Since the passage of the colonial Indian Contract Act of 1872 (ICA)1, much has changed or developed in the manner that commerce is done. Due to the act’s age, there are a few flaws that need to be reviewed and fixed to ensure efficient corporate operations. Unliquidated losses, which apply where a contract lacks a section addressing liquidated damages, are discussed in Section 74 discusses liquidated damages.
This clause deals with liquidated damages, however, the act doesn’t define them, and the courts have frequently issued contradictory rulings in various circumstances. These decisions are frequently viewed incorrectly or differently. This study aims to clear up any ambiguity about significant liquidated damages rulings. It is far more difficult to assert the liquidated damages since you have to demonstrate the extent of the losses the harmed party produced.
There are very few contracts where the damages in the event of a breach cannot be determined. In these kinds of circumstances, it might be challenging to assert liquidated damages that equal the actual harm. The ‘genuine prior estimate of losses’ provision, which the party who breaches the contract attempts to exploit, is given weight by the courts in determining whether liquidated damages are appropriate or not. Additionally, there is no distinction between a penalty and liquidated damages under Indian contract law because the awarded compensation cannot exceed the contract’s maximum value.
Definition of Section 74 of the Indian Contract Act
“The complaining party is entitled 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 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,”2 according to the law.
Exception of Section 74
Any person who signs a bail bond, recognizance, or another similar document, or who offers a bond by law, a directive from the [Central Government] or a 3[State Government] for the accomplishment of a public duty or act in which the public is interested, is liable to pay the full sum specified therein if the condition of the document is broken.
- In exchange for failing to pay B Rs. 500 on a specific day, A has agreed to pay B Rs. 1,000. On that day, A fails to pay B the sum of Rs. 500. A must pay B the amount of money the court finds appropriate, up to a maximum of Rs. 1,000.
- A signs a recognizance obligating him to appear in court on a particular day in exchange for a fine of Rs. 500. His recognizance is lost. He is responsible for paying the entire fine.
- A and B have an agreement that if A works as a surgeon in Calcutta, he would pay B Rs. 5,000. A is a surgeon who works in Calcutta. B is entitled to compensation that the Court deems appropriate, up to a maximum of Rs. 5,000.
Time Aspects and Other Dispositions
Time is a crucial component of this specific Section 74 of the ICA 1872. The Indian Contract Act of 1872 has significant repercussions that follow a delay, making it difficult for the party in default to immediately breach the contract. The important aspect of these actions is their profound philosophy. The contractual provision of a penalty is meaningless in the absence of any loss.
The idea of taking advantage of rewards coming from a violation of a contract is mentioned in the Indian Contract of 1872. The bare act states that “When the vendor sells to the defaulting vendee is not eligible to receive the benefits of the later contract if the price is higher than the market price on the day of delivery.” This is accurate even if the vendor received the advantages of a different contract that was desirable to him in return for the loss of the contract that the defaulting vendee had breached.
Importance of Penalties
The essence of a penalty is the payment of the agreed-upon monetary recompense to the party who was wronged. The fundamental idea behind compensation is that the aggrieved party should regain its prior position before the contract’s performance. The landmark case Tata Iron & Steel Co Ltd v. Ramanlal Kandoi3 established this rule, stating that it is important to be aware of the events that caused the plaintiff’s loss of income. The innocent person needs to comprehend the damages.
A comprehensive analysis of the types of fines and damages is necessary. The mere use of terms like “loss” or “damages” does not make the defaulting party liable. A sequence of events must occur for the loss brought on by the contract’s breach to be fairly assessed. Section 74 of the Indian Contract Act abolishes the rather convoluted differences established under English Common Law between provisions allowing for the payment of liquidated damages and clauses in the form of penalties.
Jurisdiction of Section 74 of the Act
Bal Kishan Das v. Fateh Chand4, the Court explained the application of Section 74 by dividing situations involving damages into two categories:
- First, whether the sum to be paid in the event of contract violation has been predetermined and
- Any further penalty clauses that may be included in the contract.
Analysis of Section 74 of the Act
When considering the application of Section 74 in Fateh Chand v. Bal Kishan Das5, The Court stated that it handles issues involving damages, which are divided into two categories. when the compensation due in the case of a contract violation is predetermined. Where penalties in the form of extra provisions may be included in the contract.
The Supreme Court noted that the expression is meant to embrace several sorts of contracts in Maula Bux v. Union of India6, It might not be practicable for the court to determine compensation in cases of contract breaches. If the sum agreed upon by the parties is a real pre-estimate and not a penalty, then it may be used in some circumstances as the benchmark for appropriate compensation.
