Holding

The clause providing for lump‑sum payment with interest on default is not a penalty and is enforceable; the appeal is allowed and the High Court judgment is set aside.

Summary

The respondents, subscribers to a Kuri (chit fund) in 1962, defaulted on instalment payments after receiving their prized amounts. Their bonds contained a clause that on default the entire balance would become immediately payable in a lump sum with 12% interest, without credit for any dividend. The trial court decreed payment of the principal and interest; the Kerala High Court Division Bench modified the decree, holding the clause unconscionable and penal and reducing the interest. A full bench of the Kerala High Court later reversed that view, holding the clause was not a penalty because the whole amount was a debt due at the time of the bond, with instalments being a concession. The Supreme Court adopted the full bench reasoning, held that the clause was not a penalty, set aside the Division Bench judgment and allowed the appeal, while dismissing the special leave petition.

Issues considered

Whether a contractual stipulation that on default the whole balance becomes payable in a lump sum with interest constitutes a penalty or an unconscionable term under Section 74 of the Contract Act, 1872.
Whether such a stipulation is enforceable in the context of a Kuri (chit fund) transaction governed by the Kerala Chitties Act, 1975.
Interpretation of instalment contracts to determine if the debt is due in present or future.

Legislation cited

Indian Contract Act, 1872s. 74
Kerala Chitties Act, 1975s. 28, s. 6, s. 7

Subjects

penalty clausecontract lawchit fundKuridefaultinstalment paymentunconscionable contractinterest rateSupreme Court of IndiaKerala Chitties Act

Judgment

K.P. SUBBARAMA SASTRI & ORS. ETC.
A
v.
K.S. RAGHAV AN & ORS. ETC.

APRIL 3, 1987

[V. KHALID AND G.L. OZA, JJ.] B

Contract Act, 1872: s. 74--Kuris a~d Chitties-Prized subscriber
~ executing bond-Provision for payment in lump sum with 12% interest
on default-Whether unconscionable and penal.
•
,,..,-
Kera/a Chitties Act, 1975: ss. 6, 7 & 28-Prized subscriber de-
faulting to pay subscriptions-Consequences of-Whole sum becoming
c
payable in lump sum with 12% interest-Such provision whether un-
~ conscionable and penal.

The respondents who were subscribers to a Kori (Chit Fund) in
1962, committed default after they had prized the tickets and realised D
the amounts. The bonds executed by them contained a provision that in
case of default they would be liable to pay all tbe future instalments in a
lumpsum with interest at 12% without giving any credit for the
dividend.
J: The suit filed for realisation of the principal sum with interest and E
the balance Kuri due was decreed by th~ trial court in 1965. In appeal
before tbe High Court it was contended for the defendant-respondents
that the stipulation in the agreement that on default the Kuri foreman
would be entitled to recover the entire balance amount with 12% in-
)- terest in a lump sum without giving credit to the subscribers was uncon-
I
I
scionable and penal and hence not enforceable. The Division Bench F
~-
·-y took tbe view that the Kori transaction and the contract between the
Kori foreman and the subscribers burdened them with unconscionable
interest and were unreasonable. It, therefore, partly allowed the appeal
by modifying the decree ref'ixing the Interest.

Allowing the appeal by appellants-plaintiffs and dismissing the G
appeal by other subscribers by special leave, the Co'urt,
-f HELD: Where a contract provides for payment of money in ins-
talments and contains also a stipulation that on default being committed
in paying any of the instalments the whole sum shall become payable at
once, the true test for determining whether the said condition is in the H

767
768 SUPREME COURT REPORTS [1987] 2 S.C.R.

A nature of a penalty is to find out whether the amounts referred to in the ").-·
agreement were aebita in praesenti although solvenda in futuro or
Whether they were to become due to the promisee on the respective
dates when the instalments were payable. [771E·G]

If on proper consideration of a contrllct it is found that the whole
B
amount was on the date of the bond a debt due but the creditor for the
convenience of the debtor allowed it to be paid by instalments then the ~
stipulation would not be penal. If on the other hand the court comes to
the conclusion that the debt becomes due only on the respective dates - ·~. ~
fixed for the instalments, the stipulation would be in the nature of a
penalty. [771G·H; 772A·B]
c
In the instant case there was nothing unconscionable about the
contract. A subscriber to a Kori truly and really becomes a debtor for
the prized amount paid to him. The facility of repayment in instalments
is only a concessional facility. The stipulation enabling the foreman to
withdraw this facility on default of punctual payment of the instalment
D
could not, therefore, be said to be penal. [770G-H; 771A·B]

P.K. Achuthan v. State Bank of Travancore, Calicut, ·[1974]
K.L. T. 806 (F.B.), approved. ~

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 85
E
(N) of 1972.

