The Savamalai Estates Limited vs P.M. Kannayan

Sethuraman, J.—The defendant in O.S. No. 519 of 1968 in the Court of the Subordinate Judge of Coimbatore is the appellant. The plaintiff

entered into an agreement with the defendant company at Coimbatore on 1st August, 1965 for clearing and uprooting all jungle and shade trees

together with coffee stumps in 20 acres in plot No. 2 in Fields Nos. 5 and 6 of survey No. 39 in Manamboli Estate belonging to the defendant

company. The value of the trees and the coffee stumps in their then existing condition was fixed at Rs. 300 per acre and the plaintiff paid the entire

consideration of Rs. 6,000 for 20 acres. According to the agreement the plaintiff should on or before 15th September, 1965 clear and fell all

standing trees together with the coffee stumps on the 20 acres. It was contemplated that the plaintiff should get the necessary permission from the

concerned authorities for transporting and removing all the trees uprooted as expeditiously as possible. On receipt of such permission any timber or

firewood remaining on the estate at the expiry of the validity of the permit granted by the Collector of Coimbatore would become the property of

the estate. The plaintiff cleared and felled all the trees in the 20 acres and transported all the logs and firewood and charcoal from about 10 acres in

time. The removal of the rest of the logs, firewood and charcoal could not be completed before the date of expiry of the Collector''s permit, that is,

25th April, 1966 on account of various reasons. After 25th April, 1966 when the previous permit had expired, the defendant applied to the

Collector for extension of time for transporting the timber, firewood etc., by a letter dated 12th May, 1966. By his proceedings dated 12th May,

1967 the Collector granted extension of time for three months from that date. The plaintiff came to know about the extension of time and requested

the defendant''s permission to remove the logs etc. The defendant stated in its letter dated 2nd August, 1967 that the plaintiff had no right over the

timber and that he had committed a breach of the contract. The value of the timber etc., which had been left in the defendant''s estate was

estimated at Rs. 24,750 and after deducting the felling charges etc., the plaintiff claimed a sum of Rs. 14,750 as the loss of the timber, logs,

charcoal etc., and in addition claimed to have paid Rs. 2,106 by way of seigniorage charges. Thus, the total amount claimed as due from the

defendant was Rs. 16,856; as the defendant did not pay the said amount in response to a notice sent by the plaintiff on 11th June, 1968, the

plaintiff came forward with the present suit for its recovery.

The defendant in its written statement contended that the Collector''s permit expired on 25th April, 1966, that under the contract the timber etc.,

remaining in the land after that date became its property and that time was of the very essence of the contract. The defendant wanted the clearance

for the purpose of replantation. According to the defendant, the plaintiff had ample opportunity to remove the timber etc., and as he failed to do so,

under the contract, the timber etc., became its properties. As the plaintiff had committed a breach, there was absolutely no cause of action as

against the defendant.

The learned Subordinate Judge came to the conclusion that the contract, Exhibit A-1, embodied all the terms, that time was of the essence of

the contract, that the non-removal of timber etc., was beyond the control of the plaintiff and that the timber etc., remaining on the land had not

become the defendant''s property. In the result, there was a decree for a sum of Rs. 6,000 with proportionate costs and subsequent interest. It is

this decree that is challenged by the defendant in the present appeal.

The learned Counsel for the appellant contended that there was no hindrance to the plaintiffs'' removing of the timber etc., before the stipulated

time and that the timber remaining on the land after the stipulated time, had become the defendant''s property. It was argued that the contract being

in the nature of a licence stood on a par with a lease in respect of which the plea of impossibility of performance envisaged in Section 56 would not

apply and that, in any event, the result of the timber etc., becoming the property of the defendant after 25th April, 1966 could not be said to be a

penalty, which could be relieved against. For the respondent the submission was that the correspondence emanating from the defendant itself

would go to show that the plaintiff could not remove the logs because of non-availability of diesel oil and this is a case in which the plaintiff would

be entitled to realise the value of the logs etc., left on the land.

The only question that arises out of the rival contentions summarised above is as to whether the plaintiff is entitled to the value of the logs etc.,

left on the land of the defendant. Exhibit A-1, which is the agreement dated 1st August, 1965 recites that the contract was entered into for the

purpose of clearing off and uprooting all the trees inclusive of coffee stumps in the particular area on or before 15th September, 1965 to facilitate

the company''s re-planting programme. Clauses 1 and 2 of the agreement are as follows:

The contractor will on or before 15th September, 1963 clear and fell all the standing jungle and shade trees together with the coffee stumps on

the 20 acres in field Nos. 5 and 6 in S. No. 39 demarcated as Plot 2 in the sketch map appended to this agreement.

