1. This appeal arises out of the suit filed by the appellant our against the respondent-Union of India owning and representing Western Railway. for the recovery of the amount of the Rs.20,000/- in the court of Civil Judge, S. D. Baroda, where it is was registered as Special Civil Suit No. 61 of 1964. The learned trial Judge has partly decreed the plaintiff suit for a amount of Rs. 5,767,76 with proportionate costs,. But since the rest of the claim of the plaintiff is disallowed the plaintiff has approached this Court in this appeal. However, in this appeal the plaintiff has of Rs. 4,419.85. Therefore only the particulars an merits of this claim are required to be considered in this appeal.
2. Short facts giving rise to this litigation are that the appellant-plaintiff is a firms which had kept a contract from Western Railway for the supply of one lac cubic ft. of rubbles and 80,000 cubic fit. of metal and loading the same into the wagons at Zazpur Railway Station. The plaintiff carried on the work of supplying all these materials for some time. But the Railway department found that he was not supplying the materials according to the specifications. Initially the contract was to be completed on 22nd January 1961 but this period was subsequently extended upto 22nd April, 1961. As the material supplied by the plaintiff was not found to be in compliance with the specifications. the Divisional Engineer of Railway rescinded the contract to 22nd July, 1963. At Ex. 36 is the latter written by the Division Engineer Baroda, to the plaintiff on 22nd July, 1963 stating that is as the plaintiff filed in supplying the approved quality of the materials in time the contract was treated as having been abandoned and was, therefore, terminated. This letter further stated that upon the termination of this contract. 'the amount of security deposit taken by the Railway against this work, has been forfeited to the railway'.
3. It is an admitted position that originally the appellant-plaintiff had paid the amount of Rs. 1145/- as earnest money. which was, according to the terms of the contract. according to the terms of the contract covered in to security deposit. Further there is no dispute about the fact that the as and when running bills about the word done by the contract were passed. 10 per cent of the amount of these bills were retained by the railway department as security deposit. The last running bill submitted by the plaintiff was for the amount of Rs. 6,408.62. As the contract was terminate as per the above referred letter. Ex. 36, the department did not make payment of the whole of this amount of this bill,. Moreover on the previous running bills, which were passed and paid, an amount of 10 per cent was deducted and kept by the Railway department with itself as the security deposit. The amount of security deposit was admittedly of Rs. 2,634.00. Thus after the termination of the contract the following there amounts were retained by the Railway department:
(1) Rs. 1,145.00 Security deposit which was converted from the earnest money.
(2) Rs. 2,634,00 Security deposit in form of 10 per cent deduction from the running bills.
(3) Rs. 6,408.62 whole amount of last unpaid bill.
Rs. 10,187.62 Total.
The plaintiff claims that the railway department was not entitled to retain this amount of Rs. 10,187.62. He has therefore claimed this amount in this suit.
4. The contentions of the Railway department as regards the above claim is that the total value of the suit contract was Rs. 69,267/- and according to the terms of the contract the Railway was entitled to retain 10 per cent of this total amount of the contract as security deposit. Therefore, Rs. 6,927/- was the amount of the security deposit. which the Railway was entitled to keep with it for the furtherance of the contract. The Railway department contends that since the contract was required to be terminated on account of the default committed by the plaintiff this whole amount of Rs. 6,927/- became liable to be forfeited. There if this amount is deducted from the above referred amount of Rs. 10,187.62 the plaintiff would be entitled to the balance of Rs. 3,260.62. However out of the this amount only Rs. 1,295/- in form of fixed deposit were offered to the plaintiff by the Railway department but since the plaintiff refused to accept this amount the plaintiff is not entitled to make any claim. These contention of the Railway department are found in para 5 of the written statement.
5. The learned trial Judge has dismissed the plaintiff suit on the ground that since the contract was terminated on account of the default of the plaintiff the amount of security deposit were rightly forfeited by the Railway department as per the terms of the contracts.
6. It is evident from the above referred contentions of the parties that the dispute involved in this appeal is purely on the question whether the whole of the security deposit becomes liable to forfeiture on account of the termination of the contract. Now on this question the contention which is put forward on behalf of the appellant is that according to Section 74 of the Indian Contract Act the security deposit could not have been forfeited as the said forfeiture would be penal. It was pointed out that the security deposit was merely kept by the department with itself for due performance of the contact and therefore. this forfeiture would be governed by the provisions contained in Section 74 of the contract Act. and if that be so.. the Railway department would be entitled to forfeits the same only if it has been successfully in showing that a legal injury is caused and that damage to the extent of the amount of the security deposit. have been suffered. According to the plaintiff in this case there is not an iota of evidence to show that any legal injury has been caused on account of the breach of the contract and, therefore the Railway department is bound to the make a refund of the whole amount of the security deposit. In answer to this plea Shri Bhatt, who appears on behalf of the respondent. has contended that since the appellant-plaintiff has committed breach of the contract and since it was on account of this breach that the Railway department was obliged to complete the remaining work of the contract legal injury contemplated by Section 74 of the Contract Act should be presumed and even if there is no actual evidence as regard the damages or loss suffered by the Railway the court should deduct some amounts from the security deposit to compensate the railway department for the legal injury cause to it.
