1. The Plaintiff in O.S.No.292 of 1999 on the file of the IV Additional District Judge, (O.S.No.496 of 1988 on the file of Subordinate Judge), Guntur, is the appellant herein. The suit was filed for recovery of a sum of Rs.53,753.05 Ps. with interest thereon at the rate of 18% per annum.
2. The plaintiff was appointed as a Contractor for loading, unloading, handling and transport at FCI Godowns, Nambur and Rail Head and vice-versa as per the Tender, dated 01-01-1985. A concluded contract was entered. A sum of Rs.50,000/- was furnished as security deposit in the shape of Bank Guarantee. As per the terms, the stock shall be transported from Nambur-FIC Godowns to M.G. & B.G. Goods shed at Guntur via Balaji Weigh Bridge, Guntur or vice-versa, so also from other railway slidings. The Balaji Weigh Bridge is located at 14th cross road, near Collector's Office, Guntur. The rates were fixed keeping in mind the transport being at Balaji weigh bride. Some time after the suit contract between the parties, a new Weigh Bridge was constructed in the outskirts of Guntur Town known as Modern Weigh Bridge, which is nearer to the godowns of the defendant than Balaji Weigh Bridge located near Collector's office, Guntur, though the defendant is not permitted to introduce deviation of route which would result in loss to the plaintiff, still with a view to obviate ruphase and unpleasantness. Unfortunately, the contractor of the Weigh Bridge refused to handle the work of the defendant as a result of over-Bearing of the officers of the defendant and unreasonable delay in payment. Without any basis, the officers of the defendant began suspecting the plaintiff in the matter and started directing the plaintiff cent per cent weighment at the Railway sliding itself, which is impracticable and well might impossible having regard to the fact that Rs.25,000/- bags are to be handled within a short span of five hours, which is the free time allowed by Railways without charging any demurrage. Despite protests of the plaintiff against the unjust measure of cent percent weighment at the Railway sliding with the aid of beam scale which resulted in inordinate delay and consequent demurrages for which he is not liable, through letters and telegrams, there was no change in the position. On the one hand, the defendant's officers made it impossible for the plaintiff to continue the work and on the other cancelled the suit on the ground that he has failed to resume H & T operations at F.C.I. Depot, Nambur. The plaintiff received a letter dated 15-11-1985 that the Contract was terminated with immediate effect. It is submitted that the work for the un-expired period of contract will be got done at the plaintiff's risk and cost and that the security deposit would be adjusted against risk and cost expenditure and balance, would be recovered from him. The termination of the suit contract by the Regional Manager of the defendant is invalid and illegal and liable to be set aside. Therefore, the defendant's claim for recovery of risk and cost expenditure from the plaintiff is untenable and does not arise at any rate. Though the plaintiff submitted that he sustained huge loss on account of the impugned termination, he has refrained from action against the defendant out of disgust and despair.
The defendant collected the security deposit from the bank and did not return the same.
3. After a long lapse of 22 months after termination of the suit contract, the Regional Manager of the defendant sent a letter claiming adjustment of Rs.20,791.19 Ps., from out of the security deposit amount. The claim for deduction of Rs.15,804.24 Ps. towards difference in the expenditure between the contract rate and risk and cost expenditure and Rs.8,704/- towards demurrage, wharf age charges incurred for the period from 14-04-1985 to 26-08-1985 is unjust and untenable besides being illegal and arbitrary. The plaintiff under the circumstances is entitled for return of security deposit of Rs.50,000/- and for payment of Rs.3,753.05 Ps with-held bill amount from the date of termination of suit contract with interest. Despite demands, the claim of the plaintiff was not complied. Hence the suit.
4. The defendant filed a written statement, denying the material allegations in the plaint and also the loss said to have been suffered by the refusal of the contractor of the weigh bridge to enable the transport. It was further pleaded that the Bank Guarantee submitted by plaintiff is defective and is not in accordance with the terms of agreement. The Bank Guarantee should be in force for a period of three years after the expiry of the contract. But, the plaintiff has submitted the Bank Guarantee for a period of three years from the commencement of the contract. As per the terms and conditions Nos. 2 to 8 of the tender, the plaintiff is expected to move the stocks on wieghment as directed by the Senior Regional Manager or any other officer authorised by him. The defendant has the right to choose the mode of weighment. The defendant has the right to choose the method that is economical to it. The plaintiff has to weigh the stocks as advised by the defendant.
