On the decisions as aforesaid, the principles which follow in the matter of application ofSection 74 are that where an agreement provides that an amount is to be paid in case of breach thereof whether the amount so payable is penalty or liquidated damages what is payable is reasonable compensation. The Court, therefore, is conferred the jurisdiction in adjudicating any such claim whether the amount claimed really represents the reasonable compensation or not and whether the party claiming such amount has suffered any damage or not to sustain such a claim. The Court is to decide this on consideration of all the facts and circumstances proved including the agreement itself so that if on the agreement proved it is found that the money made payable is liquidated damages bated on a genuine pre-estimate of the damage to be suffered and is not excessive or unconscionable with reference to the damage likely to have suffered by the party claiming the amount, the Court can certainly decree the amount so estimated by the party and mere absence of an independent proof of damage or the quantum thereof would not necessarily induce the Court to overrule the claim and dismiss the suit. The claim now under consideration when adjudged in the aforesaid light is quite sustainable. The agreement has been proved between the parties and on our findings made hereinbefore, the amount payable on the breach is based on a genuine pre-estimate of the damage to be suffered by the plaintiff/respondent in case of breach thereof by the defendant/appellant and that amount again on our findings already made, represents a sum which can only reasonably compensate the loss that the company must have suffered on training up the appellant for 6 months Therefore, even if we accept the contention of Mr. Bagchi that the plaintiff/respondent in the present case had not specifically plead any damage nor proved the same, since the plaintiff/respondent had sued for recovery of a liquidated damage it can rely upon the agreement itself for proof of the damage and the quantum of compensation payable there for to sustain the decree in its favour, fn this view, the second point raised by Mr. Bdgchi fails and is overruled.
1. This is an appeal by the defendant in a suit for recovery of money is directed against the original decree passed by the learned Judge, 4th Bench, City Civil Court at Calcutta, dated March 18, J969, passed in Money Suit No. 161 of 1967. This appeal has been argued on two questions of law, facts not being very much in dispute,
Calcutta High Court
Subir Ghosh vs Indian Iron & Steel Co. on 12 September, 1976
Equivalent citations: (1977) IILLJ 120 Cal
Bench: A Sen, M Roy
2. The appellant was recruited as an officer trainee by the respondent-company under its First Staff Assistant Scheme for training. He was so recruited on an agreement between the panics made on September 20, 1965. The agreement provided:
In consideration of a bond to be executed immediately after the signing hereof by the officer trainee in favour of the company whereby he shall bind himself to pay to the company a sum of Rs 6,000 by way of premium but subject to the condition provided by such bond and also to the undertakings on his part herein contained the company undertakes no afford such training and instruction to the officer trainee as the company shall deem necessary to qualify him for employment by the company as a First Staff Assistant in any of its works.
The agreement proceeded to provide that the training will be for a period of two years subject, however, to the company's approbation and subject further to the company's right to determine the same at any time without any notice and without assigning any reason. During the period of training the company agreed to pay the officer trainee a salary of Rs. 300 and an allowance of Rs. 100 as dearness allowance per month and provided free accommodation in one of the company's hostels. The officer trainee was made entitled to free medical facilities similar to those available to permanent First Staff Assistants of the company and one month's leave on full pay fox every completed year of training. Under the said agreement the appellant undertook to serve the company during the period of training diligently and to the utmost of his power and skill and to devote whole of his time to works and duties assigned to him and to airy out all orders and directions by his superior authority and observe and perform ail service conditions and standing orders of the company for the time being in force. He further undertook not to apply for any outside appointment without a prior written permission from the company and that he would not become a member of the trade union or any other organisation of the employees. The more important undertaking given in the said agreement was to the effect that if during or at the expiration of the said term of training the company offers employment to him as a First Mail' Assistant with the company on terms and conditions as prevailing for the time being, the officer trainee will accept such employment and will and faithfully discharge the dimes and observe and perform the terms and conditions of employment for a period of not less than 5 years and will not either directly or indirectly nor on his account or as servant or agent of any other person, firm or company accept any employment otherwise that with the company. The last clause in this agreement provided that in the event the officer trainee be found guilty of any misconduct as specified therein "the company may summarily terminate the training notwithstanding any other penalty to which the office trainee may be liable under any of their provisions contained in this agreement and in the bond referred to in Clause 2 hereof."
