Sankaranarayana Vadhyar vs Sankaranarayana Ayyar

Arnold White, C.J.—In this case the defendant was indebted to the stake-holder of a chit fund in a sum of Rs. 750. He undertook to pay

this sum by half-yearly instalments of Rs. 62-8-0 and in default he bound himself to pay in a lump sum on demand the principal debt and interest at

the rate of 1 pie per diem per rupee from the date of default. The half-yearly instalments of Rs. 62-8-0, which the defendant undertook to pay,

were on account of principal only. There is some conflict of authority with reference to the enforcement of stipulations which provide for the

payment of a higher rate of interest on default, but the authorities appear to be uniform at any rate to this extent--that when the higher rate of

interest is payable as from the date of default and not as from the date of the contract, the contract rate is enforceable. See Arulu Mastry v.

Wakuthu Chinnayan 2 M.H.C.R. 205 Nanjappa v. Nanjappa ILR 12 Mad. 161 the judgment of this Court (Shephard, J. and Davies, J.) in

Krishnasami Ayyar v. Samu Ayyar Second Appeal No. 1303 of 1896 (unreported), Dullabhdas Devchandshet v. Lakshmandas Swarupchand

ILR 14 Bom. 200 Umarkhan Mahamadkhan Deshmukh v. Salekhan ILR 17 Bom. 106 Mackintosh v. Crow ILR 9 Calc. 689 and Deno Nath

Santh v. Nibaran Chandra Chuckerbutty ILR 27 Calc. 421. The result of the authorities is thus stated by Sargent, C.J., in Umarkhan

Mahamadkhan Deshmukh v. Salekhan L.R. 10 IndAp 162 ""a proviso for retrospective enhancement of interest in default of payment of the

interest at due date is generally a penalty which should be relieved against, but a proviso for enhanced interest in the future cannot be considered as

a penalty) unless the enhanced rate be such as to lead to the conclusion that it could not have been intended to be part of the primary contract

between the parties."" As pointed out by this Court in the case of Nanjappa v. Nanjappa ILR 12 Mad. 161 when the agreement is to pay the

higher rate as from the date of default no question of penalty really arises. At the moment of the breach no larger sum can be exacted by the

creditor, but from the date of the breach the terms on which the debtor holds the money become less favourable. ""By the default he accepts the

alternative arrangement of paying a higher rate of interest for the future. On the other hand when the stipulation is that on default the higher rate shall

be payable from the date of the original obligation, the debtor does on default become immediately liable for a larger sum."" The decisions in the

cases in which the Courts have gone further and, following the decision of the Privy Council in Rai Balkishen Dass v. Raja Run Bahadoor Singh

L.R. 10 IndAp 162 have held that the contract rate is enforceable even where the higher rate is payable as from the date of the agreement (see for

instance Basavayya v. Subbarazu ILR 11 Mad. 294 Narayanasami Naidu v. Narayana Rau ILR 17 Mad. 62 Arjan Bibi v. Asgar Ali Chowdhuri

ILR 13 Calc. 200 Banwari Das v. Muhammad Mashiat ILR 9 All. 690, and Banke Behari v. Sundar Lal ILR 15 All. 232 do not of course conflict

with this view.

It seems to me both on principle and on authority that, as the law stood under the Act of 1872, when the enhanced rate of interest only becomes

payable as from the date of default, the stipulation ought not to be construed as a stipulation by way of penalty and the debtor ought not to be

relieved therefrom. The mere fact that the rate of interest which the debtor agrees to pay is high, or even exorbitant, is, in itself, of course no reason

for relieving him from his bargain, although it may be evidence that the parties were not dealing at arm''s length and that some unfair advantage was

taken by the creditor--in other words, that there was no real contract between the parties. In the present case, however, having regard to the

relations between the parties and the circumstances in which the defendant undertook the obligation which he failed to fulfil, I am certainly not

prepared to say that the rate of interest was exorbitant.

