Forfeiture of security deposit is penal, and only reasonable compensation is recoverable under section 74 when no loss is proved.

A contractual clause permitting forfeiture of a security deposit on breach was treated as penal in nature, not as an automatic entitlement to retain the whole amount. The Court held that where the deposit is security for due performance and no actual loss is proved, section 74 of the Contract Act permits only reasonable compensation. As the amount was not earnest money and the appellant had shown no proved loss from the breach, full forfeiture was disallowed and recovery was confined to reasonable compensation, with the balance security deposit refundable.

---

---

Issues: Whether the appellant was entitled to forfeit the entire security deposit on the respondents' breach of contract, or whether only reasonable compensation could be awarded under section 74 of the Contract Act.

Analysis: The contract provided for forfeiture of the security deposit on default, but the breach caused no proved loss to the appellant. The amount deposited was security for due performance and was not earnest money. Applying the governing principle that a stipulation to forfeit money already paid by the other party in case of breach is in the nature of a penalty, the Court followed the earlier ruling that forfeiture is not automatic and only reasonable compensation is recoverable where no loss is shown.

Conclusion: The appellant was not entitled to forfeit the entire security deposit, and the award restricting recovery to reasonable compensation was upheld.

Final Conclusion: The appeal failed, and the award directing refund of the balance security deposit stood affirmed.

Ratio Decidendi: A contractual clause for forfeiture of a security deposit on breach operates in the nature of a penalty, and where no loss is proved, only reasonable compensation can be awarded under section 74 of the Contract Act.

---