MAULA BUX Vs. UNION OF INDIA

JUDGEMENT

(1.) 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:

(2.) 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 forfeit 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.

(3.) The Trial Court found in decreeing the plaintiff's suit that there was no evidence at all to prove what 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 forfeiture 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, (1964) 1 SCR 515 = (AIR 1963 SC 1405) 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 Government "there were circumstances in the case which 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: