1. The defendant borrowed Es. 30 from the plaintiff and executed a promissory note promising to pay on demand the principal with interest at one rupee per week, i.e. at about Rs. 172 per cent per annum. In a suit on the note the Subordinate Judge reduced the rate of interest to 24% on the ground that the contract rate was extortionate. He took no evidence and does not find that the contract was procured by undue influence as denned and explained in Section 16 of the Contract Act. The question is whether the Judge had power to reopen the contract and reduce the rate of interest.
2. The argument in support of such a power is rested on two grounds. It was argued that there is a head of equity apart and distinct from ' undue influence ' which would enable a Court of Equity in England to reopen a contract which the court thought ' hard or unconscionable' and that the British Indian Courts which are also courts of Equity can exercise the same jurisdiction apart from and outside the provisions of the Contract Act. This argument appears to proceed on a misapprehension of the English doctrine as to harsh and unconscionable bargains and is further opposed to authority. As we understand the law, the fact that a bargain appears to the court hard or unconscionable, is not by itself sufficient ground for equitable relief, but there must be some disparity in the position of the parties actual or presumed or some circumstance, such as surprise ignorance, distress or even poverty which prevented the parties to the transaction from meeting on equal terms. A theory of constructive fraud was developed which included cases of undue influence strictly so called of which Huguenin v. Baseley (1807) 14 Ves. 273 : 9 R.R. 276 was the type and cases of unconscionable bargains of which Earl of Chesterfield v. Jansen (1750) 2 Ves. Sen 155 was the type, Both these classes were based on the common principle that where one person is in a position to dominate the will of another either on account of antecedent relationship or because of the circumstances attending a particular transaction so as to prevent that other from giving an intelligent or free consent to the bargain, the person who obtained an undue advantage by using his position should not in justice be allowed to retain it. What those circumstances were the Courts declined to define. To the substantive doctrine, there were added certain rules of evidence or presumption which in some cases subsequently crystallised into rigid rules of law as in the case of sales of reversions and certain other dealings with expectant heirs necessitating the interference of the legislature. The Indian Legislature has included all these matters in a comprehensive definition or explanation under the head of undue influence, in Section 16 of the Contract Act, The section as originally enacted was found inadequate to meet all cases and has therefore been amended and re-enacted in 1899. Clause 3 of Section 16 is in substantial accord with the English Equity doctrine as to unconscionable bargains, though in its application the different circumstances of this country will have to be taken into account; for instance as the English Courts invented the class ' Expectant heirs', we have developed the class of Pardanashin women. At the same time inasmuch as Courts of Equity in England and following them the Courts here did not in this class of cases wholly set aside the transaction, but gave relief only on terms, a new Section 19-A was added to give effect to this rule. In Dhanipal Das v. Raja Muneshwar Bahsh Singh (1906) L.R. 33 I. A 118 at p. 127 28 All. 570 Lord Davey said
" Apart from a recent statute (Money Lenders Act) an English Court of Equity could not give relief from a transaction or contract merely on the ground that it was a hard bargain, except perhaps where the extortion is so great, as to be itself evidence of fraud. In other cases there must be some other equity arising from the position of the parties or the particular circumstances of the case"
. The same case is also authority for the position that we are not entitled to travel outside the provisions of the Contract Act, and invent a new head of equity; and the same principle has been acted upon in several recent cases in this Court.
