1. This appeal is by the defendants. It arises out of a suit for realisation of Rs. 905/- which was paid by the plaintiff to the defendants as security money for the due performance of the contract entered into between the parties under the document dated 18-2-57 which is Ex. 1 on the record and whereof Ext. E forms a part. Ext. E is a comprehensive act of rules for the guidance V of the forest officers and forest contractors in making contracts for the sale and purchase of forest produce. The plaintiff is a contractor and the aforesaid contract was given to him for collecting the minor forest produce, such as, tamarind, Mohuwa seeds and others from the Ravagada Unit in the Parlakhimedi Taluk. Thereunder the plaintiff was to remove the forest produce from the forest areas within the period from 22-2-57 till the end of 30-9-57.As a consideration for it he was to pay a sum of Rs. 9050/- in three instalments. The first instalment of Rs. 3018/- was payable on 1-3-57, the second instalment of Rs. 3016/- was payable on 1-5-57, the third instalment of Rs. 3016/- was payable on 1-7-57.
It was also stipulated under the contract that the plaintiff was to deposit a sum of Rs. 905/- as security money for the due performance of the contract and it is not denied that in pursuance of the contract the plaintiff deposited the said sum of Rs. 905/- as security money with the defendants. It is security deposit, as already stated, which is the subject matter of claim in the present case. It appears that the first two instalments were actually paid and accepted by the defendants though not exactly on the dates due, but within the period allowed by them. The difficulty however arose on account of the non-payment of the third instalment which was due to be paid on 1-7-57. Originally the plaintiff applied for extension of time for payment of the demand and that prayer was allowed and the time was extended for payment of the third instalment till 25-7-57. But even after this extension that amount was not paid and his agreement, as provided in Rule 34 of the Orissa Forest Contract Rules, was determined by letter No. 15403 C. F. dated 26-8-1957.
This order determining the contract was communicated to the plaintiff by the Divisional Forest Officer in his memo No. 2712 dated 30-8-57. Thereunder the plaintiff was permitted to pay the arrears dues together with interest within a month. Unfortunately the plaintiff could not take advantage even of this period allowed to him for payment of the dues with the result that the necessary step for realisation of these dues were taken against him under the Madras Revenue Recovery Act. Before however the proceedings under the said Act could be completed, it appears that the plaintiff deposited in the sub-treasury of Parlakhimedi the entire dues which were left yet unpaid along with interest up to the date of payment. In the meantime under Rule 34(3) (e) the security deposit of the contractor the plaintiff was forfeited by the Government and despite the demands made for refund of this amount the same was not paid back to him. Hence the suit for realisation of the same.
2. Rules 34(3) of the Orissa Forest Contract Rules provides that:
'On such termination Government shall be entitled-
(a) to keep all sums already paid by the contractor as consideration or part consideration of the Forest Contract;
(b) to recover as arrears of land revenue any part of the consideration which has fallen due but is still unpaid on the date of the termination of the contract:
(c) to recover arrears of land revenue any compensation which may be assessed under these rules:
(d) to recover as arrears of land revenue any part of the consideration which would have subsequently fallen due but for such termination or to resale the contract and to recover in like manner the amount by which the price secured on such resale falls short of that part of the consideration which would have so fallen due;
(e) to forfeit the security deposit of the contractor.'
The defendants relying on this Sub-clause (e) have pleaded that the Government had, under the rules which formed part of the contract, the right to forfeit the security deposit in view of the termination of the contract already effected and therefore the plaintiff is not entitled to any refund of the security money. It is true that under the terms of the contract the defendant had the right to forfeit the security deposits: but the question that arises for consideration is whether this term, as stipulated in the contract, can in law deprive the plaintiff of the entire security money independent of the consideration whether as a result of the breach of the contract there was any damage caused to the defendants or not. The trial Court took the view that as the contract had been terminated by the Government it was open to the defendants, as provided in the aforesaid Rule 34(3) (e), to forfeit the aforesaid security money and once that amount was forfeited the plaintiff had no right left to demand the same.
Accordingly at the trial the suit was dismissed. In appeal that judgment has been reversed. The lower appellate Court relying on Section 74 of the Indian Contract Act held that this deposit made by the plaintiff was by way of penalty and therefore the defendants could not forfeit it but only set off the amount of damage suffered by them for breach of the contract out of that amount and the rest was liable to be refunded under the law. But as the lower appellate Court, also found that 'there is no data to come to a finding that the defendants have sustained any loss on account of the breach of the contract by the plaintiff by not paying the instalment money on the dates fixed, 'it has decreed the entire claim. Accordingly now the defendants have come in Second Appeal to this Court.
3. The relevant provision made in the Orissa Forest Contract Rules relating to security deposit is to be found in Rule 8. It reads as follows:
'The forest contractors shall make security deposits to be fixed at 10 to 25 per cent of the purchase price at the discretion of the Divisional Forest Officer, subject to a minimum of Rs. 10/-. Such security deposits shall be retained by the Divisional Forest Officer as security for the due observation and performance by the contractor of the covenants and agreements contained in the forest contract executed by him and any sum or sums of money which shall become payable by the contractor to the Government of Orissa under any of the conditions of any forest contract may be deducted therefrom by the Divisional Forest Officer. In the event of any deductions the contractor shall immediately on demand pay to the Divisional Forest Officer such sum as shall be required to make up the deposit to its full original amount. Pending the payment of such sum the Divisional Forest Officer may at his discretion prohibit the sale and removal of any produce from the lot covered by the contract and the contractor shall not be entitled to compensation for any loss that may be sustained by him owing to such prohibition: Provided always that if the amount deposited as security in respect of any forest contract is at any time or times not sufficient to make good any amount which may become payable to the Government of Orissa under the terms and conditions of the contract, the Divisional Forest Officer shall be entitled to deduct the balance due to him out of security moneys deposited by the contractor and the Contractor shall be bound, on demand, to deposit forthwith additional moneys as security to make good any amount so deducted by the Divisional Forest Officer.'
