Ramalinga Adaviar and Another vs Meenakshisundaram Pillai and Others

Srinivasa Aiyangar, J.—The short and simple question in this Second Appeal is whether on a proper construction of the terms of the

document, Ex. A., the provision is penal for the payment of the whole of the balance remaining due in default should be made in the payment of any

instalment for a period of six months after the date fixed for payment. The plaintiffs are the stake-holders of a chit fund and the defendants for the

purpose of this appeal may be referred to conveniently as holders of one chit. The document was executed by the defendants in relation to the first

chit to which they became entitled as the bidders that offered to pay the highest amount of premium. The chit holders were 10 in number and each

chit was of Rs. 400 per year. The total amount pooled being Rs. 4,000 the defendants at the auction agreed to a deduction of Rs. 1,500 as

premium, and out of the balance of Rs. 2,500 deducting the sum of Rs. 400 payable by them for that chit and a further sum of Rs. 100 which was

retained by the stake-holders as advance towards the second chit payable by the defendants, the actual amount received by the defendants was

only Rs. 2,000. But as the sum of Rs. 400 had in any case to be paid by the defendants for the first chit I must take it that the actual amount

received by the defendants was Rs. 2,400. Receiving that amount they executed the bond in favour of the plaintiffs for Rs. 3,500. The bond

provides as follows : "" The amount which you have paid and which we have received from you as per particulars for consideration described

below is Rs. 3,500. Out of this sum of Rs. 3,500 we shall pay you Rs. 300 for the second chit which is due on 30th Karthigai, 1094 (Andu 15th

December, 1918). From the third chit forward we shall bring and be paying you on the 30th Karthigai of each year at the rate of Rs. 400 per

instalment and make an endorsement of payment upon this. If we fail to pay in this way, we shall pay the amount due for the instalment for which

we have failed to pay within six months together with interest thereon at the rate of 2 per cent. per mensem from the date of default. If we fail to

pay even in this way, we shall pay you on demand the whole of the remaining amount together with interest thereon at the aforesaid rate in a lump

sum without reference to future instalments."" For some reason best known, I dare say to the learned vakil for the appellant, perhaps having regard

to the terms of Explanation I to Section 74 of the Indian Contract Act, he did not argue that the provision with regard to the payment of interest at

the rate of 2 per cent. per mensem or 24 per cent. per annum on the amount of the installment omitted to be paid on the due date would not be

penal. He contended himself with arguing only that the provision with regard to the whole of the unpaid balance becoming due on default being

made for six months after the date fixed for payment of any instalment was not penal. In support of his contention Mr. A. Krishnaswami Aiyar

referred to the case of John Wailingford v. The Directors of Mutual Society (1880) 5 AC 685. Though the facts of this case are somewhat

complicated yet there is no doubt that the case has been always cited and aecepted only as an authority for the position set out in illustration (f) to

Section 74 of the Indian Contract Act. The learned Lords dealt with the case on the footing that the amounts secured by the bond were debita in

praesenti although solvenda in futuro and the Lord Chancellor at page 696 goes on to say ""and being such, it is consistent both with principle and

with authority to hold, that if the party who ought to have paid them, or any of them, at the proper time failed to do so, the default was his own,

and the time might lawfully be accelerated for the other payments which were originally deferred. "" Again at p. 705 Lord Blackburn from whose

judgment the learned Vakil for the appellant cited passages on which he relied strongly, observes as follows :-"" The agreement between the parties

was, and it is obvious that what they meant to agree was, that �6,000 and the �5,000 odd in addition as the premium shall be a debitum in

praesenti payable by instalments if the instalments are punctually paid, but if there be a default in paying them, then all is to be paid at once. That

being the contract between the parties that is not the case of a penal sum. It is not necessary for the House probably to decide that question, but if

it were necessary to decide it, I should say that it was not a penalty but an actual sum, like the case of a promissory note payable by instalments,

the whole to become due if one of the instalments is not punctually paid."" The principle of the distinction would thus be seen to be very thin. If on a

proper consideration and construction of the contract I should come to the conclusion that the real agreement between the parties was to the effect

that the whole amount was on the date of the bond a debt due but the creditor for the convenience of the debtor allowed it to be paid by

