The Indian Contract Act, 1872 (ICA) is a colonial act and much has changed or
evolved in the way business is conducted. The act being old has a few
loopholes which need to be relooked and corrected for the smooth conduct of
business. One such loophole is in Sec. 73 and 74 of the ICA. Sec. 73 speaks
about unliquidated damages which comes into play when liquidated damages clause
is absent in in contract. Sec.74 speaks about liquidated damages.
deals with liquidated damages but the definition of liquidated damages is not
provided in the act and the courts have often given confusing judgements in
different cases. These judgements are often interpreted differently or the wrong
interpretation. This research tries to solve the confusion between the important
judgements related to liquidated damages. The need to prove the amount of
damages caused by the aggrieved party makes it much more difficult to claim the
There are few Contracts where the damages cannot be
calculated in the case of breach of contract. Claiming liquidated damages
amounting to the actual damages are difficult in these type of cases. The courts
gives importance to the 'genuine pre estimate of damages'clause in the contract
which the party who breaks the contract tries to take advantage over the clause
to determine if it is liquidated damages or not. Further the contract law in
India has no difference between penalty and liquidated damages as the
compensation granted cannot exceed the amount specified in the contract.
Act and Definitions:
Black's Law dictionary defines Liquidated damages as:
"An amount contractually stipulated as a reasonable estimation of actual damages
to be recovered by one party if the other party breaches; also
If the parties to a contract have agreed on Liquidated Damages, the sum fixed is
the measure of damages for a breach, whether it exceeds or falls short of the
Section 73 of the ICA says:
"When a contract has been broken, the party who suffers by such breach is
entitled to receive, from the party who has broken the contract, compensation
for any loss or damage caused to him thereby, which naturally arose in the usual
course of things from such breach, or which the parties knew, when they made the
contract, to be likely to result from the breach of it".
Section 74 of the Contract Act reads as under:
"When a contract has been broken, if a sum is named in the contract as the
amount to be paid in case of such breach, or if the contract contains any other
stipulation by way of penalty, the party complaining of the breach is entitled,
whether or not actual damage or loss is provided to have been caused thereby, to
receive from the party who has broken the contract reasonable compensation not
exceeding the amount so named, or the case may be, the penalty stipulated for."
Analysis of Court Judgements:
In Fateh Chand v. Bal Kishan Das
AIR 1963 SC 1405 the Court while discussing the
scope of Sec.74 stated that it deals with damages which are divided into two
classes of cases:
- Where there is pre-determination of amount which has to be paid in cases
of breach of contract
- Where the contract may contain any further stipulation in form of
The Supreme Court in Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd
5 SCC 705 held that:
- Terms of the contract are required to be taken into consideration before
arriving at the conclusion whether the party claiming damages is entitled to
- If the terms are clear and unambiguous stipulating the liquidated
damages in case of the breach of the contract unless it is held that such
estimate of damages/compensation is unreasonable or is by way of penalty,
party who has committed the breach is required to pay such compensation and
that is what is provided in Section 73 of the Contract Act
- Section 74 is to be read along with Section 73 and, therefore, in every
case of breach of contract, the person aggrieved by the breach is not
required to prove actual loss or damage suffered by him before he can claim
a decree. The Court is competent to award reasonable compensation in case of
breach even if no actual damage is proved to have been suffered in
consequences of the breach of a contract.
- In some contracts, it would be impossible for the Court to assess the
compensation arising from breach and if the compensation contemplated is not
by way of penalty or unreasonable, Court can award the same if it is genuine
pre-estimate by the parties as the measure of reasonable compensation.
In Indian Oil Corporation Vs. Messrs Lloyds Steel Industries Ltd
.; 2007 (144) DLT 659):
- The Delhi Court held mere delay in construction and commissioning of the
terminal at Jodhpur by the contractor did not entitle IOC to recover
Liquidated Damages because there was no loss suffered by IOC.
- The court found that the pipeline reached Jodhpur terminal much after
the date of completion of construction and the terminal could not be put to
commercial use without the pipeline reaching the terminal.
In Herbicides (India) Ltd. vs. Shashank Pesticides Pvt. Ltd
. 180 (2011) DLT
- Merely because the stipulation of 'Liquidated Damages' is available in
the contract, the aggrieved party cannot claim full amount of Liquidated
Damages as a matter of right. Its entitlement would be to recover damages
only to the extent of actual losses proved to have been suffered by it.
- In those cases, where no actual loss is proved, but undeniably losses
have been caused, the Courts would not be powerless to award reasonable
damages to the aggrieved party.
- There can be yet another type of situation where the nature of contract
is such that assessing damages is not possible. In such a situation, the
Court would be empowered to grant full amount of Liquidated Damages provided
it is of the view that the same are fair and reasonable pre-estimate of
damages agreed between the parties.
The judgement in the case of Kailash Nath Associates v. DDA
(2015) 4 SCC 136
got in a new perspective of Sec.74 which was discussed:
- Where the dispute was whether a delay in payment would attract Section
74 of the Contract Act even if the respondents subsequently sold the
property at a significantly higher amount.
