MAULA BUX versus UNION OF INDIA

Citation: [1970] 1 S.C.R. 928 · Decided: 19-08-1969 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Appeal(s) allowed

Cited by 5 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

928 
MAULABUX 
v. 
UNION OF INDIA 
August 19, 1969 
A 
[J.C. SHAH, ACTING C.J., V. RAMASWAMI AND A. N. GROVER, JJ.) 
B 
Indian 
Contract 
A ct 
(9 of 1872), s. 14-Deposit of money a.r 
guarantee for due 
performance of contract for 
mpply of goods-
Breach of contract-Forfeiture of deposit-Proo/ of Joss suffered when 
necessary-Scope of :'iection-"Whether or not actual damage or loss is 
proved to have been caused thereby'', meaning of-Earnest money, lvhat 
is. 
The appellant entered 
into a contract with the respondent to supply 
some goods and deposited a certain amount as security for due perfor-
mance of the contract. It was stipulated that the amounts were to stand 
forfeited in case the appellant neglected to perform his part of the con-
tract. 
When the appellant made defaults in the supply, the respondent 
rescinded the contract and forfeited the amount deposited. 
The appellaJt 
filed ·3 suit for recovery of the amount with interest. The trial court 
decreed the suit, holding that the respondent was justified in rescinding the 
contracts, but could not 'forreit the 
deposit, for, it had not suffered any 
loss in consequence of the default committed by the appellant. The High 
Court modified the decree and av.·arded the respondent a major po~tion of 
the amount deposited as damages. 
~Ine High Court took the vic\V that 
the forfeiture or a sum deposited by \\'ay of security for due performance 
cil a contract, \\'here the amount forreited wa.<: not unreasonable s. 74 of 
the Contract Act had no application and that the deposit~ so made coc1d 
be regarded as earnest money. 
HELD : The High Court was in error in disallowing the appellant's 
claim. 
(i) Earnest money is a deposit made by a purchaser to be a;ir~:..:d 
toward~ part pavment of the price when the contract is completed and 1il1 
then as evidcnclnJ? an intention on the part of the purchaser to buy pr<>-
perty or goods. 
Forfeiture of earnest money under a contract for sate of 
property, if the amount is reasonable, 
docs not fall within s. 74 of the 
Contract Act. [ 933 D ). 
Kunwar Chiraniit Singh v. Har Swarup, A.l.R. 1926 P.C. I, relied on. 
(ii) Where under the terms cif the contract the party in breach 
has 
undertaken to pay a sum of money or to forfeit a sum of money which he 
has already paid to the party complaining of a breach of contract, the 
undertak~g is in the nalure of a penalty and, s. 74 applied thereto. [933 
E.FJ 
Faith Chand v. Balkishan Dass, [1964] l S.C.R. 515, relied on. 
Contrary view in Natesa Aiyar v. Appavu Padayachi, (1913) J.L.R. 
38 Mad. 178, Singer Manufacturing Co. v. Raia Prosad, (1909) I.LR. 36 
Cal. 960 and Manian Parter v. Madras Railway Comparry, (1906) I.LR. 
i 9 Mad. 188, disapproved. 
c 
D 
E 
F 
G 
The exprc5sion 
11whcthcr or not actua1 damage or loss is proved 
to 
have been caused thereby" in 5. 74 is intended to cover different classes of 
H 
contracts which come before the courts. 
Jn ca5e of breach of some con-
tracts it may be imp<>sSihte for rhe court to assess compensation arising 
from breach, while 1n other cases, compensation can 
be 
calculated in 
A 
B 
c 
MAULA BUX V. UNION (Shah, Ag. C.J.) 
929 
accordance with esfllblfshed rules. Where the court is unable to assess 
the compensation, tbs sum named by the parties, 
if it be regarded as a 
genuine pre-estimate, may be taken into consideration as the measure of 
reasonable compens1.tion, but not if the sum named is in the nature of a 
penalty. [934 A-C] 
In the present caae it was possible for the, respondent-Government to 
lead evidence to prove the loss suffered but it did not attempt to do so. 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 851 of 
1966. 
Appeal by special leave from the judgment and order dated 
December 20, 1963 of !lie Allahabad High Court, Lucknow Bench 
in First Civil Appeal No. 28 of 1954. 
Jagdish Swarup, Solicitor-General, Yogeshwar Prasad, C. M. 
Kohli and G. R. Chopra, for the appellant. 
L. M. Singhvi and S. P. Nayar, for the respondent. 
The Judgment of the Court was delivered by 
Shah, Ag. C.J, Maula Bux-hereinafter called 'the plaintiff 
D. -entered into a contract No. C/74 with the Government of India 
on February 20, 194 7, to supply potatoes at the Military Head-
quarters, U. P. Ar~a, and deposited an amount of Rs. 10,000 
as security for dUEi!! performance of the 
contract. 
He entered 
into another contraet with Government of India on March 4, 194 7 
No. C/120 to supplv at the same place poultry, eggs and f

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