The distinction between penalty and liquidated damages in a contract and the interpretation of Section 74 of the Indian Contract Act, 1872.

K. N. MISRA, C. J.

( 1 ) PLAINTIFF, a Company incorporated under the Indian Companies Act with its registered office at Calcutta, entered into a contract with the State of Orissa through its officers for supply of materials meant for use in construction of projects and/or buildings of the State. Mutual rights and obligations were stipulated in the contract. When the security furnished by the plaintiff was forfeited and penalty was levied against it on the plea of breach, it filed a suit on 23-8-1965 for declaration that the order of forfeiture and the levy of penalty were liable to be set aside and for a direction that the amounts withheld be paid to the plaintiff. The plaintiff pleaded that it was the obligation of the defendants to provide a motorable road to the siphon site where delivery and stacking of materials were to be made. The defendants were under obligation to provide the stacking site too. They having failed to perform their part of the contract, the plaintiff could not make the supply according to the time schedule though it was ready to fulfil its obligation. It was also contended that the levy of penalty was unconscionable and otherwise bad.

( 2 ) ALL the defendants in a joint written statement contended that the plaintiff had no cause of action as the penalty and the forfeiture were in accordance with the terms of the contract. They disputed their obligation to provide the road and pleaded that they had indicated the stacking site. Plaintiff committed breach of the contract and in terms of the stipulations became liable to be visited with an order of forefeiture of the security deposit and levy of penalty.

( 3 ) IN paragraph 11 of the written statement it was pleaded :-

". . . . . . . . . . . . These defendants had no responsibility or duty to provide a motorable road to the syphon site and the terms of contract do not provide that the place of stacking would be provided by these defendants. On the contrary Clause 29 of the conditions of the tender appended to the contract clearly shows that it is the responsibility of the plaintiff to provide and maintain the approach road at his own cost. " In paragraph 13 of the written statement, it was pleaded :-". . . . . . . . . . . . Apart from the terms of the contract, the defendant No. 2 had made sufficient arrangement and provided enough space to facilitate the stacking of the goods and the plaintiff was intimated of the same fact by letter Number 1. 11. 25/59-60, dated 3-12-1959. . . . . . . "the defendants further pleaded in paragraphs 22 to 24 thus:-"22. . . . . . . . . . . . . According to the terms of the contract the executive Engineer has full authority to rescind the contract and impose fine. . . . . . . . . . . . 23. . . . . . . . . . . . . According to the terms of the contract, the defendants are entitled to withhold the security deposit till recovery of the penalty imposed on the plaintiff and so the refusal to refund the security deposit is legally justfied. 24. . . . . . . . . . . . . The plaintiff due to default in performing the contract as agreed to between the parties is liable to pay rs. 96,405/- as penalty and after adjustment of the earnest money of Rs. 19,281/- in deposit and security money recovered from his bills, an amount of Rs. 65,641/- is still due from the plaintiff and the present suit is filed falsely to avoid the said liability. "

( 4 ) THE trial Court came to hold that

(i) the defendants were not liable under the contract to provide any approach road for the plaintiff's transport vehicles to carry the materials and the plaintiff was to make its own arrangements for such purpose;

(ii) the defendants were to provide stacking yard, and delay in delivery of the materials by the plaintiff was partly due to failure to provide such stacking yard till December, 1959;

(iii) the defendants did not commit any breach of contract by modifying the contract;

(iv) as no date was mentioned in the tender for supply of the materials, penalty would not