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Judgment
Krishnaswami Aiyangar, J.—The maintenance in proper condition of the irrigation and drainage channels in a village is a matter of vital
importance for the well being of the village community. The productivity of the land very largely depends on the supply in time of sufficient
quantities of water, and this can only be secured by keeping the channels periodically cleared of accumulating silt. Every member of the village
community is fully conscious of this need but unfortunately we find quite an appreciable number, of the smaller mirasdars in particular frequently
evading their share of the common burden. The problem is sufficiently accute, in the Cauvery delta and it is time that the Government devised an
effective remedial measure to meet the evil, the existing machinery being inadequate.
The difficulty appears to have been felt in the village of Seelaipillayarputhur in the Musiri Taluk as early as 1876 when we find, an agreement
was entered into amongst the mirasdars of the village for the due maintenance of the village irrigation system and for the proper conduct of its
common affairs. The agreement was embodied in the razinama decree passed in O.S. No. 9 of 1876 on the file of the District Munsif of Kulitalai,
and appears to have been in force for a period of nearly 58 years. Experience during these years probably suggested that there was need for a
revision and hence a fresh agreement Ex. B was entered into on 9th July, 1934.
The appellant is a pattadar holding lands in the village. The respondent is a leading mirasdar of the village, being the largest single owner therein.
It was but natural that he should have been singled out and entrusted with the task of keeping the village channels in proper repair. By Ex. B he and
his legal representatives after him were accordingly appointed managers for the several purposes therein mentioned. The funds necessary for
enabling the respondent to carry out the repairs to the channels were derived from the following sources. There are the samudayam or the common
lands in the village and there are also certain other common sources of village income, namely, those arising out of what has been described as the
duck lease and the grass lease. The agreement provides that the samudayam lands should be under the management of the respondent, but the kist
due thereon should be paid by the several pattadars proportionately to the extent of the land in their respective pattas. The proceeds of the duck
lease and the grass lease to be realised by auctions held for the purpose, were to be divided into two moieties one moiety to be paid to the
appellant for defraying certain common expenses of the village, the other moiety to be retained by the respondent. The income from these sources
was to be supplemented by the payment by the several mirasdars to the respondent, sums of money calculated on the basis of one rupee for each
acre of land.
The clause which has given rise to the present dispute is the following:
(a) The account of year ending with the 31st March of each year shall be printed and sent to all the pattadars before the 30th of the next April.
Should the expenditure be greater than the amount collected according to the aforesaid account, the amount of tax for the current year and the
amount due in proportion to the acreage, towards the amount of the excess expenditure, shall be together paid by every pattadar to the samudaya
Manager Avergal (respondent), before the 15th May.
(b) Should the amount of expenditure be less than the amount collected, the amount becoming less in proportion to the acreage, shall be deducted
from out of the amount of tax payable for the current year and the balance shall be paid to the samudaya Manager Avergal within the time specified
above.
(c) In default of making such payment of the amount due before the 15th May of every year, the samudaya Manager shall have the power to
collect, from the pattadar at default an amount which is twice the amount found due proportionately to each acre.
This clause contemplates the mirasdars paying an additional sum of money if the expenditure incurred by the respondent is greater than the
amount collected in the manner mentioned; but if it should be less, their contribution should be correspondingly reduced in the coming year. But the
amount, whatever it is, has to be paid on or before the 15th May every year. In case of default the respondent as the samudaya Manager is given
the power to collect from the defaulting pattadar double the amount which was payable by him should he fail to pay it in time. The appellant''s
contention in the Courts below, as it is here, was that this provision is in the nature of a penalty from which he is entitled to be relieved. This
question has been decided against the appellant in the Courts below and hence he has preferred the second appeal.
The lower Courts while conceding that ordinarily a provision for the payment of twice the sum when default is committed by non-payment within
the time limited, may be penal, have decided against the appellant on the ground that there is something so special in the nature of the agreement in
question and the relationship created between the parties thereby that the Court is bound to hold that the contract is one falling outside the purview
of Section 74 of the Indian Contract Act. The special features are said to be (1) the manager has to spend a substantial sum between the 15th May
and June and see that the breaches in the channels are all repaired and the silt cleared and the channel kept in proper condition to receive a regular
flow of water from the main irrigation channel; (2) the work has to be done promptly and unless the pattadars pay the contributions regularly within
the time stipulated the manager will find it very difficult to carry on the management. Such a provision is highly essential for carrying out the work
entrusted to him. (3) The amount collected does not go into the pockets of the manager, but has to be credited in the accounts and would
ultimately enure to the benefit of the mirasdars.
