Badhava Singh and another vs Charan Singh and another

Modi, J.—This is a first appeal by the defendants Badhava Singh and Suhava Singh in a suit for damages for breach of contract for sale of land.

On 25-7-1949, the defendants had entered into an agreement with the plaintiffs Charansingh and Chanansingh by which the former agreed to sell to the latter 2 squares of land Nos. 1 and 7, measuring 50 Bighas in Chak 53 G.V., Tehsil Anoopgarh for a sum of Rs. 16,000/- and the vendees paid a sum of Rs. 2000/- by way of earnest money on the same date. The sale was to be completed on or before 15-12-1949, when the balance of the purchase money was to be paid by the vendees. It was also agreed between the parties that they would share the cost of registration, stamp paper and certain other necessary charges half and half. A further stipulation was that if the defendant-vendors failed to complete the sale, they would be liable to refund the earnest money and in addition to pay a sum of Rs. 4000/- as damages for breach of contract, and it was similarly provided that if the vendees failed to complete the sale, they would be liable to forfeiture of their earnest money and to pay a further sum of Rs. 2000/- as damages for breach of contract.

Some ten days before the final date for the completion of the sale, the defendants sold the land in question to Sohansingh and others and executed a sale-deed in their favour on 5-12-1949. As the plaintiffs had come to know of the sale by the defendants in favour of the third party, they sent a telegraphic protest to the defendants and also made an application before the Registrar asking for postponement of the registration of the sale-deed on the very day, that is, 5-12-1949, but the Registrar refused to accede to the request of the vendees, and the document was registered. The plaintiffs, therefore, instituted the suit, out of which the present appeal has arisen, on 6-12-1949, claiming the refund of Rs. 2000/- in lieu of the earnest money and the stipulated sum of Rs. 4000/- as damages.

The defendants admitted having executed the agreement Ex. P-1 dated 25-7-1949, but resisted the suit on two grounds; firstly, that the contract for sale had been broken by the plaintiffs inasmuch as they had refused to pay half the share of the expenses which were required for the completion of the sale and for obtaining the permission of the authorities concerned to the sale which was rendered necessary on account of the circumstance that the defendants were Sikh Jats and the plaintiffs Seni Jats, and a sale from the one to the (sic) required permission of competent authority (sic) it could be validly effected. In the second (sic) the defendants contended that the damages (sic) for by the plaintiffs were in the nature of (sic) and, were, therefore, illegal.

The trial Court decreed the plaintiffs'' suit for a sum of Rs. 6000/-. Its findings are (1) that the defendants and not the plaintiffs were responsible for the breach of the contract for sale, (2) that no permission was necessary for the completion of the sale as none was required under any law and (3) that the sum of Rs. 4000/- named in Ex. P-1 as damages was in no way excessive and was in fact a reasonable compensation to which the plaintiffs were entitled in the circumstances of this case. In this connection, the trial Court also came to the conclusion that the defendants had broken the contract as they had re-sold the land in dispute for Rs. 6000/- in excess of the price of Rs. 16,000/- stipulated between them and the plaintiffs. The defendants have now come up in appeal.

Learned counsel for the defendants did not contest before us the finding of the trial Court that no permission was necessary for the completion of the sale. We shall, therefore, say nothing about this point. The points on which he attacked the decision of the Court below are two in number. In the first place, he contended that the defendants were not responsible for the infringement of the contract and the plaintiffs were at fault in this regard. The case of the defendants originally was that the plaintiffs had refused to pay half of the expenses of registration, stamp paper and certain other incidental charges, and in spite of repeated demands, they finally declined to pay on 4-12-1949. As the defendants were in urgent need of money, they were reduced to the necessity of selling the suit land to Sohansingh and others, and, therefore, they were not at all to blame in the matter. (After considering the evidence His Lordship concluded that the defendants were responsible for the breach of the contract and not the plaintiffs.)

