Contract Act 1872 Section 74
Contract Act 1872 Section 74 explains compensation for breach of contract when no specific sum is agreed.
Contract Act Section 74 deals with compensation payable when a contract is breached without a predetermined penalty. It ensures that the aggrieved party receives a fair sum to cover losses caused by the breach.
Understanding this section is vital for businesses to assess risks and liabilities in contracts. It helps parties anticipate remedies and avoid disputes over damages in commercial transactions.
Contract Act Section 74 – Exact Provision
This section provides a legal framework for awarding compensation when a contract is broken. It allows courts to grant reasonable damages up to the amount specified as penalty or liquidated damages. The aim is to fairly compensate the injured party without imposing excessive penalties.
Applies when contract breach involves a penalty or liquidated damages clause.
Compensation awarded is reasonable and capped at the stipulated amount.
Actual loss proof is not mandatory to claim compensation.
Protects parties from unfair penalties while ensuring remedy for breach.
Explanation of Contract Act Section 74
This section sets out rules for compensation when a contract is breached and a penalty or liquidated damages clause exists.
States that compensation is payable if a contract names a sum or penalty for breach.
Affects parties who have agreed on penalty or liquidated damages clauses.
Requires that compensation be reasonable and not exceed the stipulated amount.
Triggering event is breach of contract.
Compensation can be awarded even without proof of actual loss.
Purpose and Rationale of Contract Act Section 74
The section aims to balance fairness by preventing excessive penalties while ensuring injured parties receive compensation.
Protects contractual fairness by capping damages.
Ensures parties are compensated for breach losses.
Prevents unjust enrichment or punishment through penalties.
Maintains certainty in contract enforcement.
When Contract Act Section 74 Applies
This section applies when contracts include penalty or liquidated damages clauses and a breach occurs.
Conditions: breach of contract with penalty/liquidated damages clause.
Invoked by the aggrieved party claiming compensation.
Affects contracts with pre-agreed sums for breach.
Scope limited to reasonable compensation not exceeding stipulated amount.
Exceptions: no penalty clause or damages agreed elsewhere.
Legal Effect of Contract Act Section 74
Section 74 affects the enforceability of penalty clauses by limiting compensation to reasonable amounts. It clarifies that actual loss proof is unnecessary, supporting enforceability of liquidated damages within limits. It complements Sections 10–30 by addressing remedies post-breach.
Limits damages to reasonable sums capped by contract.
Supports enforceability of penalty/liquidated damages clauses.
Allows compensation without proving actual loss.
Nature of Rights and Obligations under Contract Act Section 74
The section creates a right to reasonable compensation for breach when penalty clauses exist. Obligations include paying damages up to the stipulated limit. Duties are mandatory to ensure fairness. Non-payment may lead to legal action.
Right to compensation capped by contract terms.
Obligation to pay reasonable damages on breach.
Duties are mandatory, not discretionary.
Non-performance results in enforceable claims.
Stage of Transaction Where Contract Act Section 74 Applies
This section applies at the breach and remedies stage after contract formation and performance obligations arise.
Contract formation: penalty/liquidated damages clause included.
Performance: obligations expected.
Breach: triggering compensation rights.
Remedies/enforcement: claiming damages under section.
Remedies and Legal Consequences under Contract Act Section 74
Section 74 grants the right to sue for reasonable compensation capped by the contract’s penalty clause. Remedies include damages but exclude excessive penalties. Specific performance or injunctions are not typically covered. Contracts may be voidable if penalty clauses are unconscionable.
Right to sue for reasonable damages.
Damages capped at stipulated penalty/liquidated damages.
No requirement to prove actual loss.
Specific performance usually not applicable.
Example of Contract Act Section 74 in Practical Use
Person X contracts with a supplier to deliver goods by a set date, with a penalty clause of ₹50,000 for delay. The supplier delivers late, causing minor losses. X sues for compensation. Under Section 74, X can claim reasonable damages up to ₹50,000 without proving exact loss.
Allows claiming capped damages without detailed loss proof.
Prevents supplier from paying excessive penalties.
Historical Background of Contract Act Section 74
This section was introduced to regulate penalty clauses, preventing unfair punishment while protecting injured parties. Historically, courts distinguished between penalties and genuine pre-estimates of loss. Amendments refined the reasonableness test for damages.
Originated to curb excessive penalty enforcement.
Courts evolved tests for reasonable compensation.
Amended to clarify compensation limits.
Modern Relevance of Contract Act Section 74
In 2026, Section 74 remains crucial for digital and e-commerce contracts where penalty clauses are common. It ensures fair compensation in online agreements and supports dispute resolution in modern business practices.
Applies to digital contracts and e-signatures.
Important for e-commerce penalty clauses.
Relevant in resolving modern contract disputes.
Related Sections
Contract Act Section 2 – Definitions of contract terms.
Contract Act Section 10 – Requirements of a valid contract.
Contract Act Section 37 – Obligation of parties to contracts.
Contract Act Section 73 – Compensation for loss or damage caused by breach.
IPC Section 415 – Cheating, relevant where consent is obtained by deception.
Evidence Act Section 101 – Burden of proving contract terms.
Case References under Contract Act Section 74
- Fateh Chand v. Balkishan Dass (1963 AIR 1405)
– Established that compensation under Section 74 should be reasonable and not punitive.
- Superintendence Company v. Krishnaswami (1980 AIR 1829)
– Clarified the distinction between penalty and liquidated damages under Section 74.
- Energy Watchdog v. CERC (2017 SCC 715)
– Affirmed the application of Section 74 in modern commercial contracts.
Key Facts Summary for Contract Act Section 74
Section: 74
Title: Compensation for Breach of Contract
Category: Remedies, Damages, Penalty Clauses
Applies To: Parties with penalty or liquidated damages clauses
Transaction Stage: Breach and Remedies
Legal Effect: Limits damages to reasonable sums capped by contract
Related Remedies: Damages, Compensation
Conclusion on Contract Act Section 74
Contract Act Section 74 plays a vital role in balancing the interests of contracting parties by regulating compensation for breach when penalty clauses exist. It ensures injured parties receive fair damages while preventing excessive penalties that could be punitive.
This provision promotes certainty and fairness in commercial transactions, helping businesses manage risks and liabilities effectively. Understanding Section 74 is essential for drafting enforceable contracts and resolving disputes efficiently in both traditional and digital marketplaces.
FAQs on Contract Act Section 74
What is the main purpose of Section 74?
Section 74 aims to provide reasonable compensation for breach of contract when a penalty or liquidated damages clause exists, preventing excessive penalties while ensuring fair remedy.
Does Section 74 require proof of actual loss?
No, the section allows compensation claims even if the aggrieved party cannot prove actual loss, as long as the amount is reasonable and within the stipulated limit.
Can compensation under Section 74 exceed the penalty amount?
No, compensation awarded cannot exceed the sum named in the contract as penalty or liquidated damages.
Who can claim compensation under Section 74?
The party who suffers from the breach and is entitled to compensation under the contract’s penalty or liquidated damages clause can claim under Section 74.
Is specific performance a remedy under Section 74?
No, Section 74 primarily deals with monetary compensation and does not provide for specific performance or injunctions as remedies.