The substantial question that falls to be considered in this case is whether the provision for the payment of twice the amount when default is
committed in the performance of the primary obligation is one in the nature of a penalty falling within Section 74 of the Indian Contract Act. It may
be that the contract under consideration is not one of an ordinary loan by one party to another. The obligation of the appellant arises out of his duty
to contribute for a purpose which is common to himself and all the other mirasdars in the village. Nonetheless, it must be viewed--and this was
expressly conceded by the Advocate-General--as a contract between the manager as the representative of the village community on the one hand
and the individual mirasdar on the other. Nor can there be any doubt that prima facie a provision for the payment of double the proper amount in
the event of a default is a stipulation by way of penalty. I am quite clear that this is a question for the Court to decide and not for the parties to
agree about. On the facts of the case it does look as if the conditions necessary for the application of Section 74 are all present unless of course
the special facts--those adverted to above--warrant the conclusion that the provision in question is not a stipulation by way of penalty within the
meaning of Section 74. That, it seems to me, is the only way by which the respondent can succeed, if he can succeed at all. The only alternative is
to regard the stipulation in the agreement as an exception to the section and that indeed was suggested. But I am definitely of opinion that the
argument cannot be sustained on the language of the section which refers to one and only one exception and that is confined to a specified class of
bonds executed for the performance of a public duty or act in which the public are interested.
The Courts below, and the respondent here, have relied on the line of cases decided in this Court regarding stipulations contained in bonds
executed by the successful bidder to the stakeholder in the familiar kuri chit transactions which have frequently come before the Courts. There may
be certain features which may at the first blush appear to be common to these transactions and the present. But the essential difference which is by
no means negligible, is this; the stipulations in the kuri chit bonds are for the payment in lump and with interest of all the outstanding instalments if
default is made by the successful bidder in the payment of any future instalment. But in no case had the Court to consider the enforce-ability of a
stipulation for the payment of twice the amount, which is the case on hand here. The general principle is not now open to doubt, and it has been
ruled that the policy of the Legislature in enacting Section 74 of the Contract Act is "" that stipulations of the kind should not be enforceable in so far
as they provide for more than reasonable compensation, and that we ought not to construe the word ""penalty"" narrowly or to be astute in finding
reasons to take the case out of the section."" Per Walk''s, J., in Muthukrishna Aiyar v. Sankaralingam Pillai (1912) 24 M.L.J. 135 : ILR Mad. 229
In the same case at page 265 Sundara Aiyar, J., made the following observations:
What then is the real principle underlying the Court''s interference with the contract between parties as to a payment to be made by way of
damages? In my opinion it can be no other than this the doctrine that the Court will carry out all contracts between parties is confined to the
carrying out of the primary contract and does not extend to a secondary or subsidiary contract to come into operation if the primary contract is
broken. In bonds securing the payment of money, the contract regarded as primary is the promise to pay the amount due to the creditor with the
interest, if any, agreed upon. Any further contract, to be binding on the promisor if he breaks this contract, is regarded as a secondary one
intended to secure the fulfilment of the primary contract; and the Courts both in England and in India do not feel bound to carry out such a
secondary Contract apart from its justice and reasonableness. This view has been laid down for too long a time to admit of question.
So far as I am aware these principles have never been departed from in this Court (vide Thallur Narasimhulu Setty Vs. Kotha Seshayya, ).
Before referring to the decisions relating to kuri chit bonds I should briefly indicate the main features of a kuri chit. The stakeholder, as he has
been called, is the chief organiser of the kuri chit and is the controller of the chit fund. The scheme is to collect from each of the kuri chit holders
who are the subscribers to the chit fund, a specified sum of money called the share money payable periodically. The fund so collected is put up to
auction among the chit holders and he who offers the highest discount gets the fund less the discount (which is distributed among the subscribers).
The number of the chit holders, the period during which the fund is to run, the number of the instalments and the time of payment is generally fixed
by the stakeholder and assented to by those who join the chit. The successful bidder has to bind himself to pay the future instalments and in the
large majority of cases also furnishes security. The bond provides for the regular payment of the future instalments and also contains a covenant
that if default is made the defaulted instalments should be paid together with interest at a rate which is generally high, within a further period of time,
and if even by then the successful bidder does not pay the amount and interest, the entire future instalments should be immediately payable in a
lump without reference to the original stipulation.
