Holding

The default clause was not a penalty and the High Court’s order extending time was unjustified, so the order was set aside.

Summary

The appellants, sisters Smt. Sova Ray and others, sued for partition of family property claiming a one‑third share. The trial court granted the share and the parties later settled on a compromise whereby the defendant, their uncle Gostha Gopal Dey, would acquire half of their share (one‑sixth of the property) for Rs 40,000 payable in two instalments. The first instalment was paid but the second was not, and the defendant sought an extension of time, which the Orissa High Court granted. The appellants challenged this extension, arguing that a court cannot alter a consent‑based order without the parties’ further consent and that the default clause was a penal provision. The Supreme Court held that the default clause was not a penalty but a legitimate condition, and that the High Court had no justification to extend the time, especially without giving notice to the plaintiffs. Consequently, the High Court’s order was set aside and the application for extension was rejected.

Issues considered

Whether a court can modify an order based on parties' consent without further consent of the parties.
Whether the default clause in the compromise agreement constitutes an illegal penalty under Section 74 of the Indian Contract Act.
Whether the High Court was justified in granting an extension of time for payment of the instalment.
Whether notice of the extension application should have been served on the plaintiffs.

Legislation cited

Indian Contract Act, 1872s. 74

Subjects

partition suitcompromise agreementpenalty clauseextension of timecourt order modificationspecial leave petitioncivil procedurecontract law

Judgment

SMT. SOVA RAY & ANR. A
v.•
GOSTHA GOPAL DEY & ORS.

MARCH 18, 1988
B
,1 (A.P. SEN AND LALIT MOHAN SHARMA, JJ.]

... I
Agreement-Whether an order of Court based on consent of
parties can be modified by Court at the instance of one party. without
further consent of other party-'-Whether it is open to Court to alter terms
( ' of compromise otherwise-Whether a default clause in agreement is
penal in·nature and illegal:· c
i
The appellants had filed a suit for partition of property claiming
' 1/3rd share. A preliminary decree was passed by .the trial c~urt.
Respondent No. 1 (defendant No. 9 in the suit) challenged the decree
before the High Court in first appeal. The appeal was disposed of on D
compromise whereby the appellants plaintiffs' claim to l/3rd share was
accepted, but .it was agreed that half of the share of the plaintiffs would
go to the defendant No. 9, provided he paid Rs.40,000 to the plaintiffs
I in two instalments, the first one of Rs. 10,000 by 3L 7.1979 and the
second of the remaining amount, by 28.2. 1980, failing which payment
J.. within time, the decree passed by the trial court would stand confirmed
E
as per the terms of the compromise. The first instahnent was paid
within time, but the remaining amount was not paid. The defendant No.
9 made an application before the High Court on 28.8. 198 l for extension
of time for payment of the second instahnent. The High Court by its
order dated 31.8.1981 allowed the application. The appellants moved
+- this Court by special leave, challenging the said order dated 31.8.1981
of the High Court.
F

The appellants inter alia contended that an order based on the
consent of the parties could be modified only with the further consent of
the parties and it was not open to the Court to alter the terms otherwise.
If the High Court had issued notice on the application for extension of G
time made by the defendant No. 9 to the plaintiffs-appellants, they
1 would have placed before the Court the circumstances showing that it
was against the cause of justice to allow the prayer of the defendant No.
9 and specially so after such a long delay. There was no justification
whatsoever for the High Court to condone the delay and extend the
period for deposit of the money, they contended. H

287
•

288 SUPREME COURT REPORTS [1988] 3 S.C.R.

The contesting respondents argued that the 6th term of the com-
i
A promise dealing with the consequence of the default in payment of the
instalments was penal in nature and illegal, and that the clause ~eing
severable from the other terms of the compromise should be ignored. It
was further argued that it was not correct to suggest that the Court had
no power to permit the respondent No. l to make the deposit later.
B
Allowing the appeal, the Court,

