# MAULABUX v. UNION OF INDIA

- **Citation:** [1970] 1 S.C.R. 928
- **Court:** Supreme Court of India
- **Decided:** 1969-08-19
- **Case number:** Civil Appeal No. 851 of 1966
- **Bench:** J.C. Shah, Acting C.J, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/maulabux-v-union-of-india-4737
- **Pages:** 8

## Headnote

B
Indian
Contract
A ct
(9 of 1872), s. 14-Deposit of money a.r
guarantee for due
performance of contract for
mpply of goodsBreach 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 performance of the contract. It was stipulated that the amounts were to stand
forfeited in case the appellant neglected to perform his part of the contract.
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rescinded the contract and forfeited the amount deposited.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.
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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 contracts it may be imp<>sSihte for rhe court to assess compensation arising
from breach, while 1n other cases, compensation can
be
calculated in
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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.

## Text

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 goodsBreach 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 performance of the contract. It was stipulated that the amounts were to stand
forfeited in case the appellant neglected to perform his part of the contract.
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.
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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 contracts 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
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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 Headquarters, 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 fish for
E
one year and depoSlted an amount of Rs. 8,500/- for due performance of the contract.
Claus~ 8 of the contract ran as
follows :
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"The officer sanctioning the contract may rescind
his contract by notice to me/us in writing :-
(i)
(ii)
(iii)
(iv)
(v)
If I/we;.decline, neglect or delay to comply with
any demand or requisition or in any other way
fail tc.r;lij\erform or observe anv condition of the
contract.
(vi)
...
In case of such rescission, my/our security deposit (or
such portion thfreof as the officer sanctioning the contract shall consider fit or adequate) shall stand forfeited and be absolutely at the disposal of Government,
without prejudii::e to any other remedy or action that
the Goverrunent m!fy have to take . . . .
930
St:PREME COURT REPORTS
(1970] ! S.C.R.
In the case of such
rescission,
the
Government
;hall be entitled to recover from me/us on demand any
extra expense the Government may be put to in obtaining supplies/services hereby agreed
to be
supplied,
from elsewhere in any manner
mentioned
in
clause
7 (ii) hereof, for the remainder of the period for which
this contract was entereu into, without prejudice to any
other remedy the Government may have."
The plaintiff having made persistent default in making "regular
and full supplies" of the commodities agreed to be supplied, the
Gcwcrnm~nt of India rescinded the contracts-the first on November 23, 194 7, and the ;econd on December 2,
194 7,
and
forfeited the amounts deposited by the plaintiff.
The plaintiff commenced an action against
the
Union
of
lndia in the Court of the Civil Judge, Lucknow, for a decree for
Rs. 20,000 ·. being the amounts deposited with the Government
of India for due performance of the contracts and interest thereon at the rate .of 6 per cent.
per annum.
The Trial Court decrec<i the suit.
The Court held that the
Government of
India
was ju;tilicd in rescindinl! the contracts, but they could not forfeit the amounts of deposit, for they had not suffered any loss in
consequence of the default committed by the plaintiff.
The High
Court of Aliahabad in appeal modified the decree, and awardeJ
Rs. 416.25 only with interest at the rate of 3 per cent from the
date of th~ suit.
The plaintiff has appealed to this Court with
special lea 1c.
The ') cial Court found in decrecin~ the plaintiff's
suit
that
there was no evidence at all to prove that loss, if any, was suffered
by the Government of India in consequence of the plaintiff's default. and on that account amounts deposited as security were not
liable to be forfeited.
Jn the view of the High Court, to
forfeiture of a sum deposited by way of security for due performance of a contract. wher.~ the amount forfeited is not unreasonable, s. 74 of the Contract Act has no application.
The Court
observed that the decision of this
Court in Fateh
Chand v.
Balk isha11 Dass ( 1 ) did not purport
to
overrule the previous
"trend of authorities" to the effect that earnest money deposited
by way of security for the due performance of a contract docs not
constitute penalty contemplated under s. 74 of the Indian C0ntract Act. that even if it be held that the security deposited in
the case was a stipulation hy way of penalty. the Government was
entitled to receive from the plaintiff reasonable compensation not
exceeding that amount. whether or not actual dcmage or loss was
proved to have been caused. and that even in the absence of evidence to prove the actual damage or loss caused to the Gcwern11%41 I S.CR. lll.
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MAULA BUX v. UNION (Shah, Ag. C.J.)
931
ment "there were circumstances in the case with indicated that
the amount of Rs. 10,000
in the case of potato contract and
Rs. 8,500/- in the case of poultry contract may be taken as not
exceeding the reasonable compensation for the breach of contract by the plaintiff."
