1931 (7) TMI 23 - HC - Indian Laws

Court Reduces Exorbitant Mortgage Bond Interest to 25% Per Annum, Dismisses Appeal as Penalty Under Contract Act.

Mahammad Raja Mia Versus Naderajjama Mia

The court determined that the stipulation for interest in the mortgage bond constituted a penalty under Section 74 of the Contract Act due to its ... - Issues Involved:1. Whether the stipulation for interest in the mortgage bond is in the nature of a penalty under Section 74 of the Contract Act.2. Whether the bond was executed for the proper price of the paddy lent.3. Whether the rate of interest charged by the plaintiff is exorbitant and extortionate.Detailed Analysis:1. Nature of Stipulation for Interest as Penalty under Section 74 of the Contract Act:The primary issue in this case is whether the stipulation for interest in the mortgage bond is in the nature of a penalty under Section 74 of the Contract Act. The bond stipulated that in default of payment of any instalment, the mortgagors would pay interest at the rate of one pan of betelnut per rupee per month, which amounted to an interest rate of 150 to 300 percent. The plaintiff, however, claimed interest at 75 percent per annum.The trial court held that the stipulation was not by way of penalty and decreed the suit in full. The District Judge on appeal, while expressing doubt if the stipulation could be brought within the strict wording of Section 74, Contract Act, reduced the interest rate to 25 percent per annum, considering it extortionate.The court reviewed various precedents to determine if the stipulation for interest was penal. It noted that the stipulation for increased interest from the date of default may be considered a penalty. The court concluded that if the rate of interest is exorbitant, the stipulation is penal. The court found that the interest rate of 150 to 300 percent, even though reduced to 75 percent by the plaintiff, was exorbitant and thus penal under Section 74 of the Contract Act.2. Proper Price of Paddy Lent:One of the defenses was that the paddy at the date of the bond was selling at a lower rate than Rs. 4 per maund, and the price was fixed at Rs. 4 in consideration of future interest and profit to the mortgagee. The trial court found that the defendant failed to prove that the price of paddy was less than Rs. 4 per maund at the date of the bond and held that the bond was for the proper price of the paddy lent. This finding was not challenged before the District Judge, and thus, the court accepted that the bond was executed for the proper price of the paddy lent.3. Exorbitant and Extortionate Rate of Interest:The court examined whether the rate of interest charged by the plaintiff was exorbitant and extortionate. The bond stipulated an interest rate of 150 to 300 percent, but the plaintiff claimed 75 percent per annum. The court found that even the reduced rate of 75 percent was exorbitant and, therefore, penal. The court referenced various cases where high rates of interest were considered penal and reduced by the courts.The court concluded that the rate of interest allowed by the lower appellate court at 25 percent per annum was not too low and affirmed the decree of the learned District Judge. The appeal was dismissed with costs.Conclusion:The court held that the stipulation for interest in the mortgage bond was in the nature of a penalty under Section 74 of the Contract Act due to the exorbitant rate of interest. The bond was executed for the proper price of the paddy lent, and the rate of interest charged by the plaintiff was found to be extortionate. The court affirmed the decision of the District Judge to reduce the interest rate to 25 percent per annum and dismissed the appeal.