HELD: There was no merit in the argument that the impugned
'""
~

clause 6 of the agreement was illegal being penal in nature. It had to be "
noted that the plaintiffs had in the trial court obtained a decree for
partition for their I/3rd share in the suit properties and there was pre-
c sumption in favour of correctness of the decree. At the appellate stage, '}
one of the three branches of the parties, represented by the heirs of
Brajlll'pal, and uncle of the plaintiffs-appellants, was satisfied with the
share allotted to them and the interest of defendant No. 9, second uncle
of the plaintiffs, was identical to their interest. The situation was
D acceptable to the defendant No. 9 also but he wanted to acquire half the
share of the plaintiffs on payment of consideration, fixed at Rs.40,000.
The amount was to be paid by way of price. It had not been suggested
'by the defendant No. 9 or his heirs that the entire compromise should be \
ignored on account of the impugned clause 6 thereof. They had been
relying upon the compromise except the default clause which alone was ,l
E sought to be ignored. Tliiit part of the compromise was in substance an
agreement for transfer by the plaintiffs of half of their share for a sum
of Rs.40,000 to be paid within stipulated time. The market price of the
property was higher, and a beneficial right was bestowed on the
defendant No. 9 to acquire the property for a considerably low amount.
In this background, the said defendant was subjected to the condition
F that if he had to take the advantage of the bargain, he was under a duty -'\
to pay the stipulated amount within the time mentioned in the agree-
ment. On failure to pay within time, he was to be deprived of that
special benefit. Such a clause could not be considered a penalty clause.
The expression 'penalty' is an elastic term with many different shades
of meanings, but it always involves an idea of punishment. The
G impugned clause in this case did not involve infliction of any punish-
ment, it. merely deprived the defendant No. 9 of a special advantage in
case of default. [293A-H; 294A] ....
,
The High Court assuming it had the power to do so, was not
justified in allowing the prayer of the defendant No. 9 to make a grossly
H belated payment. Even where such a power exists, it is not to be exer-
cised liberally. [294B-C]
SMT. SOVA RAY v. G.G. DEY (SHARMA, J.J 289

Justice was manifestly in favour of the plaintiffs and against the
A
contesting respondents. The clause in question was not a forfeiture
clause. [294E]

1 ne grievance of the plaintiffs that they were not afforded reasonable
opportunity to contest the prayer ofthe defendant was also well-founded;
notice of the application for extension of time should have been directly B
! )- sent to the plaintiffs. The Court did not consider it necessary to remand
the matter to the High Court for a fresh consideration, as it had come to a
final conclusion on merits in favour of the plaintiffs. [294G; 295B]
-~----- -

The order dated 31.8. 1981 of the High Court was set aside and the
application filed by respondent No. 1 defendant No. 9 for extension of C
time was rejected. l295C-D]

Charles Hubert Kinch v. Edward Keith Walcott & Ors., A.I.R.
1929 P.C. 289; Banku Behari Dhur v. J.C. Galstaun &-.Anr., A.I.R.
1922 P.C. 339;/agat Singh & Ors. v. Sangat Singh & Ors., A.I.R. 1940
- P.C. 70 and Smt. Periyakkal & Ors. v. Smt. Dakshyani, [1983] 2 SCR D
467, referred to.

CIVIL APPELLAlE JURISDICTION: Civil Appeal No. 2463
of 1982.

From the Judgment and Order dated 31. 8. 1981 of the Orissa E
High Court in First Appeal No. 184 of 1977.

Veenu Bhagat for the Appellants.

A.P. Mohanty and A.K. Mahapatra for the Respondents.
F
The Judgment of the Court was delivered by

SHA~IA, J. The appellants filed a snit for "partition of the
properties detailed in the plaint claiming 1/3rd share. A preliminary
decree was passed by the trial court which was challenged by the
defendant .No. 9 (original respondent No~ 1 in the present appeal) G
before the Orissa High Court in FirSt appeal No. 184 of 1972. The
appeal was disposed of on compromise whereby the plaintiffs' claim to
1/3rd share was accepted as correct. The terms of the compromise are
set out in paragraph 2 of the order dated 27.3.79. It was, however, -
further agreed that half of the share of the plaintiffs, i.e. 1/6th share,
would go to the defendant No. 9 provided he paid a sum of Rs.40,000 H
290' SUPREME COURT REPORTS [1988] 3 S.C.R.
)