The question which has been debated is whether the stipulation for the payment of the future instalments in lump and the stipulation for the
payment of interest are penal in nature, the argument being that the stakeholder is only entitled to recover the instalments which have actually fallen
due perhaps with interest but not anything more. In Vaithinatha Aiyar v. Govindasami Odayar (1921) 42 M.L.J. 551 Oldfield and Ramesam, JJ.,
held that such provisions are not penal. In coming to this conclusion the learned Judges laid emphasis on the special relation in which the
stakeholder stands to the subscribers and the special necessity for the protection of his interest in view of the fact that he alone is liable to each
subscriber, and there is no liability between the subscribers inter se. It was said that without punctual payment by individual subscribers the
stakeholder could not discharge his obligation to the successful bidder and that it justified the imposition of stringent conditions on the defaulter.
The question whether these stipulations are stipulations by way of penalty is certainly one for the Court to determine and it was determined in the
negative on a consideration of the special features of chit fund transactions. In P. Sankunni Menon Vs. The Empire of India Life Assurance Co.
Ltd., , Venkatasubba Rao J., understood this case as laying down a principle peculiar to chit fund transactions; for he observed:
What may be construed as a penalty in the case of an ordinary loan, is not necessarily a penalty in the case of a chit fund transaction.
These two cases and certain others decided in this Court were reviewed by Ananthakrishna Aiyar, J., in Kunju Nair v. Narayanan Nair (1932)
65 M.L.J. 29 and he came to the conclusion that the provision for the payment of all the future instalments in lump in case of default by the prize
winner in payment of any instalment according to his bond, is not to be regarded as a penalty in itself. In this connection he referred to the decisions
of the House of Lords in Wellingford v. Directors, etc., of Mutual Society (1880) 5 A.C. 685 and the Court of Appeal in The Protector Loan Co.
v. Grice (1880)5 Q.B.D. 592. and of the Irish Court in In the matter of O. B.--an arranging debtor (1917) 2 I.R. 354 and also to a passage in 13
Halsbury 152 and observed:
In essence, the transaction before me is a loan of a common fund to one member. The member to whom the loan is to be advanced is selected
either by casting of lots or by other means. The person who offers the highest discount is, in some cases, selected as the person entitled to the loan
of the common fund. But the amount advanced to such member is a loan, and the common fund is lent to such subscriber in turn. As observed by
Scotland, C. J., and Frere, J., in Kamakshi Achari v. Appavu Pillai (1863) 1 M.H.C.R. 448 ''It is simply a loan of the common fund to each
subscriber in turn''...It is really a debt in praesenti but to be paid by particular instalments if certain conditions be duly observed, but otherwise to
be paid up at once irrespective of the benefit of time and instalments. It has been so viewed in this Presidency for a long time.
The principle which the learned Judge had in mind is that where a debt is made payable by instalments a stipulation that on non-payment of any
instalment the entire debt shall become due is not in the nature of a penalty. The same question came up before Stone and Walsh, JJ., in Raghavan
Pattar v. Arumugham (1934) 68 M.L.J.283. The learned Judges accepted the conclusion of Ananthakrishna Aiyar, J., in Kunju Nair v. Narayanan
Nair (1932) 65 M.L.J. 29 but on a line of reasoning different from that which prevailed in the earlier cases. Stone, J., who delivered the judgment
of the Court distinguished the decision in Muthukrishna Aiyar v. Sankaralingam Pillai (1912) 24 M.L.J. 135 : ILR Mad 36 on the ground that it
had reference to transactions which are in essence loan transactions and then observed:
At the auction the person bidding the highest discount is regarded as a purchaser of the subject-matter of the auction. There is no reason we can
see why a chit fund auction is different from any other auction save that as a rule what is sold is a present sum of money which is ''movable
property'' and not ''goods'' within the meaning of the Contract Act, whereas at most auctions what is sold are goods, in the ordinary sense. But
even a chit auction in some cases has as the subject-matter the sale of goods in the ordinary sense, viz., rice and it seems to us clear that in essence
the person who offers the highest discount and therefore becomes the owner of the chit fund is a purchaser at an auction and the contract is one of
sale and not of borrowing. Different considerations may apply after the coming into force of the Indian Sale of Goods Act, 1930, which excludes
money from this class of goods. As to this we express no opinion. The highest bidder purchases the chit by offering (1) the highest discount, (2) a
bond for the future payments of instalments and these two things together constitute the consideration that he gives for the right which he buys
immediately, the subject-matter of the chit. From that it seems to us to follow that it is irrelevant to consider, in determining whether the clause in
the bond which he gives is a penalty or not, whether the amount of the chit that he buys and the amount of the instalments that he undertakes to pay
are or are not the same.
This explanation puts a totally different complexion upon the nature of kuri chit bonds which according to the learned Judges is not to be
regarded as a contract of loan but a contract of purchase.