From the Judgment and Order dated 27.11.1970 of the Kerala f
High Court in A.S. No. 380 of 1965. ~··

WITH
F y"
SPECIAL LEA VE PETITION (CIVIL) No. 2908 of 1975.
From the Judgment and Order dated 15.1.1975 of the Kerala High
Court in Second Appeal No. 390 of 1971.

T.S. Krishna Murthy Iyer, A.S. Nambiar, G.N. Rao and Ms.
G Shanta Vasudevan for the Appellants in C.A. No. 85(N) of 1972 and
Respondents in SLP. No. 2908 of 1975.
N.M .. Ghatate and S. Balakrishnan for the Respondents in C.A.
No. 85(N) of 1972 and Petitioners in S.L.P. No. 2908of1975.

H The Judgment of the Court was delivered by
K.P.S. SASTRI v. K.S. RAGHAVAN (KHALID ,J.] 769

KHALID, J. We will first deal with Civil Appeal 85/1972. The A
appellants were the plaintiffs in O.S,. No. 78 of 1964 on the files of the
Subordinate Judge's Court, Palghat. The s11it was based on a Kuri
transaction (Chit Fund). The respondents were s11bscribers to the
Kuri. They committed defa11lt after they had prized it and realised the
Kuri amounts. Hence the suit was filed for realisation of the principal
sum with interest and the balance K11ri due. B

The suit was decreed by the Subordinate Judge by his Judgment
dated 24th June, 1965. An appeal was filed before the High Court. A
Division Bench of the High Court heard the appeal and partly allowed
it by modifying the decree of the Trial Court refixing the interest,
largely influenced by the fact that the Kuri transaction and the contract C
between the foreman of the Kuri and the subscribers (defaulted)
burdened the subscribers witli unconscionable interest and were
unreasonable.

To appreciate the reasoning of the Division Bench it is necessary
to set out the scheme of the Kuri. The respondents took two tickets in D
a Kuri (Chit Fund) started by the appellants in September, 1962.
Under the scheme of the Kuri, there will be bidding at monthly inter-
vals. The subscriber bids ~nd prizes the ticket depending upon his
need. When he does so, he voluntarily surrenders the benefit of
dividends which is distributed among the subscribers. For example,
suppose the Kuri amount is Rs.5,000 consisting of 50 tickets valued a\ E
Rs.100. At the first bid the lowest bid is 3500 by A. A gets this amount
and the balance of Rs.1500 will be distributed among the other sub-
scribers. But the prized subscriber has a duty to pay the entire amount
in instalments without default. Here the respondent bid and prized
both the tickets; one on the third draw and the .other at the 10th and
received the amounts. As per rules of the Kuri they executed bonds to F
secure future instalments. However, they committed default in paying
the future instalments. That resulted in the suit. The main contention
which found favour with the High Court, raised in defence, was that
the rules of· the Kuri contained several unconscionable and penal
provisions like the provisions relating to the payment of all the future
instalments in a lump with interest at 12% ignoring the claim of the G
defaulting subscribers to their share in the reduction (the dividend).

The Kuri system was in vogue in the erstwhile Travancore State
and in the Cochin State, prior to the formation of Kerala State and
they were governed in those two areas by the Travancore Chit Act of
1945 (Act 26 of 1120-M.E.) which came into force on 20-6-1945, and H
770 SUPREME COURT REPORTS [1987] 2 S.C.R.

A the Cochin Kuries Act 7 of 1106. There was no corresponding Act for \.-·
J
Malabar area from which area ,the present appeal arises. After the
formation of the Kerala State, Kuri transactions in the State are gover-
ned by the Kerala Chillies Act, 1975, as amended by Act 19 of 1978.
The High Court after taking into account the interest stipulated ob-
served that it was unconscionable and penal and reduced the amount
B to Rs.10,000 and modified the decree to that extent. The reason that
persuaded the High Court to do so was its concern at the unreason-
ableness of the terms of the contract and the High Court expressed it in
the following words: -~-.