Moreover, in the present case it is to be observed that the contract was not one which provided for the payment of a given rate of interest in any

event and a higher rate in the event of default. Under the agreement the debtor incurred no obligation to pay interest at all on the money which he

owed. His liability to pay interest only arose in the event of default. It seems to me that, if the principle on which the Courts have drawn a

distinction between agreements under which a higher rate of interest is payable as from the date of default and agreements under which a higher

rate is payable as from the date of the agreement, is sound, as I think it is, the principle applies a fortiori where the creditor may be said to waive

his right to interest so long as the debtor fulfils his obligation and where the liability to pay interest at all only arises as from the date when the debtor

fails to fulfil his obligation.

So much for the law as it stood under the Act of 1872. The next question for consideration is--assuming the amending Act of 1899 applies, is

the defendant entitled, u/s 4 of the Act, to be relieved from his contractual obligation?

As regards the enacting portion of the section, the alterations would seem to be merely verbal. The explanation, however, declares that a

stipulation for increased interest from the date of default may be a stipulation by way of penalty. The explanation appears to be intended to meet

the decisions to which I have referred. It is to be observed, however, that the explanation only says that the stipulation may be a stipulation by way

of penalty. There is nothing in the explanation to preclude a Court from holding that, notwithstanding that the stipulation was for increased interest

from the date of default and not from the date of agreement, the stipulation ought not to be regarded as a stipulation by way of penalty. Further, the

explanation does not apply to the contract in the present case, where the stipulation was not for increased interest on default, but for interest on

default, no interest being payable if there was no default. None of the new illustrations cover the present case, but there is nothing in any of the

illustrations which conflicts with the view indicated above. Putting the proposition of law in the form of an illustration it would run thus: A

undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that, in default of payment of any instalment, the

whole shall become due, with interest from the date of default. The fact that interest is payable from the date of default does not, in itself, render the

stipulation one by way of penalty.

It seems to me, therefore, that as a question of construction, Section 4 of the Act of 1899 would not preclude a Court from holding that the

stipulation in the contract in question is not a stipulation by way of penalty.

If the view, expressed above, is right, the question whether, on the construction of Section 1 (3) of the Act of 1899, the Act applies at all to the

contract in the present case, would not arise. This question of construction, however, has been fully argued, and I propose to deal with it. The Act

came into operation on 1st May 1899. The decree of the Court of First Instance (which gave the plaintiff interest at the contract rate) was before

the Act came into operation. The decree of the lower Appellate Court, which gave the plaintiff interest at the rate of 12 per cent. only, was after

the Act came into operation. Section 1 (3) of the Act of 1899 provides that the Act shall apply to every contract in respect of which any suit is

instituted, or which is put in issue in any suit, after the commencement of the Act. The question, therefore, turns on the construction of the words or

which is put in issue in any suit.

The contention on behalf of the defendant was that the words ""put in issue"" were not intended to be used in any technical sense and that the

word ""suit"" included ""appeal."" On behalf of the plaintiff it was argued that the word ""suit"" as first used in the sub-section obviously meant suit in the

restricted sense and that it should be so construed when it is used in connection with the words ""put in issue."" In the view I take of the construction

of the section it is not necessary to deal with these points. If it were I should be disposed to say that the words ""which is put in issue"" mean nothing

more than ""which is in issue"" and that where there is an appeal from a decree in a suit instituted in respect of a contract the contract is ""in issue"" in

the appeal. It seems to me, however, that the words ""put in issue"" in any suit mean put in issue in any suit instituted after the commencement of the

Act. I concede that this intention could have been made clear beyond all doubt by the introduction of the word ""instituted"" after the words, ""in any

suit,"" and that the construction which I am prepared to adopt is not the strict grammatical construction of the sub-section. It seems to me, however,

that to construe it otherwise would lead to serious inconveniences and anomalies and that, having regard to the general scope of the amendments

made by the Act and the canons of construction in cases where vested rights are affected or the legal character of past transactions is concerned,

the Act should be construed as applying only to suits instituted after the commencement of the Act. I think the words ""or which is put in issue in any

suit"" were intended to apply to cases where, although the suit is not instituted in respect of the contract, the contract is put in issue in the suit. The

words ""contract in respect of which any suit is instituted"" apply to cases where a suit is brought to enforce a contract or to have a contract set

aside. The words ""contract...which is put in issue"" apply to cases where it becomes necessary for the Court to adjudicate upon a contract, although

the suit was not brought either to enforce it or to have it set aside.

