Ramalinga Adaviar v. Meenakshisundaram Pillai

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, if 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 offerred to pay the highest amount of premium, The chit holders were 10 in number and each chit was 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 Es. 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 1 to Sect. 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 instalments omitted to be paid, on the due date, would not be penal. He contented 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 Wallingford v. The Directors of Mutual Society(1). Though the facts of this case are somewhat complicated, yet there is no doubt that the case has been always cited and accepted, only as an authority for the position, set out in Illustration (f) to Sect. 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 presenti, 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 page 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 and odd, in addition, as the premium, shall be 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 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 burden-some or oppressive character, it may operate in terrorem over the promisor, so as to drive him to fulfill 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, as well as the case of Sukkulal Sowcar…Plaintiff; v. A.V Tirumala Row Sahib…Defendant.(2), proceeded upon the construction of the particular documents the Court had to consider. The case of Periasami Thalavar v. Subramaniam Asari(3), contains no discussion of any principle and was decided before the Full Bench decision, in Muthukrishna Iyer v. Sankaralingam Pillai(4). As regards the case of Vaithinatha Iyer v. Govindaswami Odayar(5), 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 note 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 John Wallingford v. The Director of Mutual Society(6), debitum in presenti. It is somewhat inexplicable how in the whole of the judgment in the case of Vaithinatha Iyer v. Govindaswami Odayar there should have been no reference whatever to the Full Bench decision in Muthukrishna Iyer v. Sankaralingam Pillai. 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 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 debitum 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 Karthigai 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 John Wallinford v. The Director of Mutual Society, Periasawmi Thalavar v. Subrahmaniam Asari, Muthukrishna Iyer v. Sankaralingam Pillai and Vaithianatha Iyer. v. Govindaswami Odayar. 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 Sect. 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 monies 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 balance but the loss of the consideration he has already paid for the use of the monies 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 the 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 may 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 amount of 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 reached 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 Sect. 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.

W.S.SAppeal dismissed..