The contractor will obtain all the necessary permission from the required authorities for transporting and removing from the company''s estate al1

the timber, firewood and coffee stumps uprooted under this agreement as expeditiously as possible on receipt of such permission. Any timber or

firewood remaining on the estate at the expiry of the validity of the permit granted by the Collector of Coimbatore will became the property of the

estate.

It is unnecessary to refer to the other clauses in Exhibit A-1. It is in evidence that the defendant made an application to the District Collector on its

own for permission to transport the timber etc., felled in this area. The first letter was addressed to the Collector on 10th May, 1965 (Exhibit A-2)

and the second letter was on 26th May, 1965 (Exhibit A-3). On 26th July. 1965 the Collector gave the permission, under Exhibit A-5 giving nine

months'' time for removal of the timber etc. This period of nine months would expire on 25th April, 1966. The procedure for removal of the logs

has been described by the learned Subordinate Judge in paragraph 6 of his judgment. There is no dispute about the said description and it runs as

follows:

The cut timber etc., has to be first measured. Then the necessary application has to be made to the (Forest) Range Officer. The Range Officer will

come to the estate and then check the measurement. The Range Officer will also put a property mark by a hammer on every log of timber to be

transported. Then he will issue a certificate. With that certificate, the person who wants to transport has to deposit the necessary seigniorage in the

Forest Office. After depositing that fees on an application made, the Range Officer will issue the necessary passes in triplicate.

This procedure had been taken from what was spoken to by D.W. 1. As mentioned already, the permit in the present case had been obtained in

the name of the defendant-company. It Was therefore, necessary for plaintiff to take the rest of the steps only with the help of the defendant-

company and the passes would also be issued only to the defendant company. The plaintiff had to obtain the initials of the Manager or the head

clerk of the defendant company and then use the lorries | asses for transporting the timber. The plaintiff''s grievance was that on account of the

unhelpful attitude of the then Manager it was difficult to get the forest passes in time. There were also difficulties in getting lorries for the transport of

timber. As early as 3rd October, 1965 the plaintiff wrote in Exhibit A-10 to the defendant''s manager mentioning various difficulties and had also

offered to pay the lorry charges to the defendant if they would offer to give delivery of the consignments at the places where the plaintiff wanted

them. In spite of the difficulties pointed out by the plaintiff, the defendant in Exhibit B-8 dated 19th February, 1966 pointed out that the progress in

the transportation of the timber was slow and that the timber would become their property at the expiry of the permit period. On 12th May, 1966

the defendant itself wrote Exhibit B-14 in which it was mentioned as follows:

Due to acute shortage of diesel oil and lack of transport facilities our contractor could not complete the removal in time. Hence we request you to

kindly extend the time for another 3 months from the date of receipt of permission, so that we could transport the balance timber and firewood as

early as possible and complete our replanting programme during this South West Monsoon.

Again on 11th February, 1967 in Exhibit B-15 the plaintiff repeated the shortage of diesel oil and lack of transport facilities as the reason why the

contractor could not complete the removal of timber etc., in time and wanted extension of time for the removal of the logs etc. The acute shortage

of diesel oil referred to in Exhibits B-14 and B-15 arose on account of the Indo-Pakistan war. It is thus an admitted fact that the plaintiff could not

remove the logs for the reasons beyond his control. It is also clear from the correspondence with the Collector that subsequently the defendant

obtained the necessary permit on the basis of such representations to the Collector about the acute shortage of diesel oil and lack of transport

facilities to remove the logs. It is on these facts the question of rights of parties has to be determined.

If we take time as the essence of the contract, then as pointed out in Exhibits B-14 and B-15 it was impossible for the plaintiff to perform the

contract in the manner contemplated by the parties. As pointed out by Mukherjea, J., in Satyabrata Ghose Vs. Mugneeram Bangur and Co. and

Another, , in deciding cases in India the only doctrine that we have to go by is that of supervening impossibility or illegality as laid down in Section

56 of the Contract Act, taking the word ""impossible"" in its practical and not literal sense. It is in this context that the learned Counsel for the

appellant contended, that the provisions of Section 56 embodying the rule of frustration as avoiding a contract would not apply to a licence, as it

does not apply to a lease. The attempt was to equate a licence, with lease.

I shall first examine the question as to whether Section 56 would apply to leases.This question directly arose in Raja Dhruya Dey Chand v.