Therefore, the defendant pleaded that the entire amount can be forfeited after the cancellation and the plaintiff is not entitled for the said amount.
5. On the basis of the above pleadings, the following issues have been framed by the trial court, for trial:
1) Whether the defendant committed breach of contract?
2) Whether plaintiff is entitled for return of security deposit of Rs.50,000/- with interest?
3) Whether there is an outstanding bill amount of Rs.3,753.05 paise and plaintiff is entitled to recover it with interest?
4) To what relief?
6. On behalf of both parties, no oral evidence was adduced and on behalf of the plaintiff Exs.A-1 to A-4 were marked, and Exs.B-1 to B-5 were marked on behalf of the defendant.
7. After considering the rival contentions, the learned IV Additional District Judge, Guntur, dismissed the suit of the plaintiff. Aggrieved by the said judgment, the present appeal is filed.
8. The points that arise for consideration are:
1) Whether the defendant is entitled to forfeit the security deposit?
2) Whether the plaintiff is entitled for refund of the security deposit and if so, to what extent?
3) Whether the judgment and decree passed by the learned IV Additional District Judge, Guntur, is legal and sustainable?
The suit being one for recovery of money, which is the security deposit, consequent on the cancellation of the contract and since there is no prayer in this suit questioning the cancellation, as such the limited scope of consideration is as to whether the defendant is entitled to forfeit the entire security deposit and the plaintiff is not entitled for any amount.
To decide the issue between the parties, it is useful to refer to relevant clauses in the agreement Ex.B-1 clause X refers to the right of termination and the conditions are as follows:
a) In the event of the contractors having been adjudged insolvent or going into liquidation or winding up their business or making arrangements with their creditors or failing to observe any of the provisions of this contract or any of the terms and conditions governing the contract, the Senior Regional Manager shall be at liberty to terminate the contract forthwith without prejudice to any other rights or remedies under the contract and to get the work done for the un- expired period of the contract at the risk and cost of the contracts and to claim from the contractors any resultant loss sustained or costs incurred.
b) The Senior Regional Manager shall also have without prejudice to other rights and remedies, the right in the event of breach by the contractors of any of the terms and conditions of the contract to terminate the contract forthwith and to get the work done for the un-expired period of the contract at the risk and cost of the contractors and/or forfeit the security deposit or any part thereof for the sum or sums due for any damages, losses, charges, expenses or costs that may be suffered or incurred by the Corporation due to the contractor's negligence or unwarman like performance of any of the services under the contract".
Clause XI deals with security deposit.
Clause XI deals with security deposit.
"XI. SECURITY DEPOSIT:
a) The contractor shall furnish within a week of the acceptance of their tender, security deposit and prescribed in the invitation to tender failing which the contract shall be liable to cancellation at the risk and cost of the contractors and to subject such other remedies as may be open to the Senior Regional Manager under the terms of the contract. The contractors at their option may deposit 50% of the prescribed security in any of the prescribed forms at the time of award of the contract while the balance 50% may be paid by the contractors at the rate of 5% from admitted bills of the contractors.
b) The security should be deposited in any of the prescribed forms given in Appendix IV.
f) In the event of termination of the contract, envisaged in Clause x, the Sr. Regional Manager shall have the right to forfeit the entire or part of the amount of security deposit lodged by the contractors or to appropriate to the security deposit or any part thereof either towards the said fraction of any sum due to be claimed for any damages, loss charges, expenses or costs that may be suffered or incurred by the Corporation.
Therefore, from the above clauses, it is quite clear that a contract can be cancelled and consequent on the cancellation of the contract, the Senior Regional Manager has got right to forfeit the entire or part of the amount towards the damages, loss charges etc. The contract also stipulates that in case more than the security deposit amount was incurred as damages by the defendant, they can be recovered from the plaintiff.
The learned IV Additional District Judge, taking into consideration the clauses in the contract and also the termination has upheld the forfeiture of the entire amount.
10. The learned counsel for the respondent relied on a decision reported in State of Gujarat v. Dahyabhai Zaverbhai1, wherein, it was held under Section 74 of the Contract Act-
"When there was abandonment of a contract forfeiture of the security deposit as per clause of the contract is not illegal".