A to the plaintiffs by a particular date, failing payment within time, the
decree passed by the trial court would stand confirmed as per term of
the compromise. The compromise was recorded on 27.3.1979.Accord-
ing to the compromise the sum of Rs.40,000 was to be paid in two
instalments; the first instalment of Rs.10,000 by 31-7-1979 and the
· remaining amount of Rs.30,000 by 28.2.1980. The first instalment was
B ·paid within time but the remaining amount was not paid. In the
meantime, the decree by the High Court was formally drawn up on
6.9.1979. In view of tbe default in payment of the second instalment
the plaintiffs-appellants deposited the sum of Rs.10,000 received by
them as the first instalment to the credit of the defendant No. 9 with
the permission of the Court. The defendant No. 9, thereafter, made an ~
-
application before the High Court on 28.8.1981 for extension of the
c period for payment of the second instalment of Rs.30,000. The appli- t
cation was allowed by the order dated 31.8.1981 which is under
challenge in the present appeal.

2. Before proceeding to the points involved in the present
D appeal it will be useful to briefly state the facts. The parties are close
relations, the defendant No. 9 (original respondent No. 1) being the
unde of the plaintiffs-appellants. He died during the pendency of the
appeal here and his heirs and legal representatives have been sub-
stituted as respondents. The father of the plaintiffs Nityagopal,
defendant No. 9 (original respondent No. 1) Ghosta Gopal and Bra-
E jgop·al were brothers. Nityagopal died in 1953 leaving behind the
plaintiffs and their mother who also died in 1962. According to their
case, they thus became entitled to l/3rd share in the properties belong-
ing to the family. The appellants were very young girls and lived with
Gostha Gopal for some time after the death of their parents. But,
according to their case, they had to leave for their maternal grand-
F mother's place in 1964 due to the ill-treatment by their uncle. In 1965,
a collusive suit for partition was commenced by both the uncles Gostha
Gopal and Brajgopal, in which although the plaintiffs were impleaded
as parties, their address was wrongly mentioned in the plaint. Conse-
quently no summons could be served on them nor did they have any
information about the suit and the decree passed therein. No share was
G allotted to the appellants at all. After they learnt about the collusive
suit and the decree, they filed the present suit being T.S. 32 of 1967,
• for setting aside the earlier decree and for partition. The trial court
accepted the plaintiffs case that the earlier decree was obtained by
fraud. The plaintiffs were awarded 1/3rd share as claimed by them~
Brajgopal became reconciled to the situation but Gos.Iha Gopal chal-
H lenged the decision in the aforementioned First Appeal No. 184 of >

1972.
SMT. SOVA RAY v. G.G. DEY [SHARMA, J.] 291

3. The parties reached an amicable settlement and the appeal
A
was disposed of on 27.3.1979. Accordingly the heirs ofBrajgopal (who
was dead by then) got their l/3rd share in accordance with the trial
court's decision and the suit so far as the other two' branches, that is,
the plaintiffs and Gostha Gopal were concerned, was disposed of on
the terms as mentioned in paragraph 1 above. According to the case of
the plaintiffs-appellants they had no information of the application B
dated 28.8.1981, filed by the defendant No. 9 for extension of the
period for payment of the second instalment of Rs.30,000 and when a
. copy of the application was offered to their advocate he did not accept
l the same making an endorsement thereon that notice should be served
directly on the plaintiffs as he did not continue to hold any authorit)'
on their behalf. Despite this stand of their learned counsel in the High C
Court, no notice was sent to the plaintiffs and the case was listed only
after two days on 31.8.1981. The plaintiffs' advocate-although he did
not represent them on that date-was present in Court when the case
was called out, and pointed out that there was no justification for
excusing the long delay. Earlier the court by its order dated 17.8.1981,
after taking into consideration the conduct of the defendant No. 9 in D
not complying with the terms of the compromise, had permitted the
plaintiffs to refund the sum of Rs.-10,000 paid to them as the first
instalment. The plaintiffs' counsel pointed out that the aforesaid order
had finally closed the matter. The court, however, allowed the prayer
of the defendant and permitted him to pay the remaining money along
with an additional sum of Rs.6,000 by way of compliance of the terms E
of the compromise. The counsel who was representing the plaintiffs
earlier, refused to accept the money when offered, and the court
permitted the defendant to deposit the amount with the Registrar of
the court observing that the same would be available to be withdrawn
by the plaintiffs. When the petitioners learnt about the order they took
a'copy of the same and approached this Court under Article 136 of the F
Constitution.

