SECTION 74 of the

Indian Contracts Act

1872
  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
WHAT IS party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby, to receive
SECTION 74 from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the
case may be, the penalty stipulated for.
 Fateh Chand vs Balkishan Das on 15
In the case January, 1963, 1963 AIR 1405
where
Liquidated
damages are  Maula Bux vs Union Of India on 19 August,
awarded in the 1969 ,1970 AIR 1955

form of a
penalty. Note :- Justice J.C Shah sat on the 5 Judge Bench in Fateh Chand and
was also a Judge in the 3 judge bench hearing the Maula Bux case.
  Fateh Chand was dealing with a clause in a sale deed which provided that, if for any reason the
vendee fails to get the sale-deed registered by the date stipulated, the amount of Rs. 25,000 (Rs.
1,000 paid as earnest money and Rs. 24,000 paid out of the price on delivery of possession)
would stand forfeited.
Fateh Chand  The Court held that the forfeiture amount stands as penalty and not liquidated damages . The
court justified its stance by using S 74 of the ICA 1876 which contains the phrase :
vs Balkishan “as the case may be, the penalty stipulated for.”
 The Court Held :- “The expression if the contract contains any other stipulation by way of
Das on 15 penalty widens the operation of the section so as to make it applicable to all stipulations by way
of penalty, whether the stipulation is to pay an amount of money, or is of another character, as,
for example, providing for forfeiture of money already paid.”
January, 1963,  . Justice J.C shah went to rule that the Liquidated Damages Clause between both the parties was
in the nature of a penalty clause and therefore it was up to the court to award the aggrieved party
1963 AIR an amount which :
 a. It is deemed reasonable
1405  b. Did not exceed the amount stipulated within the contract itself.
 Also, while interpreting the phrase, “whether or not actual damage or loss is proved to have been
caused thereby”
 The court merely dispensed with the requirement of proof for the actual damage caused.
However the court held that to claim a penalty the party must prove legal injury.
  The Supreme Court in this case was again dealing with a situation of forfeiture of an
amount that has already been paid under a contract and adjudicated that such a fact
situation would be a penalty covered under Section 74 of the Contract Act.

The Court in this Case held two things :
Maula Bux vs 1. “It is true that 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
Union Of decree, and the Court is competent to award reasonable compensation in case of
breach even if no actual damage is proved to have been suffered in consequence of
India the breach of contract.”
2. However when the compensation is difficult to assess :
on 19 August, “Where the Court is unable to assess the compensation, the sum named by the parties if it
be regarded as a genuine pre-estimate may be taken into consideration as the measure of
1969 ,1970 reasonable compensation, but not if the sum named is in the nature of a penalty.”

AIR 1955
 Where loss in terms of money can be determined, the party claiming compensation must
prove the loss suffered by him.”
 JC Shah J :- it is clear that the Court has held that in situations where it would be difficult
to assess compensation, the sum named by the parties can be considered to be a genuine
pre-estimate and as a reasonable compensation to be paid in situations where the clause is
an LD Clause.
  Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd on 17
Liquidated April, 2003.
damages not by
 Kailash Nath Associates v Delhi Development Authority (2015) 4
way of Penalty SCC 136
  Recovery from the contractor as agreed liquidated damages are not by way of penalty, a sum
equivalent to 1% (one percent) of the contract price of the whole unit per week for such delay or part
thereof (this is an agreed, genuine pre- estimate of damages duly agreed by the parties) which the
contractor has failed to deliver within the period fixed for delivery in the schedule, where delivery
thereof is accepted after expiry of the aforesaid period. It may be noted that such recovery of liquidated
Oil & Natural damages may be upto 10% of the contract price of whole unit of stores which the contractor has failed to
deliver within the period fixed for delivery”

Gas  Key Points Held by Justice MB Shah:

1. If parties knew when they made the contract that a particular loss is likely to result from such
Corporation breach, they can agree for payment of such compensation.

2. If parties agree to a genuine pre estimate of compensation , not as penalty , they are not required
Ltd vs Saw to prove actual loss due to breach.

Pipes Ltd 3. It was stated that in situations where the LD Clause is a pre-estimate, the burden would be on the
other party to lead evidence for proving that no loss is likely to occur by such breach.

on 17 April, The Constitutional Bench in Fateh Chand had observed that Section 74 merely dispenses with proof
2003 of "actual loss or damages” but the requirement of demonstrating legal injury still persists under
Section 74. Therefore, the Saw Pipes ruling that when parties have agreed to a genuine pre-estimate
in the LD Clause, there may not be any requirement of proving evidence to prove loss unless the
Court comes to conclusion that there may not be any legal injury suffered by a party claiming the
benefit of LD Clause, appears to be consistent with the decision of Fateh Chand.
  The Clause in question :-
 “In case of default, breach or non-compliance of any of the terms
and conditions of the auction or mis-representation by the bidder
and/or intending purchaser, the earnest money shall be forfeited.”
Kailash Nath
Associates v  The term also envisaged :
Delhi  “When the bid is accepted by the DDA, the intending purchaser shall
be informed of such acceptance in writing and the intending
Development purchaser shall, within 3 months thereof, pay to the Delhi
Development Authority, the balance 75% amount of the bid, in cash
Authority (201 or by Bank Draft in favour of the Delhi Development Authority or by
Cheque guaranteed by a Scheduled Bank as "good for payment for
5) 4 SCC 136 three months" in favour of the Delhi Development Authority. If the
bid is not accepted, the earnest money will be refunded to the
intending purchaser without any interest unless the earnest money
is forfeited under para 2 (iv) above.”
 The Delhi Development Authority (“DDA”) cancelled the allotment of the plot on
account of allegedly non-payment of balance 75 per cent of premium in a timely
manner by Kailash Nath.
  Justice Nariman :- “It may be noted that the balance 75% which had to be paid
within three months of the acceptance of the bid, was not insisted upon by the
Kailash Nath DDA. On the contrary, after setting up two High Powered Committees which were
instructed to look into the grievances of the appellant, the DDA extended time at
Associates v least twice. It is, therefore, very difficult to say that there was a breach of any
terms and conditions of the auction, as the period of three months which the DDA
could have insisted upon had specifically been waived. It is nobody's case that there
Delhi is any misrepresentation here by the bidder. Therefore, under sub-clause (iv),
without more, earnest money could not have been forfeited.”
Development  the Supreme Court held that “compensation can only be given for damage or loss
Authority (201 suffered. If damage or loss is not suffered, the law does not provide for a windfall.
 The Supreme Court speaking through Justice MB Shah had observed that if parties
5) 4 SCC 136 have agreed on a genuine pre-estimate of liquidated damages, then in such a
situation there may not be any requirement to prove actual loss suffered on account
of breach of events for which LD Clause is triggered.