The party seeking compensation must establish the loss incurred in cases when a monetary loss may be identified. In these situations, the courts must consider whether the amount sought is reasonable. The courts will do this while using the Section 73 principles. The magnitude of the damage incurred by a party must thus be shown in every instance. The obligation to establish the level of loss was waived in some instances, however, where the harm was difficult or impossible to demonstrate.
In Indian Oil Corporation vs. Messrs Lloyds Steel Industries Ltd7, the Delhi Court ruled that IOC was unable to receive liquidated damages since it had not experienced any losses as a result of the contractor’s construction and commissioning delays at the terminal in Jodhpur.
The court determined that the pipeline arrived at the Jodhpur port significantly later than the construction project’s completion date and that the terminal could not have been used for commercial purposes without the pipeline.
According to the Supreme Court’s decision in Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd8, when evaluating whether the party seeking damages is entitled to them, the conditions of the contract must be taken into account. unless it is determined that such an estimate of losses or compensation is excessive or acceptable, allowing for liquidated damages in the case of a contract violation.
The person who was harmed by a breach of contract may now obtain a decree without having to show that he experienced loss or damage thanks to Section 74. Even if no real loss is demonstrated to have been experienced as a result of the contract violation, the court is nonetheless permitted to award appropriate damages in such a situation.
If the damages are a true pre-estimate by the parties as the standard for fair damages, the court may nevertheless award them even if they are not a punishment or are reasonable. The court may find it challenging to determine the appropriate damages in some contracts.
Principal of Mitigation
According to the idea of mitigation, the complaint must make a concerted effort to accomplish considerably more in the typical court of commerce. The efforts he takes to remove himself in the case of a contract breach shouldn’t be measured on a high-tech scale. The complainant doesn’t need to endanger his assets, his reputation, or that of his business to reduce the damages that the defendant will be compelled to cover. In M Lachia Setty & Sons Ltd. v. Coffee Board Bangalore9, the Supreme Court decided that the mitigation principle should be the only consideration made while calculating damages rather than granting any rights to a party that violated the contract. In this case, it was determined that the complainant was required to do all reasonable efforts to limit the loss and that he was barred from pursuing claims for avoidable losses if he failed to do so.
According to the decision in Esso Petroleum Co. Ltd. v. Mardon10, the court has the jurisdiction to treat a prediction made concerning the subject of a contract at the pre-negotiation stage as more than just an expression of opinion and as a continuing guarantee. This is because the prognosis was provided to sway the other party into signing a contract. The person who produced the prediction may be held accountable for a breach of warranty if the estimate is subsequently found to have been prepared with complete negligence.
In Murlidhar Chiranjilal v. Harishchandra Dwarkadas11, according to the Supreme Court, there are two criteria used to determine damages when a contract for the sale of commodities is broken. The first step is to place the party that can prove the other party did not provide what they were promised in a position financially equivalent to what would have happened if the contract had been completed. The plaintiff is also not entitled to any damages resulting from failure to take reasonable efforts to mitigate the loss resulting from the breach.
Thus, it follows that the requirement that the loss sustained be shown violates the entire reason why liquidated damages provisions are included in contracts. The Act’s Section 74 emphasizes the need for fair pay. If the contract’s compensation was offered as a penalty, The consideration would be altered, and the party would only be eligible for damages reimbursement. However, if the compensation provided in the contract is a true pre-estimate of loss, which the party recognized at the time of contracting, there is no doubt as to how to prove such loss. In actuality, it is the opposing party’s responsibility to provide evidence that no loss is anticipated to result from such a breach.
- Indian Contract Act 1872
- Section 74 of the Indian Contract Act 1872
- Tata Iron & Steel Co Ltd v. Ramanlal Kandoi, (1971) 2 Cal. Rep. 493, 528
- Bal Kishan Das v. Fateh Chand, AIR 1963 SC 1405
- Fateh Chand v. Bal Kishan Das, AIR 1963 SC 1405
- Maula Bux v. Union of India, (1969) 2 SCC 554
- Indian Oil Corporation vs. Messrs Lloyds Steel Industries Ltd, 2007 (144) DLT 659)
- Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd, (2003) 5 SCC 705
- M Lachia Setty & Sons Ltd. v. Coffee Board Bangalore, (1981) SCR (1) 884
- Esso Petroleum Co. Ltd. v. Mardon,  QB 801
- Murlidhar Chiranjilal v. Harishchandra Dwarkadas, 1962 SCR (1) 653
This article is authored by Animesh Nagvanshi, a student at ICFAI University, Dehradun.