Contract for sale of land — 25% deposit paid — Time of the essence — Purchaser failing to complete — Whether deposit lawfully forfeited — Whether penalty — Privy council ordering return of deposit
The plaintiff bank, as second mortgagee, sold premises at auction to Dojap (the defendants) $J11,500,000. The contract provided for the payment of a deposit of 25% of the contract price. It also provided that the remainder of the purchase price should be paid within 14 days of the auction, whereupon the bank was to execute a transfer of the property to Dojap. Time was of the essence and failure to observe or comply with the contract would result in the deposit being forfeited.
The purchaser failed to complete on the due date and the bank wrote to Dojap rescinding the contract and purporting to forfeit the deposit. Dojap brought proceedings claiming relief from forfeiture of the deposit. The Jamaican Court of Appeal held that Dojap was entitled to relief from forfeiture to the extent that the deposit exceeded 10% of the price, but did not award any interest on that sum. The bank appealed to the Privy Council and Dojap cross-appealed claiming that it should have been awarded relief against forfeiture as to the whole of the 25% deposit with interest.
Held The appeal was dismissed and the cross-appeal allowed.
1. In general a contractual provision which required one party in breach of the contract to pay or forfeit a sum of money to the other party was unlawful as a penalty unless it could be justified as a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party would incur by reason of the breach. One exception to that general rule was the provision for payment of a deposit by the purchaser on a contract for the sale of land. The forfeiture of such a deposit (customarily 10% of the contract price) did not fall within the general rule and could be validly forfeited even though the amount of the deposit bore no reference to the anticipated loss to the vendor flowing from the breach of contract.
2. However, it was not possible for parties to attach the incidents of a deposit to the payment of a sum of money unless such sum was reasonable as earnest money. Without logic, but by such long continued usage, the customary deposit was 10%. A vendor who sought to obtain a larger amount by way of forfeitable deposit must show special circumstances which justified it.
3. In the present case the evidence fell far short of showing that it was reasonable to stipulate a forfeitable deposit of 25% of the purchase price or any deposit in excess of 10%.
4. Since the 25% deposit was not a true deposit way of earnest, the provision for its forfeiture was a plain penalty from which the court would give relief by ordering repayment of the sum so paid, less any damage actually proved to have been suffered as a result of non-completion. Accordingly, there was jurisdiction in the court to order repayment of the 25% deposit: see Commissioner of Public Works v Hills [1906] AC 368.
Roald Henriques QC and David Batts (both of the Jamaican Bar) (instructed by Philip Conway Thomas) appeared for the appellant, Workers Trust & Merchant Bank Ltd; Richard Mahfood QC (of the Jamaican Bar) and James Guthrie (instructed by Charles Russsell) appeared for the respondents Dojap Investments Ltd.
