Section 74 The Indian Contract Act, 1872
📘 Section 74 – The Indian Contract Act, 1872
Title: Compensation for breach of contract where penalty is stipulated for
🔹 Bare Act Text:
“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 proved to have been caused thereby, to receive 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.”
Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
🧾 Explanation:
Section 74 governs cases where a contract includes:
A specific amount to be paid as damages in case of breach, or
A penalty clause (e.g., a large or excessive sum to deter breach).
This section ensures that even if such a clause exists:
The injured party can claim compensation without proving actual loss.
But the compensation awarded must be reasonable and not exceed the amount stated in the contract.
📌 Key Points:
| Concept | Meaning |
|---|---|
| Liquidated Damages | Pre-decided compensation for breach (reasonable, genuine estimate). |
| Penalty | Excessive or punitive amount (not enforceable as-is, court limits it). |
| Court’s Role | Ensures fairness by awarding only reasonable compensation. |
🧑⚖️ Landmark Case: Fateh Chand v. Balkishan Das (1964)
Supreme Court held that Section 74 applies regardless of whether actual damage is proved, but compensation must be reasonable and cannot exceed the stipulated amount.
📌 Illustration:
A contracts with B to build a house by 1st July, and the contract says A will pay ₹50,000 as damages if he delays. A completes the house on 1st September. B can claim reasonable compensation—not necessarily ₹50,000—depending on the delay's impact.
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