Full Judgment
K. Ramaswamy, J.
1. The six petitioners were admittedly granted leases in Warangal Division to extract Abnus leaves in terms of the A.P.Minor Forest Produce (Regulation of Trade) Act, 1971 (for short 'the Act) and the A.P. Minor Forest Produce (Regulation of Trade in Abnus Leaves) Rules, 1970 (hereinafter referred to as 'the Rules'). They entered into statutory contracts with the Divisional Forest Officer and deposited certain amounts as security deposits. For one reason or the other, their contracts were terminated. They sought for adjustment of the security deposits towards the amounts due to the Government. Instructions were sought for from the Government in that regard. The Government in the impugned Memorandum No. 48830/For.III/81-8 dated October 4, 1982 clarified that under Rule 31 of the A.P. Forest Contract (Disposal of Forest Produce) Rules, 1977 (hereinafter referred to as the 'Forest Rules') power is only to forfeit the security deposit. That power was given under the provisions of the A.P. Forest Ac t, 1967 (hereinafter referred to as 'the Forest Act') and that the Rules are also consistent with the aforesaid rules. Therefore, the security deposits cannot be adjusted but they should be forfeited. Assailing the legality thereof, the writ petition has been filed.
2. The contention of Sri T. Dhanurbhanudu, the learned counsel for the petitioners is that the petitioners though having entered into statutory contracts, they have an unequal bargaining power, and hence the respondents cannot impose any unreasonable conditions in a unilateral way as such ostensibly, unilateral terms offend the public policy enshrined in Section 23 of the Indian Contract Act. It is contended that such arbitrary clause also offends the right to justness and rightness as enshrined under Article 14 of the Constitution. In support thereof, he placed reliance on a decision of this Court in V. Raghunadha Rao v. State of A.P. and Ors., 1988 (1) ALT 561.
3. He further contends that the power given to the Government under Rule 31 of the Forest Rules to forfeit the security deposit is only a term in terrorem for compliance of the conditions in the contract. Unless the Government proves that it suffered damage in a particular quantum, the security deposits made by the petitioners cannot be forfeited to the total extent. Section 70(3) of the Forest Act enjoins to pay back the amount found surplus in the sale-proceeds realised from the forest produce under Sub-section (2), and thereby the legislative intent is manifest that the entire sum is not liable to be forfeited. Rule 31 of the Forest Rules runs contrary to, and beyond the purpose underlying Section 70 of the Forest Act. In support thereof, he places reliance on a decision in Maula Bux v. Union of India, : [1970]1SCR928 .
4. The learned Government Pleader resisted the contentions. It is argued that the petitioners having entered into the contracts, they cannot resile from the terms of the contract. Therefore, it is impermissible for the petitioners to challenge the vires of the Rule 31 of the Forest Rules. He further contends that Section 74 of the Contract Act is a Central Act and Rule 31 is a Rule contained in a Special enactment. The Forest Act and the Forest Contract (Disposal of Forest Produce) Rules, 1977 are only State enactments. The Forest Act received the assent of the President. Therefore, the Act prevails over Section 74 of the Contract Act. Therefore, the ratio of the Supreme Court decision is not applicable and the State is entitled to forfeit the entire security deposits.
