Karnataka High Court
The General Manager, Taluk ... vs The Arbitrator, Deputy Registrar Of ... on 4 February, 1998
Equivalent citations: AIR1998KANT354, ILR1998KAR2946, 1998(3)KARLJ527, AIR 1998 KARNATAKA 354, (1998) ILR (KANT) 2946, (1998) 3 KANT LJ 527, (1999) 3 BANKLJ 409, (1999) 1 CIVLJ 425
ORDER
1. The petitioner is a Co-operative Society established under the provisions of the Karnataka Co-operative Societies Act, 1959, hereinafter called 'the Act'. It was appointed as a sub-agent of the Karnataka Food and Civil Supplies Corporation Limited, hereinafter called the 'KFCSC' for the purposes of procurement, storage, hulling and delivery of foodgrains and holding paddy stock for and on behalf of KFCSC. Whereas the petitioner, though having his own Rice "Mill since required to hull the paddy in stock in private mills for rice delivery, due to urgency of rice required by the KFCSC, entered into an agreement dated March 17, 1984 with the 3rd respondent appointing him a Milling Agent for the purposes of hulling paddy and to deliver the resultant rice, subject to certain terms and conditions.
2. That, according to the terms and conditions of the agreement, the 3rd respondent furnished a bank guarantee to the petitioner to an extent of Rs. 1 lakh; and, agreed to convert the paddy of such variety and quality as may be directed by the petitioner from time to time, into raw rice or boiled rice as the case may be and quality standards as prescribed and deliver the same to the petitioner within the period prescribed; The agreement also provided for payment of penalty by the 3rd respondent at the rate of Rs. 100/- per day, in case of default in delivery of the rice and for enforcement of the bank guarantee by the petitioner for non-performance of the services/duties or breach/default of any of the terms of the said agreement.
3. It is stated that, by the year 1986, the 3rd respondent committed default in delivery of certain quantity of rice to the petitioner. The petitioner after notice dated January 15, 1986, calling upon the 3rd respondent to comply with the terms of the agreement by delivering the required quantity of rice invoked bank guarantee by demand dated February 8, 1986; The 3rd respondent filed a suit in O.S. No. 39 of 1987 on the file of the learned Munsiff, Gangavathi and obtained an ex parte order of temporary injunction restraining the petitioner from enforcing the bank guarantee; On the application of the petitioner the interim injunction came to be vacated, and the Bank credited the amount mentioned in the bank guarantee to the account of the petitioner on July 11, 1988, at the request of the petitioner; Later the suit also came to be dismissed.
4. The 3rd respondent raised a dispute under Section 70 of the Karnataka Co-operative Societies Act, before the Deputy Registrar of Co-operative Societies, Raichur, for a judgment and award against the petitioner for recovery of transport and hulling charges in a sum of Rs. 52,847.55 with interest thereon and for a further direction to the petitioner to reimburse a sum of Rs. 1 lakh along with interest thereon from the date of release to the date of reimbursement with a further declaration that he is not liable to pay Rs. 1 lakh to the Andhra Bank. The Deputy Registrar by his award dated April 22, 1991 directed the 3rd respondent to deliver 169.50 quintals of rice or its cost at the present market price in lieu of rice to the petitioner with penalty as per Clause 20 of the agreement from 15-1-1986 to 8-2-1986 to the petitioner. The Deputy Registrar has further directed the petitioner to reimburse the bank guarantee of Rs. 1 lakh to the 3rd respondent upon his delivery of rice or payment of its value and also to pay the outstanding arrears of transportation and milling charges in a sum of Rs. 52,847.55 to the 3rd respondent.
5. As the period of default was not properly calculated, the petitioner filed an application before the Deputy Registrar to modify the period of default from '15-1-1986 till 8-2-1986' to '15-1-1986 till 11-7-1988'. The said application was rejected. However, the review application filed by the 3rd respondent for award of interest in respect of Rs. 1 lakh and Rs. 52,847.55 was allowed, which ultimately came to be quashed by this Court.