The High Court further observed that
the contract was for supply of large
quantities of potatoes,
poultry and fish, which would not ordinarily be available in the
market, and "had to be procured in case of breach of contract
everyday with great inconvenience,"
and in the circumstances
the Court "could take judicial notice of the fact that 194 7-48
was the period when the prices were rising and it would not have
been easy to procure the supplies at the rates contracted for".
The High Court concluded :
" ...... taking into consideration the amount of inconvenience and the difficulties and the rising rate of
prices, it would not be unfair if in case of such IJreach
for the supply of such huge amounts of potatoes and
poultry, we consider an amount of Rs. 18,500/- by way
of damages as being not unreasonable."
Under the terms of the agreements the amounts deposited by
the plaintiff as security for due performance of the contracts
were to stand forfeited in case the plaintiff neglected to perform
his part of the contract. The High Court observed that the deposits so made may be regarded as earnest money.
But that view
cannot be accepted.
According to Earl
Jowitt in "The Dictionary of English Law" at p.
68'.l : "Giving an earnest or
earnest-money is 'a mode of signifying assent to a contract of sale
or the like, by giving to the vendor a nominal sum
(e.g.
a
shilling) as a token that the parties are in earnest or have made
up their minds." As observed by the
Judicial Committee in
Kun war Chiranjit Singh v. Har Swarup (') :
"Earnest money is part of the purchase price when
the transaction goes forward : it is forfeited when the
transaction falls throug.1, by reason of the fault or failure
of the vendee."
In the present case the deposit was made not of a sum of monev
by the purchaser to be applied towards part payment of the price
when the contract was completed and till then as evidencing an
intention on the part of the purchaser to buy 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 7 4 of the Contract Act provides :
"When a contract has been broken, if a sum is
named in the contract as the amount to be paid in case
(!) A.l.R. 1926 P.C. I .
932
SUPREME COUllT REPORTS
[1970] l S.C.R.
of such breach, or if the contract contains any other
A
stipulation by way of penalty, the party complaining of
the breach is entitled, whether or not actual damage or
Joss 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.
B
"
There is authority, no doubt coloured by the view
which was
taken in English cases, that s. 74 of the Contract Act has
no
application to cases of deposit for due perfonnance of a contract
which is stipulated to be forfeited for breach : Natesa Aiyar v.
Appavu Padayachi( 1); Singer Man11/ac111ri111: Company
v. Raja
Prosad('); Manian Pall er v. The Madra.1· Railway Company(').
But this view is no longer good Jaw in view of the judgment of
this Court in Fateh Chand's case'.').
This Court observed at
p. 526 :
"Section 7 4 of the Indian Contract Act deals with
the measure of damag.~s in two classes of cases (i)
where the contrnct 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 breach of a stipulation by way of
penalty is by s. 74 reasonabl.e compensation not exceeding the penalty stipulated for."
The Court also observed :
"It was urged that the section deals in tenns with
the right to receive from the party who has broken the
contract reasonable compensation and not the right to
forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that
s. 74 applies only to cases where the aggrieved party
is seeking to receive som~ amount on breach or contract
and not to cases whereupon breach of contract an
amount received under the contract is sought to be forfeited.
In our judgment the expression "the contract
contains any other stipulation by way of penalty" comprehensively applies to 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 right to money or other property
already
delivered.
Duty not to enforce the penalty clause but
(I) (1913) I.LR. JR Mad. 178,
CJ) [1906J 1.L.R. 19 Mad. 188.
(2) {!909) l.L.R. 36 Cal. 960.
(4) [19641 1 S.C.R. SIS.
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MAUI.A BUX v. UNION (Shah, Ag. C.l.)
cinly to awa«J: reasonable compensation is statutorily
imposed upon: courts by s. 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 c,ontract as liable to forfeiture.", and that,
"There is no ground for holding that the expression
"contract contains any other stipulation by way of
penalty" is .limited to cases of stipulation in the nature
of an agteement to pay money or deliver property on
breach and-Ooes not comprehend covenants under which
amounts paid or property delivered l1nder the contract,
which by 'the terms of the contract expressly or by
clear implication are liable to be forfeited."
933
Forfeiture of earnest money under a contract for sale of property-movable or,immovable-if the 'amount is
reasonable,
does not fall within s. 74. That has been decided in several
!
cases : Kunwar Chiranjit Singh v. Har Swarup('); Roshan Lal
v. The Delhi Cloth and General Mills Company Ltd., Delhi(2 );
Muhammad Habibtillah v. Muhammad Shafi('); Bishan Chand
v. Radha Kishan D(ZS(4); These cases are easily explained, for
forfeiture of a reasonable amount paid as earnest money does not
amount to imposing a penalty. But if forfeiture is of the nature
of penalty, s. 7 4 applies. Where under the terms of the contract
the patty 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 undertaking is cf the
nature of a penalty.
Counsel for, the Union, however, urged that in the present
case Rs. 10,000/- in respect of the potato contract and Rs. 8,500
in respect of the poultry contract were genuine pre-estimates