He also relied upon a decision reported in Managing Director M/s. Hindustan Shipyard Private Ltd. Visakhapatnam, v. Attili Appalaswami2. Therefore, according to him, the plaintiff is not entitled for any amount. In this connection, it is useful to refer to Section 74 of the Contract Act.
74. Compensation for breach of contract where penalty stipulated for:- 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, the penalty stipulated for".
11. It is useful to refer to the decision reported in Fateh Chand, v. Balkishan Dass3, wherein it has been specifically held in Para Nos. 8 and 10, as follows:
"8. The 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 in 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.
10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by S.74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damage"; it does not justify the award of compensation when in consequence of the breach no 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".
12. In fact, the same view has been reinforced in the decision reported in Maula Bux v. Union of India4.
Both the above decisions clearly lays down that when an amount of compensation was fixed either as security deposit or liquidated damages, consequent on the breach, it is not mandatory that the entire amount has to be forfeited and the Court can consider as to what is the actual loss and the quantum of compensation the party will be entitled to. The above decisions have been reiterated in recent decision of the Supreme Court reported in Ashokan v. CCE5, wherein the power of the Court to grant reasonable compensation even inspite of stipulated liquidated damages were recognized.
13. The decision in 1997 Supreme Court 2701, relied on by the counsel for the defendant does not deal with the situation as to whether the forfeiture shall be the entire amount or a reasonable amount of compensation that aspect was answered in the above decisions, which are referred.
Therefore, in view of the above circumstances, it is not absolute right to forfeit the entire amount without proof of total damages. On the other hand, when the material on record shows that the extent of the damages or loss suffered by the party is less no one can be allowed to enrich by taking undue advantage of the forfeiture clause. Evidently, the purpose of paying compensation is only to see the party does not suffer loss due to the breach of the contract and when actual loss is ascertainable, it is not permissible to hold that the entire forfeiture is legal.
14. In this connection even as can be seen from the contract itself as per clause 11 (f), the Senior Manager has got a discretion to forfeit the entire amount or portion of it and evidently, it relates to the expenditure incurred by the defendant. In this connection, the intention of the defendant can be gathered from the letter, dated 19-09-1987, which is marked as Ex.A-4, which is as follows:
"Consequent on your stoppage of Handling and Transport work at Nambur with effect from 26-08-1985, the H&T; Contract awarded to you at FCI Depot, Nambur for the period from 14-04-1985 to 13-04-1987 vide this office letter of even number dated 14-03-1985 has been terminated and the work got done at your risk and cost under Clause-x(b) of the tender agreement. The details of additional/extra expenditure incurred on this A/c is given hereunder:
I. From 07-04-85 to 13-04-87
(differences between 617% ASOR allotted to you and the
Contract finalised at 627%
At your risk and cost. .... Rs.15,804-24
II. Demurrage/wharf age charges
Incurred for the period
14-04-85 to 26-08-85 .... Rs. 8,740-00
Minus outstanding H&T; Bills ... Rs. 3,753-05
Total net amount recoverable ... Rs.20,791-19
Please take notice that the above amount of Rs.20,791-19 is adjusted out of your security deposit amount of Rs.50,000/-".
15. Therefore, from the above letter, the intention of the defendant is only to recover the actual damages or expenses incurred to a tune of Rs.20,791.91 ps. out of the security deposit amount. If really, the total security deposit amount is sought to be recovered, there is no need to quantify the damages and inform the plaintiff about the adjustment. Therefore, the defendant never intended to forfeit the entire security deposit and the right was not exercised.
16. Therefore, in view of the above circumstances, it has to be held that the dismissal of the suit of the plaintiff is totally upheld, the forfeiture is not valid and is against the principles of law mentioned above. The defendant is entitled to deduct the sum of Rs.20,791.19 Ps as claimed in Ex.A-4 and the plaintiff will be entitled for the balance amount. Accordingly, the Judgment and decree of the lower Court is set aside and the suit of the plaintiff is decreed for a sum of Rs.29,209/-. The plaintiff will be entitled to the interest only from the date of the suit.
17. In the result, the appeal is allowed in part and the plaintiff is entitled for a sum of Rs.29,209/- with interest at the rate of 6% per annum from the date of suit till the date of realisation and the plaintiff will be also entitled to proportionate costs in both the Courts. The defendant shall bear his own costs.