K.P.
Subbarama Sastri & Ors V. K.S. Raghavan & Ors [1987] Insc 96 (3 April
1987)
Khalid,
V. (J) Khalid, V. (J) Oza, G.L. (J) Citation: 1987 Air 1257 1987 Scr (2) 767
1987 Scc (2) 424 Jt 1987 (2) 53 1987 Scale (1)681
ACT:
Contract
Act, 872:s. 74--Kuris and Chitties--Prized sub- scriber executing
bond--Provision for payment in lump sum with 12% interest on default--Whether
unconscionable and penal.
Kerala
Chitties Act, 1975: ss. 6, 7 & 28--Prized sub- scriber defaulting to pay
subscriptions--Consequences of--Whole sum becoming payable in lump sum with 12%
inter- est--Such provision whether unconscionable and penal.
HEADNOTE:
The
respondents who were subscribers to a Kuri (Chit Fund) in 1962, committed
default after they had prized the tickets and realised the amounts. The bonds
executed by them contained a provision that in case of default they would be
liable to pay all the future instalments in a lumpsum with interest at 12%
without giving any credit for the dividend.
The
suit filed for realisation of the principal sum with interest and the balance
Kuri due was decreed by the trial court in 1965. In appeal before the High
Court it was con- tended for the defendant-respondents that the stipulation in
the agreement that on default the Kuri foreman would be entitled to recover the
entire balance amount with 12% interest in a lump sum without giving credit to
the sub- scribers was unconscionable and penal and hence not enforce- able. The
Division Bench took the view that the Kuri trans- action and the contract
between the Kuri foreman and the subscribers burdened them with unconscionable
interest and were unreasonable. It, therefore, partly allowed the appeal by
modifying the decree refixing the interest.
Allowing
the appeal by appellants-plaintiffs and dis- missing the appeal by other
subscribers by special leave, the Court,
HELD:
Where a contract provides for payment of money in instalments and contains also
a stipulation that on default being committed in paying any of the instalments
the whole sum shall become payable at once, the true test for deter- mining
whether the said condition is in the 768 nature of a penalty is to find out
whether the amounts referred to in the agreement were debita in praesenti al-
though solvenda in futuro or whether they were to become due to the promisee on
the respective dates when the instalments were payable. [771E-G] If on proper
consideration of a contract it is found that the whole amount was on the date
of the bond a debt due but the creditor for the convenience of the debtor
allowed it to be paid by instalments then the stipulation would not be penal.
If on the other hand the court comes to the con- clusion that the debt becomes
due only on the respective dates fixed for the instalments, the stipulation
would be in the nature of a penalty. [771G-H; 772A-B] In the instant case there
was nothing unconscionable about the contract. A subscriber to a Kuri truly and
really becomes a debtor for the prized amount paid to him, The facility of repayment
in instalments is only a concessional facility. The stipulation enabling the
foreman to withdraw this facility on default of punctual payment of the instal-
ment could not, therefore, be said to be penal. [770G-H;
771A-B]
P.K. Achuthan v. State Bank of Travancore, Calicut, [1974] K.L.T. 806 (F.B.),
approved.
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 85 (N) of 1972.
From
the Judgment and Order dated 27.11.1970 of the Kerala High Court in A.S. No.
380 of 1965.
WITH
SPECIAL LEAVE PETITION (CIVIL) No. 2908of 1975.
From
the Judgment and Order dated 15.1.1975 of the Kerala High Court in Second
Appeal No. 390 of 1971.
T.S.
Krishna Murthy lyer, A.S. Nambiar, G.N. Rao and Ms. Shanta Vasudevan for the
Appellants in C.A. No. 85(N) of 1972 and Respondents in SLP. No. 2908 of 1975.
N.M.
Ghatate and S. Balakrishnan for the Respondents in C.A. No. 85(N) of 1972 and
Petitioners in S.L.P. No. 2908 of 1975.
The
Judgment of the Court was delivered by 769 KHALID, J. We will first deal with
Civil Appeal 85/1972.
The
appellants were the plaintiffs in O.S. No. 78 of 1964 on the files of the
Subordinate Judge's Court, Palghat. The suit was based on a Kuri transaction
(Chit Fund). The re- spondents were subscribers to the Kuri. They committed
default after they had prized it and realised the Kuri amounts. Hence the suit
was filed for realisation of the principal sum with interest and the balance
Kuri due.
The
suit was decreed by the Subordinate Judge by his Judgment dated 24th June,
1965. An appeal was filed before the High Court. A Division Bench of the High
Court heard the appeal and partly allowed it by modifying the decree of the
Trial Court refixing the interest, largely influenced by the fact that the Kuri
transaction and the contract between the foreman of the Kuri and the
subscribers (defaulted) burdened the subscribers with unconscionable interest
and were unrea- sonable.
To
appreciate the reasoning of the Division Bench it is necessary to set out the
scheme of the Kuri. The respondents took two tickets in a Kuri (Chit Fund)
started by the appel- lants in September, 1962. Under the scheme of the Kuri,
there will be bidding at monthly intervals. The subscriber bids and prizes the
ticket depending upon his need. When he does so, he voluntarily surrenders the benefit
of dividends which is distributed among the subscribers. For example, suppose
the Kuri amount is Rs.5,000 consisting of 50 tickets valued at Rs.100. At the
first bid the lowest bid is 3500 by A. A gets this amount and the balance of
Rs.1500 will be distributed among the other subscribers. But the prized
subscriber has a duty to pay the entire amount in instal- ments without
default. Here the respondent bid and prized both the tickets; one on the third
draw and the other at the th and received the amounts. As per rules of the Kuri
they executed bonds to secure future instalments. However, they committed
default in paying the future instalments. That resulted in the suit. The main
contention which found favour with the High Court, raised in defence, was that
the rules of 'the Kuri contained several unconscionable and penal provisions
like the provisions relating to the payment of all the future instalments in a
lump with interest at 12% ignoring the claim of the defaulting subscribers to
their share in the reduction (the dividend).
