Maula Bux v. Union of India (1970): Supreme Court on the concept of ‘Earnest Money’ and Section 74 of Indian Contract Act.

Maula Bux v. Union of India, 1970 AIR 1955, 1970 SCR (1) 928

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 procedural history: –

February 20 and March 4,1947: Plaintiff entered into two contract with government to supply potatoes, deposited aggregate amount of 18500/- for due performance of the contract

November 23 and December 2- 1947: Due to plaintiff’s failure of making regular and full supplies, government rescinded the contract and forfeiture the abovementioned amount

The plaintiff commenced an action for amount of Rs 20000/- with interest, trial court held that government was not justified in forfeiting the contract, as they suffered no loss. The High Court held that even though the amount was stipulation by way of penalty, government is entitled to receive reasonable compensation irrespective of whether actual damage is caused or not. The High Court awarded the plaintiff 416.25 with interest. Aggrieved by the decision, plaintiff applied to the Supreme Court through special leave petition.

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 S. 74 of Indian Contract Act, 1872 applies to the case?

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 18500/- was genuine pre-estimates the government was likely to suffer because of breach of the contract. Hence, by virtue of S. 74 it should be regarded as reasonable compensation.
  • They further contended that the parties should be given opportunity to prove evidence regarding damage occurred.

Decision of the court:-

  • 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 S. 74 but if the amount is in nature of penalty S. 74 applies.
  • The party complaining of the breach is entitled to receive reasonable compensation, whether or not actual loss has occurred. However, the government did not attempt to prove that the amount was genuine pre-estimate of damages.

Held:-

The court directed the Union of India to pay the plaintiff Rs 18500/- with interest from the date of suit.

(This brief was prepared and submitted to LawBriefs.in by Aarsh Chokshi, student at Gujarat National Law University.)

 

 

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