IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMAN & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 30TH JANUARY 2008 / 10TH MAGHA 1929 AS.No. 232 of 2001(E) --------------------- OS.395/1996 of I ADDL.SUB COURT,ERNAKULAM .................... APPELLANT/PLAINTIFF: ---------- M/S.BELL LEASING & HIRE PURCHASE LTD., A COMPANY INCORPORATED UNDER THE INDIAN COMPANIES, 1956 HAVING ITS REGISTERED OFFICE AT 35/2791, CHAKIAT CHAMBERS, M.G.ROAD, RAVIPURAM, ERNAKULAM, KOCHI -16 REPRESENTED BY ITS AUTHORISED SIGNATORY SHRI C.K.VENKITESWARAN, ASSISTANT MANAGER, M/S.BELL LEASING AND HIRE PURCHASE LIMITED. BY ADV. SRI.S.EASWARAN RESPONDENT/DEFENDANT: ----------- MARTIN PAIVA, S/O.ANDREW LSUNNY PAIVA, PANDARAPARAMBIL HOUSE, 43/640, CHITTOOR ROAD, PROPRIETOR OF M/S.PREMIER TRANSPORT SERVICE, CEMETRY JUNCTION, CHITTOOR ROAD, ERNAKULAM KOCHI -682 018. BY ADV. SRI.K.C.CHARLES THIS APPEAL SUIT HAVING BEEN FINALLY HEARD ON 30/01/2008 ALONG WITH AS NO.322 OF 2001, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: P.R. RAMAN & V. K. MOHANAN, JJ. = = = = = = = = = = = = = = = = = = = = A.S. NOS. 232 & 322 OF 2001 = = = = = = = = = = = = = = = = = = = = = = DATED THIS, THE 30TH DAY OF JANUARY, 2008. J U D G M E N T Raman, J. Both the above appeals arise out of the same judgment in O.S. No. 395 of 1996 on the file of the 1st Additional Sub Court, Ernakulam. While the appellant in A.S. 232/2001 is the plaintiff, the appellants in A.S. 322/2001 is the defendant in the above said suit. The plaintiff is aggrieved by the dismissal of the suit without granting any relief, whereas the defendant is aggrieved because of the dismissal of his counter claim raised in the suit. 2. Briefly stated, the facts are as follows: The defendant took on hire five motor vehicles of which four are Swaraj Mazda bearing Reg. No. KL-7 F 1270, 12 71, 1272 and 1273 and one DCM Toyota Dyna Truck bearing Registration No. KL 7/F 8904. There were separate hire agreements in respect of each of these vehicles which are produced and marked as Exts.A1 to A5 respectively. Except the amount payable, the terms and conditions are identical in nature. As per the terms of the agreement, the defendant has to make an initial security deposit in the case AS NOS. 232 & 322/01 :2: of each of these vehicles. The hire agreement provides for payment of hire charges every month besides additional security. In the case of first three vehicles, hire charges fixed is Rs. 10,000/- per month and the additional security to be paid every month is Rs. 1,500/- whereas in the case of the 4th vehicle KL 7/F 1273 the hire charge is Rs. 7,500/- and additional security Rs. 700/-. Likewise in the case of DCM Toyota the hire charges agreed to be paid is Rs. 12,000/- and additional monthly securityRs.2,640/- . The agreement was for a total period of 48 months in the case of the first four vehicles and in the case of DCM Toyota for a period of 36 months. Exts. A1 to A4 dated 1.2.1994 are relating to vehicles KL 7/F 1270, KL 7/F 1271, KL 7/F 1272 and KL 7/F 1273 respectively, whereas Ext.A5 hire agreement relating to Vehicle bearing Registration No. KL 7/F 8904 is dated 25.5.1994. The initial security deposit of Rs. 69,000/- each in the case of vehicle KL 7/F 1270 to KL 7/F 1273 and in respect of the vehicle No. KL 7/8904 of Rs.25,000/- were paid by the defendant and took possession of the same. It is not in dispute that after paying the hire amount for a period varying for 15 months to 17 months, the defendant committed default whereby the plaintiff in terms of the agreement took possession of the vehicles KL-7/F 1270, 1273 and 8904 on 1.10.1995, KL 7/1271 on 19.1.1996 and vehicle No. KL 7/F 1272 on 17.1.1996. The last of the AS NOS. 232 & 322/01 :3: vehicle was actually lying in the workshop for repairs and according to the plaintiff the Insurance Company only paid a portion of the amount by way of repair charges and the balance amount had to be paid by him. As per the terms of the agreement, both the initial security deposit as well as the additional security payable every month is adjustable on the termination of the contract. So however, it also provides that in case of default and premature termination of the contract on such ground, the security deposit will stand forfeited. It was further provided that in case default is committed in paying the hire charges, the hire charge will also carry interest at 36%. The plaintiff instituted the suit claiming an amount of Rs. 4,50,789.50 with future interest at 36%. 