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has been paid, and the principal is still due. Interest for the first year
became due and payable on the 25th of April 1875. It was not paid.
It may be doubtful, having regard to the terms of this mortgage-deed,
whether the mortgagees could at any time have sued for the yearly amounts
of interest as they became due, and whether the intention of the parties
was not that in case of default in payment of the lower rate of interest,
interest should be calculated at the higher rate as from the date of the
contract and added to the principal as principal.

For the purpose of illustrating our views as to the inapplicability of
s. 74 of the Indian Contract Act, 1872, to agreements to substitute on
the happening of a given state of circumstances, a higher rate of interest
for a lower, we will assume a case of a mortgage for 10 years from
the 25th of April 1893. with an agreement to pay on the 25th of April
in each year interest on the principal at the rate of Ee. 1 per
centum per mensem and that in case of default being made in the
due payment of such interest the mortgagor should, as from the 25th of
April 1893, and thenceforward, pay interest on the principal at the rate
of Ee. 1-8 per centum per mensem in lieu of interest at the lower rate
of Ee. 1. In such case how is s. 74 of the Indian Contract Act., 1872,
to be applied should default be made in the payment of the interest
due on the 25th of April 1894, and again default be made on the 25th of
April 1895 ? If the mortgagee should bring bis suit in 'May 1895 for
[238] the interest due in 1894 and for that due in 1895, what should be
the decree ? Should it be for the amount of the higher rate of interest, or
of the lower rate of interest from the date of the contract to the 25th of
April 1894, plus compensation, and of the higher rate of interest from the
date of the breach, that is, from the 25th April 1894, or should it be for
the lower rate of interest for the two years plus compensation, or should
it be one for compensation only ? It has been held in India, in cases to
which we shall subsequently refer, that a contract to pay a higher rate of
interest from the date of the contract, on default being made in payment
of a lower rate of interest, is to be regarded as a stipulation for a penalty,
to which s. 74 of the Indian Contract Act, 1872, is to be applied. It has
also been held in India, and so far as we are aware, has been seldom
doubted, that an agreement to pay a higher rate of interest from the date
of the default in payment of a lower rate is a contract to be performed, and

870



11]



BANKE BEHARI v. SUNDAR LAL



15 All. 240



not a stipulation for a penalty to be relieved against, and that s. 74 of
the Indian Contract; Act, 1872, dees not apply to such an agreement.

The two propositions are clearly and concisely put in the judgment
in Nanjappa v. Nanjappa (1). Although the cases there put, like many of
those in which this question has arisen, were cases in which a borrower
had agreed to pay the principal money with certain interest on a given
day, with a stipulation that a higher rate of interest should be paid if
default were made, there cannot, as it appears to u?, be any difference in
principle between such cases and that which we are putting by way of
illustration. In each case it is the stipulation as to a higher rate of inte-
rest, if it could be enforced, which would impose on the borrower the obli-
gation of paying a larger sum than he would have to pay if no default
wera made. At pp. 166 and 167 of I.L.K., 12 Mad., the two propositions
are thus stated :

By the cases in this country it is well established that an
agreement to pay a sum of money on a given day with interest at
a certain rate with a stipulation that in default the debtor shall
[239] thenceforward pay a higher rate of interest is strictly enforceable.
In such an agreement no question of penalty arises, because it imposes an*
obligation on the debtor to pay a larger sum than what was originally due.
In the words of s. 74 of the Contract Act no sum is named as the amount
to be paid in case of such breach. At tbe moment of the breach no larger
sum can be exacted by tbe creditor, but from that date the terms on which
the debtor holds the money became less favourable. By the default he
accepts the alternative arrangement of paying a higher rate of interest for
the future. On the other land, where the stipulation is that on default
the higher rate shall be payable from the date of the original obligation, the
debtor does on default become immediately liable for a larger sum, vis.,
the difference between the enhanced and the original rate of interest
already due." We should have thought that in each of those cases the
debtor by the default accepted the alternative arrangement of paying a
higher rate of interest.

