Maula Bux v. Union of India (1969) — Liquidated Damages & Section 74

In Maula Bux v. Union of India, the Supreme Court said that a party cannot keep a deposit as a penalty unless there is proof of loss, when loss can be measured. Section 74 of the Contract Act allows only reasonable compensation up to the named sum. Here, the Government could not show loss for the entire security deposits, so the Court ordered a refund with interest.

• Named sums are a ceiling, not automatic damages.
• If loss is measurable, it must be proved.
• Genuine pre-estimate helps only where loss is hard to assess.

1. Can the Government forfeit the security deposits as a penalty for delayed or deficient supplies?
2. How does Section 74 treat a named sum where loss can versus cannot be assessed?
3. Is the deposit here the same as earnest money in a sale so as to fall outside Section 74?

Section 74, Contract Act: “Whether or not actual damage or loss is proved…” covers different types of contracts.

• If loss cannot be easily measured, a genuine pre-estimate may guide the court for reasonable compensation.
• If loss can be calculated, the party must prove actual loss; a penalty sum cannot be blindly enforced.
• Earnest money (in reasonable amount) under a sale contract may be forfeited and may not fall under Section 74; not all deposits are earnest money.

The Supreme Court held in favour of the plaintiff. The Government had rescinded validly, but could not retain the entire deposits as a penalty without proving loss where loss could be worked out. The Court directed payment of ₹18,500 with 3% p.a. interest from the date of the suit.

• Section 74 sets a cap (named sum) on damages; it is not automatic.
• If loss is not measurable, the named sum, if a genuine pre-estimate, may inform reasonable compensation.
• If loss is measurable, proof is needed; penalties are unenforceable.
• Earnest money in a sale may be forfeited if reasonable; not all security deposits are earnest money.

The case guides drafting and enforcing liquidated damages clauses in India. It warns against calling a sum “liquidated damages” when it functions as a penalty. It also teaches how courts read Section 74: as a balance between certainty and fairness.

Mnemonic: “CAP-GP” — Ceiling, Assess, Prove — Genuine Pre-estimate.

1. Ceiling: Named sum sets the cap.
2. Assess: If loss is measurable, assess it.
3. Prove: Claimant must prove loss; else no penalty.

Liquidated Damages

Amount named in the contract as a fair guess of loss if breach happens.

Penalty

Amount set to punish, not to fairly cover loss; generally unenforceable.

Earnest Money

Buyer’s deposit in a sale to show intent; reasonable forfeiture may be allowed.

Reasonable Compensation

Fair amount awarded by court based on circumstances, not exceeding the named sum.