3. According to the defendant, the provision for payment of interest at 36% is penal in nature. It is also contended that the forfeiture clause in the agreement is contrary to the provisions of Section 74 of the Contract Act. Thus, the defendant, according to him, is not legally liable to pay interest at the rate of 36% on the defaulted hire amount and also contended that the entire security deposit is liable to be adjusted against whatever amount legally payable by him and on such calculation, amount have been paid in excess of what is legally due to the plaintiff and hence prayed for a decree by way of a counter claim of Rs. 1,28,100/- with interest at 36%. AS NOS. 232 & 322/01 :4: 4. The evidence in the case consists of Exts.A1 to A26 on the side of the plaintiff and Exts. B1 to B32 on the defendant's side. Plaintiff gave evidence as PW.1 and defendant gave evidence as DW.1. 5. It was found that the initial security deposit is not penal and is a reasonable compensation. It was also held that provision for payment of interest at 36% is unconscionable and hit by the provisions of Section 74 of the Indian Contract Act. After calculating the amount due and payable on that basis, it was found that the security deposit amount will more or less wipe off the arrears of instalment and hence both the suit and counter claim were dismissed. 6. Learned counsel Sri. Easwaran, appearing for the appellant in A.S. 232/2001 submits that the finding as regards the provision regarding payment of interest at 36% is hit by Section 74 is not legally warranted. According to him, it is always possible for the parties to stipulate any ascertained amount by way of liquidated damages and when there is a provision in the agreement providing the rate of interest at 36% it should be treated as a provision for payment of liquidated damages and the rate having been agreed upon, the court was not right in law in holding that it is a penalty clause. He further contended that once it is accepted that this is a provision for liquidated damages it is not necessary for the plaintiff to show AS NOS. 232 & 322/01 :5: actual sufferance of damages. 7. Learned counsel Smt. Lakshmi, appearing in A.S. 322/2001, on the other hand, would contend that the court below was wrong in holding that the security amount is in the form of liquidated damages and therefore, it is liable to be forfeited as a reasonable compensation. It was contended by her that security deposit, unlike earnest money, is not liable to be forfeited and hence the entire initial security deposit as well as the additional security deposit made by the defendant is liable to be adjusted against whatever amount legally payable by the defendant. On the finding as regards the levy of interest, she supported the judgment rendered by the court below. It was also contended that on a reasonable calculation of the amount due and payable, the court ought to have found that whatever amount is paid by the defendant is in excess of the amount payable by him and therefore, the counter claim ought to have been allowed. 8. We have heard the parties. This is a case where admittedly five vehicles were given on hire as per Exts.A1 to A5 and the defendant committed default in repayment of the amount in terms of the agreement. As a result, the plaintiff re-possessed the vehicle. It is also not in dispute that initial security deposit of Rs. 69,000/- each in the case of three vehicles was made by the defendant and an amount of Rs. 48,000/- and AS NOS. 232 & 322/01 :6: 25,000/- respectively were paid by way of security deposit in respect of two other vehicles. The total amount thus comes to Rs.2,80,000/-. Every month, along with the instalment towards hire charges as agreed, the defendant had also to pay a fixed amount of Rs. 1,500/ towards security deposit in respect of the three vehicles, Rs. 700/- in the case of the 4th vehicle and Rs. 2,640/- in respect of the 5th vehicle. Thus, a total security amount of Rs. 1,17,600/- was also paid by the defendant. The total security amount inclusive of the monthly security amount thus comes to Rs. 3,97,600/-. Since the defendant has defaulted in repayment, they are liable to pay damages. 9. The question now arises for consideration is whether the total security amount could be treated as a reasonable amount of compensation towards such damages suffered by the plaintiff. 10. We may now refer to some of the decisions of the apex court and this court as to the principles to be followed while answering the question. In Maula Bux v. Union of India (AIR 1970 SC 1955) it was held thus: "Forfeiture of earnest money under a contract for sale of property, movable or immovable, if the amount is reasonable, does not fall within S.74. But if forfeiture is of the nature of penalty, S.74 applies. Where under the terms of the contract the party in breach has undertaken to pay AS NOS. 232 & 322/01 :7: a sum of money or to forfeit a sum of money which he has already paid as security, for guaranteeing due performance of the contract to the party complaining of the breach of the contract, the undertaking is of the nature of a penalty." 