The
Kuri system was in vogue in the erstwhile Travancore State and in the Cochin
State, prior to the formation of Kerala State and they were governed in those
two areas by the Travancore Chit Act of 1945 (Act 26 of 1120-M.E.) which came
into force on 20-6-1945, and 770 the Cochin KUries Act 7 of 1106. There was no
corresponding Act for Malabar area from which area the present appeal arises.
After the formation of the Kerala State, Kuri trans- actions in the State are
governed by the Kerala Chitties Act, 1975, as amended by Act 19 of 1978. The
High Court after taking into account the interest stipulated observed that it
was unconscionable and penal and reduced the amount to Rs.10,000 and modified
the decree to that extent. The reason that persuaded the High Court to do so
was its con- cern at the unreasonableness of the terms of the contract and the
High Court expressed it in the following words:
"Before
we leave this case, we wish to add a few words. In our experience, we have not
yet come across such a kurivari which has so many unconscionable provisions.
Ground No. 5 in the memorandum of grounds of appeal shows the amount payable by
the appellants. the amount received by them, etc. to show the unconscion-
ableness. The appellants received only Rs.
16,185
(on both the tickets together); and, all told, they already paid back Rs.5,100
as subscriptions. The claim in the suit towards future instalments is Rs.21,000
with interest of Rs.1,785. And all this within less than two years, the date of
commencement of the Kuri being 20th September, 1962 and the date of suit being
2nd September, 1964 for receiving a little over Rs.16,000 the appellants have
to pay a little less than Rs.28,000. In our considered opinion, such
transactions should not be allowed, and people who carry on such transactions
are really unsocial elements. We are told that the same stake-holders are
carrying on such kuries even now without any hindrance, because there is no law
to control the conduct of chit funds now in the Malabar area. It is time that
the Government moved in the matter and brought some legislation to control such
unsocial activities." A full Bench of the Kerala High Court had occasion
to consider the correctness of this view and in a decision reported in 1974
K.L.T. 806, such Kuri transactions were upheld and the decision of the Division
Bench was reversed.
According
to the full Bench, there was nothing unconscion- able about the contract.
Before the full Bench it was con- tended that this stipulation in the agreement
where a sub- scriber prized his chit, providing that on default the Kuri
foreman would be entitled to recover the entire balance amount with 12%
interest in a lump sum without giving credit to the subscribers, is penal 771
in nature and held in terrorem for securing due performance of their promise
and hence not enforceable. Eradi, J. as he then was, speaking for the full
Bench held that a subscriber truly and really becomes a debtor for the prized
amount paid to him, that the facility of repayment in instalments is only a
concessional facility and that stipulation enabling the foreman to withdraw the
concessional facility on default of punctual payment of the instalments would
not be penal or unconscionable. We quote below the observations made by the
full Bench in paragraphs 6 & 7:
"6.
The question whether a particular stipula- tion in a contractual agreement is
in the nature of a penalty has to be determined by the court against the
background of various relevant factors, such as the character of the
transaction and its special nature, if any, the relative situation of the
parties, the rights and obligations accruing from such a transaction under the
general law and the intention of the parties in incorporating in the contract
the particular stipulation which is contended to be penal in nature. If on such
a comprehensive consideration, the court finds that the real purpose for which
the stipula- tion was incorporated in the contract was that by reason of its
burdensome or oppressive character it may operate in terrorem over the promiser
so as to drive him to fulfil the contract, then the provision will be held to
be one by way of penalty." "7. Where a contract provides for payment
of money in instalments and contains also a stipulation that on default being
committed in paying any of the instalments the whole sum shall become payable
at once, the true test for determining whether the said condition is in the
nature of a penalty is to find out whether the amounts referred to in the
agree- ment were debita in praesenti although solven- da in futuro or whether
they were to become due to the promisee only on the respective dates when the
instalments were payable. If on a proper construction of a contract it is found
that the real agreement between the parties was to the effect that the whole
amount was on the date of the bond a debt due but the creditor for the
convenience of the debtor allowed it to be paid by instalments intimating that
if default should be made in the payment of any instalments he would with- draw
the concession, then the stipulation as to the whole amount of the balance
becoming payable 772 would not be penal; if, on the other hand, on a proper
consideration of the terms of the contract the court comes to the conclusion
that the debt itself arises or becomes due and payable by the debtor only on
the respective dates fixed for the instalments the stipula- tion that on
default being made in the payment of any instalment the whole of the balance
should become due and payable would be in the nature of a penalty." We
agree with the law so laid down by the full Bench.
The
result is that the appeal has to be allowed. Accord- ingly, we set aside the
Judgment of the High Court and allow this appeal but in the circumstances of
the case, without costs.
Special
leave granted in S.L.P. (Civil) 2908/75. Here the Judgment of the High Court is
challenged by a subscriber putting forth the arguments that found favour with
the Division Bench in the earlier appeal. We adopt the reasoning of the full
Bench in 1974 KLT 806, which was followed by the Division Bench in the Judgment
under appeal in this case.
The
appeal, therefore, has to fail and is dismissed.
However,
with no order as to costs.
P.S.S.
Appeal dis- missed.
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