3. Simultaneously, (he appellant executed a bond as envisaged by Clause 2 of the agreement, as aforesaid, and since it is necessary to refer to the actual terms of the bond for deciding one of the points of law raised in this appeal we set out the bond hereunder:
Whereas by an agreement dated the 20th day of September, 1965 and made between myself of the one part and the company of the other part (hereinafter referred to as the said agreement') I bound myself to serve the company as a trainee in the company's business and the company in consideration of a bond to be executed by me in favour of the company (being this bond) undertook to afford training and instruction to me in its business upon and subject to the terms and conditions by the said agreement prescribed.
Now the above-written obligation is conditioned to be void if I shall duly and faithfully in all respects whatsoever observe and perform the undertakings on my part set forth in the said agreement and shall accept any employment in which the company may be desirous of offering me upon the terms stipulated by the company in that behalf during or, at the expiration of the term of my training and shall well and faithfully discharge the duties and observe and perform the terms and conditions of such employment for a continuous period of not less than five years. But in the event of my failing at any time to observe my said undertakings or to accept such employment as aforesaid or to discharge well and faithfully the duties or to observe and perform the terms and conditions of such employment then the above-written bond shall remain in full or such reduced force and effect and to such extent as may be appropriate to the period which may elapse before such failure shall occur that is to say, if such failure shall occur:
(a) during the period of my training to the extent of the full sum hereby secured or Rs. 500 per month for the period during which I received training whichever is lower;
(b) during the first year of my service with you, to the extent of the full sum hereby secured;
(c) after expiration of the first year, but before the expiration of the second year of such service to the extent of fourteenth-fifteenth of the said sum;
(d) after expiration of the second year, but before the expiration of the third year, of such service to the extent of four, fifth of the said sum;
(e) after expiration of the third year, but before the expiration of the fourth year, of such service to the extent of three-fifth of the said sum;
(f) after expiration of the fourth year, but before the expiration of fifth year, of such service to the extent of one-third of the said sum.
Subir Ghosh 22.9.65.
4. While the appellant was undergoing his training and after he had received training for a period of 6 months and few days he on his part terminated the employment with effect from April 4, 1966, by submitting a letter of resignation bearing the said date. The respondent demanded of the appellant payment of a sum of Rs. 3,000 payable by him in terms of the bond for his alleged wrongful termination of his employment and the amount so demanded not having been paid, the respondent instituted the suit for recovery of the said sum of Rs. 3,000.
5. The appellant contested the suit merely contesting his liability to pay the amount though he did not deny his employment on execution of agreement and the bond above referred to. He pleaded the agreement to be void and raised certain other defences which are unnecessary for us to refer to because of the points now raised before us in this appeal.
6. On the pleadings, as aforesaid, several issues were raised, some of which were not pressed and others were all decided in favour of the respondent. In particular, the learned Judge in the trial Court specifically overruled the defence plea that the agreement and the bond are illegal and void and decided the issue as to whether such an agreement and bond are legally valid and enforceable, in favour of the respondent when he upheld the agreement and the bond as valid in law. Similarly, the learned Judge in the trial Court overruled the defenre plea that the respondent not having pleaded any damage suffered by it nor having proved the quantum thereof, the claim as made was not maintainable in view of the provisions of Section 74 of the Contract Act. The suit having been decreed on the findings, as aforesaid, the defendant appellant has come up with this appeal.
