1958 Supreme(Pat) 146

PATNA HIGH COURT
Raj Kishore Prasad, J.
Union Of India
Versus
Vasudeo Agarwal
Appeal from Original Decree No. 315 of 1952 ;
Decided On : SEPTEMBER 23, 1958

An agreement to pay a penalty is in the nature of a penalty and not liquidated damages if it is not an integral part of the main contract, is introduced only for the purpose of securing the due performance of the contract, is in the sense of punishment irrespective of the damage actually sustained, puts the defaulting party in a worse position than they would occupy if there was no penal clause, and the amount of penalty is disproportionate to the damage sustained.

Headnote:

The agreement to pay penalty equal to 1/2 per cent per day on the value of the undelivered quantity of goods by the plaintiffs to the defendant was in the nature of a penalty and not liquidated damages. There was no implied agreement that the defendant railway would supply wagons to the plaintiffs for supply of the goods contracted for.

Fact of the Case:

The plaintiffs, parties to five agreements, admittedly broke it, in that, the commodities contracted for under these agreements were not delivered in any of these cases within the time stipulated; and, admittedly on the plaint itself, there was delay in each case, and, the commodities were supplied and accepted in each ease beyond even the extended date mentioned under condition No. 8 of each of these five agreements.

Finding of the Court:

The court held that the agreement to pay penalty was in the nature of a penalty and not liquidated damages. There was no implied agreement that the defendant railway would supply wagons to the plaintiffs for supply of the goods contracted for.

Issues: 1. Whether the agreement for payment of the penalty equal to half per cent per day on the value of the undelivered quantity of goods by the plaintiffs to the defendant was in the nature of a penalty? 2. Whether there was an implied agreement that the defendant railway would supply wagons to the plaintiffs for supply of the goods contracted for?

Ratio Decidendi: 1. The court held that the agreement to pay penalty was in the nature of a penalty and not liquidated damages because: * The stipulation to pay the penalty was not an integral part of the main contract, it was extraneous and collateral to the actual contract for delivery of the commodity; * This term was ex facie introduced, on the terms of the agreement itself, only for the purpose of securing the due performance of the contract within the stipulated date of completion of delivery mentioned on the front of each agreement : * This penal clause, which imposes penalty for the default, is prima facie in the sense of punishment irrespective of the damage actually sustained, or likely to flow from the breach; * This term, put in Clause 8 apparently as a security for the due performance of the contract, puts the plaintiffs in a worse position than they would occupy if there was no penal clause, because, the plaintiffs claim on delivery beyond the contract time, would be diminished by the amount of penalty; * The agreement in Clause 8, no doubt, does not provide for payment of a single lump sum upon the non-performance of the only obligation of the plaintiffs, and, it only provides a flat rate of 1/2 per cent per day on the undelivered quantity, and, the rate at which the penalty is to be calculated may appear to be very small and insignificant, and quite proportionate to the extent to which the plaintiffs may fail to implement their obligation; but when we take into consideration the fact, which, to my mind, is an important factor, that the amount of damages to be calculated at 1/2 per cent per day on the value of the undelivered quantity is to vary with the time of delivery, and, if the defendant chooses to accept the delivery whenever it is made beyond the contract time, the amount of penalty may be unlimited, increasing with the time of delivery, and, in such a case, it may become disproportionate may become so great as to make it plain that the payment stipulated in Clause 8 was as a penalty. 2. The court held that there was no implied agreement that the defendant railway would supply wagons to the plaintiffs for supply of the goods contracted for because: * The fact that in the contract, as will appear from Clause 3, it was clearly stated that the Railway Administration will not be liable for anything that may happen to the suppliers commodities until the same passed into the physical possession of the Railway Administration as a buyer, and not as a carrier, at place of delivery noted in the Purchase Order is a clear indication that the parties intended to keep the liability of the defendant-railway as a carrier distinct and separate from its liability as a buyer. * Whatever may be the causes of the delay, the fact remains that in fact there was delay in each case in delivery of the commodities. If there has been delay in supply of wagons by the defendant to the plaintiffs, due to which alone, as contended, the plaintiffs could not supply the commodities to the defendant in time, the defendant may be liable in damages for the loss to the plaintiffs, but such damages if any, could be recovered, by a separate suit and not in the present action, and, therefore, the liability of the defendant as a carrier cannot be taken into account in considering its rights as a buyer.

Final Decision: The appeal partly succeeds, the judgment and decree of the court below are set aside, and, the suit is remanded to the court below only for ascertainment of defendants loss, if any, on the lines indicated above and for disposal in accordance with law. Costs of this appeal will abide the result of the suit in the court below.