Manaklal Bhagchand Sahu of Amarwara, District Chhindwara vs Bhagwandas Hibalal Chaurasia of Amarwara, District Chhindwara

Shiv Dayal, J.

This second appeal arises from a suit for specific performance on foot of a bond dated 1-8-1960 (Exh. P-1), under which the Respondent took a loan of Rs. 2,500 from the Appellant with the stipulation that if he did not repay the loan within one year from that date, he would be liable to sell his house and badi, described therein, in favour of the creditor. As the Defendant did not repay the loan within the time fixed in the bond, the creditor sued for specific performance of the contract for sale. The suit was resisted by the Defendant, contending, inter alia, that he could not be forced to sell the immovable property just because lie could not repay the loan within the stipulated time. The trial Court passed a decree for specific performance, but the first appellate Court modified it and, rejecting the first prayer in the plaint, allowed the alternative relief of a decree for Rs. 2.500. It also allowed interest on Rs. 2,500 at 4 per cent per annum from the date of the suit to the date of realisation. The Plaintiff is aggrieved by this modification in the trial Court''s decree and, in this second appeal, prays that a decree for specific performance be passed.

Shri Pandit, Learned Counsel for the Appellant, contends that the first appellate Court was not right in refusing specific performance on the ground that the sale of the property was barred u/s 165(4) of the M.P. Land Revenue Code, 1959. Learned Counsel points out that in order to get benefit u/s 165(4) of the Code, it was necessary for the Defendant to allege how much land he had. Moreover, the property, which the debtor undertook to sell, is not agricultural land inasmuch as it consists of a house and a badi. Similarly, the first appellate Court was not justified in raising a new plea of undue influence, which was not contained in the written statement. Shri R.S. Dabir, Learned Counsel for the Respondent, concedes these points. He supports the decree of the first appellate Court merely on the ground that the stipulation to sell the immovable property, in case of default of payment of loan within the time fixed, was penal and the Court was entitled to relieve the debtor u/s 74 of the Contract Act.

It seems to me clear that the stipulation contained in the bond that the debtor would sell his property in default of repayment of the loan within the time fixed, was penal and the Court can relieve him of it. In a contract the parties may provide for the consequences of its breach. If the stipulation put is not by way of reasonable compensation to the promisee, but, by reason of its burdensome or suppressive character, operates in terrorem over the promisor so as to drive him to perform his part of the contract, such a stipulation is a penalty. The essence of a penalty is a stipulation in terrorem of the offending party. A stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it. The Court awards to the aggrieved party only reasonable compensation. However, the penalty clause does not deprive the aggrieved party of his right to damages that can be estimated. Pointing out the distinction between the English Common Law and our Contract Act in Fateh Chand Vs. Balkishan Das, ., their Lordships have laid down as follows:

The Indian Legislature has sought to cut across the web of rules and presumptions under the English Common Law, by enacting a uniform principle applicable to all stipulations, naming amounts to be paid in case of breach, and stipulations by way of penalty.

A penal provision contained in a contract is not restricted to money for enhanced rate of interest, but is wide enough to include a stipulation to convey immovable property on default of payment of a debt on the fixed date. In the case of a loan, the debtor is bound to repay it to the creditor together with the interest agreed upon, but the stipulation that the debtor will convey his immovable property to the creditor, in case he does not repay the loan within the time fixed for its repayment, is necessarily in terrorem of the debtor to drive him to repay the loan within the stipulated time. Therefore, where a creditor seeks to enforce that penalty, the Court will relieve the debtor from it and, instead, award reasonable compensation to the creditor. This view finds support in Phoolchand v. Punaram 1963 MPLJ Note No. 84 (Second Appeal No. 502 of 1960 decided on the 11th December, 1962). See also Rajah of Ramnad v. Sellachami AIR 1917 Mad. 405 and Mahadeo Bakhsh v. Sant Bakhsh AIR 1920 Oudh 180.

It is an argument that where the value of such immovable property is equal to the amount due or somewhere about that, the stipulation should not be considered as penal; such a stipulation should be held to be penal only where the value of the property is disproportionate to the amount payable by the debtor. Shri Pandit says that the value of the house in the present case is not more than Rs. 2,500, while, according to Shri Dabir, its value is about Rs. 5,000. In my opinion, the argument cannot be accepted. Apart from his own assessment of the value of a house, its owner may have certain sentiments attached to it. Moreover, if the value of the house is not, in the eyes of the debtor, higher than the amount payable by him, he would not claim relief from the penalty clause.

For these reasons, the appeal is dismissed. Having regard to the facts and circumstances of the case, I direct that the parties shall bear their own costs throughout.