1. The plaintiff has filed this suit for recovery of a sum of Rs. 2,80,840 from the defendants being the amount of balance of sale consideration in respect of transfer of shares of the company known as Kanza Food Industry and interest at the rate of 6 % per annum from 1-12-1965 till the filing of the suit.
2. The plaintiff has also claimed future interest on the above amount from the date of institution of the suit till the amount is paid at the rate of 6 % per annum and costs of the suit.
3. The admitted position in the case is that the plaintiffs who were the shareholders and directors of a Private Limited Company known as Messrs Kanza Food Industry Limited (hereinafter to be referred to as "the Company") entered into an agreement of Acquisition dated 4-i 1-1964 (hereinafter to be referred as the agreement) with the defendants for sale of their entire share--holdings in the Company. The defendants made a payment of Rs. 1,50,000 to the plaintiffs out of the agreed sale consideration of Rs, 4,00,000 upon execu--tion of the agreement and took over the entire control and management of the Company. Simultaneously the entire share-holdings of the plaintiffs in the Company except shares of the face value of Rs. 15,000 were also transferred in favour of defendants. The nominal shares of the value of Rs. 15,000 were retained in the name of plaintiff No. 1 to enable him to complete certain formalities under the agreement and on. Completion of these formalities these shares as well were to be transferred in favour of defendants. One of the conditions in the agreement related to the obtaining of the sanction letter of a German Loan from the I. D. B. P. By the plaintiffs in favour of the company. The plaintiffs, it appears did not succeed in fulfilling this condition whereupon the defendants forfeited the balance of the sale consideration amounting to Rs. 2,50,000 payable to plaintiffs and transferred the remaining shares of the value of Rs. 15,000 standing in the name of plaintiff No. 1, in their favour, purporting to resort to clause (16) of the agreement. The plaintiffs therefore instituted this suit for recovery of the balance of the sale consideration amounting to Rs. 2,38,000 due under the agreement claiming interest from 1-12-1965 a 6 %, per annum.
4. The defendants in their written statement have taken the stand that as a result of breach on the part of plaintiffs, the defendants have resorted to clause (16) of the agreement which absolved them from making any further payment to the plaintiffs and permitted them to acquire all rights, title and interest of the plaintiffs in the shares and in the Company without any further payment and as such they are not liable to pay anything tai the plaintiffs.
5. On 19-1-1970 as many as 32 consent issues were filed by the parties which were adopted by the Court. However, when the matter came up for final hearing before my learned brother Naimuddin, J. The learned Judge with the consent and on the suggestion of the counsel for the parties re- framed the issues as follows;--
(1) What is the effect of failure of the plaintiffs in obtaining the final sanction loan letter from I. D. B.
6. P. For import of plant and machinery under the German Loan keeping in view the provisions of clause (16) of the Contract dated 4-11-1964 ?
(2) Whether the defendants were entitled to claim a sum of Rs. 2,50,000 as damages and adjust the same against the sale consideration under the agreement or under, the provisions of section 74 of the Contract Act ?
(3) What reliefs, if any, the plaintiffs are entitled to ?
7. Large number of documents have been exhibited in evidence by consent of the parties and besides these documents, the parties have also led oral evidence. The entire trend of evidence both oral and documentary led by each party, is to prove the breach of agreement on the other.
8. However, from the issues as framed above on 6-8-1979, the plaintiffs have admitted their failure in obtaining of the final sanction letter -of German loan and therefore the only point which needs determination now is what is its effect on the rights of the parties in view of clause (16) of the Agreement and section 74 of the Contract Act.
9. I have heard Mr. J. H. Hahimtoola and Mr. Munawar Abbas, the learned counsel for the plaintiffs and defendants respectively. My findings on the above issues are as under;-- Issues Nos. 1 & 2.-1 will deal both these issues together as the learned counsel addressed their arguments en these issues simultaneously and I also feel that they can be conveniently disposed of together. The learned counsel for the plaintiffs mainly contended before me that the consequence of breach provided in clause (16) of the Agreement, is in the nature of a penalty and therefore it cannot be legally enforced against the plaintiffs. Alternatively it is urged on their behalf that the defendants having failed to adduce any evidence with regard to the alleged damages suffered by them, they can at best claim nominal damages only. The learned counsel for the defendants on the other hand contended that the amount mentioned in clause (16) is not a penalty but a pre-estimated liquidated damages which the parties had in their contemplation at the time of entering into the above agreement and which could reasonably arise in the event of a breach and therefore the Court is bound to give effect to the same. The defendants, it is accordingly contended were entitled to forfeit the balance of the sale consideration amounting to Rs. 2,50,000 which they could otherwise recover from the plaintiffs by way of liquidated damages.
