Indian Contract Act Section 74 — Compensation for breach of contract where penalty stipulated for
CHAPTER VI OF THE CONSEQUENCES OF BREACH OF CONTRACT
Commercial / Corporate
Summary
When a contract is broken, and the contract itself names a specific sum of money to be paid for that breach, or contains any other clause that acts as a penalty, the person who is complaining about the breach is entitled to receive reasonable compensation from the party who broke the contract. This is true whether or not any actual damage or loss is proved. However, the compensation cannot exceed the amount named in the contract or the penalty that was stipulated.
The explanation clarifies that a clause providing for increased interest from the date of default may be considered a stipulation by way of penalty.
There is an exception to this rule. When a person enters into a bail-bond, recognizance, or other instrument of the same nature, or gives any bond for the performance of any public duty or act in which the public are interested, under the provisions of any law or under the orders of the Central Government or any State Government, then upon breach of the condition of such an instrument, that person is liable to pay the whole sum mentioned in the instrument.
A further explanation states that a person who enters into a contract with the Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.
Official Text
1[When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Explanation.—A stipulation for increased interest from the date of default may be a stipulation by way of penalty.] Exception.—When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 2[Central Government] or of any 3[State Government], gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation.—A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested. Illustrations