11. It was also held 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. That was a case where as per the terms of the contract an amount of Rs. 10,000/- was deposited as security for due performance of the contract. The contract also provides that in case of any default, the security deposit shall stand forfeited and be absolutely at the disposal of the Government. The plaintiff in that case committed default in making regular and full supplies as agreed to and accordingly, the contract was rescind by the Government of India and forfeited the amount deposited by the plaintiff. The plaintiff later commenced action against Union of India for a decree for Rs. 20,000/- being the amount deposited with Government for due performance of the contract and interest thereon at 6% per annum. The trial court found that the rescission of the contract by the Government was AS NOS. 232 & 322/01 :8: justified; but held that they could not forfeit the amount deposited, for they had not suffered any loss in consequence of the default committed by the plaintiff. The High Court, in appeal, modified the decree and awarded an amount of Rs. 416.25 only with interest thereon against which the plaintiff appealed to the apex court. Under the terms of the contract, the amount deposited by the plaintiff as security for due performance of the contract were to stand forfeited in case the plaintiff neglected to perform his part of the contract. It was observed by the High Court that the deposit so made is to be regarded as earnest money. But the apex court held that, that view cannot be accepted. "Earnest money" is part of the purchase price when the transaction goes forward it is forfeited when the transaction falls through by reason of the fault or failure of the vendee. In that case the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. There, the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contract. Such deposit cannot be regarded as earnest money. 12. In the present case also, what is deposited is not the earnest money; but it is the amount which is held by the plaintiff towards security AS NOS. 232 & 322/01 :9: for due performance of the contract. Further, the agreement provides that in the event of any default, the security deposit both initial as well as the subsequent security deposit to be made every month will stand forfeited. Therefore, applying the principle laid down by the apex court, we have no hesitation to hold that in the instant case what has been deposited either initially or subsequently every month is only by way of security deposit for the due discharge of the obligation by the defendant. The apex court, in the very same decision, after considering Section 74 of the Indian Contract Act, held that even in the case of earnest money, so long as it is a reasonable amount paid will not amount to imposition of penalty. 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 as security, for guaranteeing due performance of the contract to the party complaining of the breach of the contract, the undertaking is of the nature of a penalty. 13. Therefore, in this case, the security deposit made by the defendant, considering that there is a forfeiture clause in case of default, has to be treated as a penalty, provided the amount of security is held to be unreasonable. In the above decision of the apex court, after finding as to what is the portion of the security deposit that could be treated as a reasonable amount, a decree was passed in favour of the plaintiff for a AS NOS. 232 & 322/01 :10: limited amount of Rs. 18,500/- with interest at the rate of 3% per annum from the date of suit till payment. 14. The above decision of the apex court was followed in Union of India v. Rampur Distillery & Chemical Co. Ltd. (1973 SC 1098) wherein it was held that the party to a contract taxing security deposit from the other party to ensure due performance of the contract is not entitled to forfeit the deposit on ground of default when no loss is caused to him in consequence of such default. In a subsequent decision in State of Gujarat v. Dahyabhai zaverbhai (1997 (9) SCC 34) it was held that forfeiture of security deposit in terms of the contract is valid. The Full Bench decision of the apex court in Maula Bux's case (AIR 1970 SC 1955) and the subsequent decision reported in the case of Rampur Distillery & Chemical Co. Ltd. (AIR 1973 SC 1098) was obviously not brought to the notice of the court in the above said decision. In the decision of a Division Bench of this Court in State of Kerala v. United Shippers & Dredgers (1982 KLT 738) it was held as follows: "That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of "legal injury" having been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Ss. 73 and 75 of the Act. S.74 AS NOS. 232 & 322/01 :11: is only supplementary to S. 73 of the Act and it does not make any departure from the principle behind S.73 in regard to this matter. Every case of compensation for breach of contract has to be dealt with on the basis of S.73 of the Act. In a particular case, where the contract itself stipulates for payment of a sum of money on the breach of contract or contains any other stipulation for penalty, the principle additionally propounded by S.74 also will have to be applied and that is why irrespective of the amount stipulated in the contract, the party suffering from the breach is entitled only to reasonable compensation which, however, shall not exceed the amount so stipulated in the contract, whether it be a contract which stipulates a sum of money as being payable on breach of contract or whether it contains any other penal clause, or whether it is a contract which does not contain any such clause, the party complaining of breach of contract cannot successfully claim compensation unless he makes out loss or damage referable to such breach." 