A Brief Overview of Sec. 73 and 74 of the Contract Act

Section 73, 74 of Contract Act – Introduction

Section 73 and 74 of the Indian Contract Act, 1872, grants for unliquidated and liquidated damages respectively. Unliquidated Damages are the damages awarded through the courts on the basis and evaluation of authentic loss or damage induced to the party suffering breach of contract. Whereas, Liquidated Damages are the damages which the parties to the contract can also agree to as price of a certain amount on the breach of contract.
Firstly, irrespective of the nature of damages, breach of contract is the pre-condition to declare the same. That is, there can be no claim for damages if there is no breach of contract between the parties. Secondly, to claim damages, the party making such claim has to establish the loss.
Section 74 awards practical compensation for injury or loss induced through a breach of contract, injury or loss induced is a sine qua non for the applicability of the Section. However, as long as it serves a compensatory function, liquidated damages ought to be allowed barring the requirement to prove precise losses.

The expression “whether or not real injury or loss is proved to have been prompted thereby” means that the place it is feasible to show proper injury or loss, such proof is not disbursed with. It is only in cases where harm or loss is difficult or impossible to prove, that the liquidated amount named in the contract, if a genuine pre-estimate of injury or loss, can be awarded. Thus, it is the nature of the Liquidated Damages clause that needs to be considered, that is, whether it is an actual pre-estimate of loss occurred on breach of contract or whether or not it is in shape of penalty and deterrent in nature.

Case Laws

In the case of Maula Bux[1], the court has specifically held that the court is competent to award reasonable compensation in a case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. The court has, however, also specifically held that in case of breach of some contracts it may be impossible for the court to assess compensation arising from breach. In such a case, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. In the case of Iron & Hardware (India) Co. v. Firm Shamlal & Bros[2], it was stated that an automatic pecuniary liability does not arise in the event of a breach of a contract which contains a clause for liquidated damages. Till the time, it is determined by the court that the party complaining of the breach is entitled to damages; the plaintiff shall not be granted compensation by the mere presence of a liquidated damages clause.

In the case of Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd[3], it was held that if the terms of the contract 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. However, 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 the case of Indian Oil Corporation v. Lloyds Steel Industries Ltd[4], the court held that:

“…The guiding principle is ‘reasonable compensation’. In order to see what would be the reasonable compensation in a given case, the Court can adjudge the said compensation in that case. For this purpose, as held in Fateh Chand (supra) it is the duty of the Court to award compensation according to settled principles. Settled principles warrant not awarding compensation where no loss is suffered, as one cannot compensate a person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage.”

Conclusion

It can thus be concluded that the demand to prove the loss suffered defeats the very purpose for which liquidated damages clauses are inserted in contracts. Section 74 of the Act emphasises on reasonable compensation. Only if the compensation in the contract is by way of penalty, consideration would be different and the party would only be entitled to compensation for the loss suffered. But if the compensation named in the contract is a genuine pre-estimate of loss, which the party knew at the time of entering into contract, there is no question of proving such loss. Burden is in fact on the other party to lead evidence to prove that no loss is likely to occur by such breach.

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[1]Maula Bux v. Union Of India, (1969) 2 SCC 554

[2] Iron & Hardware (India) Co. v. Firm Shamlal & Bros, AIR 1954 Bom 423

[3] Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd, (2003) 5 SCC 705

[4] Indian Oil Corporation v. Lloyds Steel Industries Ltd, (2007) 144 DLT 659