7. In order to appreciate the respective contentions of the parties the it would be first necessary to consider what the contract stipulates about the forfeiture of security deposits. Clause 16 of the contract speaks about the earnest money and security deposit and sub-clauses (1) thereof, which is relevant for our purpose, is as under:
'(1) The earnest money deposited by the contractor with the tender will be retained by the Railway as part of security for the due and faithful fulfilment of the contract the by contractor. The balance to make up the security deposit. the rates for which are given below in may be deposited by the contractor in cash on in the form of Government securities or may be recovered by percentage deductions from the contractor's 'on account' bills'.
This clause thus provides for two things, namely, (1) the conversion of earnest money paid with the tender into security deposit and (2) the total amount of security deposit should be 10 per cent to the total value of the contract.
8. About the forfeiture, the relevant provision is made in clause (61) of the contract. Sub-clause (1) whereof constrains the following useful provisions:--
'The Engineer on behalf of the Railway may............ adopt by or several of the following courses: (a) To rescind the contract, of which rescission notice in writing to the contractor under the hand of the Engineer shall be conclusive evidence. in which case the security deposit of the contractor shall stand forfeited to the railway without prejudice to the railway's right to recover from the contractor any amount by which the cost of completing the works by any other agency shall exceed the value of the contract'.
In order to consider whether the stipulation as regards the forfeitures contained in the above clause, is governed by Section 74 of the Contract Act or no, it is necessary to notice that this clause contemplates two consequence on rescission of the contract namely, (1) forfeiture of security deposit and (2) railway's right to recover any amount by which the cost of the completing the work by any other agency shall exceed the value of the contract which in other words, means that the contractor shall be liable to the railway to reimburse all the loss which the railway suffers in completing the unfinished works. This analysis of the clause makes it clear that the stipulations contained in this clause not only enable the railway to recover from the contract the loss sustained by it, but also to forfeit the whole amount of the deposit. which was retained for securing the due performance of the contract.
9. Now according to Section 74 of the Contract Act when a contract has been broken. if the sum is named in the contract as amount to be said in case of such breach, or if the contract contains any other stipulation by was of penalty the party complaining of the breach is entitled, to receive from the party, who is has broken the contract reasonable compensation, and such a reasonable compensation can be given even if the actual damage of loss is not proved. The amount of security deposit in this case is the sum named in the contract as the amount to be paid in case of breach. Therefore, the stipulation as regards the forfeiture of this amount is obviously in nature of a penalty because, that forfeiture of this amount is over and above the railway departments' right to be reimbursed fro the loss caused to it on account of execution of the unfulfilled part of the contract.
10. Once question which requires to be considered in this connection is whether the amount which is stipulated to be paid in case of breach of contract, is an amount of liquidated damages or not. If it is the amount of liquidated damage which represent a reasonable pre-estimate of the damage cause by breach of the contract then the aggrieved party can insist upon the payment of the amount and the court would not interfere with the estimate so arrived at by the parties at the time of entering into the contract,. But if the payment of sum named in the contract is in the nature of the stipulation as in terrorem of the offending party then the provision of Section 74 of the Contract Act would be attracted and the aggrieved party would not be entitled to anything more than reasonable compensation provided of course a legal injury is proved. The reasonable compensation so awarded by the court would have be subject to maximum limit of the amount stipulate by the contract.
11. In this case there is absolutely noting to suggest that security deposit of the 10 per cent of the total value of the contract was a reasonable pre-estimate of damages not as the railway administration put forward any defence of this type. It follows, therefore, that the stipulation sin the contract as regards the forfeiture of the deposit taken with a view to secure the performance of the contract, is controlled by the provisions of Section 74 of the Contract Act.
12. If that be so, the respondent it is shown that the breach of the contract committed by the plaintiff has resulted in any legal injury and that the amount of the security deposit involved in this case, of any part thereof. represents a reasonable amount of the compensation for the said breach. I however, find that there is nothing either in the written statement or in the evidence offered by the respondent to show that the railway department has suffered any injury whatever from the breach of the contract.