- While analysing the scope of compensation to be awarded under Section 74
the Court held the expression "whether or not actual loss is proved to have been
caused thereby" to mean that wherever it was possible for the party claiming
compensation to prove the actual damage, such proof was not dispensed with.
In this case, the petitioner Kailash Nath was declared as a successful bidder by
the respondentDDA in relation to an auction proceedings. In this connection, the
petitioner had deposited 25% of the bid amount as earnest money. However,
without putting the petitioner to notice that it has to deposit the balance 75%
of the bid within a certain stipulated time, the respondent had cancelled the
allotment of petitioner and forfeited the 25% earnest money. The Supreme Court
held that, it would be arbitrary for DDA to forfeit the earnest money on two
- There is no breach of contract on part of the appellant
- DDA not having been put to any loss, even if DDA could insist on a
contractual stipulation in its favour, it would be arbitrary to allow DDA as a
public authority to appropriate Rs ... without any loss being caused."
- Later in the judgment, the Supreme Court restated the principles
applicable to Section 74. In doing so, the Court held that, .like Section 73
and 75 of Contract Act, 1872, compensation is payable for breach of contract
under Section 74 ,only where damage or loss is caused by such breach.. The
Court also held thatdamage or loss caused is a sine qua non for the applicability of
Relying on the judgement of Kailash Nath , it has been argued by some that the
law in Saw Pipeshas 'undergone a change' and that it is no longer a 'good' law.
In other words, an oversimplistic and generalised argument is being advanced to
state that, notwithstanding the nature of the contract, proof of actual loss is
a pre-requisite for obtaining liquidated damages. In this regard, it is
important to acknowledge that no legal principle can be applied in abstract.
Each case has its own context due to which the understanding of the law keeps
The bone of contention in almost all cases has been the use of the expression
'whether or not actual damage or loss is proved to have been caused thereby' in
section 74. by reference to section 73 despite there being a named sum in the
In Maula Bux v Union of India
, the Supreme Court explained that the expression is
intended to cover different classes of contracts. In case of breach of some
contracts it may be impossible for the court to assess compensation arising from
the breach. It is in these circumstances that the sum named by parties may be
taken into consideration as the measure of reasonable compensation, provided it
is a genuine pre-estimate and not in the nature of a penalty.
Where loss in
terms of money can be determined, the party claiming compensation has
necessarily to prove the loss suffered and in such instances, the courts are
bound to assess the reasonableness of compensation claimed. It is while doing so
that the courts will apply the principles under section 73.
Thus, in every case a party must prove the extent of the loss suffered by it.
The exception, however, was for cases where the damage was difficult or
impossible to prove and in such cases the requirement to prove the extent of
loss was dispensed with.
In each of the above cases stands on a different footing. While Fateh Chand,
Maula Bux and Kailash Nath were concerned with clauses on forfeiture, the
relevant clause in Saw Pipes was on levy of liquidated damages. Further, the
important distinction in all the above four cases is that in Fateh Chand, Maula
Bux and Kailash Nath, the Supreme Court reached a conclusion that the person
aggrieved could have proved his loss by adducing evidence.
However, in Saw
Pipes, the Supreme Court found that it was impossible to prove loss. Hence, the
conclusion arrived in Fateh Chand, Maula Bux and Kailash Nath should not be
confused with the conclusion reached in Saw Pipes. Further, the finding on facts
in Kailash Nath puts it in a separate class altogether. In the said case, the
Court reached a finding that there was no breach on part of the person whose
money was forfeited. As such, the pivotal requirement to trigger application of
Section 74 , 'breach of contract' had not been satisfied in that case.
In view of the above, it may not be correct to interpret in abstract that the
law in Saw Pipes has been re-written or diluted in Kailash Nath. This is more so
since Kailash Nath itself acknowledges that, "It is only in cases where damage
or loss is difficult or impossible to prove that the liquidated amount named in
the contract, if a genuine pre-estimate of damage or loss, can be awarded."
To sum up, as would appear from the analysis above, the ruling in Saw Pipes is
not disturbed by Kailash Nath. The criteria for application of Section 74
continues to be a fact driven exercise and hinges on a careful assessment of the
possibility to prove loss. The rule in Fateh Chand, Maula Bux and Kailash
Nath, that a party must prove its loss cannot be universally applied.
application, without regard to facts of a case and the nature of the contract
involved, would be antithetical to the very purpose for which parties agree to a
genuine pre-estimate of liquidated damage in cases where it is impossible to
prove loss. In other words, once the parties contractually agree to a genuine
pre-estimate of damages, the contractual entitlement to the same should not be
doubted on account of impossibility in proving actual loss caused due to the
The interpretation of landmark cases makes the concept of liquidated and
unliquidated damages clear. The distinction between penalty and damages is also
clear as there in no difference in Indian Contract Law because the damages
should not exceed the stipulated amount.
The study has also shown the power of
the court to decide the damages reasonably in cases where it is not possible to
calculate the damages caused to the aggrieved party. Therefore it is clear that
the intention of providing damages is to recover the loss incurred by the
complainant, return the complainant to the position he had before the breach and
to minimize penalizing the respondent.
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