5. In view of the respective contentions, the question that emerges is whether the respondents are entitled to forfeit the entire security deposits. Under Section 9 of the Act, the Government or the authorised officer or agent shall be bound to purchase the minor forest produce offered for sale at the depot during the hours of business in the raw form from all the growers registered under Section 10 at the rice fixed under Section 7 of the Act. The power to purchase is regulated under the Rules. Under Rule 3(10)(a) of the Rules every person on his appointment as an agent shall execute an agreement in Form B-2 within 15 days from the date of despatch of the order by registered post. Where any such person fails to so execute the agreement, his appointment shall be liable for cancellation without any further notice of such cancellation. Clause (6) of the agreement begins with the words 'the purchaser hereby expressly agree with the Divisional Forest Officer' as mentioned in the agreement. In Clause 6(S) of the agreement it is mentioned thus 'the purchaser has furnished a security deposit of a sum of Rs.... for the due performance and observance by him, his servants and employes of the term and conditions of the agreement' and in Clause 6(S)(2) it is mentioned that 'the Security deposit either in full or in part as the case may be adjusted by the Divisional Forest Officer concerned towards the recovery of the amounts due, from the purchaser, if any, including the sale amount'. In Clause 6(S)(3) it is provided: 'the security deposit or the balance of it as the case may be shall be refunded to the purchaser after the Divisional Forest Officer is satisfied that all the obligations and formalities under the said Act, the said Rules and the Agreement have been duly complied with by the purchaser and that no amount is due from him' .Clause (T) deals with penalties and payment of penalties in that regard. Clause (X) provides the procedure of termination of the agreement. Clause (X)(3)(a) provides that on termination of the agreement the department is entitled to forfeit the security deposit in full. Clause (X)(3)(c)(ii) provides that if in such resale a better rate per standard bag is obtained, the Government shall be entitled to retain the full amount and the purchaser shall have no right or claim thereto.
Rule 31 of the Forest Rules provides thus:
(i For breach of any of the provisions of the A.P. Forest Act, 1967 or the rules made thereunder or condition of sale, either by the Forest Contractor himself, his agent or servant, the Divisional Forest Officer shall call for the explanation of the Forest contractor or his authorised agent and after taking the explanation if any tendered within the time specified into consideration, the Divisional Forest Officer may;
(1)(a) terminate the contract and simultaneously forfeit (in favour of the Government) all the sums paid as sale amount or otherwise and in addition levy compensation for the damage caused by breach; or
(b) forfeit the security deposit in full or part and allow continuance of the contract, provided the security deposit is reimbursed to the full extent; or
(c) forfeit the security deposit and also levy compensation for the damage caused by such breach and allow continuance of the contract provided the security deposit is reimbursed to the full extent and compensation is paid.
(2) .. ..
(i) .. ..
(ii .. ..
(iii) On termination of the contract under the Sub-rule (i) or lapse of contract on expiry of the period of contract the Divisional Forest Officer shall take action in accordance with the provisions of Section 70 of the A.P. Forest Act, 1967, to recover the amounts, duly ascertained and payable by the Forest Contractor.
(iv) .. ..
Section 70(1) of the Forest Act gives power to the Government to recover any amount due to the Government as if it were arrears of land revenue. Sub-section (2) of Section 70 gives power to the Government to sell the forest produce and to recover the amount which shall be deemed to be first charge on that forest produce. The sale of forest produce shall be by public auction and the proceeds of the sale shall be applied first in discharge of the amounts due thereunder. Sub-Section (3) provides that the surplus if any shall be paid to the person entitled thereto.
6. Thus it is seen that under the Act and the Rules and the agreement the power is given to forfeit in full or in part the security amount for breach of any of the conditions of the contract or the Rules or the Act. An analoguous power has been given under Rule 31 of the Forest Rules and Section 70 of the Forest Act.