Ranee Annapurni Nachiar v. Swaminatha Chettiar (
1910) I.LR. 34 M. 7 :
20 M.L.J. 785 and
Kesavelu Naidu v. Arithulai Ammal (1912) I.L.R. 36 M. 533. The decisions of the Judicial Committee in
Srimati Kamini Sundari Chowdhrani v. Kali Prosonno Ghosh (
1895) LR. 12 I.A. 215 :
I.L.R. 12 C. 225 and
Rajah Mokhan Singh v. Rajah Rup Singh (1893) L.R. 20 I.A. 127 which were strongly relied on by the respondent are not authorities to the contrary. The first of these cases falls within Clause 3 of Section 16. Though that clause has not been enacted when the decision was passed, it must be remembered that the rule embodied in it has always been acted upon as a rule of evidence and the burden of proof laid on the party supporting the transaction. Their Lordships carefully point out the circumstances which showed that the parties were not meeting on equal terms. It was the case of a pardanashin and her muktiar and their Lordships cited the decision of the Master of the Rolls in Benyon v. Cook (1875) 10 Ch. A. 389 as correctly laying down the law. The transaction in Benyon v. Cook (1875) 10 Ch. A. 389 was with a person who came under the class of 'expectant heirs'. The Master of the Rolls in the opening sentences of his judgment determines first that the party seeking relief came within that class and then considers whether the bargain was unconscionable. Their Lordships no doubt say in a previous portion of the judgment that the finding of the lower court against fraud and undue influence must be accepted; that apparently means that there was no proof of actual imposition in the case. In Mokhan Singh v. Rup Singh (1893) L.R. 20 I.A. 127 the transaction was with a person in a position analogous to that of an expectant heir. Even in cases of specific performance, the mere fact that the bargain was harsh or onerous is no defence. See
Davis v. Maung Shwe Go (
1911) L.R. 38 I.A. 155 :
38 C. 805. It may also be pointed out that the words 'harsh and unconscionable bargains' are oftentimes used so as to include the element of inequality in the position of the parties. We are therefore unable to accept this argument.
3. It was then contended that the contract to pay a heavy rate of interest is by itself a stipulation by way of ' penalty' and can be relieved against under Section 74 of the Contract Act. Though the distinction between 'penalty' and 'liquidated damages' was abolished by the Contract Act, and however wide the powers of a court may be to relieve against all stipulations which it considers penal irrespective of the language of the Contract, it is quite clear that there cannot be a stipulation by way of penalty unless there is another antecedent promise; for the section says, that for the sum named to be treated as a penalty, it must be an amount to be paid in case of a breach of the contract, i.e., breach of an antecedent promise; a promise for consideration is a contract. ' Any other stipulation by way of penalty' similarly means a provision intended to secure the performance of the main contract. As stated in Bouvier's Law Dictionary ' a penalty always includes two distinct engagements.' If courts have power to relieve parties from their main contracts as stipulation in the nature of penalty whenever they think the bargain was harsh or unconscionable there would in many cases be no need for any investigation as to whether undue influence was exercised or fraud practised in the obtaining of the contract. Several cases were cited by the respondent, but there is no case in this Court which in any way lends support to his argument; on the other hand in Annamalai Chettiar v. Veerabadram Chetty (1902) I.L.R. 26 M. 111 and in Vevkataramiah Pillai v. Subramania Pillai (1916) 37 I.C. 799 decided very recently, (both of them cases of loans), the distinction between the primary obligation to repay the loan with interest as agreed to, and a penalty stipulated to be paid on its breach was kept up. The learned Judges while relieving against the penalty felt themselves bound to give some compensation for the breach of the contract beyond enforcing it. In Surya Devara Seetharamayya v. Suryadevara Kotayya (1916) 35 I.C. 111, Ayling, J., clearly explained the difference between the primary obligation and the subsidiary proviso, intended to secure the due performance of the primary obligation or to fix the compensation payable on its breach. The other learned Judge, Abdur Rahim, J., though he differed from him on another point, not material now, did not express any dissent on this question; on the other hand he was a party to the decision in Venkataramiah Pillai v. Subramania Pillai (1916) 37 I.C. 799 already referred to. Neither the decision of the full Bench of this Court in A. Muthukrishna Aiyar v. Sankaralingam Pillai (1912) I.L.R. 36 M. 229 : 24 M.L.J. 135 nor the Judgment of Sadasiva Aiyar, J, in the order of reference, lends any support to the respondent; on the other hand the definition of 'penalty' given by Sadasiva Aiyar, J., at page 238 of the report is against the contention. Though references to the Money Lenders Act and to the decisions of the House of Lords especially Samuel v. Newbould (1906) L.R. A.C 461 decided