of damages which_ the Union was likely to suffer as a result of
breach of contract, and th_e plaintiff was not entitled to any relief
against forfeiture. · Reliance in support of this contention was
placed upon the expression (used in s. 74 of the Contract Act),
"the party c~mplaining of the breach is entitled, whether or not
actual damag ·or loss is proved to have been caused thereby, to
receive from t e party who has broken the contract reasonable
compensation". · It ls true that in every case of breach of contract
the person aggrievell by the breach is not required to prove actual
loss or damage suffered by him before he can claim a decree,
and the Court is competent to award reasonable compensation in
(I) A.I.R. 1926 P.C. I.
(2) I.LR. 33 All. 166.
(3) I.LR. 41 All. 324.
(4) l.D. 19 All. 490.
934
SUPREME COURT REPORTS
(1970] l S.C.R.
case of breach even if no actual damage is proved to have been
suffered in consequence of the breach of contract.
But the expression "whether or not actual damage or loss is proved to have
been caused thereby" is intended to cover different
classes
of
contracts which come before the Courts.
In case of breach <)f
some contr~ct; it may be impossible for the Court to assess com·
pensation arising from breach, while in other cases compensation
can be calculated in accordance with established rules.
Where
the Court is unable to aS5ess the compensation, the sum named
by the parties if it be regarded as a genuine pre-estimate may
be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty.
Where loss in terms of money can be determined, the party claim·
ing compensation must prove the loss suffered by him.
In the present case, it was possible for the Government of
India to lead evidence to prove the
rates at
which
potatoes,
poultry, eggs and fish were purchased by them when the plaintiff
failed to dehver "regularly and fully" the
quantities
stipulated
under the terms of the contracts and after the
contracts
were
terminated.
They could have proved the
rates at which
they
had to be purchased and also the other incidental charges incurred by them in procuring the goods contracted for.
But no such
attempt was made.
Counsel for the Union, however, contended that in the Trial
Court the true po<ition in law was not appreciated am.: the parties
proceeded to trial on the question whc1'hcr the Government was
entitled in the circumstances of the case to forfeit under cl. 8
of the terms of the contracts the deposits made for securing due
performance of the contracts.
Since there was no pleading and
no issue on the question of reasonable compensation, an opportu·
nity should be given to the parties to lead evidence on this point.
But with the suit out of which this appeal arises was tried another suit filed by the plaintiff Maula Bux against the Union for
a decree for Rs. 53.000 odd being the price of goods sJpplied
under the terms of another contract
with the
Government of
India.
Jn that suit the Union claimed that it
had set off
the
amount due to the plaintiff. amounts which the plaintiff was liable
to pav as compensation to the Union for loss suffered hecause of
the plaintiff's failure to carry out the terms of the contracts C /74
and C/ 120.
The Trial Court held in that case that the Union
failed ta nrove that anv loss was suffered by it in consequence of
the default by Maula Rux to supply potatoes. poultry, e~gs and
fish as stipulated hv him.
Against the judgment of that Court
Appeal No. 2001 of 1966 is filed in this Court and is
decided
today.
The Hi~h Court of Allahabad
having
confirmed
the
decree passed by the Trial Court, no useful purpose will be served
by directing a fresh enquiry into the question whether the Union
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MAUI.A BUX v. UNION (Shah, Ag. C.J.)
935
of India is entitled to recover from the plaintiff any reasonable
compensation for breach of contracts and whether that compeil.-
sation is equal to or exceeds the amounts deposited.
Evidence
on that question has already been led and findings have been re-.
corded. In dealing with the Appeal No. 2001 of 1966 we have
held that the Union has failed to establish by evidence that any
damage or Joss was suffered by them which arose out of the default committed by the plaintiff.
We decline therefore to afford
another opportunity for leading the evidence as to the loss suffered by the Union on account of the failure on the part of the plaintiff to carry out the contracts.
On the view taken by us it must be held that the High Court
was in error in disallowing the plaintiff's case.
The High Court has held that the plaintiff is not entitled to
any interest prior to the date of the suit.
No argument has bt:en
advanced before us cha!lenging that view.
Since interest was not
recoverable under any contract or usage or under the provisions
of the Interest Act, 1838 the High Court allowed interest at the
rate of 3% per annum on Rs. 416.25 from the date of the suit,
the rate of interest allowed on the claim decreed also should not
exceed 3 per cent per annum.
We set aside the decree passed by the High Court and substitute the following decree :
"The Union of India do
pay to the plaintiff
Rs. 18,500/- with interest at the rate of 3% per annum
from the date of the suit till payment."
The plaintiff was guilty of breach of the contracts. Considerable
inconvenience was caused to the Military authorities because of
the failure on the part of the plaintiff to supply the' food-stuff
contracted to be supplied. Even though there is no evidence of
the rates at which the goods were purchased, we are of the view,
having regard to the circumstances of the case, that the fairest
order is that each party do bear its own costs throughout.
Y.P.
Appeal allowed.