I think this appeal should be allowed with costs here and in the lower Appellate Court, the decree of the lower Appellate Court set aside, and

that of the District Munsif restored. The plaintiff is entitled to interest at the contract rate on the principal debt Rs. 600 from the date of the plaint

until the date of the Munsif''s decree and interest at the rate of 6 per cent. from the data of the Munsif''s decree until payment.

Davies, J.

The defendant was under an obligation to pay Rs. 750 in half-yearly instalments of Rs. 62 1/2 to a benefit fund and ha executed a bond to the

plaintiff who was managing the fund to make payment accordingly. In default of the payment of the instalments on the due dates, he stipulated that

the whole principal should become payable at once and that he would pay interest on the instalments in case of non-payment on the fixed dates at

the rate of 1 pie per diem per rupee.

The only question before us is whether the interest so agreed upon is recoverable in full as the contract rate between the parties, u/s 2 of Act

XXVIII of 1855, which provides that ""in any suit in which interest is recoverable, the amount shall be adjudged or decreed by the Court at the rate

(if any) agreed upon by the parties"" or whether that rate, being a very high one-- amounting as it does to about 180 per cent. per annum--ought to

be relieved against as a penalty, and only a lower rate allowed. The contract rate was allowed by the District Munsif, but the Subordinate Judge, in

appeal, holding that rate to be exorbitant, decreed at the rate of only 12 per cent. per annum. Hence this second appeal by the plaintiff, whose

pleader points out that in an exactly similar case in the same Munsif''s Court, a Division Bench of this Court in Krishnasami Ayyar v. Samu Ayyar

ILR 3 All. 260 decided in favour of the contract rate. There is no question here, nor was there in the second appeal just referred to, as to the

contract being voidable on the ground of the defendant not understanding the transaction. He entered into it with free consent and the parties were

on an equal footing. Section 74 of the Contract Act, and the numerous and various decisions of the High Courts in India in regard to the provision

in a contract for an increased rate of interest when there is a default in payment of a lower rate, are also, in my opinion, inapplicable to this case,

inasmuch as no increased rate of interest is here stipulated for. The agreement simply was that interest was to be paid on overdue instalments, and

the rate of such interest was once for all fixed. So what the respondent''s pleader mainly relies on is a ruling of the Allahabad High Court that when

an extravagant rate of interest is provided for it is only equitable to hold that ""interest"" was not intended to mean ""interest"" but a penalty--in other

words, that though nominally interest, it was really penalty Bansidhar v. Bu Ali Khan Second Appeal No. 1303 of 1896 (unreported). But I am

unable to agree in this view. When persons make an engagement with their eyes open they should be bound by it: although to the Court the bargain

may appear extortionate it may in reality not be so. It is impossible for the Court always to know what are the considerations weighing between

parties when they come to an agreement, especially in money matters. The urgency of the demand, and the scarcity of the supply, would often

operate to increase the cost--or in this case the fund might itself have had to pay for the money it required to enable it to be carried on an

exorbitant rate of interest, if the defendant failed to keep up to his engagement. So that when the intention of the parties is plain and unmistakable

as it is here, that intention must be given effect to. In accordance with this view it was held in Appu Rau v. Suryanarayana ILR 10 Mad. 203 that

the mere fact that the terms are exorbitant is of itself no reason for not enforcing a contract duly made, and an the same principle in Arjan Bibi v.

Asgur Ali Chowdhuri ILR 13 Calc. 200 a rate of interest almost as high as that in the present case, namely, 2 annas per rupee per month, was

decreed. I am therefore clearly of opinion that the decision in Krishnasami Ayyar v. Samu Ayyar Second Appeal No. 1303 of 1896 (unreported.)

was right, and following it, I would reverse the decree of the lower Appellate Court and restore that of the Munsif, plus the further interest

awarded in the judgment of the learned Chief Justice. The respondent must pay the appellant''s costs in this and in the lower Appellate Court.