Source: https://www.legalindia.com/judgments/sankaranarayana-vadhya-vs-sankaranarayana-iyer-on-14-november-1901
Timestamp: 2019-04-21 10:18:32+00:00

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Posted On November 14, 1901 by &filed under High Court, Madras High Court.
1. In this case the defendant was indebted to the stake-holder of a chit fund in a sum of Rs. 750. He undertook to pay this sum in half-yearly instalments of Rs. 62-8-0, and in default he bound himself to pay in a lump sum on demand the principal debt and interest at the rate of 1 pie per diem per rupee from the date of default. The half-yearly instalments of Rs. 62-8-0, which the defendant undertook to pay, were on account of the principal only. There is some conflict’ of authority with reference to the enforcement of the stipulations which provide for the payment of a higher rate of interest on default, but the authorities appear to be uniform at any rate to this extent–that when the higher rate of interest is payable as from the date of default and not as from the date of the contract, the contract rate is enforceable. See 2 M H.C.R. 205, Nanjappa v. Nanjappa I.L.R. 12 M. 161, the judgment of this Court (Shephard and Davies, JJ.) in S.A. No. 1303 of 1896 (unreported), Dullabhdas Devchandshet v. Lakshmandas Swarupchand I.L.R. 14 B. 200, Umed Khan Mahamad Khan Deshmukh v. Salekhan 17 B. 106, Mackintosh v. Crow I.L.R. 9 C. 689, and Deno Nath Singh v. Nibaran Chandra Chuckerbutty I.L.R. 27 C. 421. The result of the authorities is thus stated by Sargent, C.J., in the case reported in I.L.R. 17 B. 106, (at p. 113)–“a proviso for retrospective enhancement of interest, in default of payment of the interest at due date is generally a penalty which should be relieved against, but a proviso for enhanced interest in the future cannot be considered as a penalty, unless the enhanced rate be such as to lead to the conclusion that it could not have been intended to be part of the primary contract between the parties.” As pointed out by this Court in the case reported in I.L.R. 12 M. 161 (see page 166), when the agreement is to pay the higher rate as from the date of default, no question of penalty really arises. At the moment of the breach no larger sum can be exacted by the creditor, but from the date of the breach the terms on which the debtor holds the money become less favourable. “By the default he accepts the alternative arrangement of paying a higher rate of interest for the future. On the other hand, when the stipulation is that on default the higher rate shall be payable from the date of the original obligation, the debtor does on default become immediately liable for a larger sum.” The decisions in the cases in which the Courts have gone further and, following the decision of the Privy Council reported in Balkishen Das v. Run Bahadur Sing I.L.R. 10 C. 305, have held that the contract rate is enforceable even where the higher rate is payable as from the date of the agreement (see for instance Basavayya v. Sabbarazu I.L.R. 11 M. 294, Narayanasami Naidu v. Narayaua Rao I.L.R. 17 M. 62, Arjan Bibi v. Asgar Ali Chowdhuri I.L.R. 18 C. 200, Banwar v. Muhammad Mashiat 9 A. 690, and Banke Behari v. Sundar Lal 15 A. 232 do not of course conflict with this view.
2. It seems to me both on principle and on authority that as the law stood under the Act of 1872, when the enhanced rate of interest only becomes payable as from the date of default, the stipulation ought not to be construed as a stipulatiotn by way of penalty, and the debtor ought not to be relieved therefrom. The mere faei that the rate of interest which the debtor agrees to pay is high, or even exorbitant, is, in itself, of course no reason for relieving him from his bargain, although it may be evidence that the parties were not dealing at arm’s length and that some unfair advantage was taken by the creditor–in other words, that there was 116 real contract between the parties. In the present case, however, having regard to the relations between the parties and the circum-stances in which the defendant undertook the obligation which he failed to fulfil, I am certainly not prepared to say that the rate of interest was exorbitant.
3. Moreover, in the present case it is to be observed that the contract was not one which provided for the payment of a given rate of interest in any event and a higher rate in the event of default. Under the agreement the debtor incurred no obligation to pay interest at all on the money which he owed. His liability to pay interest only arose in the event of default. It seems to me that if the principle on which the Courts have drawn a distinction between agreements under which a higher rate of interest is payable as from the date of default and agreements under which a higher rate of interest is payable as from the date of agreement, is sound, as 1 think it is, the principle applies a fortiori whether the creditor may be said to waive his right to interest so long as the debtor fulfils his obligation and where the liability to pay interest at all only arises as from the date when the debtor fails to fulfil his obligation.
4. So much for the law as it stood under the Act of 1872. The next question for consideration is–assuming the Amending Act of 1899 applies, is the defendant entitled under Section 4 of the Act to be relieved from his contractual obligation?
5. As regards the exacting portion of the section, the alterations would seem to be merely verbal. The explanation, however, declares that a stipulation for increased interest from the date of de-fault may be stipulation by way of penalty. The explanation appears to be intended to meet the decisions to which I have referred. It is to be observed, however, that the explanation only says that the stipulation may fee a stipulation by way of penalty. There is nothing in the explanation to preclude a Court from holding that, notwithstanding that the stipulation was for increased interest from the date of default and not from the date of agreement, the stipulation ought not to be regarded as a stipulation by way of penalty. Further, the explanation does not apply to the contract in the present case where the stipulation was not for increased interest on default, but for interest on default which would not hare been payable at all if there had been no default. None of the new illustrations cover the present case, but there is nothing in any of the illustrations which conflicts with the view indicated above. Putting the proposition of law in the form of an illustration it r would run thus: A. undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that, in default of payment of any instalments, the whole shall become due, with interest, from the date of default. The fact that interest is payable from the date of default does not, in itself, render the stipulation one by way of penalty.
