Court caseAIR 1970 SC 1955

Maula Bux contracted with the Government to supply potatoes, poultry, eggs and fish to military headquarters, and deposited Rs 10,000 and Rs 8,500 as security for due performance, to be forfeited on default. He failed to supply regularly; the Government rescinded the contracts and forfeited the deposits. He sued for their return.

The Supreme Court (Shah J) held that the amounts were not earnest money but security for performance, and that their forfeiture on breach was a stipulation by way of penalty within s. 74. Under that section the Government was entitled only to reasonable compensation. Where loss is capable of proof, the party complaining of breach must prove it; the Government, which could easily have shown what it paid to buy the supplies elsewhere, led no evidence of loss. The forfeiture could not be sustained and the deposits were ordered to be refunded. The Court added that where it is impossible to prove the loss, the court may award the named sum if it is a genuine pre-estimate.