6. Having been aggrieved by the awards, both the petitioner as well as the 3rd respondent filed separate appeals before the Karnataka Appellate Tribunal in Appeal Nos. 396 of 1991 and 342 of 1992 respectively. The Karnataka Appellate Tribunal by its judgment and award dated March 9,1994 modified the award made by the Deputy Registrar in the following terms:
"(i) the Society is directed to return the realised bank guarantee with Bank interest in the account of Andhra Bank, Branch : Gangavathi, not with effect from 11-2-1986 as ordered by the Deputy Registrar of Co-operative Societies, Raichur but from 11-7-1988.
(ii) the society to pay the appellant in appeal No. 342 of 1992, and 3rd respondent in Appeal No. 396 of 1991 Rs.
52,847.55 with bank interest relating to transportation and milling charges, .and
(iii) the appellant in Appeal No. 342 of 1992, 3rd respondent in Appeal No. 396 of 1991 to supply as directed by the Deputy Registrar of Co-operative Societies, 169.50 quintals of rice to the society or cost at the market price as on the date of order of Deputy Registrar of Co-operative Societies, on 22nd April, 1991".
It is seen from the aforesaid portion of the judgment that the claim of the petitioner for penalty and for interest on the value of rice during the period of default is not granted.
7. Aggrieved by the order of the Tribunal, this petition is filed by the petitioner under Articles 226 and 227 of the Constitution of India, for quashing the judgment and award dated March 9, 1994, made by the Tribunal as per Annexure-P, with a further writ in the nature of mandamus directing the 3rd respondent to pay penalty as per agreement Clause 20 in Annexure-A, with a further writ in the nature of declaration that the award made by the Deputy Registrar is void, with a further direction to the 3rd respondent to deliver 169.50 quintals of rice or the present market value.
8. Sri G.S. Visweswara, learned Counsel appearing for the petitioner has contended that in view of Clauses 20 and 21 of the agreement at Annexure-A made between the petitioner and the 3rd respondent, the petitioner society is entitled to enforce the bank guarantee either for the non-performance or for breach of any of the terms of the agreement; as the 3rd respondent admittedly committed breach of the agreement in as much not delivering 169.50 quintals of rice, the enforcement of bank guarantee became absolutely necessary and the 3rd respondent is not entitled for reimbursement of the amount mentioned in the bank guarantee much less with interest. He has further contended that where, the parties have agreed for payment of penalty in case of default at a specified rate, there is no need to establish the extent of damages suffered by one of the parties and without establishing the actual injury he is entitled to enforce the clause and recover penalty by way of compensation and if the Court is of the view that the agreed amount is high or was arbitrary it is open to the Court to grant compensation at such rate as may appear to be reasonable but Clause 20 cannot be declared invalid. It is the further contention of Sri G.S. Visweswara, the learned Counsel appearing for the petitioner that at any rate the 3rd respondent is not entitled for interest at bank rate where the transaction is not a commercial transaction. Sri. G.S. Visweswara however, did not contest the correctness of the finding that the petitioner is liable to pay the transport and milling charges. He has fairly accepted the liability to pay interest thereon but not at the bank rate as awarded by the Tribunal. It is his further contention that the petitioner is entitled for recovery of penalty by way of compensation from 15-1-1986 till 11-7-1988, the date on which the amount was credited to their account" as the delay occurred due to the injunction order obtained by the 3rd respondent
9. Sri Jaykumar S. Patil, learned Counsel appearing for respondent 3, per contra, has contended that the petitioner was not entitled to enforce the bank guarantee in full as the bank guarantee was given only to secure the compliance of the terms of the contract. That is to say, the delivery of rice to the petitioner as agreed under the terms of the contract and if there is any default the bank guarantee should be encashed only to the extent of his liability and not in respect of the whole. He has further contended that the petitioner is not entitled for the value of the rice prevailing as on the date of the award, as the petitioner had already recovered the value of the rice by enforcing the bank guarantee and if at all he is entitled for any value of the rice it must be the value of the rice as prevailed on July 11, 1988 on which day the amount was credited to their account by Andhra Bank. Sri Jayakumar S. Patil has further contended that Clause 20 being one-sided and oppressive is invalid and unenforceable. It is his further case that the petitioner withheld the transport and milling charges without any reasonable cause and therefore, the 3rd respondent is entitled for interest at bank rate.
