Devandra Nath Ghose and Others vs Sambhu Nath Panday and Others

This appeal arises out of a decision of the Subordinate Judge of Dhanbad, dated the 14th August 1920, in an action to recover royalty and commission due from Magh 1319 to Pous 1325 B.S. in respect of coalfields in Mauza Tentulia, the coal covering an area of 175 bighas. This property belongs to the plaintiffs and Defendants 5 to 9, the plaintiffs having six annas share therein. Defendant No. 1 is the representative of lessee of the said property, and Defendants 2 to 4 are sub-lessees under Defendant No. 1. ''This appeal has been filed by Defendants 2 to 4 and the only question involved in it is as to the rate of interest which the plaintiffs are entitled to get from the defendants. This point is covered by Issue No. 3 framed in the Court below and has been decided against the defendants. The plaintiffs claim the interest at the rate mentioned in paras. 11 and 13 of the kabuliats (Ext. 5). Those paragraphs are as follows:

Paragraph 11:

That whether the said coal is raised and sold or not, I shall have to pay the sum of Rs. 1,750 as annual minimum royalty. I shall pay the said minimum royalty and commission equally in four kishts of the year i.e. in the month of Asar, Aswin Pous, and Chaitra. If I make default in payment of kishts, I shall pay interest thereon at 1 per cent per mensem, and if I do not pay the minimum royalty of any year, for four kishts successively I shall pay interest thereafter at Rs. 3-2-0 per cent.

Paragraph 13:

That I shall pay after every six months the commission, which will be due within the year, according to the account given in the above paragraph 10, i.e., I shall pay the commission which will be due from Baisakh to Aswin within the month of Kartik thereafter and the commission which will be due from Kartick to Chaitra, within the month of Baisakh of the next year. At the time of thus paying the total amount of commission, I shall pay the remaining amount after crediting the amount, which will be paid up to that time on account of royalty. If I do not regularly pay the said excess amount of commission, I shall pay interest at Re. 1 per cent, per mensem, and if I do not pay the amount of commission due for a year within the month of Baisakh of the next year, I shall pay interest on the said unpaid amount at Rs. 3-2-0 per cent, per mensem.

The appellants contend that the enhanced rate of Rs. 3-2-0 per cent, per mensem mentioned in the aforesaid clauses is penal and the plaintiffs are not entitled to the said rate. This contention is based upon 8. 74 of the Contract Act. That section says:

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 following explanation has been added to that section by the amending Act VI of 1899.

A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

This explanation has been further elucidated by the said Amendment Act by an illustration being added to the section, namely, illustration D which runs as follows:

A gives B a bond for the payment of Rs. 1,000 with interest at 12 per cent, at the end of six months, with a stipulation that, in case of default, interest shall be payable at the rate of 75 per cent, from the date of default. This stipulation is by way of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable.

The question as to whether an increased rate of interest after a default made in the payment at the original rate of interest is or is not a penalty has been the subject of various decisions. The Full Bench decision of the Madras Court in Muthukrishna Iyer v. Sankaralingam Pillai (1913) 36 Mad. 219 has summarised the authorities upon the point and has come to the conclusion that even when no interest is payable until default but interest at an exorbitant rate is payable from the date of default the Court has power u/s 74 of the Contract Act IX of 1872 as amended to treat the latter stipulation as a penalty and award reasonable compensation in lieu of such excessive interest.