Now, to continue our illustration. According to those decisions in
India which regard an agreement to pay a higher rate of interest from the
date of the contract in lieu of a lower rate as a penalty and as within
s. 74 of the Indian Contract Act, 1872, the decree of the mortgagee of our
illustration, so far as it related to the claim for interest from the 25th of
April 1893 to the 25th of Aoril 1894, should, to be consistent with s. 74,
be for one year's interest at the rate of Re. 1 per centum per mensem
plus reasonable compensation. Otherwise where would the compensation
be '? It might easily happpen that on tbe 25th of April 1894 and thence until
the decree in the suit of 1895 was made, the rate of interest at which
money could be invested on reasonably good security would be only eight
annas per centum per mensem. In such case tbe decree so far as it related
to the claim for interest from the 25th of April 1893 to the 25th of
April 1894, would be for 12 months' interest on the principle at the
rate of 12 per centum per annum plus compensation at the rate of
6 per centum per annum calculated on the amount of the 12 per centum
interest from tbe date of the breach, that is, from the 25th of April 1894,
and would not be [240] a decree for interest at the rate of 18 per centum
per annum calculated on the principal, and yet the latter decree would
be according to the agreement as the parties who made it understood it.

(1) 12 M. 161 at pp. 166 and 167.
871



1893

JUNE 28.

FULL
BENCH.

15 A. 232

(F.B.) =
13 A.W.N.
(1893) 130.



15 All. 241



INDIAN DECISIONS, NEW SERIES



[Yol.



1893

JUNE as.

FULL
BENCH.

15 A. 232

(F.B.H

13 A.W.M.

(1893) 130.



are unable to understand
as to interest can receive
In reply to this it might
and in such a case apply



Then what should be the decree so far as it related to the claim for interest
from the 25th of April 1894 to the 25th of April 1895? It should, appa-
rently according to some of the decisions, to which we are referring, be for
12 months' interest at the rate of 18 per centum per annum calculated
on the principal, as the agreement so far as it related to a higher rate
from the date of default was to be performed, and consequently from the
default of the 25th of April 1894 interest on the principal would be at
the rate of 18 per' centum per annum. We
on what principle one and the same contract
two different and inconsistent interpretations,
be said, " Let there be one consistent rule
section 74 of the Indian Contract Act, 1872, to the whole period of the
agreement." If that were the reply, the question might be asked, why
should the mortgagor be in a better position and the mortgagee in a
worse under the contract as it was made than they would have been
if in the negotiation for the loan, to give a second illustration, the borrower
had said, " I will regularly pay you interest at the rate of 12 per centum
per annum, and should I make default in the payment of that interest
I will pay you interest from the date of the loan at the rate of 18 per
centum per annum," and the mortgagee should say, " No, I fear
you would make default. I will lend you my money only on the terms
that you pay interest for the whole period at the rate of 18 per centum
per annum, " and the borrower said, " Very well, I accept your terms,"
and the mortgage was drawn up accordingly, providing for only one
rate of interest and that rate 18 per centum per annum. In this latter
case we presume that no Court would hold that the contract did not
express what the parties to it meant, or, if nothing showing that the
contract was unconscionable or tainted with fraud was proved, that
it was a contract from the performance of which the borrower was
to be relieved. An ordinary man, who was not acquainted with the
English equitable doctrine of penalties, would be amazed [241] to
find that the money-lender, who had refused to lend his o.oney at a
less rate of interest than 18 per centum per annum, would in the eye
and conscience of the law be, in case of a default in payment of interest,
in a better position than would be the man who gave the borrower a'
chance of not having to pay 18 per centum per annum interest but only
12 : yet such is the English equitable doctrine of penalties and such is the
principle which we are asked to sanction in these Provinces. We fail to
see on what sound principle the mortgagor of our principal illustration, if
s.74 of the Indian Contract Act, 1872, is to be applied to the whole period
of his contract, is to be by his default in a better position than would be
another debtor, who had by a mortgage of the same date giving an equally
good security contracted to pay interest ab the rate of 12 per centum per
annum, with a stipulation that in default he should thenceforward pay
interest at the rate of 18 per centum per annum, or. why one and the
same agreement as to higher interest is to receive two different interpre-
tations, as appears to have been held by Banerjee, J., in Kalachand Kyal
v. Shib Chander Roy (1), and as would appear to be the logical result of
many of the decisions in India, and why such a contract is to be construed
as a penalty so far as it relates to the payment of a higher rate of interest
from the date of the agreement to the default and as a contract to be
performed so far as it relates to the payment of a higher rate from the

(1) 19 C. 392.
872



YII]



BANKB BEHABI V. SUNDAB LAL



IS All. 243



date of the default. By the agreement which we are using as an illustra-
tion the parties had agreed that on default in payment of interest at the
lower rate the contract should be construed as if the higher rate of interest
was the rate payable during the whole period of the mortgage. That
stipulation would attach, if it was capable of attaching at all, the moment
default in paying the interest due in 1894 would be made, and if s. 74 of
the Indian Contract Act, 1872, applied, it must, as it appears to us, apply,
on the happening of the breach to the whole period of the contract,
however difficult it might in practice be to apply it.

