Maula Bux v.

Union of India - Case Analysis

Maula Bux v. Union of India, (AIR 1970 SC 1955)

Before the Supreme Court of India

Decided on: – 19th August, 1969.

Bench: – JC Shah.
Counsel for the petitioners: – Jagdish Swarup, Solicitor-General, Yogeshwar Prasad, C.M. Kohli,
G.R. Chopra.
Counsel for respondents: – L.M. Singhvi, S.P. Nayar.

 Brief facts and History of the case:-

 The petitioner entered into two separate contracts with Government of India for the supply
of potatoes and other for supply of poultry,eggs, etc and deposited an aggregate amount
of 18500/- for due performance of the contract.
 He committed breach of both the contracts. The contracts provided for forfeiture of the
amounts he has deposited as security for performance under each contract.
 Due to plaintiff’s failure of making regular and full supplies, government rescinded the
contract and forfeited the above mentioned amount as provided in the contracts.
 The plaintiff commenced an action before the court for amount of Rs 20,000/- with interest.

 Issues before the court: –

 Whether the money deposited by the plaintiff for due performance of the contract, be
regarded as earnest money?
 Whether the forfeiture made by the government was in nature of penalty or whether Sec. 74
of Indian Contract Act, 1872 applies to the case?

 Proceedings before the court:-

 Trial Court:-The trial court upheld the rescission but held that government was not justified
in forfeiting the contract, as they had suffered no loss consequent on breach of contract by
the petitioner.

 High Court:- In view of the he High Court, even if the deposits were held to be in the nature
of penalty, the Government is entitled on the breach of contract to receive reasonable
compensation under Sec 74 under the part “whether or not actual damage or loss was
proved to have been caused”.
The High Court awarded the plaintiff sum of Rs.416.25 with interest.

The plaintiff appealed to the Supreme Court.

 Arguments for the plaintiff: –

 The plaintiff primarily contended that amount deposited was not to be applied towards the
part payment of price, but was to be forfeited in case of non-performance; hence, it cannot be
regarded as earnest money.

 Arguments for the respondents: –

 The counsel for the union contended that amount Rs 18,500 was genuine pre-estimates the
government was likely to suffer because of breach of the contract. Hence, by virtue of Sec. 74
it should be regarded as reasonable compensation.
 They further contended that the parties should be given opportunity to prove evidence
regarding damage occurred.
 Under the Indian Contract Act, 1872, Section 73 and Section 74 provide for unliquidated
and liquidated damages respectively. Unliquidated Damages are the damages awarded
by the courts on the basis and assessment of actual loss or injury caused to the party
suffering breach of contract. Whereas, Liquidated Damages are the damages which the
parties to the contract may agree to, as payment of a certain amount on the breach of
contract.

The relevant parts of the sections are as follows:-

 Section 73: Compensation for loss or damage caused by breach of

contract: When a contract has been broken, the party who suffers by such breach is
entitled to receive, from the party who has broken the contract, compensation for any
loss or damage caused to him thereby, which naturally arose in the usual course of
things from such breach, or which the parties knew, when they made the contract, to
be likely to result from the breach of it. Such compensation is not to be given for any
remote and indirect loss or damage sustained by reason of the breach.
 Section 74: Compensation for breach of contract where penalty is stipulated
for: When a contract has been broken, if a sum is named in the contract as the amount
to be paid in case of such breach, or if the contract contains any other stipulation by
way of penalty, the party complaining 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.

 Finding on the basis of facts :-

 Earnest money is nominal amount paid to the vendor to be applied towards the part-payment
of price, the court held the amount cannot be regarded as earnest money as it was for due
performance of the contract.
 Forfeiture of earnest money does not come under Sec. 74 but if the amount is in nature of
penalty Sec. 74 applies.
 The party complaining of the breach is entitled to receive reasonable compensation, whether
or not actual loss has occurred.
 The Court ruled that where compensation that maybe ordered cannot be assessed, by the
court, according to established rules, the sum named by the parties if it maybe regarded as a
genuine pre-estimate maybe taken into consideration as the measure of reasonable
compensation, but not if the sum named is in the nature of penalty.

 Decision of the court:-

 However, as the government failed to attempt to prove that the amount was genuine pre-
estimate of damages and it had suffered any loss or damage consequent to the breach of
contract, the Supreme court decreed that the amounts deposited by plaintiff be returned to
him with interest.
Held:-
 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."