"Before we leave this case, we wish to add a few words. In
c our experience, we have not yet come across such a
kurivari which has so many unconscionable provisions.
Ground No. 5 in the memorandum of grounds of appeal
shows the amount payable by the appellants, the amount
received by them, etc. to show the unconscionableness.
The appellants received only Rs.16, 185 (on both the tickets
D together); and, all told, they already paid back Rs.5,100 as
suhscriptions. The claim in the suit towards future ,instal-
ments is Rs.21,000 with interest of Rs.1,785. And all this
within less than two years, the date of commencement of
the Kuri being 20th September, 1962 and the date of suit
being 2nd September, 1964 for receiving a little over
E Rs.16,000 , the appellants have to pay a little less than
Rs.28,000. In our considered opinion, such transactions
should not be allowed, and people who carry on such trans-
actions are really unsocial elements. We are told that the
same stake-holders are carrying on such kuries even now
without any hindrance, because there is no law to control
F the conduct of chit funds now in the Malabar area. It is time
that the Government moved in the matter and brought
some legislation to control such unsocial activities."
,.
A full Bench of the Kerala High Court had occasion to consider
the correctness of this view and in a decision reported in 1974 K.L. T.
G 806, such Kuri transactions were upheld_ and the decision of the
Division Bench was reversed. According to the full Bench, there was
nothing unconscionable about the contract. Before the full Bench it
was contended that this stipulation in the agreement where a sub-
scriber prized his chit, providing that on default the Kuri foreman
would be entitled to recover the entire balance amount with 12%
H interest in a lilmp sum without giving credit to the subscribers, is penal
K.P.S. SASTRI v. K.S. RAGHAVAN [KHALID ,J.l 771

in nature and held in terrorem for securing due performance of their A
promise and hence not enforceable. Eradi, J. as he then was, speaking
for the full Bench held that a subscriber truly and really becomes a
debtor for the prized amount paid to him, that the facility of repay-
ment in instalments is only a concessional facility and that stipulation
enabling the foreman to withdraw the concessional facility on default
of punctual payment of the instalments would not be penal or uncons- B
cionable. We quote below the observations made by the full Bench in
paragraphs 6 & 7:

"6. The question whether a particular stipulation in a con-
tractual agreement is in the nature of a penalty has to be
determined by the court against the background of various C
relevant factors, such as the character of the transaction
and its special nature, if any, the relative situation of the
parties, the rights and obligations accruing from such a
transaction under the general law and the intention of the
parties in incorporating in the contract the particular stipu-
lation which is contended to be penal in nature. If on such a D
comprehensive consideration, the court finds that the real
purpose for which the stipulation was incorporated in the
contract was that by reason of its burdensome or oppres-
sive character it may operate in terrorem over the promiser
so as to drive him to fulfil the contract, then the provision
will be held to be one by way of penalty." E

"7. Where a contract provides for payment of money in
instalments and contains also a stipulation that on default
being committed in paying any of the instalments the whole
sum shall become payable at once, the true test for
determining whether the said condition is in the nature of a F
penalty is to find out whether the amounts referred to in
the agreement were debita in praesenti although solvenda
in futuro or whether they were to become due to the pro-
misee only on the respective dates when the instalments
were payable. If on a proper construction of a contract it is
found that the real agreement between the parties was to G
the effect that the whole amount was on the date of the
bond a debt due but the creditor for the convenience of the
debtor allowed it to be paid by instalments intimating that
if default should be made in the payment of any instalments
he would withdraw the concession, then the stipulation as
to the whole amount of the balance becoming payable H
772 SUPREME COURT REPORTS (1987] 2 S.C.R.

A would not be penal; if, on the other hand, on a proper
consideration of the terms of the contract the court comes
to the conclusion that the debt itself arises or becomes due
and payable by the debtor only on the respective dates
fixed for the instalments the stipulation that on default
being made in the payment of any instalment the whole of
B. the balance should become due and payable would be in
the nature of a penalty."

We agree with the law so laid down by the full Bench.

The result is that the appeal has to be allowed. Accordingly, we
C set aside the Judgment of the High Court and allow this appeal but in
the circumstances of the case, without costs.

Special leave granted in S.L.P. (Civil) 2908/75. Here the Judg-
ment of the High Court is challenged by a subscriber putting forth the
D argum~.nts that found favour with the Division Bench in the earlier
appeal. We adopt the reasoning of the full Bench in 1974 KLT 806,
which was followed by the Division Bench in the Judgment under
appeal in this case.

·The appeal, therefore, has to fail and is dismissed. However,
with no order as to costs.
E
P.S.S. Appeal dismissed.