10. In so far as the recovery of damages for breach of a contract by a party is concerned, it is not disputed that the position will be governed either under section 73 or under section 74 of the Contract Act. It is agreed that in the present case section 73 of the Contract Act will have no application as the damages are claimed on the basis of a stipulation in the contract which provided for payment of a named sums in the event of breach. The damages accordingly will be payable as provided in section 74 of the Contract Act. There is however, disagreement between the plaintiffs and the defendants with regard to the nature of stipulation in the agreement which provides for forfeiture of the balance of sale consideration by defendants in case of breach by the plaintiffs. While it is contended by the plaintiffs that it is a penalty and as such not enforceable under.. The law, the defendants treat it as a liquidation damage legally recoverable in the event of breach. In view of the pronouncement of the Supreme Court in the case of West Pakistan v. Messrs Mistry Patel & Company PLD1969SC80,and West Pakistan Industrial Develop--ment Corporation v.
11. Aziz Kureshi PLD1973SC222, I ventures to say that the difference which exists under the English law between liquidated damages and a penalty is [A not recognized by section 74 of the Contract Act and therefore irrespective of the fact whether the amount as mentioned in the agreement is a penalty, or liquidated damages, a party complaining of the breach is entitled to recover damages whether or not actual damages have been suffered by it subject to the maximum limit of such damages which will be the amount so mentioned in the agreement. Therefore, merely because a specific sum by way of liquidated damages is mentioned as payable in the event of breach in the Agreement, is not, a sufficient ground for the Court to grant the same to the Party complaining of the breach as this amount only represents the maximum limit of damages which may be recovered by such party in the event of a breach. In spite of mention of a specific sum in an agreement to be paid as damages to a party in the event of a breach by the other, the Court still has to hold that such amount would normally arise as damages to such aparty in the case of a breach by the other. Therefore, in cases, where the party complaining of the breach in fact, suffered no damages at all and on the contrary gained some advantage in spite of the breach or where the Court finds that the sum mentioned as damages in the agreement in case of breach, is such that it could not reasonably arise from such breach, the Court may refuse to grant the same.
12. In the present case, therefore, before the defendants could successfully forfeit the sum of Rs.
13. 2,50,000 under clause (16) of the Agreement or claim its adjustment by way of damages arising from the breach on the part of plaintiffs, it must be shown that this amount would reasonably arise as damages to the defendants in the case of non-performance of the condition in the Agreement relating to sanction letter of German loan by the plaintiffs. As answer to this will largely depend on consideration of various terms and conditions of the Agreement and mainly the construction of the stipula--tion with regard to forfeiture of amount contained in clause (16) of the agreement, it will be quite advantageous to reproduce here in extenso clause (16) :- "1(6) If the company and/or the Second Parties fail or commit default in producing the final loan sanction letter of the 1. D. B. P. Mentioned in clause (15) sub-clause (a) within the said period of 3 months for no fault of the purchasers, the second parties shall pay to the purchasers, and the purchasers shall be entitled to receive from the Second Parties the sum of Rs. 2,50,000 to cover the said initial part-payment by the purchasers of Rs. 1,50,000 plus Rs. 1,00,00-) as agreed and settled liquidated damages together with all sums, payments, costs, charges, expenses incurred and paid, by the purchasers in the shape of --
(i) payments made to PICIC for loan and/or any instalment or instalments thereof and/or interest and all costs, charges, expenses and payment of I/C margin-made to I. D. B. P. In connection with the opening of letter of Credit.
(ii) All costs, charges and expenses of the transport and conveyance of the plants, machineries, accessories, paraphernalia etc. Of the Company from Karachi to Islamabad in the Company as required by the exigencies of the Company's business in connection with shifting of machinery ;
(iii) The costs, charges and expenses of and incidental to the construction of the Company's. Factory Building, structures, tenaments, and the like, and erection of machinery and godown rent of machinery ;
(iv) Costs, charges and expenses of and incidental to the obtaining of the lease and/or other vesting Deed and/or other Title Deed of the Company's said lands described in Schedule I from the Government and/or Capital Development Authority (hereinafter called C. D. A.) including stamps, registration and law charges therefor.
(v) All sums and interests thereon borrowed by the Purchasers from third Parties and invested in the company to meet the exigencies of the company's business for shifting of machineries and construction and erection of machineries or completion of clauses (i) to (iv) of this para. Above- mentioned within one month from the day of the expiry of the said period of three months and upon such payment of Rs. 2,50,000 being made by the Second Parties to the Purchasers all the charges shall be re-transferred by the purchasers to the names of the Second Parties respectively and the said bank guarantee given by the purchasers mentioned in clause (15) in the sum of Rs.