The reasons given by Mitter, J., in his judgment in Baijnath Singh
v. Shah Ali Husain (1), independently of the decision of the [242]
Privy Council in Rai Balkishen Das v. Raja, Run Bahadur Singh (2),
on which he also relied, conclusively show in our opinion that s. 74
of the Indian Contract Act, 1872, does not apply to cases of two rates
of interest. That was a case in which the borrower agreed to pay the
principal on the 14th of December, 1883 with interest at 2 per centum
per mensem, and that if the money were not paid on the 14th of December,
1883, the principal should bear interest at the rate of 4 per centum per
mensem from the date of the loan, the 14th of December, 1881.

Further, the illustrations to s. 74 suggest to our minds that the section
was not intended to apply to a case in which interest should be payable
periodically, and in our opinion the wording of the section precludes its
application to any case of alternative rates of interest.

There is much conflict in the decisions on the question as to whether
section 74 of the Indian Contract Act, 1872, does or does not apply to a
contract to pay enhanced interest. In Banuari Das v. Muhammad
Mashiat (3),Baij Nath Singh v. Shah Ali Husain (1), Basavayya v. Subba-
razu (4), Umar Khan Muhammad Khan Dsshmukh v. Salekhan (5), and by
Tyrrell, J., in Narain Das v. Gltia.it Ham (6), it was held that s. 74 of the
Indian Contract Act, 1872, does not apply to agreements to pay on default
a higher rate of interest from the date of the agreement. In some of the
above cases the Judge were nob unanimous on the question of the appli-
cability of s. 74 of the Indian Contract Act, 1872, and in some of the
judgments in the cases above referred to the decision of their Lordships of
the Privy Council in Rai Balkishhen Das v. Raja Run Bahadur Singh (2)
was treated, and, as we shall later on show, rightly, as an authority for
holding that s. 74 of the Indian Contract Act, 1872, does not apply to an
agreement; to pay alternative rates of interest.

[243] In H. Mackintosh v. C. Crow (7), and by Banerjee, J., in
Kalachand Kyal v. Shtb Ghander Roy (8), it was held that s. 74 of the
Indian Contract Acfc, 1872, did notaoply, and in Dullabhdas Devchandshet
v. Lakshman Das Sivarupchund (9) it was doubted whether s. 74 did
apply to agreements to pay a higher rate of interest from the date of
default.

In Moya Ram v. Naubat (10) it was held that s. 74 of the Indian
Contract Act, 1872, did not apply to a condition in a bond that the sum
due under it should be paid without interest by monthly instalments, and
that in the event of any default in payment of two instalments, interest
should be thenceforth charged on the amount due at the rate of 24 per
centum per annum.



1893

JUNE 28,

FULL
BENCH.

is A. 232

(F.B.)-
13 l.W.N.
(1893) 130.



(1) 14 0. 248.
(4) 11 M. 294.
(8) 19 C. 392.



(2) L. R. 101. A. 162 =
(5) 17 B. 106.
(9) 14 B. 200.



= 100.305. (3) 9 A. 690.

(6) 6 A. 179. (7) 90. 689.
(10) 5 A. W. N. (1885), 62.



x VII 110



873



15 All. 244



INDIAN DECISIONS, NEW SERIES



[Vol.



1893
JUNE ss;

FULL
BENCH.

18 A. 232

(F.B.) =
13 A.W.N.
(1893) 130.



In Mackintosh v. Hunt (1) it was held that s. 74 of the Indian Con-
tract Act, 1872, did not apply to a contract to pay the principal sum on a
given date by which the borrowers agreed : " Should we neglect or fail
to pay this amount on due date, then only shall it carry interest from and
on due date to date of payment at the defaulting rate of 10 per cent, per
mensem."

In the following cases in which ifc has been decided in India that a
contract to pay a higher rate of interest from the date of the contract on
default in payment of a lower rate cannot be, or should not be, enforced by
reason of s. 74 of the Indian Contract Act, 1872, it was held that the sti-
pulation to pay a higher rate of interest was a penalty, and consequently
that s. 74 of the Indian Contract Act, 1872, applied. The cases to which
we refer are Ram Lai v. Sada Sukh (%),MuthuraPersad Singh v. Luggun
Kooer f3), Sunqut Lai v. Baij Nath Roy (4), Kalachand Kayal v. Shib
Chander Roy (5).