Now, interest is payable by way of damage for the loss sustained to the party who advances money to another. This damage may be the subject of an agreement between the parties and at the time when the contract of loan is entered into, the parties may fix a consolidated sum or merely a certain percentage on the amount advanced to be paid by the debtor as compensation to the lender on account of his being out of pocket with respect to the sum advanced by him as a loan. The latter way of fixing compensation is commonly known as interest on the loan. This is enforceable in law as an agreement between the parties, but over and above this in order to ensure payment of loan at an appointed time the parties may further agree that an additional sum by way of penalty or an increased rate of interest over and above that originally fixed would be payable by the defaulting debtor in case of breach of the contract to pay at the appointed time. The enhanced rate of interest may be chargeable either from the time the breach is committed or from any prior period. This kind of stipulation is said to be penal, and the creditor cannot as a matter of right enforce it in law. Section 74 in such a case gives power to the Court to interfere with the contract entered into between the parties, by empowering the Court to vary the amount fixed or the increased rate of interest by allowing only reasonable compensation. The section as it originally stood in the Act of 1876 gave rise to doubt as to applicability of the section when the amount of compensation is not named in the contract as a fixed sum but an increased rate of interest on the loan. One view was that the section would apply inasmuch as the enhanced rate of interest can be resolved into a fixed sum by a mere arithmetical calculation and thus become a fixed sum named in the contract at the time the agreement is sought to be enforced.

Again doubts were entertained as to whether the section would apply only when the increased rate of interest is payable from a date prior to the date of default or also whether the increased rate of interest is payable only from the date of default and not from a time anterior thereto. There was no serious doubt entertained as to the former stipulation being penal, and the Explanation and Illustration D quoted above were added in 1899 to make it clear that the latter class of stipulation also is Penal.

These do not purport to make a new change in the law as enunciated in the section as it stood in 1872, but only explain and illustrate it so as to remove the doubt entertained in some quarters. As a matter of fact, the provision in the main section is wide enough to cover the case contemplated in the Explanation and illustration D, not only the enhanced rate of interest becomes by a mere arithmetical calculation a fixed sum at the time the contract is sought to be enforced and thus becomes the "amount to be paid in case of such breach," but that such a stipulation would clearly come in the words of the section, "or if the contract contains any other stipulation by way of penalty."

Therefore the contention that the Explanation and the Illustration referred to above do not apply to the present case, inasmuch as the kabuliat in question (Ex. 5) is dated 19th April 1895, that is to say, much anterior to the Amending Act of 1899, has no force in it.

No doubt, upon a plain construction of the clauses in the aforesaid kabuliat it will be manifest that the primary contract is to pay interest at one per cent, per mensem. It is only in case of default for successive four kists in a year that an increased rate of interest, namely, Rs. 3-2-0 from the date of default of interest is to come into operation only when a breach will be committed by the debtor in the primary agreement adverted to above.

Therefore, to my mind, it appears that the primary contract between the parties is to pay interest at the rate of one per cent, per mensem and the secondary contract, depending upon certain events, is at an enhanced rate of Rs. 3-2-0 percent per mensem. Section 74 does not make a distinction between a primary and a secondary contract, but such a distinction seems to have been maintained and recognized in the various cases referred to in Muthukrishna Iyer v. Sankaralingam Pillai (1913) 36 Mad. 219. Under the section a stipulation for an increased rate of interest from the date of default may be a stipulation by way of penalty irrespective of whether the stipulation happens to be the primary or the secondary contract. I have already observed that this Explanation was added in order to remove any doubt as to the increased rate of interest from the date of default being not considered as a penal clause, for an increased rate of interest prior to the date of default was unquestionably always deemed to be a penalty.

I have, therefore, no doubt in my mind that the increased rate of interest, i.e., Rs. 3-2-0 per cent, per mensem stipulated for in Clauses 11 and 13 of the kabuliat is a penal clause. The view is supported by the authorities, both English and Indian, referred to in detail by the Full Bench of the Madras High Court in the case of Muthuknshna Iyer v. Sankaralingam Pillai (1913) 36 Mad. 219.