13. In ordinary course a security deposit is intended to be refunded and the amount in question is kept in deposit only for the purpose of securing the due performance of the contract. The said amount is forfeited only when a breach of the contract occurs and results in a legal injury. Therefore, if the railway administration wants to forfeit that amount or a part thereof, the burden is upon it to show that necessary requirements for the forfeiture exists. In this case the plaintiff has come forward with a plea that the defendants is not entitled to forfeit any party of the amount of security deposit. In reply to this plea of the plaintiff the defendants has merely riled upon the contractual stipulations regarding forfeiture in case of breach of the contract. The result it that there is no issue seeking to rove whether the breach has resulted in any legal injury or any loss or damage to the railway administration. Now the law does not presume that a legal injury of loss and damage occurs the moment the contract is broken. The question whether a breach of contract has resulted in legal injury or actual loss or damage to the aggrieved party is essentially and wholly a question of fact. Therefore. so long as the facts necessary to prove this aspect of the matter are not pleaded, and so long as the parties do not get proper opportunity to prove their respective contentions on this aspect f the matter,. it would not be possible for the court to hold legal injury exists or that any damage or loss has occurred to the aggrieved party. By reference to the written statement I find that there is absolutely nothing in any part thereof to show that the breach of the suit contract by the plaintiff has resulted in any legal injury. Obviously, therefore, there is no issue on this point and after referring to the evidence recorded in the case. I find that there is no evidence even of a causal type to the prove that the plaintiff breach of contract has resulted in any legal injury to the defendants. I specifically invited Shri Bhatt, the learned advocate of the defendants. to draw my attention to any part of the record which would given even an indirect indication of the existence of legal injury. Shri Bhatt was not able to point out to any such evidence. But his contention was that the since it is found that it is plaintiff who has broken the contract and since the unfulfilled part of the contract was required to be executed by the railway, the court must presume that there is legal injury. I find myself unable to agree with this contention because existence of legal injury is not a fact which can be washed away or imagined. Not all the breaches of contracts result in loss. damage or injury and this would be more so, in case of commercial contracts where of varieties of the reasons, the breach may result in profit or in a situation where there is neither any profit nor any loss. therefore from the mere facts that the contracts was broken by the other said. and that the remaining part of the contract was required to be performed either departmentally or by giving a new contract the court cannot be hold that the legal injury. which is contemplated by Section 74 of the Contract Act has occurred.
14. If that is so, the contention of Shri Bhatt that the court should allow a suitable percentage of the amount of penalty to the forfeited. cannot be accepted.
15. Shri Bhatt then contended that since the parties do not seem to be award during the course of the trial that they should produced evidence as regards the existence of legal injury. the matter should be remanded back to the trial Court after framing a suitable issue. I find myself unable to accept even this contention of Shri Bhatt because. the written statement does not contain even a plea that the breach of the contract has resulted in any legal injury. damage or loss to the railway administration. The law on the subject has been laid down by the Supreme Court as early as the month of January 1963 in Fateh Chand v. Balkishan Dass, reported in AIR 1963 SC 1405. While considering the argument the Section 74 of the Contract Act does not required the proof of actual loss of damage. Their Lordship of the Supreme Court have in this case succinctly pointed out that Section 74 of the Contract Act merely dispensed with proof of 'actual loss or damage', it does not justify the award of compensation when in consequence of the breach on legal injury at all has resulted, because, compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things. or which the parties knew when they made the contract to be likely to result from the breach. Supreme Court far as security deposit is concerned,. the law is laid down by the Supreme Court in a recent decision in Maulal Bux v. Union of India, AIR 1970 SC 1955. Therein also after stating that in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim decree and therefore, the Court is competent to award reasonable compensation in case of breach , even if no actual damage is proved to have been suffered in consequence of the breach of the contract, their Lordships have observed as under:
'But the expression 'whether or not actual damage or loss is proved to have been caused thereby' is intended to cover different classes of contracts which come before the Courts. In cases of breach of some breach, while in other cases compensation can be calculated in accordance with established rules. Whether the Court is unable to asses the compensation. the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him'.
These observations show that it was the duty of the railway administration to plead and prove the facts necessary to justify the forfeiture of the amount of security deposit or part thereof. The law on the subject was clear even before the suit was filed and , therefore, I see no justification for remaining the matter to the trial Court.
16. Looking to the facts of the case. I find that even if it is believed that breach of said contract has resulted in some legal injury and that, therefore, some token compensation should be awarded to the railway administration. I find that the defendants is sufficiently compensated on account of the fact that the security deposit amounting to Rupees 10,187,62 has remained with the railway department for so much time without any interest to be paid to the plaintiff.
17. The result. therefore, is that this appeal succeeds. Over and above the decree granted by the trial Court. the plaintiff is found entitled to a further decree for the amount of Rs. 4,419.85. The plaintiff shall be entitled to recover this amount with costs in the trial Court and interest at the rate of 4 per cent from the date of the suit till realisation. There shall be no order as to costs of this appeal. Decree accordingly.
18. Order accordingly,