7. Mr. Bagchi appearing in support of this appeal has raised two points. In the first place, Mr. Bagchi has contended that the agreement was unfair and one-sided in favour of the company when option was left with the company to terminate the training at any point of time and in not guaranteeing any employment on successful completion of the training though making it incumbent for the appellant not only to serve the company during the period of training but for a period of 5 years thereafter, once an employment is offered to him. Such covenant, according to Mr. Bagchi, is against public policy and constitutes restraint on trade. The second point raised by Mr. Bagchi is to the effect that in any event the claim as preferred by the respondent comes specifically within Section 74 of the Contract Act and not-withstanding the amount payable as penalty prescribed by the agreement what the respondent is entitled to realise is only reasonable com-pensation for which it was necessary for the plaintiff-respondent to plead and prove the damage suffered by it and that not having been done, the suit could not have been decreed.
8. Both the points thus raised by Mr. Bagchi have been controverted by Mr. Ghosal, the learned advocate for the respondent. According to Mr. Ghosal the terms of the agreement were not unconscionable and do not constitute any restraint of trade, and as such, are in no way illegal or void. So far as the second point raised by Mr. Bagchi is concerned, it has been contended by Mr. Ghosal that the amount claimed is not by way of penalty but liquidated damages payable as compensation on breach of the agreement and on provisions of Section 74 of the Contract Act even in the absence of proof of any damages, the respondent is entitled in law to claim the amount of such liquidated damages.
9. So far as the first point raised by Mr. Bagchi is concerned, in our opinion, the same can be disposed of very shortly. We have set out the agreement hereinbefore. Under the agreement, the company agreed to train up the appellant as a qualified First. Staff Assistant providing for him not only a monthly remuneration but also certain other privileges. As a consideration thereof, the company obtained an undertaking from the appellant that he should not only serve out the period of training faithfully and diligently but also render tie company at least 5 years' service if demanded on the completion of the training No doubt there is a negative covenant that during this period the appellant would not accept any other employment either on his own account or as a servant of agent of any other person, firm or company but such a negative covenant is operative for a very reasonable period and is further subject to the appellant being kept in the employment of the company. It has now been clearly laid down by the Supreme Court in the case of Niranjan Shankar Gnlikali v. Century Spinning and Manufacturing Co. Limited , that such an agreement is quite lawful and the negative covenant incorporated therein cannot be regarded as restraint of trade. The learned Judge in the trial Court, in our opinion, rightly accepted the above view in overruling the defence plea that the agreement in the present case is void and illegal.
10. So far as the second point raised by Mr. Bagchi is concerned it raises a question of law of some importance. According to Mr. Bagchi, the amount payable under the bond on the breach of the agreement is by way of penalty. Any claim for recovery of such penalty can be entertained by a Court of law only to the limited extent of damages suffered by the breach by the party who claims the penalty. Under Section 74 of the Contract Act notwithstanding any covenant to pay any amount of penalty on breach of the agreement what is payable is only reasonable compensation not exceeding the amount so specified, Hence, according to Mr. Bagchi it was necessary for the plaintiff/respondent to plead the damage which it has sustained and prove the same before It could get any decree for the amount as claimed. According to him, the suit as framed on the bond itself for recovery of the amount provided in the bond as payable on breach of the agreement in the absence of any pleading and proof of damage due to such breach is not maintainable. At least, the Court could not have decreed the entire amount so claimed without rending out what would have been the reasonable compensation payable to the plaintiff/respondent. The point thus raised was unfortunately not considered from its proper perspective by the learned Judge in the Court below. The learned Judge merely observed that when on evidence it is established that she defendant/appellant of his own accord had entered into the agreement and had executed the bond he must be held to ha bound by the terms of the bond and the agreement and the money will be payable in terms thereof irrespective of whether the plaintiff pleads or proves any loss suffered by him.
