HON’BLE SRI JUSTICE G.BHAVANI PRASAD APPEAL SUIT No.2616 of 1989 Dated : 21.06.2010 Between : The Food Corporation of India ….. Appellant a n d M/s.Jai Bajranga Traders, Nizamabad And others ….. Respondents HON’BLE SRI JUSTICE G.BHAVANI PRASAD APPEAL SUIT No.2616 OF 1989 ORDER: This appeal is directed against the judgment and decree in O.S.No.127 of 1983 on the file of the Subordinate Judge’s Court, Nizamabad, dated 13.09.1989. The appellant Corporation filed the suit for recovery of Rs.20,39,765-44 ps. with interest and costs from the first defendant- Firm and defendants 2 to 8, its partners. The case of the appellant is that the Firm and its partners were entrusted with paddy for milling with an obligation to deliver the resultant rice to the plaintiff as per the terms and conditions of the agreements between them and even the gunny bags for transportation of paddy were entrusted to the defendants by the plaintiff. Notwithstanding the execution of three agreements, two on 01.10.1980 and third on 05.01.1981 between the parties agreeing to lift 500 metric tons, 1000 metric tons and 8150 metric tons paddy and deliver the resultant rice, the defendants lifted only 499.799 metric tons of paddy under the first agreement, 883.201 metric tons of paddy under the second agreement and no paddy under the third agreement. The defendants also failed to deliver the entire quantity of resultant rice after milling even in respect of the paddy lifted by them and they delivered only 14.250 metric tons of export quality rice and 265.124.000 metric tons of boiled rice under the first agreement with a short fall of 71.247.000 metric tons. Under the second agreement, the defendants delivered only 446.720 metric tons of boiled rice with a short fall of 175.731 metric tons. The defendants to the extent of their default are bound to pay two times economic costs under the first agreement and 2 ½ times economic costs under the second agreement for the undelivered quantity of rice. They have to pay Rs.502.30 ps per quintal under the first agreement and Rs.627.87 ps per quintal under the second agreement and for the total short fall, the defendants have to therefore pay Rs.11,03,362-00 ps, towards the damages and for unlifted quantity of paddy they have to pay Rs.1,65,340/- and for non delivery of 4846 gunny bags they have to pay Rs.49,080-30 ps. and the interest at 11% per annum payable under the second agreement comes to Rs.3,64,109.46 ps. For all the amounts due, the plaintiff issued notice to the defendants on 15.04.1981 and the defendants gave a false reply on 05.05.1981 enclosing the alleged statement of quantity of paddy received by them and the balance due, and the reply dated 05.05.1981 itself constitute an admission of liability of the defendants extending the period of limitation. Hence, the suit for recovery of the said amounts with interest @ 19% per annum. Defendants 1, 2 and 6 to 8 contested the suit contending that the District Manager representing the plaintiff had no legal capacity to file the suit. They also contended that only they continue to be partners of the Firm while the defendants 3 to 5 retired earlier to the transaction with the plaintiff. The defendants did not admit the various claims about the quantities of paddy lifted or short lifted or the amounts liable to be paid. They contended that the default clauses in the agreement are oppressive and unconscionable and therefore unenforceable. They also pleaded that they were forced to sign on dotted lines due to the dominant character of the Government under the transactions and they also disputed the rates of paddy and rice claimed by the plaintiff at the relevant times. Defendants 1, 2 and 6 to 8 also denied failure to account for any stock of gunny bags and therefore desired the suit to be dismissed. The defendants 3 to 5 contested the claim pleading that they were no more partners of the first defendant after 07.11.1980 and they did not execute any agreement in favour of the plaintiff and therefore they are not liable for the suit claim. On such pleadings, the trial Court framed the following issues for trial: 1) whether the Dist. Manager who signed the plaint is duly authorized to institute the suit on behalf of the plaintiff Corporation? 2) whether D.3 to D.5 are not partners in the first defendant firm from 07.11.1980 by giving due public notice and whether they are not liable for all the suit claim? 3) whether the first two agreements are dt.25.08.1980 as alleged by D1, 2 and 6 to 8 and not 01.10.1980? 