4. While hearing the Special Leave Petition this Court directed
the Subordinate Judge, Baripada 'to ascertain the market value of the
l/6th share of the property in question. The Subordinate Judge in his
report to this Court stated that the value of the entire properties would G
be Rs.13,90,000 and the value of 1/6th share would accordingly be
Rs.2,31,716. After the parties filed a number of affidavits, special
leave was granted on 30.7.1982. \

5. Mr. Bhagat, appearing in support of the appeal, contended
that an order based on the consent of the parties_can be modified only .H
292 SUPREME COURT REPORTS (1988) 3 S.C.R.

A with further consent and it is not open to the court to alter the terms
otherwise. It was further argued that assuming the court to he so
empowered, the jurisdictio'n has to be exercised in exceptional cir-
cumstances and only in the ends of justice. If the High Court had
directed notice to be issued to the plaintiffs, they would have placed
before the court the circumstances showing that it was against the
B cause of justice to allow the prayer of defendant No. 9 and specially so ~
after such a long delay. The plaintiffs were shabbily treated by their . ·
uncle.after the death of their father when they were very young and

C
had to take refuge at their deceased mother's parental home. Out of
the two sisters only one could be married, and the younger one could
not be married as the sum of Rs.30,000 promised by the respondent
No. 1 to be paid by 28.2.1980 was not actually paid. According to the
affidavit filed before this Court by way of rejoinder to the respondents'
·7
supplementary affidavit she was not married till then. The learned
counsel, therefore, argued that there was no justification whatsoever
for the High Court to condone the delay and extend the period for
deposit of the money by the respondent after more than 11/2 years of
D default: . . · .

6. Mr. Mohanty, the learned counsel representing the contest-
ing respondents, who· have been substituted in place of the original
respondent No . .t Gostha Gopal, contended that the 6th term of the
compromise dealing with the consequence of default in payment of the ~
E instalments is penal in nature and must, therefore, be held illegal. He r
urged that. the clause being severable from the other terms of the
compromise should be ignored and the other terms of the compromise
ought to be given effect to. As a result the clause that on the non-v
payment of the agreed sum by the time indicated therein the decree of.
the trial court would. become final, must be rejected as illegal. \:
F Reliance was placed on Section 74 of the Indian Contract Act. It w ·
further argued that the position with respect to an order of a court of
law made on the basis of consent of parties is also the same and it is not
correct to suggest that in the circumstances of the present case the
court had no power to permit the respondent No. 1 to make the
deposit later. The learned counsel relied on the observations made in
G Charles Hubert Kinch v. Edward Keith Walcott& Ors., AIR 1929P.C.
289, Banku Behari Dhurv. J.C. Galstaun & Anr., AIR 1922 P.C. 339
and Jagat Singh & Ors. v. Sangat Singh & Ors., AIR 1940 P.C. 70 and
the decision of this Court in Smt. Periyakkal & Ors. v. Smt. Daks-
hyani, (1983] 2 SCR 467. It was argued that it is not right to assume
that the decree of the trial court was unassailable in appeal. The
H respondent No.1 had a substantial defence which he could have sue-
SMT. SOVA RAY v. G.G. DEY [SHARMA, J.J 293
r cessfully pressed if the dispute had not been amicably settled.
A
. 7. We do not find any merit in the argument that the impugned
clause 6 of the agreement is illegal being penal in nature and has,
therefore, to be ignored. It has to be noted that the plaintiffs had in the
trial court obtained a decree for partition for 1/3rd share in the suit
properties and there was presumption in favour of correctness of the B
.A decree. At the appellate stage one of the three branches represented

- by the heirs of Brajgopal was satisfied with the share allotted to them
and the interest of Gostha Gopal (defendant No. 9) was identical to
their interest. The situation was acceptable to the defendant No. 9 also
·(('-.' but he wanted to acquire half the share of the plaintiffs on payment of
consideration. The plaintiffs agreed and the sum of Rs.40,000 was fixed
. ,)
y as the price. In clause 2 of the agreement, as mentioned below, it was c
expressly stated thus:

~
"The sum of Rs.40,000 agreed to be paid by defendant No.
9 to the plaintiffs as compensation for the I/ 6th share shall
be paid in two instalments: .......... " D
(Emphasis added)