instalments intimating that if default should be made in the payment of any instalment he would withdraw the concession, then the stipulation as to

the whole amount of the balance becoming payable would not be penal. But if, on the other hand, on a proper consideration and construction of

the contract between the parties I should come to the conclusion that the debt itself is an instalment debt so to call it, that is to say, that the debt

itself arises or becomes due and payable by the debtors on the respective dates fixed for the instalments, the stipulation that on default being made

in the payment of any instalment the whole of the balance should become due and payable would be in the nature of a penalty. At first sight, no

doubt it might seem that there is really no distinction at all between the two and that the difference consists merely in the way of putting it. But it

seems to me that legally speaking the distinction is real. The whole principle of the law of penalty is this, as I understand it. The parties who enter

into a contract no doubt expect that the contract would be carried out; but they also contemplate the possibility of the contract not being carried

out and provide for such a case. If in making provision for breach of contract the promisee stipulates from the promisor on the breach only for such

compensation as the Court would deem reasonable in the circumstances, then there is no penalty and the stipulation is not penal. But if, on the

other hand, the Court would on a proper consideration come to the conclusion that the stipulation was put in not by way of reasonable

compensation to the promisee but in order that by reason of its burdensome or oppressive character it may operate in terrorum over the promisor

so as to drive him to fulfil the contract, then the stipulation is one by way of penalty. Applying these principles, it is obvious that if the debt itself

should arise on a date fixed, the stipulation that on default of payment, there and then the whole of the balance should become due and payable

would not by any means be reasonable compensation for default in paying the instalment that has fallen due and payable only then but be really a

stipulation by way of penalty. Several cases have been cited as to the question what constitutes a penalty. The case of Salem Town Bank, Ltd. v.

Venkatachar 9 IndCas 197 as well as the case of Sukkulal Sowcar v. A. V. Tirumal Rao Sahib 51 IndCas 295 proceeded upon the construction

of the particular documents the Court had to consider. The case of Periaswami Thalavar v. Subramania Asari (1903) 14 MLJ 136 contains no

discussion of any principle and was decided before the Full Bench decision in Muthukrishna Aiyar v. Sankaralingam Pillai (1912) ILR 36 M 229 :

1912 24 MLJ 135. As regard the case of Vydianatha Aiyar v. Govinda Odayar (1921) 42 MLJ 551 I am unable to appreciate the reasoning of

the learned Judge in some parts of the judgment. But for the purposes of the present case it is only necessary to observe that the judgment in that

case proceeded on a construction of the document and contract before the Court and it seems to me that it was possible and perhaps proper

having regard to the terms of the document in question in that case to hold that the liability was as observed in the case of Wallingford v. The

Directors of the Mutual Society (1880) 5 AC 685) debitum in praesenti. It is somewhat inexplicable how in the whole of the judgment in the case

of Vydianatha Aiyar v. Govinda Odayar (1921) 42 MLJ 551 there should have been no reference whatever to the Full Bench decision in

Muthukrishna Aiyar v. Sankaralingam Pillai ILR (1912) M 229 : 1912 24 MLJ 135. After all, the question whether any particular stipulation is

only by way of compensation or by way of penalty should depend upon the construction of the particular document or contract and on the

circumstances of each case. I now turn therefore to the document before me, Ex. A. The question whether the parties to the contract treated the

amounts for which the bond is given as debita in praesenti although solvenda in futuro is a question of intention to be gathered from the document

itself. I do not find in the document any such intention. There is no clause in it by or under which the obligor binds himself to pay the whole amount,

namely Rs. 3,500. The obligation undertaken is in terms to pay each instalment as it becomes due Rs. 300 on the 30th Karthi-gai, 1094 (Andu

15th December, 1918) and Rs. 400 on the 30th Karthigai of each succeeding year. This aspect clearly distinguishes the present case from such

cases as Wallingford v. The Directors of Mutual Society (1880) 5 AC 685, Periaswami Thalavar v. Subramania Asari (1903) 14 MLJ 136,

Muthukrishna Aiyar v. Sankaralingam Pillai ILR (1912) M 229 : 24 MLJ 135 (FB) and Vydianatha Aiyar v. Govinda Odayar (1921) 42 MLJ