Harmohi-binder Singh and another (1958) 3 S.C.R. 339 : (1969) 1 S.C.J. 920 ; A.I R. 1938 S.C. 1024. In that case there was a lease of five

squares of land in the District of Montgomery in the undivided Punjab for two seasons in 1947-48. Following the partition of India in July, 1947

and allotment of the territory in which the lands were situate to Pakistan, the lessee migrated to India. He filed a suit for refund of the rent paid by

him on the ground of impossibility of performance and the application of doctrine of frustration to the contract of lease. The Supreme Court held

that where the property leased was not destroyed or rendered substantially and permanently unfit, the lessee cannot avoid the lease because he

was unable to use the land for the purpose for which it was let to him. It was pointed out, that except in the manner contemplated in Section 108(e)

of the Transfer of Property Act, the doctrine of frustration would not apply to leases. The principle behind this proposition was explained by stating

that there was a clear distinction between a complete conveyance and an executory contract and that events which discharged an executory

contract did not invalidate a concluded transfer. A lease of an immovable property is a transfer of right to enjoy such property for a certain period

or in perpetuity in consideration of what is called rent. The rent may be in cash or in kind or in the shape of service or any other thing of value. Just

as in the case of a sale deed the destruction of he properties subsequent to the execution and registration of a sale deed would not avoid the

transfer, similarly in the case of a lease, there is a transfer of property on the execution of the document or on the commencement of the ease as

contemplated by the parties. It is as much a concluded contract as a sale. There is nothing executory about the transfer. It is because of these

considerations that Courts have not applied Section 56 of the Contract Act to leases, though Section 4 of the Transfer of Property Act provides

that the chapters and sections of that Act which related to contracts should be taken as part of the Indian Contract Act. Whatever may by the

position as regards the leases, this is a case of licence and the distinction between lease and licence is quite well-known. ''Licence'' is defined in

Section 52 of the Indian Easements Act of 1882 as a right to do or continue to do, in or upon the immovable property of the grantor, something

which would, in the absence of such right, he unlawful and such right does not amount to an easment, or an interest in the property. A lease, on the

other hand, is a transfer of right to enjoy an immovable property and is thus an interest in immovable property. Therefore, what applies to a lease

would not necessarily apply to a licence. The contract in the present case is also executory in character because it contemplates an act being done

in accordance with it in the shape of cutting of the timber and removal thereof. Therefore; whatever applies to leases cannot ipso facto apply to a

licence like this. The impossibility of performance within the time contemplated would attract Section 56.

The next aspect to be considered is whether the clause providing for timber etc., becoming the property of the defendant if it was not removed

before the expiry of the permit is a penal one so that Courts would have jurisdiction to mitigate it.

The learned Counsel for the appellant relied on Karnani Industrial Bank Limited v. Bengal Province AIR 1949 Cal. 47, as supporting his

proposition that a clause like this vesting the timber etc., lying on the land in the owner, was nothing unusual and was valid. That was a case of a

lease of brick fields for 10 years. There was a clause providing for the removal of the bricks and the other materials on the demised land before the

expirty of the lease period or within three months thereafter by the lessee. The lessee in that case had on the land same boilers, engines, trucks,

kilns, railway and tram lines which were useful in the manufacture and transport of bricks. On account of some breach of the terms of the lease, the

owner of the land, the Government in that case, sued for ejectment and damages. The lessee contested the suit contending that the lease had not

been validly terminated, that they were not required to remove the bricks and other items at the termination of the contract and that the said terms

were illegal and penal. It was argued that the Government was not entitled to forfeit them. It is in this context that the question as to whether the

forfeiture of those items amounted to a penalty came up for consideration. The Calcutta High Court held that the clause was not penal in character.

The decision as to whether the terms of a contract contained any provision by way of penalty has to be determined on the terms of the

contract. The Supreme Court considered this question in two later decisions. The first of them is Fateh Chand Vs. Balkishan Das, . In that case

under the agreement dated 21st March, 1949 there was a sale of leasehold rights in a piece of land and in the buildings constructed thereon to the

defendant. The plaintiff received R.s. 25,000 under the agreement and delivered possession. However the sale was not actually completed before

the expiry of the period stipulated in the agreement, and the vendor instituted a suit claiming to forfeit the amount of Rs. 25,000 received by him

and praying for a decree for possession of the land and building and also for compensation for use and occupation thereof. The defendant

contended that the plaintiff had broken the contract and that the sum of Rs. 25,000 could not be forfeited. The Supreme Court held that there was

a breach of the contract and that the vendor could forfeit only Rs. 1,000 received as the earnest money and was also entitled to compensation at

the rate of Rs. 140 per month. In the course of the judgment at page 527 it was observed as follows:

Before turning to the question about the compensation which may be awarded to the plaintiff, it is necessary to consider whether Section 74

applies to stipulations for forfeiture of amounts desposited or paid under the contract. It was urged that the section deals in terms with the right to

receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the

party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that Section 74 applies only to cases

where the aggrieved party is seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount

received under the contract is sought to be forfeited. In our judgment the expression ''the contract contains any other stipulation by way of penalty''

comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in

future or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable

compensation is statutorily imposed upon Courts by Section 74. In all cases, therefore, where there is a stipulation in the nature of penalty for

forfeiture of an amount deposited pursuant to the terms of the contract which expressly provides for forfeiture, the Court has jurisdiction to award

such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture.