The amount was to be paid by way of price was reiterated by the use of
the word "consideration" in clause 3. It is significant to note that the
->-. defendant No. 9 in the court below or his heirs (after his death) before
us have not suggested that the entire compromise should be ignored on E
account of the impugned clause 6. They have been relying upon the

- compromise except the default clause which alone is sought to be
ignored. They insist that under the compromise the shares allotted to
the different branches should be treated as final and further half of the
share of the plaintiffs, i.e. 1/6th share in the suit properties should
.+- have gone to the defendant No. 9 (and after him, to them, i.e. his F
heirs) for Rs.40,000. This part of the compromise is in substance an
agreement for transfer by the plaintiffs of half their share for a sum of
Rs.40,000 to be paid within the time indicated. It is true that the
market price of the property was higher, and a beneficial right was
bestowed on the defendant No. 9 to acquire the same for an amount
considerably low. In this background the defendant was subjected to G
the condition that if he had to take the advantage of the bargain he
,1,, was under a duty to pay the stipulated amount by the time mentioned
in the agreement. On failure to do so within time, he was to be
deprived of this special benefit. Such a clause cannot be considered to
be a penalty clause. The expression 'penalty' is an elastic term with
many different shades of meaning but it always involves an idea of H
294 SUPREME COURT REPORTS 11988] 3 S.C.R.

punishment. The impugned clause in the present case does not involve
A infliction of any punishment; it merely deprives the defendant No. 9 of
a special advantage in case of default.

8. Coming to the next question as to whether the High Court
acted rightly in extending the period for payment of the second instal-
B ment, the learned counsel for the parties have placed all the facts and
circumstances of the case in detail in support of their respective argu-
• ments, and we have considered them closely and do not have any
hesitation in holding that the High Court, assuming that it had the •
power to do so, was not justified in allowing the prayer of the

C i
defendant No. 9 permitting him to make a grossly belated payment.
Even where such a power exists it is not to be exercised liberally. In
Smt. Periyakkal and Ors. v. Smt. Dakshyani, [1983] 2 SCR 467, relied
upon by the respondents, this Court thus observed:

"Of course, time would not be extended ordinarily, nor for
the mere asking. It would be granted in rare cases to pre-
D vent manifest injustice. True the court would not rewrite a
contract between the parties but the court would relieve
against a forfeiture clause .... "

In the present case, justice is manifestly in favour of the plaintiffs and
against the contesting respondents and further the clause in question ).
E was not a forfeiture clause. Even the High Court had to observe as
follows:

"The conduct of the appellant (i.e. the defendant No. 9) is
indeed very reprehensible. Though extensions were.obtain-
ed from us, he did not comply with the directions and suf- --1-
F fered Order No. 72 dated 17.8.1981 to be passed. Only
when his rights were taken away did he realise the real
effect of what he had lost."

In view of our conclusion it is not necessary to decide the abstract
question of the general power of the court in this regard.
G
9. The grievance of the plaintiffs that they were not afforded
reasonable opportunity to contest the defendants' prayer is also well '>-·
founded. The appeal in the High Court had been disposed of earlier.
After the default in payment of the second instalment occurred the
present appellants placed the circumstances before the court and
H prayed for permission to refund the first instalment of Rs.10,000,
SMT. SOVA RAY v. G.G. DEY [SHARMA, J.] 295

received by them so that they could take full advantage of the com- A
promise decree. The matter was fully considered and decided by the
order dated 17.8.1981 as mentioned by the High Court in the above
quoted passage. In the situation the counsel who represented the
plaintiffs in the appeal could not have been held to have continued to
represent them specially when they informed the court that he had no B
~
further authority and that notice should be directly sent to the
~ plaintiffs. However, we do not consider it necessary to remand the

_,.·l
matter to the High Court for fresh consideration as we have considered •
all the relevant.materials and have come to a final conclusion on merits
in favour of the plaintiffs.
/· 10. For the reasons mentioned above, the order dated 31.8.1981 C
passed by the Orissa High Court in First Appeal No. 184 of 1972 is set

•t
*
! aside and the application filed by Gostha Gopal Dey for extension of
time is rejected. The appeal is accordingly allowed with costs payable
to the appellants by the contesting respondents.
D
S.L. Appeal allowed.