Upon a true construction of the section I have also arrived at the same conclusion viz., that a stipulation as to increased rate of interest such as the one we are considering is a penal one. But that does not determine the question in hand. The section in the Explanation does not straightaway disallow all stipulations for compensation in the shape of fixed amount or an increased rate of interest agreed upon to be payable in case of breach of contract. The section only makes such stipulations penal and empowers the Court to rip up the agreement between the parties and to award such compensation as the Courts consider reasonable in the circumstances of the case, not exceeding the increased rate of interest agreed to between the parties. The contract between the parties fixes the limit beyond which no compensation can be allowed. But the Court has power to reduce the compensation mentioned in the agreement of the parties.

We are relieved in this case from considering the question further from any other point of view. There is no suggestion that the contract was arrived at on account of undue influence, coercion or compulsion, misunderstanding or misrepresentation. It is admitted that the contract was willingly entered into between the parties. The simple question therefore is whether in this record there is sufficient material for us to hold that the compensation named in the written agreement of the parties, namely, the enhanced rate of interest of Rs. 3-2-0 per cent, per mensem from the date of default is not a reasonable compensation. The parties have left the point altogether in the dark--no evidence of what is the prevailing rate of interest in contracts of this kind has been adduced, nor has any evidence been given as to what is the reasonable compensation ordinarily allowed in the vicinity in respect of defaults committed by the debtor in not punctually paying the amounts of rents and royalties mentioned in the lease. We cannot, therefore, in this case regard the plaintiff''s claim for increased rate of interest as unreasonable compensation for breach of the contract committed by the lessor.

Mr. Sushil Madhab Mullick contends that the defendants are debarred from raising the question as to enhanced rate of interest being a penalty by reason of the previous decision in a suit between the plaintiff, and the lessee. This contention is based upon Exhibit 7, a judgment of the Subordinate Judge of Purulia, dated the 23rd February 1915 That was a case brought by the plaintiff''s against Charu Chandra Mitter predecessor-in-interest of defendant No. 1 the original lessee. The defendants 2 to 4, the appellants before us were not made parties in that case and the suit was for recovery of royalty and commission from 1314 to 1319. Issue No. 7 related to the point in consideration and ran as follows:

Issue No. 7.... Is the account stated in the plaint correct? Is the term as to payment of future interest by default a penal clause and hence not enforceable? Can plaintiffs get any interest?

At the hearing this issue was not pressed by the defendants, and the Subordinate Judge recorded the following finding:

The question whether the stipulation of interest claimed is in the nature of penalty was not argued by the defendant''s pleader and I fail to see how the clause about interest in the lease is in the nature of penalty. I decide this question against the defendant. Plaintiffs are entitled to interest claimed. Vide 21 C.L.J. 79 which reviewed all the cases on the subject that there is no hard and fast rule as to what may or may not be unconscionable or extravagant. In this case the rate of interest is not so and is allowable.

The defendant Charu Chandra Mitter appealed to the High Court and in the appeal (Exhibit 6) the question as to the enhanced rate of interest being penal was not raised. That case was heard analogously with cases brought by the other co-sharers of the plaintiffs, and in those suits the lessee and the sub-lessee and the present defendants were also parties and all the cases were heard together and disposed of by one judgment. Mr. Mullick contends that although the defendants appellants were not parties in that suit, yet they wore fully represented by the lessee through whom they claimed and consequently the decision in that case would operate as res-judicata not only as against the defendants as lessees but also against the sub-leasees. In sub-port of this contention he has referred us to Bigelow on Estoppel, page 188 and the case of Hamid Ali Vs. Mahomed Nurerjjama Meah, .

Mr. Sultan Ahmad, on the other hand on behalf of the appellants relies upon the case of Seshappaya v. Venkatramana (1910) 33 Mad. 459, and says that the view of Bigelow referred to above was not accepted. This case is inapplicable. In our opinion, the appellants derived their title from the original lessees and are bound by the decision against the lessees upon the point. This will be so under the principles of res-judicata enunciated in Section 11 of the Civil Procedure Code. The judgment then proceeded to consider matters not essential for this report. The appeal was finally disposed of on terms settled by the consent of the parties.