10. In view of the aforesaid contentions the following points would arise for consideration.-
(a) Whether the petitioner is entitled to enforce the bank guarantee in full for breach of the conditions of the agreement?
(b) Whether the petitioner is not entitled to recover penalty in accordance with Clause 20 of the agreement from the 3rd respondent for the defaulted period; If not, what he is entitled for?
(c) Whether the 3rd respondent is entitled for reimbursement of Rs. 1 lakh with interest at bank rate with effect from July 11, 1988 and whether he is entitled for interest at bank rate on the sum of Rs."52,857.55 paise the transport and milling charges?
(d) What order?
11. Point No. 1:
There is no dispute that the 3rd respondent failed to deliver 169,50 quintals of rice as" on January 15, 1986 and thus committed the breach of contract in complying Clause 6 of the agreement. It is also not in dispute that 'Clause 21 of the agreement provides that the petitioner shall be entitled to encash the bank guarantee furnished by the 3rd respondent for non-performance of the services/duties and or breach/default of any of the terms of the agreement. The petitioner contends that, as soon as the 3rd respondent committed default he became liable under Clause 21 of the agreement for encashment of the bank guarantee and as the clause did not indicate the extent of bank guarantee to be encashed, the petitioner is entitled to encash the bank guarantee in full irrespective of the extent of liability of the 3rd respondent.
12. Clauses 1, 2 and 3 of the agreement deals with the bank guarantee and the quantity of the paddy to be supplied by the petitioner to the 3rd respondent at a time and they read as follows:
"(1) The Milling-Agent shall provide Bank Guarantee of Rs. 1,00,000/- to cover the cost of paddy and specific performance of the contract to the Sub-Agent.
(2) The Milling-Agent shall transport paddy to his rice mill from the godowns of the Sub-Agent at the cost of the Sub-Agent.
(3) The Sub-Agent shall release paddy not more than fifty metric tonnes at a time and the value of both paddy and rice left at any time with the milling agent shall not exceed the amount of bank guarantee".
Clause 20 of the agreement provides for penalty and it reads thus.-
"20. The Milling-Agent shall be liable to pay a penalty of Rs. 100/- per day (Rupees One hundred only) for default in delivery of the rice and the same shall be recovered from the bills of the Milling-Agent".
(The petitioner in this petition is described as Sub-agent and'the 3rd respondent as Milling-Agent in the agreement produced at Annexure-A).
13. From Clause 1 of the agreement it is clear that the 3rd respondent should furnish the bank guarantee to the tune of Rs. 1 lakh to cover the cost of paddy and the specific performance of the contract and in view of Clause 3 of the agreement the paddy to be delivered for milling should not be more than 50 Metric Ton at a time and the value should not exceed the Bank guarantee. The combined effect of these two clauses is that the bank guarantee is furnished to cover the cost of paddy and the specific performance being re-delivery of the rice agreed. The object of securing the bank guarantee is, therefore, to secure the value of the paddy or the rice agreed to be delivered in case the 3rd respondent commits default. Keeping this in view, Clause 3 of the agreement provides for delivery of such quantity of paddy to the 3rd respondent by the petitioner for milling, the value of which and the rice to be delivered by the 3rd respondent, together should not exceed the value of the bank guarantee. It is, therefore, clear that the bank guarantee is only to secure the redelivery of rice or payment of the value of the paddy supplied by the petitioner to the 3rd respondent for hulling together with the rice if any and not as damage for non-performance of the terms of the agreement. If that were to be the case, the petitioner was entitled to enforce the bank guarantee only to the extent of the value of the rice as on 11-7-1988 and not the entire sum of Rs. 1 lakh. By encashing the entire bank guarantee, the petitioner has wrongfully collected monies from respondent 3 in excess of the value of 169.50 quintals of rice for which he is not liable. The petitioner is, therefore, liable to repay such sum together with interest at the rate at which the bank would have paid to a depositor, if such sum had been kept in deposit on 11-7-1988.
