Section 74 of ICA in Contemporary Commercial Context

Where the amount specified in the contract is likely to be a true prior estimate of the damage caused by the breach, it is called “one-time damages“, otherwise the amount is called a “fine” under Section 74 and Section 73 of the Indian Contract Act, 1872. 

It is also commonly believed that a “fine” is an amount specified in a contract to prevent a breach.  It is intended to provide triple protection:

1. For the injured party, it may constitute the only possibility for damages that cannot be proven with certainty;
2. For the violator, it has the effect of limiting the damage in the total amount specified;
3. For society as a whole, it aims to save time for judges, witnesses, and parties and thus reduce litigation costs.

Sections 73 and 74 of the Contracts Act provide that in a contract the party to such breach is entitled to compensation for any loss that would naturally result in the ordinary course of the breach. 

Sections 73 and 74 of the Contract Act provide in the contract that a  party suffering from such a breach is entitled to compensation for all losses incurred in the normal course of such breach. 

The parties may agree to pay such compensation if, at the time of signing the contract, they are aware that such a breach may result in certain damages.

If the court finds that the damages provision constitutes a penalty, the court may award reasonable damages not exceeding the amount mentioned in the contract upon proof of damages. 

As such, it simply distributes with proof of “actual loss or damage”; it does not guarantee an award of compensation if a breach does not result in any legal harm, as a breach of contract may be awarded to remedy any loss or damage incurred.

The affection of Section 74 and Section 73 in Contemporary Commercial Context

The liquidation damages law is governed by Section 74 of the Indian Contracts Act 1872. 

In this article, we discuss the relevant developments in this aspect of contract law and how section 74 has been interpreted and applied differently by the Supreme Court depending on the nature of the contract as well.

In doing so, we examine whether  Kailash Nath Associates v. DDA is subject to the law outlined in ONGC v. Saw Pipes concerning the requirement to prove an actual loss for claiming liquidated damages under Section 74 of the Indian Contract Act, 1872.

One of the earliest utterances in Section 74 can be found in the Supreme Court’s decision of  Fateh Chand vs. Balkishan Das.  Further, in the case of Fateh Chand, the Supreme Court considered the forfeiture clause to be like the penalty. 

In this regard, the Supreme Court clarified that “In all cases, therefore, where there is a stipulation like a penalty for forfeiture of an amount deposited. 

Interestingly, a few years later, the decision in Fateh Chand came up for consideration before Justice JC Shah himself and two other judges of the Supreme Court in the case of Maula Bux.

In this case, the Supreme Court referred to its earlier decision in Fateh Chand and held as follows:  Where the Court is unable to assess the compensation, the sum named by the parties if it is regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is like a penalty.

These different types of contracts are those for which the court may not be able to assess the amount of compensation caused by a breach and in such situations, the amount raised by the parties, if considered an estimate. 

However, when a breached party can prove damages, the situation will be different and the law outlined in Fateh Chand will apply. 

In this case, the Supreme Court faced a different type of contract than the one proposed at Maura Bux.  In the case of Saw Pipes, the petitioner enters into a casing pipe purchase contract with the defendant, the delivery of which must be completed by the defendant within a certain period, otherwise, a fine will be imposed. 

The respondent objected to the deduction in front of the arbitral tribunal, claiming that the appellant did not suffer damages caused by the delay in delivery.

On appeal, the Supreme Court made it clear that in every case of breach of contract, the person aggrieved by the breach was not required to prove actual loss or damage.

Therefore, for saw pipes, the requirement to prove actual loss depends and varies on the nature of the contract. According to Saw Pipes, the Supreme Court passed its decision in Kailash Nath Associates v.  DDA (Kailash Nath). 

In this case, the petitioner-Kailash Nath was declared a successful bidder by the respondent DDA during auction proceedings.

In light of the above facts and circumstances, the Supreme Court ruled that “it is arbitrary for the DDA to confiscate deposits for two basic reasons. ” First, there was no breach of contract by the petitioner.  only where damage or loss is caused by such breach”.

While Fateh Chand, Maula Bux, and Kailash Nath are affected by the forfeiture provisions, the related clause in Saw Pipes deals with the recovery of damages. 

Furthermore, the key difference in the above four cases is that in Fateh Chand, Maula Bux, and Kailash Nath, the Supreme Court found that the aggrieved person could have proved their loss by providing proof of loss. 

At Saw Pipes, however, the Supreme Court found the loss unprovable. Therefore, the conclusions of Fateh Chand, Maula Bux, and Kailash Nath should not be confused with the conclusions of Saw Pipes.

Given the above, it may not be correct to interpret in the abstract that the law in Saw Pipes has been rewritten or diluted in Kailash Nath.

This is more so since Kailash Nath itself acknowledges that “It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded. “

Conclusion

In summary, as you can see from the above analysis, the decision in Saw Pipes was not hampered by Kailash Nath. The criteria for applying Section 74 remain factual and rely on careful consideration of the ability to demonstrate losses. The rules of Fateh Chand, Maura Bux, and Kailash Nath do not universally apply the rule that parties must prove their losses.

Regardless of the facts and nature of the contract in question, such an application defeats the very purpose of the parties to agree to a true preliminary assessment of the liquidated damages if the damages cannot be proven.

In other words, once the parties have contractually agreed on a true preliminary estimate of the damage, it is impossible to prove the actual damage caused by the infringement and should disagree with that contractual right. There is none.