liquidated damages

English law distinguishes liquidated damages (a genuine pre-estimate of loss, enforceable) from a penalty (a sum in terrorem, unenforceable). Indian law does not draw that distinction. Under Section 74 of the Contract Act, whether the stipulated sum is a pre-estimate or a penalty, the injured party gets only reasonable compensation not exceeding the amount named.

Where the sum is a genuine pre-estimate, the court will ordinarily award it without proof of exact loss. Where it is in the nature of a penalty, the party must show legal injury, and the court awards reasonable compensation up to the cap. Earnest money forfeiture is also tested under Section 74.

Example

The clause fixing ₹10,000 per day of delay was treated as liquidated damages, but under Section 74 the court awarded only reasonable compensation within that cap.

In Indian law

• Section 74, Indian Contract Act, 1872
• Fateh Chand v. Balkishan Dass, 1963 INSC 1: Section 74 removes the English distinction
• Kailash Nath Associates v. Delhi Development Authority, 2015 INSC 22: legal injury and reasonable compensation

See also

damages · breach of contract · remoteness of damage · nominal damages

Read more in the study notes

• Arbitral award and setting aside under section 34 (Alternative Dispute Resolution Systems)
• Banking as a service: consumer protection and the RBI Ombudsman (Banking Law)
• Damages and remoteness (Contract I)
• Protecting Trade Secrets: Legislative Measures, Technology Transfer Agreements and NDAs (Law of Designs)
• Tort: meaning, nature and distinctions (Law of Torts)
• Remedies and remoteness of damage (Law of Torts)