We are then left with the question whether the plaintiffs are entitled to the sum of Rs. 4000/-by way of damages, which was awarded to them by the trial Court. It was strenuously contended before us that the said sum was in the nature of a penalty and the lower Court fell into serious error in awarding it to the plaintiffs. It was further argued that the trial Court did not frame a proper issue on this point and wrongly put the burden thereof on the defendants instead of on the plaintiffs. Reliance was placed on - AIR 1929 179 (Privy Council) a decision of their Lordships of the Privy Council. It was argued that the imperfect wording and wrong allocation of the burden of proof of this issue misled the defendants and has resulted in grave injustice to them inasmuch as they have had no opportunity of rebutting the evidence led by the plaintiffs to show that the consideration for the re-sale was not the ostensible one of Rs. 16,000/- but Rs. 6,000/- in excess thereof, that is, Rs. 22,000/-.

We propose first to deal with the precise effect of S. 74, Contract Act in this connection. Section 74, Contract Act in so far as it is material for our present purpose reads as follows:

When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, ''or if the contract contains any other stipulation by way of penalty'', the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract, reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

The first case to which we were deferred for interpreting the aforesaid section was AIR 1925 284 (Lahore) . In that case the parties to the contract for sale of certain land had provided that in the event of a breach thereof, an identical sum would be paid as damages by either party failing to perform his part of the contract. It was held that in the absence of any equitable ground, the stipulated sum should be decreed as damages. The same view was adopted in - AIR 1929 249 (Lahore) although in this case only the vendor was, under the agreement, fastened with liability to pay a sum of Rs. 2,000/- in the event of a breach on his part. It was held that where the parties have mentioned a fixed sum in case of breach, the Court should award the stipulated sum as damages unless there is something to show that that amount is exorbitant or unconscionable.

Then came the decision of their Lordships of the Privy Council in AIR 1929 179 (Privy Council) There the vendors had agreed to sell a building to the vendees for Rs. 1,05,000/-, and in the event of a breach, the party responsible for the breach was to pay a sum of Rs. 10,000/- to the other party. The vendors eventually sold the property to another purchaser at Rs. 1,04,000/- as the original vendees had broken the contract. Their Lordships held as to the amount of damages that "the effect of S. 74 is to disentitle the plaintiffs to recover simpliciter the sum fixed in the contract whether penalty or liquidated damages. The plaintiffs must prove the damages they have suffered." It was further held that the only evidence of loss was the loss of Rs. 1000/- suffered by the vendors on re-sale.

We will next refer to - Mahadeoprasad Vs. Siemens (India) Ltd., In that case Ameer Ali, J. held that the sum named in the agreement was itself some proof of damages, and that in the absence of any other proof, that alone may be considered to be sufficient; but if there is other evidence and the Court comes to the conclusion that the sum named in the agreement was unreasonable, the plaintiff must prove his damages. With great respect, we must state that this view goes much further than we think, we ought to go. Suppose there is no evidence of damage caused to the plaintiff in a particular case. Suppose also that the sum named in the agreement has apparently been fixed ''in terrorem'' or does not place the burden of breach equitably or evenly on both sides to the contract. The question then arises whether in such circumstances the sum named in the agreement should be decreed under S. 74, Contract Act? We think not.

Besides, we consider that it must be a fact to be determined in each case whether the sum named is a genuine pre-estimate or just a sum fixed ''in terrorem''. There can be no doubt that in the former case the sum named in the agreement may be decreed as reasonable compensation under S. 74 but that has got to be shown and we think that it is in that sense that the Privy Council (in Panna Singh''s case (A)), said that the plaintiff must prove the damages suffered by him. Again, it appears to us that if the view propounded in the Calcutta case Subimalchandra Chatterji Vs. Radhanath Ray, were to be adopted, then the plaintiff need not prove the damages at all and yet claim the entire amount named in the agreement as compensation on the ground that there is no other proof available on the record.