on the statute are made, it is nowhere stated that the Indian Courts have under Section 74 of the Contract Act, the powers conferred on the English Court by the Money Lenders Act. There are however some cases recently decided by the Calcutta High Court which appear to lend support to the argument of the respondent. The first of these cases is Bouwang Rajah Challaphroo Chmodhury v. Banga Behari Sen (1915) 22 C.L.J. 311 : 20 C.W.N. 408 in which a person borrowed Es. 400 and agreed to pay it with interest at 4 per cent, per mensem with six monthly rests. When the suit was brought nearly 16 years after, the amount due under the bond came to over Rs. 3,75,000, though the plaintiff claimed only Rs. 3,000 as there was no means of recovering the balance. The learned Judges reopened the contract and reduced the rate of interest. No particular section of the contract act is referred to and it may be that they set aside the contract as being induced by undue influence within the meaning of Section 16; for as pointed out in Muthukrishna Aiyar v. Sankaralingam Pilial (1912) I.L.R. 36 M. 229 a grossly extravagant rate of interest may itself be evidence of undue influence and slight circumstances of inequality between the parties may be enough to bring the case under Section 16 of the Act. It must however be conceded that Mookerjee, J., delivering the judgment of the Court referred to the rate of interest as penal and cited cases where relief was given on the ground of undue influence and also cases in which relief was given on the ground of penalty. The same remarks apply to Gopeswar Saha v. Jadav Chandra (1916) I.L.R. 43 C. 632. In the latest case in that court Krishna Charan Barman v. Sanat Kumar Das (1916) I.L.R. 44 C. 162 the learned Chief Justice of Bengal and Mookerjee, J., expressly lay down that a primary stipulation to pay interest may be a penalty and that learned Judge Mookerjee, J., states that the previous decisions above referred to were also decided on the ground that the stipulations for interest were in the nature of penalty. With all respect to the learned Judges we are unable to accept the position as sound. It must be remembered that Section 74 does not deal exclusively or primarily with money-lending contracts. If this decision is sound, courts would have power as already said to relieve a person from the performance of his contract whenever the court thinks the contract harsh in the circumstances of the case. No authority is cited, except the two cases already referred to, in support of such a proposition. Even the Money Lenders Act in England does not appear to give the English Court such a power in money lending contracts and we know of no authority which supports such a definition of penalty as regards other species of contracts. Mr. Krishnamachariar argued that in a contract of loan, the promise to pay interest must be deemed to be compensation for breach of the promise to repay the principal and an excessive rate of interest must therefore be viewed as a penalty and contended that the Calcutta decision was based on the same principle. This argument ignores the distinction between compensation for the loan and compensation for breach of the promise to repay the amount of the loan with interest. The loan made by the lender is the consideration for the promise of the borrower to repay the amount of loan with the addition of another sum as interest for allowing the debtor to have the use of the money, i.e. compensation for the money lent; but the interest is not compensation for the breach of the promise; for the promise is to pay the principal and interest. If the promise is to pay a certain sum on a particular day and in default of payment on that day to pay interest, then the agreement to pay interest may be a stipulation by way, of penalty; that was the decision of the Full Bench of this Court in Muthuhrishna Aiyar v. Sankaralingam Pillai (1912) I.L.R. 33 M. 229 : 24 M.L.J. 135 (F.B.). This last decision of the Calcutta High Court appears to us to be not only contrary to the decisions of this Court, but would also appear to be contrary to the observations of Lord Davey already referred to.
4. It was then argued that as the promissory note in this case was payable on demand, the contract was broken immediately the note was made and the interest claimed may be treated as penalty for non-performance of the contract. This is ingenious but unsound; for the contract or promise is to pay the principal with interest at a specified rate so long as the loan is not repaid, and it would be introducing a fiction contrary to fact to split this single promise into two separate engagements.
5. We think that the Subordinate Judge was wrong in giving relief merely on the ground that the interest appears excessive. We have however read the statement filed by the defendant and it is possible to read it as raising a plea of undue influence and it may be that no evidence was let in to prove those allegations because the learned Judge in the court below was prepared to give relief without such proof. We therefore reverse his decree and remand the suit for fresh trial. Costs to abide and follow the result.