SANKARANARAYANA VADHYAR Vs. SANKARANARAYANA AYYAR
LAWS(PVC)-1901-11-11
PRIVY COUNCIL
Decided on November 14,1901

SANKARANARAYANA VADHYAR Appellant
VERSUS
SANKARANARAYANA AYYAR Respondents

JUDGEMENT

Arnold White, C J - (1.) In this case the defendant was indebted to the stake-holder of a chit fund in a sum of Rs. 750. He undertook to pay this sum by half-yearly instalments of Rs. 62-8-0 and in default he bound himself to pay in a lump sum on demand the principal debt and interest at the rate of 1 pie per diem per rupee from the date of default. The half-yearly instalments of Rs. 62-8-0, which the defendant undertook to pay, were on account of principal only. There is some conflict of authority with reference to the enforcement of stipulations which provide for the payment of a higher rate of interest on default, but the authorities appear to be uniform at any rate to this extent--that when the higher rate of interest is payable as from the date of default and not as from the date of the contract, the contract rate is enforceable. See Arulu Mastry V/s. Wakuthu Chinnayan 2 M.H.C.R. 205, Nanjappa V/s. Nanjappa I.L.R. 12 Mad. 161 at p. 166, the judgment of this Court (Shephard, J. and Davies, J.) in Krishnasami Ayyar V/s. Samu Ayyar Second Appeal No. 1303 of 1896 (unreported), Dullabhdas Devchandshet v. Lakshmandas Swarupchand I.L.R. 14 Bom. 200, Umarkhan Mahamadkhan Deshmukh v. Salekhan I.L.R. 17 Bom. 106 at p. 113, Mackintosh V/s. Crow I.L.R. 9 Calc. 689, and Deno Nath Santh V/s. Nibaran Chandra Chuckerbutty I.L.R. 27 Calc. 421. The result of the authorities is thus stated by Sargent, C.J., in Umarkhan Mahamadkhan Deshmukh V/s. Salekhan L.R. 10 I.A. 162 : I.L.R. 10 Calc. 305 "a proviso for retrospective enhancement of interest in default of payment of the interest at due date is generally a penalty which should be relieved against, but a proviso for enhanced interest in the future cannot be considered as a penalty) unless the enhanced rate be such as to lead to the conclusion that it could not have been intended to be part of the primary contract between the parties." As pointed out by this Court in the case of Nanjappa V/s. Nanjappa I.L.R. 12 Mad. 161 at p. 166, when the agreement is to pay the higher rate as from the date of default no question of penalty really arises. At the moment of the breach no larger sum can be exacted by the creditor, but from the date of the breach the terms on which the debtor holds the money become less favourable. "By the default he accepts the alternative arrangement of paying a higher rate of interest for the future. On the other hand when 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." The decisions in the cases in which the Courts have gone further and, following the decision of the Privy Council in Rai Balkishen Dass V/s. Raja Run Bahadoor Singh L.R. 10 I.A. 162 : I.L.R. 10 Calc 305, have held that the contract rate is enforceable even where the higher rate is payable as from the date of the agreement (see for instance Basavayya V/s. Subbarazu I.L.R. 11 Mad. 294, Narayanasami Naidu V/s. Narayana Rau I.L.R. 17 Mad. 62, Arjan Bibi v. Asgar Ali Chowdhuri I.L.R. 13 Calc. 200, Banwari Das V/s. Muhammad Mashiat I.L.R. 9 All. 690, and Banke Behari V/s. Sundar Lal I.L.R. 15 All. 232, do not of course conflict with this view.
(2.) It seems to me both on principle and on authority that, as the law stood under the Act of 1872, when the enhanced rate of interest only becomes payable as from the date of default, the stipulation ought not to be construed as a stipulation by way of penalty and the debtor ought not to be relieved therefrom. The mere fact that the rate of interest which the debtor agrees to pay is high, or even exorbitant, is, in itself, of course no reason for relieving him from his bargain, although it may be evidence that the parties were not dealing at arm's length and that some unfair advantage was taken by the creditor--in other words, that there was no real contract between the parties. In the present case, however, having regard to the relations between the parties and the circumstances in which the defendant undertook the obligation which he failed to fulfil, I am certainly not prepared to say that the rate of interest was exorbitant.
(3.) Moreover, in the present case it is to be observed that the contract was not one which provided for the payment of a given rate of interest in any event and a higher rate in the event of default. Under the agreement the debtor incurred no obligation to pay interest at all on the money which he owed. His liability to pay interest only arose in the event of default. It seems to me that, if the principle on which the Courts have drawn a distinction between agreements under which a higher rate of interest is payable as from the date of default and agreements under which a higher rate is payable as from the date of the agreement, is sound, as I think it is, the principle applies a fortiori where the creditor may be said to waive his right to interest so long as the debtor fulfils his obligation and where the liability to pay interest at all only arises as from the date when the debtor fails to fulfil his obligation.;


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