Contract Law

Maula Bux v. Union of India

(1969) 2 SCC 554

Facts

Maula Bux entered into contracts to supply goods to the Government.
He deposited security amounts to guarantee performance.
The Government rescinded the contracts following alleged default and forfeited the deposits.
It did not establish the precise loss caused by the breach.
The Government argued that the security could be forfeited under the contractual terms without proof of damage.

Section 74 authorises reasonable compensation up to the amount stipulated.
Where loss is capable of proof, the claimant should prove it.
Proof may be unnecessary where:
the nature of the contract makes exact loss difficult or impossible to calculate;
the stipulated amount represents a reasonable estimate.
A security deposit or advance cannot be forfeited merely because the contract uses the word “forfeit.”
Genuine earnest money may stand differently where it secures the bargain, but substance prevails over labels.

Government procurement loss was not inherently impossible to calculate.
The Government could have shown:
substitute-purchase price;
market-price difference;
additional procurement expenditure;
other financial consequences.
It produced no adequate evidence of such loss.
The deposits were therefore not automatically recoverable as compensation.
Section 74 removes the need to prove the exact amount only in cases where quantification is genuinely difficult.
It does not create a windfall whenever a breach occurs.
The Court distinguished:
reasonable pre-estimated compensation;
punitive forfeiture unrelated to injury.
Since actual loss was measurable but unproved, wholesale forfeiture could not be sustained.

The forfeiture was not automatically valid.
The Government was entitled only to reasonable compensation supported by the circumstances.
Use this case for: where actual loss can be calculated, it should ordinarily be proved before compensation under Section 74 is awarded.