11. In deciding the second point thus raised by Mr. Bagchi it would be necessary for us at first to consider whether the amount payable by the appellant under the agreement is by way of penalty or by way of liquidated damages. It is, however, now well-settled in view of the decision of the Supreme Court in the case of Fateh Chand v. Balkisan Dass , that whether the amount payable is penalty or liquidated damages, the amount so payable on breach of the contract is covered by the provisions of Section 74 so that what is payable in case of such a breach is only reasonable compensation. Though according to Mr. Bagchi the amount payable under the agreement is penalty we are, however, unable to accept such a contention on the terms of the agreement itself. Strong reliance is placed by Mr. Bagchi on Clause 6(g) of the agreement wherein the amount so payable is described as penalty but in our opinion no great emphasis can be laid on use of the term "penalty" in the said clause. As a matter of fact, in Clause 2 of the agreement the amount so payable is described as premium so that it is quite apparent that the parties were using these terms rather loosely. In our opinion, whether the amount so payable is penalty or liquidated damages is to be decided on a proper construction of the terms and mere description of the amount so payable in the agreement as penalty would cot be decisive. See Elphiastone v. Monk and Iron Coal Co. Ltd. 1886 11 Appeal Cases 332. The Courts have gone to the extent of holding that not only is the use of the word penalty is not decisive but even the addition of negative words to exclude the other alternative will not make it so, the matter always being one for decision on the construction of the terms. The essence of a penalty is a payment or money stipulated as in terrorism of the offending party. While the essence of liquidated damages is a genuine covenanted predestinate of the damages to be sustain id on the breach of the covenant. Normally, when the amount payable is either disproportionately more than the actual damage suffered on the breath or remain the same irrespective of the varying damages which may be suffered due to breach of different covenants, the amount so payable partakes the nature of per ally. As observed by Lord Duniden in Dunlop Pnematic Tyre Co. Ltd. v. New Gamue and Motor Co. Limited 1915 A.C. 79 at page 87:
(a) it will be held to be a penalty if the sums stipulated for is extravagant and unconscionable m amount in comparison with the greatest loss than could conceivably be proved to have followed from the breach.
(c) there is a presumption (but no more) that it is penalty when a single lump sum is made payable by way of compensation on the occurrence of one or more or all of several events some of which may occasion serious and others but trifling damage.
12. Judging on the aforesaid light what was made payable under the bond in the present case during the period of training was either the full amount secured by the bond, namely, Rs, 6,000 or Rs. 500 per month for the period during which the appellant receives the braining, whichever is lower. Similarly, the amount payable in case of breach after the completion of the training but during the 5 years of service undertaken by the appellant is varying amounts not exceeding the full amount secured the amount payable being reduced from year to year as the appellant serves out the period so undertaken. An amount so payable cannot be consider'd to be an amount payable in terrorem. On the other band, the varied assessment of the amount so payable goes clearly to indicate that the same represents the varied damages winch the company is likely to sustain under the varying circumstances. In any event, the amount payable in case of breach during the training not to exceed Rs. 500 per month for the period during which the appellant received the training and this sum of Rs. 500 is obviously assessed on the sum of Rs. 400 paid as remuneration to the appellant and the other benefits and privileges enjoyed by him during the course of such training. The amount, therefore, reasonable represents the damage which the company is likely to suffer in case the appellant leaves the company in the midst of the training and as such, the amount so payable is nothing but a genuine predestinate of the damage which the company is liable to sustain in the event of a breach on the part of the appellant.
13. For reasons aforesaid, on true construction of the agreement between the parties we cannot but hold that the amount agreed to be payable on breach of the covenant by the appellant was liquidated damages and not penalty and the contention of Mr. Bagchi to the contrary must, therefore, be overruled.
14 As we have indicted hereinbefore Whether the amount payable is penalty or liquidated damages it would be covered by Section 74 of the Contract Act so that not withstanding any amount specified in the agreement what would be payable is only reasonable compensation. This being the position. Mr. Bagchi has contended that it was necessary for the plaintiff/respondent to plead damage sustaind by it and prove that not having been done in the present case the plaintiff/respondents suit could not have been decreed. Strong reliance is placed on a single Bench decision of this Court in the case of koramchand thapae and Borthers v. H.H. Jath Nandani. 76 C.W.N. 338. No doubt in the plaint the plaintiff/respondent had not specifically pleaded any damage sustained by it on breach of the agreement by the defendant/appellant but on our findings made hereinbefore the amount payable under the agreement being liquidated damages a suit foe recovery thereof is necessarily a suit for recovery of damages sustained on the breach of the agreement. In the evidence led, again there is no specific evidence as to damages sustained but the plaintiffs witness No. 1 in his evidence has explained the claim in the light of the agreement and has stated that the claim of Rs. 500 per month which represents Rs. 400 paid as remuneration and Rs. 100 toward free medical benefits and hostel facilitieSection Such being the position, it cannot unequivocally be said that the plaintiff/respondent had neither pleaded damages sustained by it nor proved the quantum thereof. But that apart, the objection raised by Mr. Bagchi must be overruled from another point of view.