4) whether the defendants lifted only 1369.448 M.T. of paddy under the first two agreements and not 1383 M.T.? 5) whether the short fall in supply of rice by the defendants is only M.T.232.640.454 and not 246.978 M.T.? 6) whether the terms in the suit agreements prescribing that the defendants are liable to pay at two and 2 ½ times the economic costs of rice short delivered, is penal, unconscionable and unenforceable, and if so, at what rate is the plaintiff entitled to? 7) whether the clause in the agreements that the defendants are liable to pay damages at the rate of Rs.2/- per quintal for the unlifted quantity of paddy is penal, unconscionable and unenforceable? 8) whether the defendants are liable to pay Rs.49,080.30 ps. towards 4846 gunny bags not accounted for? 9) whether the claim of the plaintiff for Rs.3,64,109.46 ps. towards the interest is onerous, unconscionable and unjustified? 10) whether the suit claim in respect of the first two agreements are barred by limitation? 11) whether the D3 to 5 are not necessary parties to the suit as contended by D4? 12) to what relief the plaintiff is entitled to? The following additional issue was framed on 07.08.1989: 1) whether the execution of agreement by the defendants in favour of the plaintiff binds the defendants 3 to 5 and defendant No.1’s firm? After examining PWs 1 and 2 and marking Exs.A.1 to A.19 on behalf of the plaintiff and DWs 1 and 2 and Exs.B.1 and B.2 on behalf of defendants, the trial Court rendered the impugned judgment. The trial Court found on issue No.1 that the District Manager, who signed the plaint on behalf of the plaintiff was competent to file the suit. It also found that two agreements were executed on 01.10.1980 and further found that except the statement under Ex.A.9 filed by the plaintiff, there was no other evidence on record to show the actual date-wise lifting of paddy. It also found that there was no evidence except Ex.A.9 to show that the defendants lifted 1383 metric tons of paddy in first two agreements. The trial Court further observed that 1369.448 metric tons of paddy were admitted to have been lifted while the statement Ex.A.18 is to the effect that 1382.982 metric tons of paddy was lifted. The trial Court further observed that the absence of any other evidence except the interested statements made under Exs.A.9 and A.18 makes the defendants liable only to the extent of the paddy admittedly lifted which was also corroborated by the statement given by the defendants to the plaintiff under Ex.A.12 given on 05.05.1981, after which, the plaintiff never denied or disputed the contents of such statement made under Ex.A.12. The trial Court further observed that the short delivery of resultant rice out of the paddy received on milling by the defendants was stated to be 246.978 metric tons while the defendants claimed the short delivery to be 232.640.454 metric tons. The short delivery itself is 14.337.546 metric tons of rice and the trial Court calculated the probable shortfall with reference to various figures given by the parties and found that the defendants were due of resultant rice only to a tune of 232.640.454 metric tons. The trial Court further observed that the penalty prescribed under the contract should be just and reasonable to the extent of actual short delivery, but the stipulation for payment of Rs.2/- per quintal as damages for unlifted quantity of paddy is onerous, oppressive and unconscionable. The trial Court referred to the relevant case law cited before it on this aspect and concluded that compensation for future loss or damages must be reasonable and even when the contract contained predetermined damages under Section 74 of the Contract Act, the compensation is permitted to the extent of reasonableness only, though the extent of actual loss and damages need not be proved. The trial Court noted that the damages specified under the contract based on the pre-estimated value depending upon the economic costs of the variety of rice involved were subject to reduction at the discretion of the District Manager, who did not exercise such discretion. Therefore, damages should be calculated at Re.1/- per quintal only. The trial Court also noted that the defendants did not deny the lifting of the gunny bags from the Food Corporation of India and did not explain as to what quantum of bags were received and not returned and therefore defendants had to pay for the value of the gunny bags as claimed by the plaintiff. The trial Court also considered the claim for interest @ 18% per annum to be high and considered grant of interest @ 12% per annum from the date of suit till the realization of amount to be reasonable. The trial Court also went into the question of limitation and found that in the light of the contract period being till 15.01.1981 under Ex.A.4 and 31.03.1981 under Ex.A.6, the suit is within limitation. The trial Court also found that defendants 3 to 5 did not execute any documents in favour of the plaintiff and they claimed to have retired