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Understanding the Damages under Indian Contract Act, 1872

The Latin maxim 'Ubi jus, ibiremedium' denotes 'where there is a right, there is a remedy'. In the world of contracts where people agree to do certain things it's important to have ways to make sure everyone follows through. That's where 'damages' come in 'it's like getting paid back when someone doesn't do what they promised in a contract'.

The provisions related to damages are outlined in Section 73 and Section 74 of the Indian Contract Act, 1872. Sections 73 and 74 of the Act introduce two main types of damages: unliquidated damages and liquidated damages. Section 73 specifies that in the event of a contract breach the injured party is entitled to seek compensation from the party at fault for any loss or damage suffered. For this compensation to be awarded two conditions must be satisfied first is the loss or damage must have arisen naturally in the usual course of events and the second is it must have been foreseeable by both parties when the contract was made.

Section 74 on the other hand addresses situations where the parties have pre-determined the amount to be paid as compensation for a breach. This pre-determined sum is known as a penalty or liquidated damages.

Damages under Indian Contract Act, 1872

Section 73 of the Indian Contract Act, 1872 is important in determining compensation for breaches of contract. It asserts that when one party fails to fulfill their contractual obligations the aggrieved party has the right to seek compensation for any resulting loss or damage. This compensation covers losses that naturally arise from the breach or those that were foreseeable at the time the contract was formed. The section also sets a limit by excluding compensation for remote or indirect losses.

In simpler terms if the loss is a direct consequence of the breach and was reasonably foreseeable by both parties when they entered into the contract the compensation is warranted. This ensures that parties are held accountable for the foreseeable consequences of their actions. It aims to provide a remedy to the injured party while preventing excessive liability for the party in breach.

Section 74 of the Indian Contract Act, 1872 deal with situation where a contract specifies a punishment for violation. In the event of a breach the party who feels wronged may pursue compensation without having to prove real harm or loss. But the amount of compensation cannot be more than the contractually stipulated penalty. This section promotes fairness in contractual relationships, prevents disproportionate fine and also holds parties accountable for their duties by ensuring that compensation is reasonable and proportionate to the breach of contract.

Under section 74 of the Indian Contract Act 1872 the term "whether or not actual damage or loss is proved to have been caused thereby" means that proof of actual injury or loss is still required even if it is possible to show it. But even in cases when establishing damage or loss is difficult or problematic the agreed-upon sum might still be granted. This is subject to the requirement that the fixed sum accurately represents a reasonable assessment of possible harm or loss. It is therefore imperative to ascertain the substance of the Liquidated Damages clause and whether it effectively forecasts the damage arising from a violation of contract or acts simply as a disincentive to breach.

The Supreme Court made it clear that Section 74 should be read with Section 73 in the case of Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd.[1] and held that the person that has been wronged in any breach of contract is entitled to compensation without having to provide proof of actual loss or harm. Even in cases where actual damage is not demonstrated the Court may nevertheless award adequate compensation for the breach. Upon proof of injury the court may grant appropriate compensation if it views the damages clause as a penalty.


In order to properly pursue damages for the breach of contract, a certain prerequisites must be met:
Valid Contract:
  • In order to successfully pursue a claim there needs to be a valid contract in place.
Breach of Contract:
  • In order for a claim to be valid the other party must to have broken the contract.
Experienced Loss:
  • The claimant has to have suffered a loss as a consequence of the violation.
Direct Causation:
  • Loss which is suffered by the claimant shall be a direct result of the breach of contract by the defaulting party.
The court reaffirmed the well-established legal position in Kailash Nath Associates v. Delhi Development Authority & Anr.[2], which states that in order for a party to be eligible for damages there must be three requirements met:
  • A contract must be broken;
  • The other party must have been harmed as a result of the breach
  • The injury must be immediate and directly related to the breach.

Differences between Section 73 and Section 74 of The Indian Contract Act, 1872

Section 73 deals with the actual damages which are also known as unliquidated losses. These damages are not predetermined in the contract but rather assessed by the court based on the actual loss sustained by the aggrieved party as a result of the breach of contract. The court calculates the amount of damages by examining the actual injury suffered by the party who did not breach the contract.

The purpose is to compensate for genuine loss that resulted from the breach and was predictable. The court determines these damages based on the information produced and the specifics of the case with the goal of returning the affected party to the position they would have been in if the breach had not occurred.

Section 74 deals with liquidated damages which are predetermined and specified in the contract itself. The contract states the amount of compensation to be paid if there's a breach. This fixed amount is meant to estimate the likely loss the non-breaching party would suffer. Liquidated damages are valid if they genuinely estimate the damages and are not meant to punish the breaching party.

Both parties are bound by the pre-agreed amount mentioned in the contract. The purpose of including liquidated damages clauses is to provide clarity and predictability in case of a breach by specifying the compensation amount beforehand. It aims to avoid the need for complex calculations and disputes over the damages amount.

  1. (2003) 5 SCC 705
  2. 2015 AIR SCW 759

Award Winning Article Is Written By: Mr.Prakash Singh
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