The Indian law makes no distinction between liquidated damages and penalty. The compensation awarded cannot exceed the amount mentioned in the contract. According to Section 74 of the Indian Contract Act, 1872, if the parties fix the damages, the Court will not allow more. Hence, the suffering party gets reasonable compensation but no penalty. There is an exception to Section 74 which states that if a party enters a contract with the State or Central government for the performance of an act in the interest of the public, then a breach of such a contract makes the party liable to pay the entire amount mentioned in the contract.
Interestingly, claiming damages is not the only remedy for a breach of contract. Here are some other remedies available to suffering parties:
1) Rescission of Contract– Rescission means revocation, cancellation, or repeal of a law, order, or agreement. If one party breaches the contract, then the other party can treat the contract as rescinded. Also, he is discharged of all obligations under the contract. Further, he can claim compensation for damages, if any. Example: Peter agrees to deliver 50 bags of cement to John on July 01, 2018. John agrees to pay Rs 10,000 on receipt of the same. However, Peter fails to deliver the cement on the specified date. Hence, John is absolved of his obligation to pay the price. Further, he can claim compensation for losses suffered in procuring the cement from another seller.
2) Quantum Merit– Quantum Meruit means a reasonable sum of money paid to a person for services rendered when the amount is not specified in a legally enforceable contract. In such cases, the law infers a promise to pay since the service rendered indicates an understanding between both parties. Quantum Merit covers a case where the party who provides the service has completed part, but not all the work that he was bound to do and seeks compensation for the value of the work done. There are two important conditions that must be met for this rule to be applied: Contract is discharged the claim is brought by the party who has not defaulted. In simple words, Quantum Meruit allows compensating a party for the value of work done or services rendered. While damages are compensatory in nature, Quantum Merit is restituted since it is a reasonable compensation awarded on the implication of a contract to remunerate. If a party does some work or renders services without the intention of doing so ‘free of charge’. If there is a contract to render services (express or implied) but there is no mention of remuneration. When one party refuses to perform a contract. The contract is divisible and the party who has not defaulted has enjoyed the benefit of the part-performance. In such cases, the party performing the contract can claim the lump sum and the other party can deduct a certain amount for the bad work done.
3) Suit for Specific Performance– In such cases, the Court may, in its discretion on a suit for specific performance, instruct the defaulting party to perform the promise as per the terms of the contract.
4) Suit for Injunction– If a party has promised not to do something vide a contract but is negating these terms, then the Court can issue an injunction order to restrain the party from doing what he has promised not to do. Example: Peter is a famous Bollywood actor. He signs a contract with John, a producer. In the contract, he agrees to work exclusively for him for the next 2 years.
Case laws associated with liquidated damages.
Initially within the case of Fateh Chand v. Bal Kishan Das, it mainly eliminated the refinement under English Law in respect to the difference between the payment of liquidated damages and stipulation of penalty. The SC during this case stated that the aggrieved party is entitled to an inexpensive compensation which should not exceed the sum of penalty or the pre-determined amount which should be paid after the breach of contract. The court also stated that the appliance of those provisions is not confined to the cases where the aggrieved party approaches the court just for relief. during this case, the Court interpreted Sec.74 as a legal liability within the case of breach of contract, whether either through pre-determined agreement compensation is paid or through penalty.
In the case of Oil & fossil fuel Commission v. saw Pipes Ltd, where the S.C. held that just in case of injury sec.73 and sec.74 must be read together and liquidated damages are often granted in those cases where it is difficult to prove the loss or damages which are incurred providing it should be reasonable compensation. within the course of deciding compensation in such cases the terms and conditions should be taken into consideration.
Sudhir Gensets Ltd. v. Indian Oil Corporation, the court kept seeable holdings within the case of Oil and gas Commission v. Saw Pipes Ltd and summarized it: Firstly, where the loss and damages cannot be shown in those cases the term of the contract needs to be considered. 74 and Sec. 73 has got to be dealt together and per the terms stipulate pre-determined damages which are not unreasonable and is not amounting to penalty, then as per Sec. 73 the party should pay such compensation.
In the case of BSNL v. Reliance, where there was a dispute was regarding the Caller Line Identification device, and as was recovered that the calls of CLI have been manipulated which invoked method of computing charges and hence resulted in BSNL, levying a charge of Rs. 9.89 cr. on Reliance. the identical maxim that is the utilization of pre-determination or pre-estimation genuine loss because the best indicator of reasonable compensation, which was utilized in the case of Fateh Chand, the court made observation in relevance Sec.74 that the damages to be provided should be supported the concept of reasonable compensation except for it court also stated that it is of no importance in characterizing the damage as penalty or as a requisite.
Liquidated damages are easy to impose in comparison with penalty. Also, penalty is often imposed on limited events like delay in completion of the work or when there’s delay in supply. Also in Indian Contract Act, there is no specific differentiation about liquidated damages and penalty. except it there are still questions in respect to Sec.74 which should be clarified.