time was to be considered as of the essence of the agreement. Default having been made in the payment of the first installment, the vendor cancelled the agreement; assignees of the purchaser sued for specific performance.

It was held that, the parties having made time of the essence of the agreement, specific performance could not be decreed, but that the forfeiture of the money paid was a penalty from which relief should be granted on proper terms."

The said learned authors of Mayne & McGregor on Damages supra lucidly analysed the two conditions set out by Denning L.J. in Stockloser v Johnson supra as follows at para. 258 pps. 240 - 24

"The first question which arose upon the earlier decision was whether or not it permitted the exercise of the equitable doctrine to allow recovery after, as well as before, rescission by the other party on the contract was made, since this is the established rule in the ordinary case where negative relief is claimed. But whereas the first condition is all that both law and equity require when asked to give negative relief, this second condition of unconscionability comes in when affirmative relief, by way of recovery of money already paid, is claimed, and it was on this condition that the Plaintiff's action foundered both in Stockloser v. Johnson and in the similar earlier case of Mussen v Van Diemen's Land Co. At first sight it would seem that, since unconscionability is also the basis of the test of what is a penalty, the court was merely applying the same criterion twice over: yet the conclusion reached on the first condition was in the Plaintiff's favour but that on the second was against him. The explanation of this lies in the time factor. Whether a penalty is involved is to be tested by the circumstances existing at the time of the formation of the contract; whether unconscionability is involved is to be tested by the conditions existing when the equitable doctrine is invoked, i.e., at the time of suit. In Stockloser v. Johnson the Plaintiff was held to have failed to satisfy the second condition because he had himself received substantial benefits by way of royalties; in Mussen v. Van Diemen's Land Co. he failed partly through his own delay in bringing suit. A great deal will therefore turn, in cases in which a buyer is paying the purchase price by instalments, upon how many instalments have already been paid at the time of the buyer's default: as Denning L.J. suggested in Stockloser v. Johnson, there would be no equity to reclaim a 5 per cent. payment of the purchase price, but it would be very different if 90 per cent. had been paid."

In the Stockloser's case supra Denning L.J. distinguished the Steedman v. Drinkle case by pointing out at p.491 that:

"The basis of the decision in Steedman v Drinkle was I think that the vendor had somewhat sharply exercised his right to rescind the contract and retake the land and it was unconscionable for him also to forfeit the sums already paid. Equity could not specifically enforce the contract, but it could and would relieve against the forfeiture."

Again at p.492 in the Stockloser's case the learned law Lord again lucidly dealt with this equity of restitution as follows:

"The equity operates, not because of the Plaintiff's default, but because it is in the particular case unconscionable for the seller to retain the money. In short, he ought not unjustly to enrich himself at the Plaintiff's expense. This equity of restitution is to be tested, I think, not at the time of the contract, but by the conditions existing when it is invoked. Suppose for instance, that in the instance of the necklace the first installment was only 5 per cent of the price; and the buyer made default on the second installment. There would be no equity by which he could ask for the first installment to be repaid to him any more that he could claim repayment of a deposit. But it would be very different after 40 per cent has been paid." (my emphasis)

I find that on the facts before me the deposit of US$100,000.00 was approximately 33% of the purchase price. I accept the argument that while the customary deposit may be 10% there is no such rule or law which preclude a higher percentage of deposit depending on the circumstances of each case.

Again in the Workers Trust & Merchant Bank case, (supra) the learned law Lords in the last paragraph of p.257 opined that:

"In their Lordships' view the correct approach is to start from the position that, without logic but by long continued usage both in the United Kingdom and formerly in Jamaica, the customary deposit has been 10 percent. A vendor who seeks to obtain a larger amount by way of profitable deposit must show special circumstances which justify such a deposit". (my emphasis)

The question that arises in dealing with this issue is what were the special circumstances which existed when the equity of restitution was invoked which justified the forfeiture of the deposit. Was it unconscionable for the vendor to retain the money?

From a perusal of the evidence before me I find that there is uncontradicted evidence that:

I find these to be special circumstances which existed when the equity of restitution was invoked which justified the forfeiture of the deposit of US$100,000.00.

The vendor's conduct was not open to criticism and his retention of the said deposit already paid does not in itself constitute unconscionable conduct.

For the above reasons I dismiss the Plaintiff's claim and give judgment for the Defendant with costs to be agreed or taxed.

------------------ O O -----------------