The difference between an earnest money or deposit and an advance

In the decision reported in The Vijaya Foundry, Pappanaicken Palayam, Coimbatore by its Proprietor A. Ramaswami Naidu v. Gordon Woodroffe & Co., Madras Private Ltd., 1963 (2) MLJ 153 , the difference between an earnest money or deposit and an advance was discussed. The decision reported in Sabina D’Costa Vs. Joseph Antony Noronha, deals with the legal position on the subject and how the Court should deal-with the question of forfeiture of earnest money. In the said decision the following passage from Fateh Chand Vs. Balkishan Das, was quoted :

“Section 74 of the Indian Contract Act is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual aggrement is regarded as a stipualtion naming liquidated damages and binding between the parties, a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce, it awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations, naming amounts to be paid in case of breach, and stipulations by way of penalty.”

Again in para 10 of the judgment, the Supreme Court has observed :

“….. The measure of damages in the case of breach of a stipuation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing the 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.”