Section 74 of the Indian Contract Act, 1872

Introduction

A contract is a promise or set of promises that are legally enforceable reached between two
parties and it must contain certain terms and conditions over which court have the authority and
obligation to enforce. According to the section 10 of the Indian Contract Act, 1872 , all
agreement are contract if they have been made with the free consent of the competent parties, for
a lawful consideration and for lawful object and are not void in nature.1

Section 74 of the Indian Contract Act, 1872 basically deals about the compensation for breach of
contract where penalty is specifically mentioned in the term and condition of the contract. Before
discussing this in detail, let us look what is the meaning of term “damages” and who can
basically claim damages under section 74 of the Indian Contract Act, 1872.

According to the Oxford dictionary the term ‘damages’ are defined as ‘financial compensation
for loss or injury’.2 In legal term, damages are money which is basically claimed by, or ordered
to be paid to, a person as compensation for loss or injury. In reference to the Indian Contract
Act, 1872 damages are referred in context to breach of contract i.e. a party's failure to perform
some contracted-for or agreed upon act, or his failure to comply with a duty imposed by law.3

According to the Section 73 of the Contract Act, the provision relating to damages is clear and
applicable in every breach of contract where penalty was stipulated as consequences for the
breach of contract. It provides that the party, who breaches a contract, is liable to compensate the
injured party for any loss or damage caused, due to the breach of contract. For compensation to
be payable, Two things should be taken into consideration4, that is:

 The loss or damage should have arisen as a natural consequence of the breach, or
 It should have been something the parties could have reasonably expected to arise from a
breach of the contract.

Damages of Breach

A contract is not a property or any type of asset. It is only a promise or set of promises
supported by some consideration upon which either the remedy of specific performance or that
of damage is available. The party who is injured by the breach of a contract by the action of the
other party may bring an action for the damages. Generally burden lies on the injured party to
prove his loss. Every action for damages raises two problems. The first lies in the problem for
remoteness of damage ´and the second, that of measure of damages´.

1
Indian Contract Act, 1872.
2
www.oxforddictionary.com
3
Mulla, law of Contract, 1872, 11th edition
4
http://docs.manupatra.in/newsline/articles/Upload/30C28D5D-262B-4A4A-AE17-C4D86F92BCE0.pdf
Remoteness of Damages

Every breach of contract lie down many settled expectations of the injured party. He may suffer
the consequences for a long time and in variety of ways. For example, if a person contracts to
supply to a shopkeeper pure mustard oil, but he sends impure stuff or some other oil in the name
of mustard oil, which is a clear breach of contract. The oil is seized by an inspector and
destroyed. The shopkeeper is arrested, prosecuted and convicted. He suffers the loss of oil, the
loss of profits to be gained on selling it, the loss of social prestige and of business reputation, not
to speak of the time and money and energy wasted on defence and mental agony and torture of
prosecution.

Thus, the consequences of a breach may be endless, but there must be an end to liability. The
defendant cannot be held liable for all that follows from his breach or any remoteness of the
breach. There must be a limit to liability and beyond that limit the damage is said to be too
remote and, therefore, irrecoverable.

The term ‘Damages’ has been defined by McGregor ‘as the pecuniary compensation, obtainable
by success in an action, for a wrong which is either a tort or a breach of contract, the
compensation being in the form of a lumpsum which is awarded unconditionally.‘ This definition
was adopted by Lord Hailsham, L.C. in Cassel & Co. Ltd. v. Broome,5.

The definition in Halsbury‘s Laws of England,6 is similar to the definition set out above. The
object of athis is to provide the plaintiff compensation for damage, loss or injury he has suffered
due to the breach f contract. The elements of damage recognised by law are divisible into two
main groups: pecuniary and non-pecuniary. While the pecuniary loss is capable of being
arithmetically worked out, the non-pecuniary loss is not so calculable. Non-pecuniary loss is
compensated in terms of money, not as a substitute or replacement for other money, but as a
substitute, what McGregor says, is generally more important than money: it is the best that a
Court can do.

Under the law of tort ,in a suit for damages, , the Court awards pecuniary compensation after it is
proved that the defendant committed a wrongful act.7 In such cases, the Court usually has to
decide three questions:

 Was the damage allegedly caused by the defendant’s wrongful act?

 Was it remote in nature?

5
(1972) 1 All ER 801 (HL) at 823
6
(4th Edn.) Vol. 12, para 1102
7
Mulla, law of Contract, 11th edition.
  What must be the monetary compensation for the damage?

The damages are divided into two categories. They are:

General Damages:

General damages are those which generally arises naturally in the usual course of things from the
breach itself. Another mode of expressing this is that the defendant is liable for all that which
naturally follows in the usual course of things after the breach.

Special Damages:

Special damages are those which generally arises on account of the unusual circumstances
affecting the plaintiff. They are not recoverable unless the special circumstances were brought to
the knowledge of the defendant; so that the possibility of the special loss was in contemplation of
the parties.

SECTION 74 PENALTIES IN REGARD TO BREACH OF CONTRACT

The parties to the legally enforceable agreement may concur at the time of getting that, in the
event of a breach, the party in default need to pay a stipulated total of cash to the next, or may
concur that in case of the break by one gathering any sum paid by him will be relinquished. In
the event that this entirety is authentic pre-gauge of harm prone to spill out of the break is called
'sold harms'. If it isn't genuine pre-estimate of the misconduct, however, a sum planned to anchor
execution of the agreement, it might be called as 'punishment'.

Section 74 provides for the measure of damages in two classes: (a) where the contract names a
sum to be paid in case of breach; and (b) where the contract contains any other stipulation by
way of penalty(Fateh Chand v. Balkrishna Das,[1964] 1 SCR 515).

ESSENCE OF PENALTY AND LIQUIDATED DAMAGE:

Penalty is a payment of money to non –defaulting party, which put the other party in fear and
enforces the other party to perform its promise under the contract .The penalty is deterrent in
nature .
A liquidated damage is a genuine and reasonable pre-estimate of damage. Liquidated damages
means it shall be taken as the sum which the parties have by the contract assessed as damages to
be paid whatever may be the actual damage.