14. 2,50,000 shall be null and void and shall ipso facto stand cancelled and discharged and in the event of the Second Parties failing and/or neglecting to pay the said sum of Rs. 2,50,000 within the said period of one month together with the sums, costs, charges, expenses, investments, etc. Hereinbefore mentioned and the Second Parties shall waive and forfeit and forego all !Heir rights whatsoever including their former interests in the shares of the Company transferred by them to the purchasers which shall at all times belong to the purchasers and also all their rights or interests in the company or its Director ship or Managing Directorship and the said Bank Guarantee of Rs.
15. 2,50,000 shall also become null and void and stand cancelled and discharged: Provided always that the time of one month hereinbefore mentioned shall be deemed-to have commenced till the amount of expenses are certified by Nariman Hyder Bhimji & Co. Chartered Accountants in case the Second Party disputes the correctness of the accounts within seven days of the production of accounts and expenses certified by Muniff & Co. Jointly."
16. A reading of the above clause in the Agreement shows that in case of default by the plaintiffs to obtain the sanction letter of German loan within 3 months of the execution of agreement, the defendants could terminate the same and in that event the plaintiffs claim back the factory and all its assets from the defendants upon payment of Rs. 2,50,00) (which included the sum of Rs. 1,50,000 initially received by the plaintiffs from the defendants on execution of the Agreement) plus such other expenses which may have been incurred by the defendants on the Company and certified by a named chartered accountant. This option could be availed by the plaintiff within one month of the service of notice of termination by the defendants and in case of dispute regarding the amount spent by defendants, within one month of final certification of accounts by the chartered accountants. If the plaintiffs failed to exercise the above option within the period mentioned above, the defendants could forfeit the balance amount of Rs. 2,50,000 payable to plaintiffs under the agreement and thereupon all rights, title, and interest of` the plaintiffs in the shares of the Company and all other assets would extin--guish andsame shall stand transferred/vested in the defendants free from all claims of the plaintiffs. After a careful consideration of the above stipulations along with other terms and conditions of the agreement I am of the view that the provisions with regard to forfeiture of Rs. 2,50,000 in clause (16) of the agreement cannot be treated or described as a pre-estimated liquidated damages which the parties had in their contemplation at the time of entering into the - Agreement. This provision clearly appears to lie a penalty provided for non-fulfilment of the condition with regard to obtaining of German loan sanction. By the plaintiffs. This view taken by me finds full support from several clauses in the agreement. Clause (1) of the Agreement which appears immediately after recital clauses reads as follows;-- "(1) It is hereby agreed and declared by and between the parties hereto that the second parties shall sell and transfer to the purchasers and/or their respective nominee or nominees all the following shares held by the Second Parties respectively in such manner as the Purchasers may direct;-- Share holder Number of Distinctive numbers of shares heldthe shares held 1.Muhammad Karimuddin25001 -300-426-2625-
2. MuhammadZainulAbeddin1425301-425-2626-3925
3. Muhammad Taqiuddin Saleem500 .4426-2925 4.Shakira Begum.5003926-4425 49251-4925 Total Face ValueTotal Amount paid Rs.Rs.
17. 2, 50,0002,12, 500 1,42,5001,21,125 50,000 42,500 50,000 42,500 4,92, 500 4,18,625 At or for the total price of Rs. 4,00,000 which price represents the total marked value of the shares after computing the total assets of the Company as hereinafter mentioned."
18. Similarly in clause (3) of the Agreement the payment of Rs. 1,50,000 by the defendants to the plaintiffs is termed as the first initial payment for the acquisition of the shares of the plaintiffs in the Company. Clause (6) of the Agreement again sets out the total assets acquired against the consideration of Rs. 4 lacs in the following terms :- "(6) Out of the aforesaid agreed and joint total consideration of Rs. 4,00,000 (Rupees four lacs only) for the total acquisition of all the shares of the Company, the Control and charge of the Company, its properties, assets, rights and privileges, the purchasers shall on the execution hereof initially pay the sum of Rs. 1,50,000 as advance in part payment of the said total consideration, jointly to the Second Parties."