14. It is contended by Sri G.S. Visweswara, the learned Counsel appearing for the petitioner that, when the agreement provides for encashment of guarantee for non-performance of the agreement, the society is entitled to encash the entire bank guarantee, as the guarantee is in the nature of earnest money as observed by Supreme Court in Shree Hanuman Cotton Mills and Another v Tata Aircraft Ltd.. . After carefully perusing of the aforesaid decision, I am not able to persuade myself to agree with the contention of the learned Counsel appearing for the petitioner, as the Supreme Court has held that the forfeiture of earnest money under a contract for sale of property does not fall within Section 74. On the other hand, the Supreme Court expressed no opinion on the question as to whether "the element of unreasonableness can ever be considered regarding the forfeiture of an amount deposited by way of earnest money".
The Supreme Court in Moula Bux v Union of India , considering the question, whether forfeiture of earnest money under a contract for sale of property does not fall within Section 74 of the Indian Contract Act, has, after considering the catena of decisions has held that:--
"Forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is in the nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of penalty".
15. Admittedly, the agreement on hand provides for penalty as well as encashment of Bank Guarantee. The Bank Guarantee is secured to "cover the cost of paddy and specific performance of the contract". It also provides that the petitioner should not release the paddy more than 50 metric tonnes at a time and the value of both paddy and rice left at any time with the 3rd respondent should not exceed the amount of bank guarantee. It is, therefore, clear that the bank guarantee provided by the 3rd respondent is not in the nature of Earnest Money deposit as made in cases of other works of the Government. It is to secure the payment of the value of the paddy or rice as the case may be if not delivered. As the penalty is also allowed the petitioner is not entitled to encash the bank guarantee in full. Point No. 1 is answered accordingly.
16. Point No. 2:
By Clause 20 of the agreement, the 3rd respondent is made liable to pay a penalty of Rs. 100/- per day for default in delivery of rice and empowered the petitioner to recover the same from the bills of the milling agent. There is no dispute that there is a default. There is also no dispute that the value of the undelivered rice has already been recovered by encashing the bank guarantee whatever may be the value according to the then prevailing price. If there is any penalty for default in delivery it must be by way of compensation and such compensation should be reasonable. It shall be neither oppressive nor unreasonable. Penalty at the rate of Rs. 100/- per day cannot be regarded as genuine pre-estimate that was taken into account as the measure of reasonable compensation. In a hypothetical condition, if the 3rd respondent committed default of 20 quintals of rice for a period of 100 days, the penalty of Rs. 100/- for every day's default is not merely unreasonable, it is oppressive also and such clause being one sided will definitely come within Section 74 of the Contract Act.
The Supreme Court in Fateh Chand v Balkishan Dass, considering the purport and intent of Section 74 of the Indian Contract Act has held as follows:
". . .Section 74 of the Indian Contract Act, which in its material part provides:
"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be, the penalty stipulated for".
The Section is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refused to enforce it, awarding to the aggrieved party only reasonable compensation. 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".
The Supreme Court has further ruled.-
"10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damage"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties . knew when they made the contract, to be likely to result from the breach".
17 In Moula Bux's case, supra, the Supreme Court has held that:
"It is true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree and the Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach -of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-es-timate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him".
18. In Union of India v Rampur Distillery and Chemical Company Limited , the Supreme Court considering the scope of Section 74 of the Indian Contract Act with reference to the permisibility of forfeiture of security deposit for default has held as follows:
"4. It is important that the breach of contract caused no loss to the appellants. The stipulated quantity of rum was subsequently supplied to the appellants by the respondents themselves at the same rate. The appellants, in fact, made no attempt to establish that they had suffered any loss or damage on account of the breach committed by the respondents.
5. Following the decision in Maula Bux's case, supra, we hold that the High Court was right in rejecting the appellants' claim that they are entitled to forfeit the security deposit".
