Maula Bux v. Union of India (1970)

1. Can the Government lawfully forfeit the security deposits after rescinding the contracts?
2. Does Section 74 apply to deposits labelled as earnest money, and if yes, to what extent?

• Section 74, ICA: Only reasonable compensation can be awarded. Courts do not enforce penalties.
• Fateh Chand v. Balkishan Dass: Even if a sum is named, the court limits relief to reasonable compensation, not exceeding the named sum.
• Proof of loss: If loss can be measured in money, the claimant must prove it.
• Genuine pre-estimate: If the named sum is a real pre-estimate and loss is hard to assess, that sum may guide compensation.

The Supreme Court reaffirmed that Section 74 controls penalty-like clauses. Earnest money can be forfeited only as reasonable compensation. Where loss is measurable, the claimant must prove it. Here, the Government could have shown later purchase rates but did not lead evidence. The Court recorded breach by the supplier and inconvenience to military authorities. The fairest order was that each party bear its own costs.

• Earnest money forfeiture stands only as reasonable compensation, not as a penalty.
• If loss can be proved, the burden is on the claimant to prove it.
• Where loss is hard to measure, a genuine pre-estimate may guide compensation but cannot be excessive.

This case sets a simple exam rule: no automatic forfeiture. Courts check reasonableness and proof of loss. It protects both sides—buyers get fair compensation, and sellers avoid excessive penalties.

• Section 74 caps relief at reasonable compensation.
• Penalty-like clauses are controlled; courts avoid windfalls.
• Proof of loss is needed when figures are available.
• Genuine pre-estimate helps when loss is hard to assess.

Mnemonic: “Reason beats Penalty, Proof when Possible” → R-P-P-P.

1. Check Reason: Is the sum reasonable compensation?
2. Spot Penalty: Does it punish rather than compensate?
3. Ask for Proof: Can the claimant show actual loss numbers?

Issue: Validity of forfeiting deposits under Section 74 after breach.

Rule: Section 74 → only reasonable compensation; penalties not enforced; proof required if loss measurable.

Application: Government could prove later rates but did not; forfeiture cannot replace proof when numbers exist; yet breach and inconvenience are noted.

Conclusion: No automatic forfeiture. Relief limited to what is reasonable on evidence; costs to lie where they fall.

Earnest Money

Deposit paid to show commitment to a contract.

Penalty

Sum fixed to punish breach, not to compensate loss.

Genuine Pre-estimate

Amount reasonably predicting likely loss at the time of contract.