Again at page 530 it was pointed out that Section 74 merely declared the liability that notwithstanding any term in the contract pre-determining

damages or providing for forfeiture of any property by way of penalty, the Court would award to the party aggrieved only reasonable

compensation not exceeding the amount named or penalty stipulated. The Court has to adjudge in every case reasonable compensation to which

the plaintiff is entitled from the defendant on breach of contract. In this context the loss sustained by the party affected by the breach had to be

proved. In that case the Supreme Court remarked that there was no evidence that any loss was suffered by the plaintiff in consequence of the

default by the defendant, save as to the loss suffered by him by having been kept out of possession of the property. In Maula Bux Vs. Union of

India (UOI), , which was a case of sale of goods where certain money had been kept in deposit for due performance of the contract for supply of

the goods and where the amount so deposited was sought to be forfeited, the Supreme Court pointed out at page 933 that forfeiture of earnest

money under a contract for sale of property-movable or immovable-if the amount was reasonable, did not fall within Section 74 and referred to

several cases in this behalf and explained them as follows:

These cases are easily explained, for forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if

forfeiture is of the nature of penalty Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of

money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of

penalty.

In that case the Union Government which was the defendant sought to forfeit Rs. 18,500 out of which Rs. 10,000 related to supplies of potato and

Rs. 8,500 to poultry contract. It was contended that these represented the estimate of damages which the Government was likely to suffer as a

result of breach of contract and that the plaintiff was not entitled to any relief against forfeiture. Dealing with this aspect the Supreme Court

observed at page 933 as follows:

Reliance in support of this contention was placed upon the expression (used in, Section 74 of the Contract Act) ''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''. It is true that in every case of breach of contract the person aggrieved by the breach is not required to prove

actual loss or damage suffered by him before he can claim a decree, and the Court is competent to award reasonable compensation in case of

breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression ''whether or not

actual damages or loss is proved to have been caused thereby'' is intended to cover different classes of contracts which come before the Courts. In

the case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, While in other cases

compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by

the parties if it be regarded as the genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the

sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss

suffered by him.

The distinction between the penalty and liquidated damages has to be borne in mind. The parties to a contract may agree beforehand what sum

shall be payable by way of damages in the event of breach, as, for instance it may be stated that a sum of Rs. 500 a day for every day of the

building remaining unfinished after the contractual date for completion may be stipulated as payable by the contractor to the owner. The sum fixed

in this manner falls into one of two classes. It may be a genuine pre-estimate of the loss that may be caused to one party if the contract is broken

by the other. In such a case it is called ""liquidated damages"" and it constitutes the amount, no more and no less, that the plaintiff is entitled to

recover in the event of breach without being required to prove actual damage. In other words, the parties may have themselves assessed the

damage at a particular figure. Secondly it may be in the nature of a threat held over the other party in terrorem, a security to the promisee that the

contract will be performed. A sum of this nature is called a penalty, and it has long been subject to equitable jurisdiction. Courts of equity have

taken the view that, since a penalty is designed as mere security for the performance of the contract, the promisee is sufficiently compensated by

being indemnified for his actual loss, and that he acts unconscionably if he demands a sum which, though certainly fixed by agreement, may well be

disproportionate to the injury. The rule, therefore, is that the plaintiff who brings an action for the enforcement of a penalty can recover

compensation only for the damage that he has in fact suffered. A penalty, in other words, covers but does not assess the damage. See Cheshire

and Fifoot, the Law of Contract, Seventh Edition, page 561.

In the present case the value of the timber etc., sought to be forfeited has absolutely no relation to any damages that the defendant can be said

to have suffered. It is in evidence that the plaintiff had stacked the timber, logs etc., in such a manner as not to affect the replantation activity. The

replantation activity could not have been affected thereby. The defendant has not also proved any loss that it has sustained. The quantity of timber

that may be left in the land is so uncertain in that it could have been considered to represent any measure of damages or compensation for any loss

that may be sustained by the defendant. This is thus a clear case of penalty. Section 74 of the Contract Act authorises the Court to award

compensation not exceeding the amount of the penalty stipulated for. As in this case there is no question of any compensation, as no loss is proved

to have been suffered by the defendant, there is no scope or justification for granting any amount as damages. The result is that the defendant has

to pay for the value of the timber etc., left in the defendant''s land. There was no dispute about the valuation of the timber as such.

The appeal, therefore, fails and it is dismissed with costs.