There is, so far as we are aware, no case in which it has been decided
that s. 74 of the Indian Contract Act, 1872, applies to an agreement to
pay a higher rate of interest in future on default being made in payment
of a lower rate of interest.

[244] As in nearly all, if not in all, the cases in which it has been
held that s. 74 of the Indian Contract Act, 1872, applied to contracts
to pay a higher rate of interest from the date of the contract on
a default being made in payment of a lower rate, s. 74 was apparently
held to apply because the stipulation as to enhanced interest was consi-
dered to be a stipulation for a penalty, it is necessary to consider what is
the origin in India of this doctrine as to a penalty as regards agreements
to pay alternative rates of interest. We think that there can be no doubt
that it is a doctrine imported from England, and that the principle as
understood in England has not been applied in India in its integrity, and
has, if we are to be guided by the decision of the Courts in England as to
what is a penalty, been disregarded and not applied by Courts in India in
cases in which it would have been applied in England.

In considering the question of what is a penalty in cases relating to
interest according to the decisions in England, it must be borne in mind
that a high rate of interest does not of itself, according to those decisions,
constitute a penalty. The principle applied in England in cases of
alternative rates of interest can be better illustrated than understood. The
following illustration shows the application of the English doctrine of a
penalty in cases of interest. It is this, we quote from Mayne on.Damages,
4th ed., p. 139 : " If a mortgagor agrees to pay 5 or 6 per cent, interest,
and the mortgagee agrees to take less, say 4 per cent, if it is paid
punctually, that is a perfectly good agreement ; but if the mortgage
interest is at 4 per cent., and there is an agreement that if it is not paid
punctually 5 or 6 per cent, interest shall ba paid, that is in the nature
of a penalty which the Court will relieve against." To the mind of any
one but a lawyer dominated by the English doctrine as to penalties, it
would appear that the object and intention of tbe mortgagor and the mort-
gagee were in each of those cases the same, and that the same rule should
be applied to each. In England where the Courts have long held that in
the first case the contract is to be enforced according to its terms, and that
in the other case what was stipulated for was a penalty which was to be



(l) 2 C. 202.
(4) 13 C. 164.



(2) 4 A W.N. (1884), 280.
(5) 19 C. 392.

874



(3) 9 C. 615.



VII]



BANKE BEHARI V. SUNDAB LAL



15 All. 246



relieved against, [245] it may be presumed that lenders and borrowers in
making their contracts had contracted on the basis of those decisions and
that their contracts should be read and interpreted in the light of those
decisions. It appears to us that the case is otherwise in India, where it can
hardly be presumed that native money-lenders and borrowers have studied
with care the law relating to penalties in England. It also appears to us
that before introducing from England into these Provinces, in which few
understand or have ever beard of the technicalities of English law or Eng-
lish conveyancing, a principle by which a contract is not to be interpreted
and enforced according to the clearly expressed intention of the parties,
we must see how far, if at all, that principle originated in, or is consistent
with, common sense. On the latter poinfe we have already indicated
what our opinion is. We shall see later on what some others haveeaid
on the subject.

The earliest reported decision of a Court in England on this question,
as to how agreements providing for the payment in a given event of a
higher rate of interest instead of a lower are to be construed, which we
can find in the library of this Court, is that in Marquis of Hallifax v.
Hie/gens (1), decided in 1689. The report is short and we give it in full.
" Money lent on a mortgage at five pounds per cent. the mortgagor cove-
nants to pay six pounds per cent, if he made default for the space of sixty
days after the time of payment. The Court decreed that from default
made, ho should pay six pounds per cent, and that this covenant was the
agreement of the parties and not to be relieved against as a penalty.'

The next decision is that in the case of Domina Holies v. TVyse (2),
decided in 1693. The report of that case is as follows :

The plaintiff lent the defendant money on a mortgage at 5 per
cent, interest, but if not punctually paid (every six months), then to
answer interest at 6 per cent., per annum. There being a great arrear of
interest, the question was, whether it should be computed after the rate
of 5 or 6 per cent. Decreed the defendant[246]should pay but 5 per
cent, and the Court looked upon the reservation of 6 per cent., but as a
nomine -panes, to oblige the defendant to the more punctual payment. But
the case of Lord Hallifax was cited, where interest, reserved at 6 per
cent., but if duly paid, agreed to accept 5 per cent., and because not
punctually paid interest allowed at 6 per cent., per annum." It is impos-
sible for us to say whether Lord Hallifai's case is correctly reported at
page 134 of 2 Vernon's Eeports or the facts of it correctly stated in the
report of Domino, Holies v. Wyse at page 289 of the same volume.

