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Judgment
This appeal arises out of the defendant''s default in connection with a chit conducted by the plaintiff. The defendant was the successful bidder at
the second auction held and afterwards paid the third, fourth and fifth instalments correctly. He defaulted in payment of the sixth instalment and the
plaintiff is now attempting to recover the money on the bond, which on taking the prize at the second auction the defendant executed. The lower
court has held that the terms of the Kararnama, Exh. A, are penal and not enforceable, and it has accordingly given relief to the defendant in a
manner to be particularly explained with reference to the conditions, under which the chit was worked. Ex. A shows that the chit was to be in 12
instalments, the subscription for each being Rs. 1,000. The instalments were at intervals of six months. The total subscription for the first instalment
went to the stake-holder and that for the last instalment went to any subscriber, who had not bid at any of the intermediate instalments. The
subscription at each of these intermediate instalments was available for loan to the successful bidder at the auction, which was held every six
months, the successful bidder being the bidder who offered to accept the lowest proportion of the total subscription. The other provisions to be
referred to are that in case the subscribers failed to pay their subscriptions they were not only to forfeit the dividend, interest and premium, which
will next be explained, but were also to pay the whole amount on demand with interest therein at 1 1/2 per cent per mensem from the date of the
auction; and it was provided further that the successful bidders should in each case within 15 days executed documents to the stake-holder for the
due payment of the chit amounts of the subsequent instalments and for abiding by the terms of Exh. A, Exh. B being the document executed by the
defendant. Reference has been made to the dividend and interest. The dividend apparently refers to the amount to be distributed among the
subscribers by deduction from the amount payable by them of the difference between Rs. 12,000 the nominal amount available at each auction,
and the amount which the successful bidder aggreed to accept instead of it. Interest is explained as being the Sum of Rs. 720 which, the agreement
provides, was to be deducted from the nominal amount of the subscriptions at each instalment for interest due for the ensuing six months, the
principle being apparently that the subscribers who had not been successful at that auction were to be compensated by deductions from what they
had to pay for use of their money during the six months.
The lower court on these terms has observed that the agreement is penal in three respects, firstly the liability of the defaulter for future
instalments from the date of his default, secondly his deprivation of the dividend and interest above referred to, and thirdly the imposition on him of
liability for interest on the amount due from him at 18 per cent, from the date of his default; and it has further said, that, although each of the said
three stipulations taken by itself may not amount to a penal stipulation, yet the three together are penal and should be relieved against. It has given
relief by awarding the actual amount of payments, which the defendant would have had to make on account of each instalment if he had not
defaulted, together with a reasonable compensation of Rs. 50 in connection with each default.
In reaching this conclusion the lower court has, it seems to us, entirely lost sight of the most material element in the case, it had, speaking
generally, to decide whether these terms were unreasonable as a whole and whether in fact they were so unreasonable that the parties never
contemplated that they should receive effect. Yet throughtout the whole of the lower Court''s judgment we find no mention of the special relation, in
which the stake-holder of the chit is to the subscribers, and the special necessity for provision for protection of his interest in the agreement, by
which those relations are regulated. That this relation is of a special nature and justifies stringency in those conditions and in particular in the rate of
interest provided for cases of default has been clearly recognised in the decisions in Periyaswami Thalavar v. Subramania Asari (1903) 14 M.L.J.
136 and Gundala Venkatrama Doss Panthulu Garu v. Thorada Pulliah and Ors. (1921) A.C. 376 and S. A. No. 23 of 1902, with which we
respectfully agree. The stake-holder has necessarily to depend on punctual payments from his subscribers and to reserve to himself powers to
enforce such payments. For the stakeholder alone is liable to each subscriber and there is no liability between the subscribers inter se; and without
punctual payments by the individual subscribers the stake-holder could not discharge his liabilities to the successful bidders, as they arose. In Ex. A
in fact the stake-holder is given exceptional powers, including the power to remove a subscriber who makes default during the currency of the chit
and to introduce a new subscriber in his stead. Looking at the transaction as a whole, as delined by Ex. A, we are unable to hold that any of the
conditions are unreasonable or are such as the parties might not naturally recognise should regulate the exceptional relations between them.
Generally therefore we cannot treat any of them as penal. In these circumstances we turn to the two arguments on which the lower Court has
relied.
The lower Court has firstly attached importance to the waiver by the plaintiff of his right to enforce the terms, of Ex. B in connection with the
fourth and fifth instalments. We need only refer to Maclaine v. Gatty. as an authority for the position that such a waiver does not affect the
creditor''s right to use the coercive measures provided by his bond in cases of future default.
Next full argument was addressed to us to show that the stipulations to which reference has been made are essentially penal. Wallis v. Smith 21
Ch. D 243 was cited and reference was also made to Thompson Hudson, 4 H.L.C. 1. In the former of these authorities the question directly under
consideration was the effect of default in payment of the prescribed sum of money in connection with the breach of one or other of a number of
obligations, an obligation to pay a far smaller sum of money being one of them. That is not directly applicable here. It was only incidentally in the
course of the judgments, particularly in that of Lord Justice Lindley, that the principle on which the defendant now relies was referred to. That
principle, which is fully supported by the second case already cited, is shortly that no substitution of liability for a larger sum in case of default for a
simaller sum will be enforced by the court. But, though that principle can be accepted at once, it is not sufficient for the decision of this case; for we
are not satisfied that the substitution of a larger sum of money for a smaller one is in question, in Exhibits A and B. It is urged that there is such a
substitution inasmuch as Exhibit B is for instalments calculated each at Rs. 1,000 whereas the instalment actually payable in each case was less,
firstly because it should have included only what the defendant had to pay, if he had continued without default and next in view of the deduction
which under Exhibit A. was to be made from each subscription on account of interest as already explained, the benefit of each of these deductions
being forfeited under Exhibit B.
With reference to the first objection it can only be said that both Exhibits. A and B are clear. They provide for the defendant''s liability for the
whole amount of each subscription and not for the amount, which he might have turned out liable for. In fact it is difficult to say how any other
arrangement could have been made. The lesser amount which the defendant contends should have been made the basis of his liability could not be
ascertained until each auction was held; and it may be observed on the other side that, if the amount which the plaintiff would have been entitled to
receive were to be the measure of the defendant''s liability, it is difficult to; avoid the argument that the amount, which the plaintiff would have had
to expend in order to find money by borrowing for distribution to the share-holders, should also have been taken into account. We can readily
understand that the arrangement in case of default was for a fixed liability and not for a sum which could not be ascertained when the default
occured and we therefore read Exhibit A is imposing a liability of the former description. Then as regards interest we think the tenour of Exhibit A
is clear. The subscription is always referred to as one of Rs. 1,000 per instalment and the amount of interest is referred to as the sum to be
deducted from the Rs. 12000. There is no question of the defendant being liable only for the net amount.
In these circumstances we allow the appeal and modify the Lower Court''s decree by substituting a. decree for the amount claimed in the plaint
with interest and costs in both courts. Time for redemption, six months from this date.