6. It seems to me, therefore, that as a question of construction Section 4 of the Act of 1899 would not preclude a Court from holding that the stipulation in the contract in question is not a stipulation by way of penalty.
8. The contention on behalf of the defendant was that the words “put in issue” were not intended to be used in any technical sense and that the word “suit” included “appeal.” On behalf of the plaintiff it was argued that the word “suit” as first used in the sub-section obviously meant suit in the restricted sense and that it should be so construed when it is used in connection with the words “put in issue.” In the view I take of the construction of the section it is not necessary to deal with these points. If it were,. I should be disposed to say that the words “which is put in issue” mean nothing more than “which is in issue” and that where there is an appeal from a decree in a suit instituted in respect of a contract the contract is “In issue” in the appeal. It seems, to me, however, that the words “put in issue” in any suit mean put in issue in any suit instituted after the commencement of the Act. I concede that this intention could have been made clear beyond all doubt by the introduction of the word “instituted” after the words in any “suit” and that the construction which I am prepared to adopt is not the strict grammatical construction of the sub-section. It seems to me, however that to construe it otherwise, would lead to serious inconveniences and anomalies and that having regard to the general scope of the amendment made by the Act and the canons of construction in cases where vested rights are affected or. the legal character of past transactions is concerned, the legislature only intended the Act to apply to suits instituted after the commencement of the Act. I think the words “or which is put in issue in any suit” were intended to apply to cases where, although the suit is not’ instituted in respect of the contract, the contract is put in issue in the suit. The words “contract in respect of which any suit is instituted” apply to cases where a suit is brought to enforce a contract or to have a contract set aside. The words “contract…which is put in issue” apply to cases where it becomes necessary for the court to adjudicate upon a contract, although the suit was not brought either to enforce it or to have it set aside.
9. I think this appeal should be allowed with costs here and in the lower appellate Court; the decree of the lower appellate Court is set aside and that of the District Munsif restored. The plaintiff is entitled to interest at the contract rate on the principal debt Rs. 600 from the date of the plaint until the date of the Munsif’s decree and interest at the rate of 6 per cent. from the date of the Munsif’s decree until payment.
10. The defendant was under an obligation to pay Rs. 750 in half yearly instalments of Rs 62 1/2 to a Benefit Fund and he executed a bond to the plaintiff who was managing the fund to make payment accordingly. In default of’ the payment of the instalments on due dates, he stipulated that the whole principal should become payable at once and that he would pay interest on the instalments in case of non-payment on the fixed dates at the rate of 1 pie per diem per rupee.
11. The only question before us is whether the interest so agreed upon is recoverable in full as the contract rate between the parties under Section 2 of Act XXVIII of 1855 which provides that “in any suit in which interest is recoverable, the amount shall be adjudged or decreed by the court at the rate (if any) agreed upon by the parties” or whether that rate being a very high one amounting as it does to about 180 per cent. per annum – ought to be relieved against as a penalty, and only a lower rate allowed. The contract rate was allowed by the District Munsif, but the Subordinate Judge in appeal holding that rate to be exorbitant decreed at the rate of only 12 per cent per annum. Hence this second appeal by the plaintiff whose pleader points out that in an exactly similar case in the same Munsif’s Court, a Division Bench of this Court in S. A. No. 1303 of 1896 decided in favour of the contract rate. There is no question here, nor was there in the second appeal just referred to, as to the contract being voidable on the ground of the defendant not understanding the transaction. He entered into it with full consent and the parties were on an equal footing. Section 74 of the Contract Act and the numerous and various decisions of the High Courts in India in regard to the provision in a contract for an increased rate of interest when there is a default in payment of a lower rate are also in my opinion inapplicable to this case, inasmuch as no increased rate of interest is here stipulated for. The agreement simply was that interest was to be paid on overdue instalments, and the rate of such interest was once for all fixed. So what the respondent’s pleader mainly relies on is a ruling of the Allahabad High Court that when an extravagant rate of interest is provided for it is only equitable to hold that “interest” was not intended to mean “interest” but a penalty, in other words that though nominally interest, it was really penalty. Bansidhar v. Bu Ali Khan I.L.R. 3 A. 260. But I am unable to agree in this view. When persons make an engagement with their eyes open, they should be bound by it although to the Court the bargain may appear extortionate it may in reality not be so. It is impossible for the Court always to know what are the considerations weighing between parties when they come to an agreement, especially in money matters. The urgency of the demand and the scarcity of the supply would often operate to increase the cost–or in this case the fund might itself have had to pay for the money it required to enable it to be carried on, an exorbitant rate of interest if the defedant failed to keep his engagement. So that, when the intention of the parties is plain and unmistakeable as it is here, that intention must be given effect to. In accordance with this view, it was held in Appa Rao v. Suryanarayana in I.L.R. 10 M. 203 that the mere fact that the terms are exorbitant is of itself no reason for not enforcing a contract duly made and on the same principle in I.L.R. 13 C. 200 a rate of interest almost as high as that m the present case, namely, 2 annas per rupee per month was decreed. I am, therefore, clearly of opinion that the decision in S.A. No. 1303 of 1896 was right and following it, I would reverse the decree of the lower appellate Court and restore that of the Munsif plus the further interest awarded in the judgment of the learned Chief Justice. The respondent must pay the appellant’s costs in this and in the lower appellate Court.

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