from the partnership prior to the transaction of the first defendant-Firm with the plaintiff. The trial Court also observed that defendants 3 to 5 were also not shown as partners even in the applications given to the plaintiff by the Firm for the purpose of obtaining the contract and P.W.2 also clearly admitted that defendants 3 to 5 cannot be made liable for the suit claim as partners of the Firm when they are not shown in the documents to be partners during the relevant period. Consequently, the trial Court decreed the suit for Rs.413.86 ps per quintal for undelivered rice under the first agreement, Rs.517.33 ps per quintal for undelivered rice under the second agreement, Re.1/- per quintal for unlifted quantity of paddy for 8280.552 metric tons, Rs.49,080.30 ps for 4846 undelivered gunny bags and future interest @ 12% per annum from the date of filing of the suit till the date of realization with proportionate costs against defendants 1, 2 and 6 to 8 while dismissing the suit against defendants 3 to 5. The Food Corporation of India filed the present appeal against the said judgment and decree contending that the defendants have lifted 1383 metric tons as probablized by the evidence and Ex.A.18 statement. It also contended that Ex.A.12 could not have been relied on and the respondent-Corporation had absolutely no need to fabricate any documents. Appellant further contended that the short fall should have been accepted as claimed by the plaintiff and the conditions of the agreement should not have been considered onerous in any manner. The claim of respondents 3 to 5 about retirement from partnership should have been rejected. For the differential claim of Rs.7,24,441-46 ps, the appeal was filed against the defendants 1 to 8. Subsequent to the filing of the appeal, the second respondent herein, who was representing the first respondent-Firm, died and his legal representatives were brought on record as per the orders in CMP No.8721 of 2000 dated 06.06.2000 as respondent 9 to 13. However, later the 13th respondent was also reported dead and no steps were taken to bring on record his legal representatives. The appeal against the 13th respondent was recorded as abated on 25.04.2006. In respect of respondents 9 to 12 also, a conditional order was passed on 25.04.2006 for payment of batta and taking of notice to respondents 9 to 12, in default of which, the appeal should stand dismissed without any further orders from the Court. Obviously, no batta was paid and no notices were taken to respondents 9 to 12 thereafter and the conditional order worked itself out making the appeal stand dismissed in respect of respondents 9 to 12. As things stand, therefore, the first respondent-Firm does not appear to be represented by anybody in the appeal. Sri Mehar Chand Nori, learned counsel for the appellant, and Sri N.Vasudeva Reddy, learned counsel for respondents 3 to 5, are heard. The points arise for consideration are : 1) whether the defendants 3 to 5 are liable for the suit claim? 2) Whether the conclusions of fact about the quantities involved arrived at by the trial Court are sustainable? 3) Whether the calculation of damages payable under agreement by the trial Court is justified and legal? 4) To what relief? POINT No.1: The learned counsel for the appellant vehemently contended that in the light of Section 32 of the Indian Partnership Act, 1932 (for short ‘the Partnership Act’), the defendants 3 to 5 cannot be absolved from the liability on the alleged ground of retirement from the partnership when the mandatory procedures prescribed by the said provision were not complied with. In answer to it, Sri N.Vasudeva Reddy, learned counsel, contended that the retirement of defendants 3 to 5 from the partnership was much before the transaction between the first defendant-Firm and the appellant, due to which, the appellant cannot claim any advantage with reference to section 32 of the Partnership Act for the reason that the documentary evidence showed that there was no partnership in the first defendant-Firm for defendants 3 to 5. It is seen from Exs.A.3, A.5 and A.7-applications that the applicants on behalf of first defendant-Firm were defendant No.2 and others and in the applications signed by them on behalf of the first defendant, it was specifically mentioned in column 4 that only the second defendant and defendants 6 to 8 were the partners of the first defendant-Firm. Exs.A.4, A.6 and A.8-agreements were again executed by defendants 2 and 6 only on behalf of first defendant-Firm and they contained no contradiction to the contents of the applications mentioning the defendants 2 and 6 to 8 alone to be the partners of the first defendant-Firm. Apart from that the evidence of DWs 1 and 2 also disclosed that defendants 