But would that not be a negation of the principle embodied in S. 74 and in the decision of their Lordships of the Privy Council in Panna Singh''s case? Ameer Ali J. concluded his discussion on this aspect of the matter by posing a question "Is not the estimate made by the parties with full consideration some evidence?" and answered it in the affirmative. But that, in our opinion, begs the very question. We think there is no getting away from the fact that it must be shown by some tangible evidence direct or circumstantial that there was a pre-estimate and that it was made after "full consideration", and that is what we think S. 74 implies when it lays down that only reasonable compensation may be allowed subject to a further consideration that such compensation will not be in excess of the sum named by the parties themselves in their agreement.

The next case to which we may refer is - ''Michel Habib v. Sheikh Sulaiman'', AIR 1941 PC 101 (E). That case came from Palestine. Their Lordships observed that the CPC in Palestine did not know "penalties" as such but that when the difference between a penalty and ''liquidated damages'' was being introduced into the jurisprudence of Palestine, a plain and just meaning must be given to the Palestine Code. Their Lordships then proceeded to say that,

Agreed liquidated damages, if to be enforced, must be the result of a "genuine pre-estimate of damages" to use the illuminating phrase of Lord Dunedin. They do not include a sum fixed ''in terrorem'' covering breaches of contract or many varying degrees of importance the possible damages from which bear no relation to the fixed sum, and which obviously have at no time-been estimated by the contracting parties.

We should like to say that although the Indian Law obliterated the distinction between "a penalty" and "liquidated damages" as embodied in S. 74, and allows only ''reasonable compensation'', we think that the observations made by their Lordships in the Palestine case may well be borne in mind and applied as a standard for assessing reasonable compensation in cases falling under" S. 74, Contract Act.

The last case to which we may refer is - ''Mool Chand Behari Lal v. S.D. Chand & Co. AIR 1947 Lah 112 (F). It was held in that case that where some amount is paid by way of earnest money or kept in deposit for the due performance of any obligation under a contract, it is always for the court to determine under S. 74, what amount would be "reasonable compensation" under the circumstances of a particular case. If the court considers that the sum named is not excessive or unreasonable, it shall allow it but where it does not so consider it, the court will reduce the stipulated amount to the figure it considers reasonable. In no case, however, the court will grant any compensation in excess of the figure named in the agreement.

On a review of the authorities cited above, we are of opinion that the true effect of Section 74 may be summarized somewhat as follows:

(1) Where a sum is named in the agreement as payable on breach thereof, the plaintiff cannot be entitled to the entire sum so named "simpliciter", that is, merely because such a sum may be mentioned in the agreement to be so payable.

(2) All that the plaintiff would be entitled to is a "reasonable compensation" subject to the amount named therein being the maximum.

(3) What is "reasonable compensation" would depend upon and must be determined by the circumstances of each case.

(4) The aforesaid result must hold good regardless of the consideration that the sum named in the agreement is what under the English law is termed as "liquidated damages" or is in the nature of a "penalty". "The effect of the Indian law as embodied in Section 74 is to do away with the distinction between "penalty" and "unliquidated damages" under the English law which has been a prolific force of case law and which has sometimes given rise to not a little confusion.

(5) It must be for the plaintiff to prove the damage suffered by him, but such proof may be direct or circumstantial, and need not possess the quality of arithmetical exactitude.

(6) If the plaintiff succeeds in establishing that the sum named in the agreement is a genuine pre-estimate of damages, or would otherwise be a reasonable compensation for the breach, the Court may grant the entire sum named in the breach as such compensation. If, on the other hand, the Court comes to the conclusion that the amount as fixed was ''in terrorem'' or unconscionable and extravagant, it would be open to it to award such sum as may appear to be reasonable.

(7) In deciding whether the amount fixed is a genuine pre-estimate or reasonable compensation or not, it would be a factor for consideration whether the sum named in the agreement is not disproportionate to the injury caused and whether the burden evenly and equitably falls on both parties to the contract.