19. In paragraph 13 of the Agreement which refers to the resolution of the Board of Directors of the Company it is mentioned that the board has resolved and given approval to the transfer of all the shares of the Company to the purchasers (defendants) at or for the said total price of Rs. 4 lacs and that the said approval and sanction of the board for transfer of shares to pur--chasers (defendants) shall be irrevocable. The above-referred clauses in the agreement indicate that the consideration of Rs. 4 lacs fixed in the agreement represented the value for transfer of shares of the Company of the paid up value of Rs. 4,18,625 and of course the legal incident of transfer of these shares to defendants would mean the transfer and vesting of all the assets and liabilities of the Company with its total control and management to the defendants. It is an admitted position in the case that upon execution of the agreement all the assets of the Company along with its total control and management stood transferred to the defendants so also the share-holdings of the plaintiffs in the Company. Therefore, in order to justify the forfeiture of the balance consideration. Of Rs. 2,50,000 as damages arising from the breach of condition by the plaintiffs relating to sanction letter of German loan, the defendants must establish that they would have normally suffered this amount as damages in case of non-performance of the above condition of the agreement by the plaintiffs. . Mr. Munawwar Abbas, the learned counsel for defendants, urged before me that in so far the as management and control of the Company was concerned, it came over to defendants on the signing of the agreement and transfer of shares in the Company in their favour and therefore, the stipulation in the agreement providing the forfeiture of Rs. 2,50,030 by the defendants in the event of failure of plaintiffs to obtain sanction letter of German loan should be construed as pre- estimated liquidated damages which the plaintiffs had agreed to pay to the defendants in case of breach of this condition. The learned counsel accordingly contended that the defendants were entitled to legally forfeit the same in terms of clause (16) of the Agreement. I am unable to agree with the contention of the learned counsel. The amount of Rs. 2,50,000 as earlier pointed out by me, was the balance consideration for the transfer of share-holdings in the Company and all its assets in favour of defendants. The contention of Mr. Munawar Abbas, is also not commensurable with the various stipulations contained in other clauses of the agreement and specially clause (18) thereof, which provided that in spite of completion of all the conditions of the agreement including the one relating to sanction letter of German loan by the plaintiffs, if the I. D. B. P. Raised any other objection the plaintiffs would still lose their right to claim the balance consideration of Rs. 2,50,000 from the defendants and-the Company shall vest in the defendants free from all claims of the plaintiffs.
20. Could such a stipulation in the agreement be treated as a pre--estimated liquidated damages which the parties had in their contemplation at the time of 'entering into the Agreement 7 In my view this forfeiture clause in the agreement was in the nature of a stipulation in terrorem incorporated in the agreement to compel the performance of condition relating to sanction letter of German loan. The defendants under the- agreement had paid only a sum of Rs. 1,50,000 to the - plaintiffs and the balance of Rs. 2,50,000 was to be paid to plaintiffs upon completion of certain terms and conditions which included the terms relating to the obtaining of sanction letter of German loan. Upon payment of Rs. 1,50,030 the plaintiffs transferred the entire share-holdings in the Company except the share of the value of Rs. 15,000 in favour of defendants and it is an admitted position that as and from that time the total control and Management of the Company with all its assets vested with the defendants. In these circumstances the stipulation in clause (16) of the Agreement which provided for payment of Rs. One lac as damages to defendants or forfeiture. Of balance of Rs. 2,50,000 by them in case of breach of condition regarding sanction letter of German loan by the plaintiffs, could not be treated as a pre-estimated liquidated damages. The provision in clause (16) of the agreement undoubtedly made a very large sum payable in the event of default by the plaintiffs and is therefore in the nature of a penalty and not enforceable as such. I will, accordingly now consider as to what reasonable compensation by way of damages should be awarded to the defendants in the circumstances of the case as the plaintiffs have almost accepted the non-fulfilment of the condition relating to sanction letter of German loan by them. The property transferred under the agreement consisted of 'share-holdings of the plaintiffs in the company of the face value of Rs. 4,92,500 and paid up value of Rs. 4,18,625 with all the assets as shown in Schedules 1 and 2 of the agreement. It is not in dispute that the defendants were put in possession of all the assets and properties shown in the agreement and that before filing of the present suit the entire share-holdings of the company stood transferred in the name of the defendants. The defendants have not led any evidence of damages suffered by them on account of non-performance of the condition by the plaintiffs relating to sanction letter of German loan. The plaintiffs on the contrary denied that the defendants have suffered any loss or damages on account of breach of the above condition and have further asserted that there has been considerable appreciation in the value of the assets transferred to defendants under the agreement. The defendants in their evidence have admitted that at the time they cancelled the agreement there was no construction existing on the plot and the machinery and plant was not transferred to Rawalpindi. It is also admitted that they constructed the factory and installed the machinery and plant and commissioned it in the year 1967. Clause (17) of the agreement provides that irrespective of breach of condition by the, plaintiffs the defendants could still acquire the company and all its assets upon payment of the balance of Rs. 2,50,000 to the plaintiffs. In the circumstances of the present case in my view the situation in the ca e will be governed under this clause of the agreement and I accordingly hold the plaintiffs are entitled to the payment of the balance of the sale consideration. The plaintiffs have admitted that they received a sum of Rs.
