1. Two rules of law are established by the Legislature of this country:
First.--That a man is free to contract to pay any rate of interest that he chooses upon money borrowed; and the Courts must enforce it against him, Act XXVIII of 1855, Section 21, and there is nothing to hinder his agreeing with regard to the future as well as the present. He may contract to pay no interest at present, but interest hereafter; or to pay one rate of interest now, and a higher or lower rate hereafter.
Secondly.--By Section 74 of the Contract Act, '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, the party complaining of such breach is entitled, whether or not actual damage 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.' This section, it will be observed, does away with the distinction between a penalty and liquidated damages and this must be borne in mind in dealing with cases decided before the Contract Act, many of which turned upon this distinction. Under this section, whether a sum would formerly have been held a penalty or liquidated damages, if it be named in the contract as the amount to be paid in case of breach, it is to be treated, much as a penalty was before, as the maximum limit of damages.
2. The contracts now before us are two, which are substantially similar in their terms. It is sufficient to set out one. (His Lordship read the note set out at page 689 ante.)
3. The question is, whether this note not having been paid at the due date, the plaintiff can recover interest at the rate stipulated for after due date. And to answer this question we must say under which of the two rules of law referred to this contract, falls.
4. Of course, the use of the word interest does not conclude the case. The substance of the transaction must be looked to; and many cases have occurred in which what has been called interest has been held to be a penalty under the old law, or to fall under Section 74 of the new.
5. Thus in many cases the provision has been, that in case of default in payment on the due date, an increased rate of interest shall be payable from the date of the contract. Such a provision was formerly a penalty, and is now within Section 74. This was the case in Rasaji bin Davlaji v. Sayana bin Sagdu 6 Bom. H.C.A. C. 7; Mazhar Ali Khan v. Sardr Mal I.L.R. 2 All. 769; and in a recent case before Field, J., and myself, Muthura Persad Singh v. Luggun Kooer (ante, p. 615).
6. In another class of cases the contract has been one of loan for a term certain, with a provision that, if default be made in payment of interest, or of an instalment of principal, the whole shall bear an increased rate of interest. This was the nature of the contract in Motoji bin Ratnaji v. Shekh Husen 6 Bom. H.C.A.C. 8 and in a recent case before Maclean, J., and myself, R.A. No. 99 of 1881.
7. In Bichook Nath Panday v. Ram Lochun Singh 11 B.L.R. 135 and in Khurram Singh v. Bhawani Baksh I.L.R. 3 All. 440 both these circumstances appear. In Pava Nagaji v. Govind Ramji 10 Bom. H.C. 382 the terms of the contract do not clearly appear from the report. But in the judgment it is said that the case of Motoji bin Ratnaji v. Shekh Husen 6 Bom. H.C.A.C. 8 was precisely in point. At any rate the case was not decided under the section with which we have now to deal.
8. In all such cases this element is present, that by the terms of the contract a sum is made payable by reason of the breach, capable of calculation at the time of the breach, and payable in all events, though in the second class of cases the payment is spread over a term.
9. But where, as here, the contract is merely, that if the money is not paid at the due date, it shall thenceforth carry interest at an enhanced rate, I do not see how it can be said that there is any sum named as to be paid in case of breach. No one can say at the time of the breach what the sum will be. It depends entirely on the time for which the borrower finds it convenient to retain the use of the money. It is a fresh sum becoming due month by month, or as the case may be, for a new consideration. And, in my opinion, the case falls under the first rule of law above mentioned, not under the second. This view of the law was acted upon by this Court in Mackintosh v. Hunt I.L.R. 2 Cal. 202.
10. A case is referred to by the learned Judge of the Small Cause Court, which may seem to conflict with this view. Bansidhar v. Bu Ali Khan was decided by a Full Bench of the Allahabad Court. The facts of the case were very peculiar. The document in question was dated the 9th November; it acknowledged a loan of Rs. 50, to be repaid in four days, on the 13th November, and added 'in the event of default he shall pay interest at the rate of Re. 1 per diem.' The Court held that this last provision was a penalty. Stuart, C.J., says that he regards it as a penalty, and Straight, J., delivering the judgment of the rest of the Court, explains the view somewhat more fully, saying that, looking at the entire instrument, the parties intended, when they spoke of interest, a penalty for each day's default in payment of the principal sum. If I rightly apprehend the principle of that decision it is based on the view that the provision as to interest was intended not to regulate the terms on which the loan was to continue, but to prevent the continuance of the loan, by imposing a penalty of Rs. 1 for the first default and treating each day's further delay as a new default, for which a new penalty should be payable. So regarded, the decision is not inconsistent with the view which I take of this case.
11. I would answer the question referred to us in the negative.
Richard Garth, C.J.
12. I agree.
1[Section 2: In any suit in which interest is recoverable, the amount shall be adjudged or decreed by the Court at the rate(if any) agreed upon by the parties;and if no rate shall have been agreed upon at such rate as the Court shall deem reasonable.]
What rate of interest shall be decreed by the Court in any suit.