The next case is that of Strode v. Parker (3), decided in 1693. The
report of that case is as follows :

" The bill being to foreclose a mortgage, the interest by the deed was
to be 5 per cent, per annum, and made payable half-yearly, and if net
paid by the space of two months after the time of payment, then to pay
after the rate of 5-10 per cent, per annum for increase of interest, the
interest being run greatly in arrear ; the question was, after what rate the
interest should be computed upon the redemption of the mortgage. The
Court decreed interest to be computed at the rate of 5 per cent., per
annum only, and took a difference where the interest was reserved at 6 per
cent., but to be reduced to 5 per cent., if paid half-yearly ; there if the party
will have the benefit of lowering or reducing the interest, he must comply
with the times of payment ; and so decreed in the Lord Hallifax's case ;



1893

JUNE 28,

EDLL
BENCH.

15 A. 232

(F.B.) =
13 A.W.N.
(1393) 130.



(1) 2 Vernon, 134.



(2) 2 Vernon, 289.
875



(3) 2 Vernon, 315.



15 All. 247 INDIAN DECISIONS, NEW SERIES [Yol.

1893 but where the interest is to be increased, if not paid at the day, that is but
JUNE 28. in the nature of a penalty and relievable in equity. Qucere tamen, for the

agreement of the parties seems to be the same in either case, and whether

FULL interest is to be reduced upon compliance with the times of payment, or to

BENCH. D8 advanced in default thereof, seems only to be a difference in

expressing one and the same thing." We wonder whether the fact that

15 A. 232= the i n t eres fe had run greatly into arrear in the case of Domina Holies v.

(P.B.)- Wyse (1), and in that of Strode v. Parker (2), influenced the Court in

13 A.W.M. homing that the agreement in each of those cases to pay interest at an

(1893) 130. increased rate was a stipulation nomine pcenoR.

[247] In Broion v. Barkham (3), Lord Parker, L.C., in 1720 said :
" since this proviso obliging the party to pay 6 per cent., on default of
paying 5 within three months after due, is generally looked upon as a
penalty and in terrorem, and to be relieved against, if only a very short
time has happened, though it may' not be relievable against in case of a
long arrear of interest."

In Walmesley v.Booth (4), which was a case relating to a bond
obtained by an attorney of his client, Lord Hardwick, L.G., in 1740 said :
" Another case which the present one has been compared with has been
that of mortgages, where the Court will not suffer hard clauses to be
inserted in them, and therefore though the Court will allow a mortgage to
be made in this manner, that 5 per cent., may be reserved, with a
proviso, that if the interest be paid within a certain time after it is due,
that the mortgagee will accept 4 per cent, and that shall be good ; yet
if a mortgage is made in this manner, that 4 per cent, is only reserved
for interest with a proviso that if the mortgagor does not pay such
interest within a certain time after it is due, he shall pay an interest of
5 j,er cent., such proviso will not be good ; and that has several times
been determined. The borrower is considered as a servant of the lender,
and to be under his power, and therefore the Court will not suffer hard
terms to be put upon him. That is a case something similar to the
present one, and so is the case of marriage brokage bonds. In these sort
of cases 'tis on the account of the public that the Court relieves ; and
'tis on that account that it^ought to relieve in the present case." Why
the public should have been more interested in relief being given when the
contract was to pay 6 per centum interest if default in paying 5 were
made, than when the contract "was to pay 6 per centum interest with a
proviso that if 5 per centum interest were paid punctually it should be
accepted in lieu of the 6 per centum interest, it is difficult after such a
lapse of time to understand. Lord Hardwick, L. C., in 1747, on the
petition of the Marquis of Powis, in the case of Nicholls v. Maynand (5),



Online LibraryChas. A. Stevens & BrosThe Indian decisions (New series) : being a re-print of all the decisions of the Privy Council on appeals from India and of the various high courts and other superior courts in India reported both in the official and non-official reports from 1875 (Volume 7) → online text (page 128 of 155)