The terms of this rule clearly make out that the deposit required thereunder is mainly meant for the due performance of the contract and that thereunder it is always open to the Government to realise out of the security money any amount that may be at the point of time found payable by the forest contractor. It is true that under the aforesaid Rule 34(3) (e) the Government on termination of the contract for the reasons as stated in that rule has the power to forfeit the security deposit of the contractor. But that clause if read with the provisions of Rule 8 merely provides a security to the Government for the purpose of realising any damage or damages that Govt. may be put to as a result of the breach of the contract committed by the contractor. In other words this provision regarding forfeiture is substantially by way of penalty as contemplated by Section 74 of the Indian Contract Act. that being so, the forfeiture clause as provided in Rule 34(3) (e) of the Orissa Forest Contract Rules has to be read in the light of Section 74 of the Contract Act and not independent of it. Section 74 of the Contract Act inter alia provides that:
'When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named, or as the case may be, penalty stipulated for.'
This section on the question of penalty referred to thereunder has been elaborately discussed in a recent decision of the Supreme Court in Fateh Chand v. Balkishan Dass AIR 1963 SC 1405. Therein in paragraph 8 it has been observed that:
'This section is clearly an attempt to eliminate the somewhat elaborate refinements made under the English Common Law in distinguishing between stipulations providing for payment of liquidated damages and stipulations to the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties; a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English Common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.'
4. On the facts of the present case it is clear that the amount of security as provided in Rule 8 of the Orissa Forest Contract Rules is not taken as any pre-estimate of liquidated damages that the forest department of the Government may have been put to as a result of the breach of the contract. On the contrary, it appears that the security Is taken in deposit for the due performance of the contract and the clause relating to forfeiture is by way of penalty. As such thereunder all that the Government is entitled to get on the termination of the contract is the amount of reasonable compensation and not the entire amount independent of the consideration whether Government has been put to any damage or not. The lower appellate Court in dealing with the question of damages has found, as already stated above, that there is no evidence on the record brought by the defendants to prove that in fact there was any damage sustained by them. But that in my opinion is not the true criterion for determination of the question of compensation. Under Section 74, even in a case where the deposit is made by way of penalty, the aggrieved party is entitled to a reasonable compensation and that too notwithstanding the fact that he might have failed to prove that there was actually any damage or loss caused to him. In my opinion therefore in such a case it would be for the court to determine as to what reasonable compensation should be allowed to the aggrieved party. On the facts stated and admitted in the present case it is not disputed that by now the entire due payable by the plaintiff to the defendants under the contract has already been satisfied and that along with the principal due interest has also been paid from the date of due to the date of payment. This interest therefore as paid by the plaintiff for the delay in making the payment of the instalment on the due date is in my opinion a reasonable measure of the damage that Govt. was put to for the breach of contract and therefore, in the circumstances of this case there is no justification made out for any additional compensation to be paid by the plaintiff to the defendants. The learned Standing Counsel however has also in the alternative laid reliance, as an answer to the claim made in this case, on the terms of Rule 43 of the Orissa Forest Contract Rules. That Rule provides that-
'In the event of any dispute or question arising whether during the continuance of or after the termination of the period covered by a forest contract, with regard to these rules or to the conditions of the agreement, or of any part or provision thereof, the decision of the Conservator of Forest, Orissa, upon the matter of such dispute or question shall be final and binding.'
The provision made in this Rule is substantially by way of arbitration clause for determination of the controversy arising out of the contract. But in my opinion here without going into the question whether this clause in the circumstances of the case will apply or not, it will suffice to say that this plea was not raised in the written statement and rightly therefore there is no discussion to be found in respect thereof in either of the two judgments of the Courts below. Clearly therefore this plea is now barred under Section 34 of the Arbitration Act. No doubt at the trial there was an issue raised to the effect
'whether the Court has jurisdiction to try this suit?' But from the discussion made in the judgment of the trial Court relating to that issue it appears that the plea raised thereunder was in relation to the terms of Rule 35 and not Rule 43 of the Orissa Forest Contract Rules. Rule 35 lays down that 'The forest contractor may within three months appeal to the Provincial Government against an order of termination of contract passed by the Conservator of Forests. Subject to the result of such appeal the order of the Conservator of Forests terminating the contract shall be final and no such final decision or any appellate order passed by the Provincial Government shall be called in question in any Civil Court.'
This Rule as it is evident from its terms deals with the appeals against orders terminating the contract. The suit here however is not directed by the plaintiff against the order terminating the contract, but is, as already stated for recovery of security money which was deposited by him in pursuance of the provision made in Rule 8 of the Orissa Forest Contract Rules. Therefore the aforesaid issue as raised at the trial had nothing to do with the arbitration as contemplated by Rule 43 of the said Rules.
5. For these reasons I hold that there is no substance in this appeal. It is accordingly dismissed.
But in the circumstances of the case there will be no order for costs.