7. The question therefore, is whether the Government is entitled to forfeit the entire security deposit, even in excess of the actual damage suffered. It is undoubtedly true that the power to forfeit the security deposit was given under the Forest Rules, and the same was incorporated in the contract as a term in terrorem for due performance of the contract. In case the contract is performed and if there are no dues then the contractor is entitled to the refund in full of the security deposit; but in case there is a breach of a contract or the agreement, or contravention of the Rules or the Provisions of the Act, the question then would be whether the respondent is entitled to forfeit the entire security amount. It is now well settled by a catena of decisions ending with V. Raghunadha Rao's case (1 supra) that the Government though as an owner of its produce, is not free to impose unconscionable conditions which are arbitrary, unjust or unfair, and that every person or a citizen has a fundamental right to enter into favourable conditions of contract with the Government, on par with his right to trade as provided under Article 19(1)(g) of the Constitution. Therefore, the conditions imposed by the State must be just, fair and reasonable as laid down by the Supreme Court in Ramanna v. I.A. Authority of India, : (1979)IILLJ217SC and reiterated in Kasturi Lal v. State of Jammu & Kashmir, AIR 1980 SC 1628. Therefore, the State is not free to impose arbitrary conditions like a private citizen. In Raghunadha Rao's case (1 supra) this court has held that the conditions in the A.P. Standard Specifications should be consistent with Articles 14, 19(1)(g), 21, 298 and 299 of the Constitution and the State is not free to impose arbitrary or unjust clauses in a public contract. If any unconstitutional conditions are imposed which may be against the public policy enshrinad in Section 23 of the Contract Act, they would be, to that extent void, as held by the Supreme Court in Central Inland Water Transport Corporation Limited v. Brojo Nath, : (1986)IILLJ171SC . Section 70(3)of the Forest Act itself gives an indication that in case any surplus remains with the State, it has no power to appropriate the same and the contractor is entitled to recover the surplus amount. Rule 31 of the Forest Rules gives power to the State to forfeit the entire security deposit for breach of contracts. Under Section 74 of the Indian Contract Act when a contract has been broken; if a sum is specified as 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. In Fateh Chand v. Balkishan Dass, : [1964]1SCR515 a Constitution Bench speaking through Shah, J., (as he then was) has held that the measure of damages in the case of breach of stipulation by way of penalty is by Section 74 a 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 damages 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. Section 74 applies to stipulation for forfeiture of the amounts deposited or paid under the contract. The application of the Section is not restricted to cases where the aggrieved party claiming relief as plaintiff. The facts in Maula Bus v. Union of India (2 supra) are similar to the facts in the case on hand. The security deposit was made therein for due performance of the contract where the security deposit was to stand forfeited in case of breach in performance of the contract. The security deposit was accordingly forfeited. Then a suit was laid. The trial court decreed the suit. On appeal, the High Court reversed it. The Supreme Court speaking through Shah, A.C.J. for the court held that the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing as on the part of the purchaser to buy the property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be regarded as earnest-money. Section 74 of the Indian Contract Act deals with the measure of damages in two classes for cases namely (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. The measure of damages in the case of a breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for is to be made. Then it was held that every covenant involving a penalty, whether it is for payment, on breach of contract, of money or delivery of property in future, or for forfeiture of their right to money or other property already delivered, casts a duty upon courts not to enforce the penalty clause but only to award reasonable compensation, as statutorily imposed upon them by Section 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. The forfeiture of earnest money under a contract for sale of property, if the amount is reasonable, does not fall within Section 74. It was also further held that it is for the State to specify and assess he reasonable compensation and it is not entitled to forfeit the entire sum by way of penalty. The same ratio applies to the facts in this case. This view is fortified by Sub-section (3) of Section70 of the Forest Act. Once excess amount is found after realising the arrears due under Section 70, it shall be refunded to the contractor. When such is the situation, Rule 31 of the Forest Rules or the covenants in the on tract would not run counter to the main purpose underlying Section 70 of the Forest Act. Therefore, the construction sought to be put under the impugned memo is far in excess of the purpose sought to be served by the State under Section 70 of the Forest Act. Therefore, rule 31 of the Forest Rules should be read down as sub-surving the purpose under section 70 and if the breach is committed, then the State is entitled to forfeit that part of the amount which is due to the State from the security deposit. If there is any amount in excess, then the contractor is entitled to refund thereof. If this contraction is adopted it would subserve the public policy as enshrined under Section 23 of the Indian Contract Act and also it would be just, reasonable and fair provided under Article 14 of the Constitution. Accordingly I hold that Rule 31 of the Forest Rules cannot be declared as ultra vires the power of the (sic)(sic) to Section 70 of the Forest Act but the construction thereof should be as indicated in the Rules. The mere fact that it received the assent of the President, does not take away the effect of construction placed by the Supreme Court under Section 74 of the Contract Act, on the power of the State, in exercise of its executive power
8. Under these circumstances, the declaration is, accordingly granted a a indicated above, and the writ petition is accordingly ordered. No as to costs. Advocate's fee Rs. 500/-.