Full Judgment Text
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PETITIONER:
K.P. SUBBARAMA SASTRI & ORS. ETC.
Vs.
RESPONDENT:
K.S. RAGHAVAN & ORS. ETC.
DATE OF JUDGMENT03/04/1987
BENCH:
KHALID, V. (J)
BENCH:
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
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nature of a penalty is to find out whether the amounts
referred to in the agreement were debita in praesenti al-
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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.
JUDGMENT:
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
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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
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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
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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
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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.
773