19. The petitioner did not place any material in support of the actual loss suffered on account of the default of the 3rd respondent to deliver the rice. It is not their case that, in order to deliver the said quantity of rice to KFCSC they purchased the said quantity of rice in open market and fulfilled their obligations. Nor is it their case that the KFCSC have recovered any penalty from the petitioner for non-delivery of the rice. If that were to be the case, the petitioners suffered no loss or damage on account of default in the supply of rice. Penalty of Rs. 100/- per day imposed without there being any pre-estimate and on the basis of surmises or whims of the parties concerned, is unenforceable. Even otherwise, if the petitioner is entitled for compensation by way of penalty it must be reasonable and in the absence of any proof as to the extent of loss or damages suffered by the petitioner, it is just and appropriate to award the interest at the rate of 18% on the total value of 169.50 quintals of rice from 15-1-1986 till 11-7-1988. Point No. 2 is answered accordingly.
20. Point No. 3:
There is no dispute as to the liability of the petitioner to pay a sum of Rs. 52,857.55 ps. to the 3rd respondent in respect of the transport and milling charges and that has not been paid, even if it is calculated from the date on which the 3rd respondent committed default in supply of rice. The petitioner encashed the bank guarantee to the tune of Rs. 1,00,000/-. It is not an earnest deposit for the due performance of the contract. It is admittedly a guarantee to cover the cost of paddy and specific performance of the contract. Hulling the paddy delivered by the petitioner and delivering the converted rice in the agreed proportion by the 3rd respondent to the petitioner is the specific performance. As both of them are inter-connected with each other the bank guarantee was secured only for the purposes of securing payment of the value of the rice, if, in quantities not delivered by the 3rd respondent to the petitioner in accordance with the agreement. The petitioner was, therefore, entitled to encash the bank guarantee to the extent of the value of the rice prevailing on 11-7-1988. No material is placed before the Arbitrator as to the price of the rice fixed by the KFCSC as on 11-7-1988. Unless the value of rice prevailing as on 11-7-1988 is determined, the petitioner is not entitled to retain any sum of money out of one lakh in excess of the value of the rice. As the petitioner is already awarded interest as compensation for default he is again not entitled for interest on the value of the price of the rice. However, the petitioner is liable to pay interest to the 3rd respondent on such sum of money as may be payable after adjusting the value of the rice as on 11-7-1988 with interest thereon at 18% from 15-6-1986 to 11-7-1988 out of Rs. 1 lakh encashed by way of bank guarantee. The money found to be due and payable by the petitioner to the 3rd respondent out of Rs. 1 lakh shall carry interest at the rate prescribed on deposits by the Andhra Bank as on 11-7-1988. The sum of Rs. 52,857.55 payable by the petitioner to the 3rd respondent shall also carry interest on 6% per annum from 15-1-1986 till the date of realisation. Point No. 3 is answered accordingly.
21. For the reasons aforesaid, this petition is disposed of in the following terms:
(a) The petitioner is entitled to adjust the value of 169.50 quintals of rice as prescribed by KFCSC as on 11-7-1988 with 18% interest thereon from 15-1-1986 to 11-7-1988 out of Rs. 1 lakh encashed by way of bank guarantee and repay the balance to the 3rd respondent with interest at the rate prescribed by Andhra Bank on deposits as on 11-7-1988, from 12-7-1988 till the date of payment.
(b) The petitioner is directed to pay the sum of Rs. 52,857.55 with 6% interest per annum thereon from 15-1-1986 till the date of payment. The matter is remitted to the Deputy Registrar of Co-operative Societies to determine the liability of the petitioner in respect of the balance that may be payable by the petitioner to the 3rd respondent after adjusting the value of rice and the interest thereon as observed above. The Deputy Registrar shall decide the matter within 3 months from the date of receipt of this order.
22. In the circumstances of the case, there is no order as to costs.
23. Sri K. Nagaraja, learned HCGP is permitted to file memo of appearance within four weeks.