15. In this case, five motor vehicles were given on hire. Subsequently, they were repossessed because of the default in making payments in terms of the contract. Necessarily, repossession of the vehicle by the plaintiff was after taking effective steps in accordance with law and in terms of the contract. One of the vehicle was lying in a workshop and according to the plaint averment, the excess repair charges over the insurance amount available had to be incurred by him. There is no dispute that one vehicle was lying in the workshop. The defendant had no case that AS NOS. 232 & 322/01 :12: repair charges were paid by him. In such circumstances, though there is no specific evidence regarding the actual amount paid by the plaintiff towards such repair charges, it is a fact that the plaintiff, in order to take back the vehicle, had necessarily to pay the repair charges. Though the agreement stipulates that the default amount will carry interest at 36% it cannot be said that no interest is liable to be paid when admittedly default is committed. Any reasonable amount of interest payable legitimately be claimed by the plaintiff even if the contract had been continued. The court below did not, however, consider as to what would be the reasonable amount of interest that is payable in the place of 36% as stipulated in the contract. However, in the factual situation, such quantification by itself is not necessary since even if it is found that the plaintiff is entitled for a reasonable rate of interest, that will only help him for the purpose of finding as to what will be the reasonable compensation payable and as to whether the security deposit already in the hands of the plaintiff could be considered to be the reasonable amount. 16. During the course of hearing, the parties have filed statements before this court which will give us some idea as to the amount that would have been payable had there been no clause for forfeiture or security deposit. The plaintiff's statement shows that an amount of Rs. 4,07,411/- as AS NOS. 232 & 322/01 :13: the approximate amount that would be payable to him if all the clauses were held to be valid which includes seizure charges, interest calculated at the rate of 36% etc. The question as to whether the rate of 36% interest as provided in the contract is unconscionable and is penal in nature, however, is not discussed in detail and either party has not adduced any evidence. When amounts due and payable every month is defaulted, it is quite reasonable that the defaulted amount will carry interest. The provision for payment of such interest is legal. Whether 36% would be unreasonable is depending on the rate of interest prevailing for such type of transaction. One has also to see what would be the normal rate of interest that is charged by commercial banks. It is based on the valuation of such evidence one will have to see whether the rate of interest at 36% is penal in nature and if so, what would be the reasonable rate of interest payable. It was the defendant who contended that the rate of interest at 36% is unconscionable but the defendant did not adduce any evidence in this regard. But security amount as well as interest at 36% on the defaulted amount both together cannot be held to be reasonable. The court below held that security amount could be held as reasonable compensation and disallowed the interest. The view taken by the court below is a plausible one. AS NOS. 232 & 322/01 :14: 17. In the above factual situation, we find that the finding that security amount cannot be treated as an unreasonable amount of compensation fixed in the contract appeals to reason. As already held by the Division Bench of this Court, when the parties have fixed a certain amount towards security and forfeiture clause, the plaintiff is not entitled to claim anything in excess of the said sum. In the result, both the appeals fail. The judgment and decree of the court below is confirmed. However, the parties shall bear their respective costs. P.R. RAMAN, (JUDGE) V. K. MOHANAN, (JUDGE) knc/- AS NOS. 232 & 322/01 :15: P.R. RAMAN & V.K. MOHANAN, JJ. = = = = = = = = = = = = A.S. NOS. 232 & 322/2001 ---------------------------------- J U D G M E N T 30TH JANUARY, 2008.