In this view, no question, of penalty can arise, as the transaction is taken out of the operation of Section 74 altogether. It was for different
reasons that the learned Judges who decided the earlier cases had held that the section was not applicable. Those reasons were (1) the necessity
for the protection of the stakeholder who stood in a special relation to the subscribers who were all bound together by common interests
(Vaithinatha Aiyar v. Govindaswami Udayar (1921) 42 M.L.J. 551 and (2) the principle that where a debt is payable in instalments a condition by
which the debtor binds himself to pay the whole of the debt at once, if he commits default in the payment of any instalment is not a penalty, Kunju
Mair v. Narayanan Nair (1932) 65 M.L.J. 29. It was urged that the position of the respondent in the present case approximates to that of the
stakeholder in a kuri chit, and that the provision for exacting a double payment is essential for the satisfactory working of the agreement in the
common interest. Otherwise it was said that the beneficent scheme underlying the agreement would be thrown out of gear and the well being of the
entire village would be in jeopardy. I am alive to the force of the argument, and I am ready to confess that I would be prepared to go as far as the
law permits to support such an agreement. But I am not able to convince myself that the stipulation in question is not a penalty. It seems to me that
the respondent who is a man of position and wealth was chosen, because quite apart from the dominant interest he possesses in the village, he
commands the necessary labour and finance to get the channel repairs made without waiting until the last pattadar has paid his quota. Secondly, I
cannot get away from the idea that the provision for the payment of double the sum, cannot under any circumstances be anything but one in
terrorem, to operate as a threat, to prevent a default. I can see nothing in common between such a stipulation and that occurring in kuri chit
transactions except that a number of persons are interested in the due performance of the obligation. But this cannot justify the exaction of a double
payment. Where is the limit to be drawn? If community of interest is the deciding factor, one can make it treble, four times and so on. The more the
amount to be paid in default, the greater will be the sanction, and all to the good of the community ultimately. But I regret I am unable to see
sufficient analogy between the kuri chit cases and the present one, to extend the principle of the decisions in the former to the latter.
It was next argued that provisions in contracts of sale and purchase for the forfeiture of earnest or deposit money furnish a parallel, and
instance an exception to the rule enacted in Section 74. Whether this is so or not, it is not perhaps necessary to decide. But surely this class of
decisions stands on a different principle altogether. The question was examined in a Full Bench decision of this Court in Natesa Aiyar and Another
Vs. Appavu Padayachi (died) and Another, , where White, C.J., stated his conclusion and the reason therefor:
I also think that Section 74, Contract Act, does not apply. The sum of Rs. 4,000(this was the deposit money) is named in the contract as an
''advance'' not as the amount to be paid in case of breach. Why should it be assumed that it was paid with a different intention from that stated in
the contract? Further, if, as seems to me to be the right view, it is paid partly by way of part payment of the purchase money and partly by way of
security or guarantee for the performance of the contract, it cannot be regarded as a sum named in the contract as the amount to be paid in case of
breach. Again, if we are to deal with this case according to the letter of the section, this, as was pointed out by Miller, J., in the course of the
argument, is not a question of the amount of compensation which the vendor is entitled to receive by reason of the breach, but a question whether
the vendee is entitled, under the contract, to recover an amount which has been already paid.
For the reasons explained, I feel constrained however reluctantly, to decide the case against the respondent and hold that the clause in question
is penal in nature and is not enforceable in terms. But the respondent is certainly entitled to reasonable compensation for the breach committed by
the appellant in not flaying his quota according to his contract. What that compensation should be has not been decided, and must now be decided.
The appeal is therefore allowed. The decrees of the Courts below are accordingly set aside and the suit is remanded to the District Munsif with the
direction that he will restore it to his file, enquire what is the proper amount of compensation to which the plaintiff is entitled in the circumstances;
and pass a decree in his favour for the amount so ascertained. The appellant is entitled to his costs here and in the lower appellate Court.
Before concluding I must refer to the complaint of the learned advocate for the appellant that the observation of the learned Subordinate Judge
that the evidence shows that the petition between the appellant and his son is only a make-believe affair is one for which there is no support
whatever in the evidence. I have not been referred to any evidence which can support the statement of the learned Judge. The appellant may be
solely liable on the ground that the lands continued to stand in his patta and have not been transferred to the name of his son in the revenue registers
in pursuance of the partition. But it was quite unnecessary to the learned Judge to consider whether the partition was valid or not and I agree that if
the remark is allowed to stand it might create complications in future as between the appellant and his son. The respondent has not endeavoured to
support this observation either. I therefore consider that it is entirely unfounded.
The court-fee on the memorandum of second appeal will be refunded.