3 to 5 ceased to be the partners of first defendant-Firm by the time of initiation of the contractual relationship between the plaintiff and the first defendant. Though the original partnership deed Ex.B.2 shows the defendants 3 to 5 as partners, there is nothing in the evidence of DWs 1 and 2 to suggest that defendants 3 to 5 continued to be the partners of the first defendant- Firm either by the time of the applications or the agreements or the subsequent events relating to the execution of the contract. Any non- compliance with section 32 of the Partnership Act by defendants 3 to 5 while retiring from the partnership would have conferred some right on the plaintiff only if any liability to the plaintiff arose prior to the retirement of defendants 3 to 5 from the partnership. When the other partners of the Firm had conceded that the defendants 3 to 5 retired from the partnership much prior even to the applications of the first defendant-Firm to the plaintiff in respect of the suit transaction, such retirement with the consent of all the other partners, therefore, absolves the defendants 3 to 5 from the liability to any third parties and the question of any non-compliance with the prescribed procedure under Section 32 of the Act conferring any rights on the plaintiff therefore does not arise. This point is answered accordingly against the plaintiff. POINT No.2: Insofar as the conclusions of the trial Court about the parties involved under the agreements are concerned, the said conclusions are based on a positive consideration of the contents of various documents filed by the plaintiff itself and the trial Court has given cogent reasons as to why it accepted Ex.A.12 rather than Exs.A.9 and A.18 and without need for replication there is absolutely no fault in the reasoning of the trial Court which enables this Court to intervene in the appeal. The conclusions and the figures arrived at are based on the contents of the documents, which stood un-contradicted by the oral evidence and therefore this point is also answered against the plaintiff. POINT No.3 : It is true that under Section 74 of the Indian Contract Act, 1872 (for short ‘Contract Act’), when the penalties stipulated for breach of contract were specified in the contract itself, no actual damage or loss need be proved. But, it is evident from the specific language of section 74 of the Contract Act itself that notwithstanding the stipulation of such penalty what the aggrieved party to the contract will be entitled is only reasonable compensation with the upper limit of the amount claimed in the contract or the penalty stipulated in the contract. It is well settled that notwithstanding any specific stipulations in the contract about such amount of damages or penalty in case of breach, such terms are always subject to judicial discretion of the Court adjudicating the breach of contract and the damages or compensation should also be confined to reasonable levels and cannot act as a penalty in terrorem against the defaulting parties. The trial Court in its well considered judgment has given strong reasons to reduce the amounts stipulated as damages or compensation to reasonable levels and the same cannot be considered to be divorced from or to be in violation of the specific language of Section 74 of the Contract Act and again without replicating the reasons given by the trial Court, this Court is in agreement with the same. Even concerning the future interest to be awarded as it is a commercial transaction within the meaning of Section 34 of the Code of Civil Procedure, the trial court cannot be considered wrong in awarding 12% per annum interest deviating from the normal rate of interest of 6% per annum, but not upholding the request for future interest of 18% per annum cannot be considered unreasonable and interference at this distance of time in fact makes the liability unreal, more so when the second defendant is no more and his legal representatives in possession of his estate have to satisfy the claim. The exercise of the judicial discretion by the trial Court does not call for any interference as regards future interest also at this stage. POINT No.4 : In the circumstances, the appeal has to fail on merits also, while in the absence of the legal representatives of the second defendant and the consequential absence of the first respondent being properly represented, the appeal has to fail on technical reasons. As the appellant is a Public Corporation and the first defendant-Firm admittedly committed default in their transactions with the plaintiff-Corporation, there is no need to burden the plaintiff with costs in the appeal. In the result, the appeal is dismissed without costs. ______________________ G.BHAVANI PRASAD, J 21st June, 2010 SUR