1969 (8) TMI 78 - SC - Indian Laws

Whether the Government was entitled in the circumstances of the case to forfeit under cl. 8 the terms of the contracts the deposits made for securing due performance of the contracts? Held that - The High Court was in error in disallowing the plaintiff s case. The High Court has held that the plaintiff is not entitled to any interest prior to the date of the suit. No argument has been advanced before us challenging that view. Since interest was not recoverable under any contract or usage or under the provisions of the Interest Act 1838 the High Court allowed interest at the rate of 3% per annum on 416.25 from the date of the suit the rate of interest allowed on the claim decreed also should not exceed 3 per cent per annum. We set aside the decree passed by the High Court and substitute the following decree - The Union of India do pay to the plaintiff 18, 500/- with interest at the rate of 3% per annum from the date of the suit till payment. The plaintiff was guilty of breach of the contracts. Considerable inconvenience was caused to the Military authorities because of the failure on the part of the plaintiff to supply the food-stuff contracted to be supplied.

Issues Involved:
1. Justification for rescinding the contracts.
2. Forfeiture of security deposits.
3. Applicability of Section 74 of the Indian Contract Act.
4. Entitlement to reasonable compensation.
5. Interest on the amount decreed.

Issue-wise Detailed Analysis:

1. Justification for Rescinding the Contracts:
The plaintiff entered into two contracts with the Government of India to supply potatoes and poultry, eggs, and fish, depositing amounts as security for due performance. The plaintiff persistently defaulted in making regular and full supplies, leading the Government to rescind the contracts on November 23, 1947, and December 2, 1947, respectively. The trial court upheld the Government's decision to rescind the contracts, finding that the plaintiff had indeed failed to perform his obligations.

2. Forfeiture of Security Deposits:
The trial court ruled that the Government could not forfeit the security deposits as there was no evidence of actual loss suffered due to the plaintiff's default. The High Court modified this, awarding only Rs. 416.25 with interest, reasoning that Section 74 of the Contract Act did not apply to deposits made as security for due performance if the forfeited amount was not unreasonable. The Supreme Court, however, disagreed with the High Court's view, stating that the deposits could not be regarded as earnest money and were subject to Section 74 of the Contract Act.

3. Applicability of Section 74 of the Indian Contract Act:
Section 74 deals with the measure of damages in cases where a sum is named in the contract as the amount to be paid in case of breach or where the contract contains a penalty stipulation. The Supreme Court emphasized that the duty to award reasonable compensation, not exceeding the stipulated amount, is statutorily imposed on courts by Section 74. The Court clarified that this section applies comprehensively to any covenant involving a penalty, including forfeiture of amounts already paid under the contract.

4. Entitlement to Reasonable Compensation:
The Supreme Court noted that the Government did not lead evidence to prove the actual loss suffered due to the plaintiff's breach, such as the rates at which the goods were purchased after the contracts were terminated. The Court held that without such evidence, the forfeiture of the security deposits could not be justified as reasonable compensation. The Court referenced its judgment in Fateh Chand v. Balkishan Dass, stating that reasonable compensation must be determined by the court and cannot exceed the amount specified in the contract.

5. Interest on the Amount Decreed:
The High Court denied interest prior to the date of the suit, a view unchallenged before the Supreme Court. The Supreme Court upheld the High Court's decision to allow interest at 3% per annum on Rs. 416.25 from the date of the suit. The Supreme Court modified the decree, ordering the Union of India to pay the plaintiff Rs. 18,500 with interest at 3% per annum from the date of the suit till payment.

Conclusion:
The Supreme Court set aside the High Court's decree and substituted it with a decree ordering the Union of India to pay the plaintiff Rs. 18,500 with interest at 3% per annum from the date of the suit until payment. Despite the plaintiff's breach causing inconvenience to the Military authorities, the lack of evidence on the actual loss led the Court to rule in favor of the plaintiff regarding the forfeiture of the security deposits. Each party was ordered to bear its own costs throughout. The appeal was allowed.

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