21. 12,000 out of the balance of Rs. 2,50,000 after the execution of the agreement and therefor they are entitled to receive Rs. 2,38,000 from the defendants. The plaintiffs have further claimed interest at 6 % per annum on this amount from 1-12-1965 as well as future interest at the same rate from the date of institution of the suit till the amount is paid to them. As the plaintiffs were. Themselves in breach of the condition regarding obtaining of the sanction letter of German loan I am not inclined to grant interest claimed by them in the suit. However, from the date of the decree the plaintiff will be entitled to claim interest at the rate of 12 % until the amount is paid.
22. Before parting with the case I may mention here that after the close of evidence Mr. Munawar Abbas, the learned counsel for the defendants filed an application on 22-1-1981 praying that an additional issue with regard to limitation .Be: framed in the suit. The application was allowed by me on the statement of the learned counsel that he would argue this additional issue on the basis of the evidence already recorded in the case and the pleadings of the plaintiffs. I will therefore, now consider this issue. Mr. Munawar Abbas, while making his submission on the issue of limitation urged before me that the defendants repudiated the contract by their letter dated 28-8-1965 which is Exh. 56 on record and therefore, the cause of action if any arose to plaintiffs on that date and accordingly the suit for recovery of the amount should have been filed within three years of that date. The suit therefore, as filed on 29-11-1968, in the sumission of the learned counsel, was beyond time. In paragraph 16 of the plaint the plaintiffs have shown the cause of action as having arisen originally on4-11-1964, whenthe agreement was entered into between the parties.It is further shown to nave arisen on 30th November, 1965, when it is alleged the title in respect of the property was completed by transfer of all the share---holdings in favour of the defendants. The cause of action is finally stated to have accrued to plaintiffs on 21-9-1966 when the plaintiffs replied to the letter of defendants. Mr. J. H. Rahimtoola the learned counsel for the plaintiffs in reply to the argument of Mr. Munawar Abbas, urged that the notice dated 28-8-1965 was bad in law as by consent of parties the period for performance of the condition regarding German loan sanction by the plaintiffs was extended up to 17-9-1965. To support his contention the learned counsel invited my attention to Exh. 103/26 written by defendant Munir Ahmad as partner of Bashir Brothers to National Bank of Pakistan with reference to the Bank guarantee furnished in connection with the agreement which was expiring on 18-5-1965 and was extended up to 17.9-1965. The defendant Munir Ahmed in his cross-examination was confronted with this letter and he admitted that by this letter the defendants extended the validity of Bank guarantee up to 17-9---1955. In the retrospect it is contended by Mr. Rahimatoola that the time being available to the plaintiffs for perfor--mance of the condition up to the date of validity of the Bank guarantee the notice dated 28-8-1965 issued by the defendants terminating the contract was not a valid notice. Although the contention of Mr. Rahimtoola appears to be not without force but it is not necessary to decide this contention here as Mr. Munawar Abbas stated before me that if the plaintiffs succeed in showing that the cause of action had arisen to them on 30-11-1965 upon acquisition of all the shares by the defendants then the suit which was filed on 29-11-1968 is within time. I will therefore first examine whether the plaintiffs have succeeded in showing that the cause of action accrued to them on 30-11-1965. The suit filed by the plaintiffs is for recovery of the balance of the sale consideration. The agreement between the parties related to the acquisition of the shares of a limited Company. On 4-11-1964 when the agreement was made between the parties all the shares admittedly were not transferred in favour of defendants. The balance due under the agreement was to be paid to the plaintiffs by the defendants on completion of the transfer of all the shares and other formalities mentioned in the agreement, it has come in the evidence that the remaining shares of the value of Rs. 15,000 in the name of plaintiff No. 1 were. Transferred in favour of defendants on 30-11-1965, intimation of which was given to plaintiffs by the defendants. I, therefore, hold that the suit as filed on 29-11-1969 is within time.
23. As a result of the above discussion the plaintiffs' suit is decreed in the sum of Rs. 2,38,000 with proportionate costs but interest will be payable from the date of decree at the rate of 12% per annum till the amount is paid.