15. The learned single Judge on whose decision strong reliance is placed by Mr. bagchi obviously based his decision the observation of the Privy Council in the case of Bhai Panna Singh v. Arjun Singh Bhajan Singh. 1929 P.C. 179, where Lord Atkin in delivering the judgment of the Judicial Committee observed:
The effect of the Contract Act, 1872, Section 74 is to disentitle the plaintiff to recover simplicitor the sum of Rs. 10,000 whether as penalty or liquidated damages: The plaintiffs must prove the damages they have suffered.
16. The true implication of the aforesaid observation had been explained by this Court in Mahadeo Prosad v. Siemens India Limited A.I.R. 1934 Calcutta 285, which unfortunately the learned single Judge has obviously not taken into consideration. It was pointed out by this Court in the above decision that Section 74 itself provides that the party suffering the damage would be entitled to reasonable compensation "whether or not actual damage or loss is proved to have been caused thereby. The true implication of Section 74, therefore, is that it is true that notwithstanding the amount agreed what would be payable is reasonable compensation but if there is no evidence showing that the amount so assessed and specified is unreasonable or excessive, the agreement between the parties estimating their damages is in itself evidence and even in the absence of any other evidence of such damage such evidence alone may be considered sufficient. The sum assessed and specified in the agreement is merely not conclusive under all circumstances and in all cases" In our view, the above interpretation of Section 74found favour with by the Supreme Court in the case of Fateh Chand (supra) where speaking about the effect of Section 74, the Supreme Court observed:
In assessing damages the Court has, subject to the limit of penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case The 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 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. There by it merely dispenses with proof of actual loss or damages; 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.
17. On the decisions as aforesaid, the principles which follow in the matter of application ofSection 74 are that where an agreement provides that an amount is to be paid in case of breach thereof whether the amount so payable is penalty or liquidated damages what is payable is reasonable compensation. The Court, therefore, is conferred the jurisdiction in adjudicating any such claim whether the amount claimed really represents the reasonable compensation or not and whether the party claiming such amount has suffered any damage or not to sustain such a claim. The Court is to decide this on consideration of all the facts and circumstances proved including the agreement itself so that if on the agreement proved it is found that the money made payable is liquidated damages bated on a genuine pre-estimate of the damage to be suffered and is not excessive or unconscionable with reference to the damage likely to have suffered by the party claiming the amount, the Court can certainly decree the amount so estimated by the party and mere absence of an independent proof of damage or the quantum thereof would not necessarily induce the Court to overrule the claim and dismiss the suit. The claim now under consideration when adjudged in the aforesaid light is quite sustainable. The agreement has been proved between the parties and on our findings made hereinbefore, the amount payable on the breach is based on a genuine pre-estimate of the damage to be suffered by the plaintiff/respondent in case of breach thereof by the defendant/appellant and that amount again on our findings already made, represents a sum which can only reasonably compensate the loss that the company must have suffered on training up the appellant for 6 months Therefore, even if we accept the contention of Mr. Bagchi that the plaintiff/respondent in the present case had not specifically plead any damage nor proved the same, since the plaintiff/respondent had sued for recovery of a liquidated damage it can rely upon the agreement itself for proof of the damage and the quantum of compensation payable there for to sustain the decree in its favour, fn this view, the second point raised by Mr. Bdgchi fails and is overruled.
18. On the conclusions as above, both the points raised in support of this appeal fail and we affirm the judgment and decree as passed by the learned Judge in the Court below. The appeal fails and is dismissed. There will be no order as to costs M.N. Roy, J.