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PETITIONER: MAULA BUX

       Vs.

RESPONDENT: UNION OF INDIA

DATE OF JUDGMENT: 19/08/1969

BENCH: SHAH, J.C. (CJ) BENCH: SHAH, J.C. (CJ) RAMASWAMI, V. GROVER, A.N.

CITATION:  1970 AIR 1955            1970 SCR  (1) 928  1969 SCC  (2) 586  CITATOR INFO :  RF         1970 SC1986  (33)  F          1973 SC1098  (3,4)

ACT:    Indian   Contract  Act  (9 of  1872), s. 74   Deposit  of money  as guarantee for due  performance  of   contract  for supply    of    goods-Breach  of   contract--Forfeiture   of deposit--Proof  of  loss suffered when  necessary--Scope  of section--"Whether or not actual damage or loss is proved  to have  been caused thereby", meaning of--Earnest money,  what is.

HEADNOTE:     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 we’re to stand forfeited  in case the appellant neglected to perform his part of the con- tract. When the appellant made defaults in the supply,   the respondent  rescinded the contract and forfeited the  amount deposited.  The appellant filed a 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 ’forfeit 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 awarded the ’respondent a major portion  of  the amount  deposited as damages.  The High Court took the  view that  the forfeiture of a sum deposited by way  of  security for  due  performance  of  a  contract,  where  the   amount forfeited was not unreasonable s. 74 of the Contract Act had no.  application  and  that the deposits so  made  could  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  applied  towards  part payment of  the  price  when  the contract  is  completed  and  till  then  as  evidencing  an intention  on the part of the purchaser to buy  property  or goods.   Forfeiture  of earnest money under a  contract  for

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sale  of  property, if the amount is reasonable,   does  not fall within s. 74 of the Contract Act. [933-D]. Kunwar  Chiranjit Singh v. Har Swarup, A.I.R. 1926  P.C.  1, relied on.     (ii) Where under the terms of 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 undertaking is in the nature of a penalty and, s. 74 applied thereto. [933  E- F] Fateh  Chand v. Balkishan Dass, [1964] 1 S.C.R. 515,  relied on.     Contrary  view  in  Natesa Aiyar  v.  Appavu  Padayachi, (1913)  LL.R. 38 Mad. 178, Singer Manufacturing Co. v.  Raja Prosad,  (1909)  I.L.R.  36 Cal. 960 and  Manian  Patter  v. Madras   Railway  Company,  (1906)  I.L.R.  19   Mad.   188, disapproved.     The expression "whether or not actual damage or loss  is proved  to have been caused thereby" in s. 74 is intended to cover  different classes of contracts which come before  the courts.   In  ease of breach of some contracts.  it  may  be impossible for the court to assess compensation arising from breach,   while  in  other  cases,  compensation   can    be calculated in 929 accordance  with  established  rules.  Where  the  court  is unable  to  assess the compensation, the sum  named  by  the parties,  if it be regarded as a genuine preestimate, may be taken  into  consideration  as  the  measure  of  reasonable compensation, but not if the sum named is in the nature of a penalty. [934 A-C]     In the present case it was possible for the  respondent- Government  to lead evidence to prove the loss suffered  but it did not attempt to do so.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION:  Civil Appeal No. 851  of 1966.     Appeal  by  special leave from the  judgment  and  order dated December 20, 1963 of the 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  entered  into  a  contract  No.  C/74  with   the Government of India on February 20, 1947, to supply potatoes at  the Military Headquarters, U.P. Area, and  deposited  an amount of Rs. 10,000 as security for due  performance of the contract.  He entered into another contract with  Government of  India on March 4, 1947 No. C/120 to supply at  the  same place  poultry, eggs and fish for one year and deposited  an amount    of  Rs.  8,500/-  for  due  performance  of    the contract.  Clause 8  of the  contract ran as follows:                     "The  officer sanctioning  the  contract               may   rescind his contract by notice to  me/us               in writing :--               (i)               (ii)               (iii)               (iv)  If  I/we decline, neglect  or  delay  to               comply  with any demand or requisition  or  in