11a. Now, applying the above principles to the case before us, we find that in the agreement entered into between the parties, it was stipulated that either party in the event of breach would be liable to pay a sum of Rs. 4000/- to the other by way of damages. In the case of a breach by the vendors, they were of course held liable to refund the earnest money, & we see nothing unreasonable about this. We may further point out in this connection that although the defendant''s case was that they had sold the land in question for Rs. 16000/- to Sonansingh and others, that is, for the same price as was settled at the original sale, the trial Court came to the conclusion on the evidence before it that the defendants really sold the land for Rs. 22000/- and not Rs. 16000/- only.

We see no sufficient reason to disagree from the conclusion arrived at by the trial court in this connection, because if this was not a fact, we would have expected the defendants to challenge the conclusion of the trial court specifically and pointedly in the grounds of appeal before us, which they have not done at all. On the hypothesis, therefore, that the re-sale took place for Rupees 22,000/-, we have no hesitation in coming to the conclusion that the amount, which was the sum of Rs. 4000/- named in the agreement as damages for breach apart from the earnest money of Rs. 2000/-, was perfectly justified and was indeed well-covered by the excess price to the tune of Rs. 6000/- received by the defendants at the resale. We may also add that in the event of breach, each party was fastened with the liability to pay an equal sum of Rs. 4000/- according to the agreement Ex. P-1, and we do not think, in the circumstances of this case, that this sum was either extravagant or unconscionable or fixed ''in terrorem'' and was in any way disproportionate to the harm caused by the breach of the contract for sale of land in a place like Ganganagar where land values are notoriously high.

The next question to which we may now briefly turn our attention is whether there was any serious error as to the procedure followed by the trial Court in arriving at the conclusion to which it did. The issue framed by the trial Court was in these terms: "Kya 4000 rupaye harjana pane ki shart tawani hai aur uska kya asar hai?" The burden was obviously placed on the defendants which they accepted without any demur throughout the trial. The contention of learned counsel is that the burden of this issue should have been placed upon the plaintiffs. Now, in view of the terms of S. 74 and the decision of their Lordships of the Privy Council in Panna Singh''s case (A), we are of opinion that this issue might well have been framed in more precise language, and the burden of its proof should have been placed on the plaintiffs in the first instance.

But the defendants did not object to the framing of the issue, and obviously led all the evidence which they wanted to lead relevant to this issue. We inquired from learned counsel for the defendants as to what further evidence he wished to lead in addition to that which was already led by him. All that learned counsel was able to tell us in reply was that he would endeavour to prove that the defendants had sold the land in dispute for Rs. 16,000/- and also to have the second sale-deed produced in evidence. Our answer is twofold. In the first place, there was nothing which precluded the defendants from leading the evidence which they now want to lead on the issue as it was actually framed, and if they did not lead this evidence, they cannot now ask for at opportunity to lead it.

In the second place, we are satisfied from the evidence of Sri Baney Singh, P.W. 7 who was the Registrar that the second sale-deed was executed for an ostensible consideration of Rupees 16,000/- only. But this would not be the end of the matter because the defendants must have had some inducement for backing out of the first sale and that inducement was very probably a larger price at the re-sale. We have already pointed out above that the defendants for some reason or other which is best known to themselves did not choose to attack the finding of the Court below on that point in their grounds of appeal in this Court and, therefore, it is not really open to them to ask for opportunity to lead their evidence to dispute that point.

We may also add that the issue as framed, in spite of all its imperfections, raised with sufficient clarity the points that the parties were required to prove, and there is no substance in the contention that the defendants were misled on account of the manner in which it was cast and were, therefore, precluded from leading the evidence which was relevant to it. Both parties had, in our opinion, a fair opportunity to produce evidence and if the defendants left out such evidence which was available and material, we cannot help thinking that they have to thank themselves. We are, therefore, decidedly of opinion that the prayer made on behalf of the defendants for re-trial of the issue as to the amount of damages is uncalled for and would be wholly futile in the circumstances of this case.

The result is that this appeal fails and is hereby dismissed with costs.