Therefore the primary obligation under the contract is to pay each instalment as it accrues due. One of the provisions for the breach of that

primary contract is that if for a period of six months after any particular instalment becomes due and payable default should be continued to be

made, then the whole of the balance should become due and payable. The question is whether this stipulation is or is not by way of penalty. If the

requirement that the whole of the balance should be paid up at once can be regarded as reasonable compensation for the breach, the stipulation

cannot be deemed to be one by way of penalty. But if, on the other hand, the burden of the stipulation is of such a character that it cannot possibly

be regarded as merely intended for compensation to the promisee for breach of contract but has only to be regarded as a stipulation by the terror

of which the promisor should feel pressed and compelled to perform the original contract itself, then the stipulation is one by way of penalty. A

comparison and consideration of the two illustrations (f) and (g) to Section 74 of the Indian Contract Act would, it seems to me, yield to us the real

principle to be applied in such case. At first sight, it may seem that there is no reason why if the stipulation for the payment of the entire balance on

default in the payment of one instalment in illustration (f) is not one by way of penalty it should be so in illustration (g). The difference is this. On the

facts given in illustration (g) the promisor has given to the promisee in the form of a promise to pay an enhanced amount as consideration for the

promisor retaining the instalments not yet fallen due or in other words for the use of the moneys representing such instalments for the periods

covered by the instalments. The stipulation in such a case for the whole amount of the balance becoming due and payable would involve for the

promisor not only the liability to pay up the whole of the bal ance but the loss of the consideration he has already paid for the use of the moneys

representing each instalment for the respective periods of the instalments. The principle underlying illustration (f) is that the whole of the debt being

payable immediately the creditor agrees with the debtor to allow him to pay the amount by instalments so long as he pays them regularly. But the

principle underlying illustration (g) is that the debtor by paying consideration gets the right to retain and use the amount of each instalment until the

date of its becoming due and payable. If therefore in such a case the debtor commits a breach and fails to pay one instalment no doubt he becomes

liable to pay to the creditor damages for such breach, but to be called upon to pay the whole of the balance in spite of the fact that he has given

consideration for withholding the amounts of the other instalments till their respective due dates would undoubtedly be in the nature of a penalty. As

some effect has to be given to illustration (g) I do not see my way to base it on any other principle. Now with regard to the question whether the

facts of the present case bring it within illustration (f) or illustration (g) the question be viewed in two ways. Is it a case in which the creditor being

entitled to the whole amount allows the debtor to pay it by instalments on condition that if default should be made in the payment of one instalment

the whole should become due; or is it a case in which there is no present debt but the debt arises for the amounts of the instalments only on the

respective dates fixed therefor. I have already held that on a proper construction of Ex. A that there is no present debt created for the whole

amount and that the parties agreed that it is only on the due dates the amounts of the instalments should become due and payable. Another way of

looking at it would be by seeing whether any consideration moved from the promisor to the promisee for the promisor retaining the amount of each

instalment till the date fixed for the payment thereof. Whether the transaction is looked at as a promise by the promisor in consideration of the

receipt of Rs. 2,400 to pay a sum of Rs. 3,500 by instalments or as a promise to pay the sum of Rs. 3,500 by instalments the creditor deducting

therefrom there and then immediately the amount stipulated by way of interest for the use of the money during the periods of the instalments it

seems to me that the principle of illustration (g) would apply. The essence of the transaction is that the actual consideration which reaches the hands

of the debtor is less (and in this case considerably less) than the total amount which he binds himself to pay by way of instalments and that therefore

the present case is on principle indistinguishable from illustration (g) to Section 74.

I have therefore come to the conclusion that the Lower Appellate Court was right in treating the stipulation for payment of the whole of the

balance as penal. As already stated the learned vakil for the appellant has not argued that the stipulation as to payment of interest at 24 per cent,

per annum is not penal, nor was there any contention advanced on behalf of the appellant that if the stipulation should be held to be penal the basis

on which the Lower Appellate Court has awarded compensation to the plaintiff for breach is not reasonable or sound.

In the result therefore the Second Appeal fails and should be dismissed with costs.