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             any other way fail to. perform or observe  any               condition of the contract.               (v)               (vi)               In  ease of such rescission,  my/our  security               deposit  (or  such  portion  thereof  as   the               officer   sanctioning   the   contract   shall               consider   fit   or  adequate)   shall   stand               forfeited and be absolutely at the disposal of               Government,  without  prejudice to  any  other               remedy or action that the Government may  have               to take.               930               In   the  case  of  such    rescission,    the               Government  shall 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 entered 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 Government of India rescinded  the  contracts the first on November 23, 1947, and the second on   December 2,1947,    and  forfeited  the  amounts  deposited  by   the plaintiff.  The plaintiff commenced an action  against   the Union of India 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 decreed the suit.  The Court held that  the Government  of   India  was  justified  in  rescinding   the contracts,  but  they  could not for  left  the  amounts  of deposit,  for they had not suffered any loss in  consequence of  the default committed by the plaintiff.  The High  Court of Allahabad in appeal modified the decree, and awarded  Rs. 416.25 only with interest at the rate of 3 per cent from the date of the suit.  The plaintiff has appealed to this  Court with ’special leave.    The  trial Court found in decreeing 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.   In the  view  of  the  High Court, to  for  feature  of  a  sum deposited  by  way  of security for  due  performance  of  a contract, where 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. Balkishan  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 does not constitute penalty contemplated under s.  74 of the Indian Contract Act, that even if it  be  held that the security deposited in the case was a stipulation by way of penalty, the Government was entitled to receive  from the  plaintiff  reasonable compensation not  exceeding  that amount,  whether or not actual damage 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 Govern [1964] 1 S.C.R. 515. 931

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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 1947-48 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  breach  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. 689:   "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 Kunwar Chiranjit Singh v. Har Swarup(1):     "Earnest money is part of the purchase price when    the transaction   goes  forward:   it  is  forfeited  when   the transaction falls through, by reason of the fault or failure of the vandee." In  the  present case the deposit was made not of a  sum  of money 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 74 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                (1) A.I.R. 1926 P.C. 1               932                 of such breach, or if the contract  contains               any other   stipulation by way of penalty, the               party  complaining of 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.                ..............................."               There  is authority, no doubt coloured by  the               view  which  was taken in English cases,  that

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             s. 74 of the Contract Act has  no  application               to  cases of deposit for due performance of  a               contract  which is stipulated to be  forfeited               for    breach:   Natesa   Aiyar   v.    Appavu               Padayachi(1); Singer Manufacturing Company  v.               Raja  Prosad(2); Manian Patter v.  The  Madras               Railway Company(a). But this view is no longer               good law in view of the judgment of this Court               in Fateh Chand’s case(4).  This Court observed               at p. 526:                     "Section  74 of the Indian Contract  Act               deals  with  the  measure of  damages  in  two               classes  of   cases  (i)  where  the  contract               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               reasonable  compensation  not  exceeding   the               penalty stipulated for."               The Court also observed:                     "It was urged that the section deals  in               terms 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 some amount on breach of 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               (1) [1913] LL.R. 38 Mad. 178.               (2) [1909] I.L.R. 36 Cal. 960.               (3) [1906] I.L.R. 19 Mad. 188.                (4) [1964] 1 S.C.R. 515.               933                      only  to award reasonable  compensation               is  statutorily imposed upon courts by s.  74.               In  all cases,. there fore,       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 contract 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               agreement to. pay money or deliver property on               breach and does not comprehend covenants under               which amounts paid or property delivered under

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             the  contract,  which   by the  terms  of  the               contract  expressly  or by  clear  implication               are liable to be forfeited."      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.   Hat Swarup (t); Roshan Lal v. The Delhi Cloth and General  Mills Company  Ltd.,  Delhi(2); Muhammad  Habibullah  v.  Muhammad Shafi(3);  Bishan Chand v. Radha Kishan Das(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. 74 applies.  Where under the terms of 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  undertaking is  of 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  preestimates of damages which the Union was  likely to  suffer  as  a  result of breach  of  contract,  and  the 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 complaining of the breach is entitled, whether or not actual damage  or loss is proved to have been caused there  by,  to receive   from  the  party  who  has  broken  the   contract reasonable compensation".  It is true that in every case  of breach of contract the person aggrieved 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    (1) A.I.R. 1926 P.C. 1.           (2) I.L.R. 33 All. 166.    (3) I.L.R. 41 All. 324.           (4) I.D. 19 All. 490. 934 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 of some contracts  it  may  be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be  calculated in  accordance with established rules.  Where the  Court  is unable  to  assess the compensation, the sum  named  by  the parties  if it be regarded as a genuine preestimate  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 claiming 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 deliver "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 position in law was not appreciated and

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the  parties proceeded to trial on the question whether  the Government was entitled in the circumstances of the case  to forfeit under cl. 8 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 opportunity 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  supplied under the terms of another contract with the  Government  of India.   In that suit the Union claimed that it had set  off the amount due to the plaintiff, amounts which the plaintiff was  liable  to pay as compensation to the  Union  for  loss suffered because 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 to prove that  any  loss was  suffered by it in consequence of the default  by  Maula Bux to supply potatoes, poultry, eggs and fish as stipulated by him.  Against the judgment of that Court Appeal No.  2001 of  1966 is filed in this Court and is  decided today.   The High  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 935 of  India  is  entitled to recover from  the  plaintiff  any reasonable compensation for breach of contracts and  whether that  compensation  is  equal  to  or  exceeds  the  amounts deposited.   Evidence on that question has already been  led and findings have been recorded.  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 loss 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 been advanced before us challenging 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. 936

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