74. Compensation for breach of contract where penalty stipulated for.----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 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 bailbond, recognizance or other instrument of the same nature, or trader the provisions of any law, or under the orders of the Central Government or any Provincial Government, gives any bond for the performance of any public duly 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 duly, or promise to do an act in which the public are interested.

(a) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceedings Rs. 1,000, as the Court considers reasonable.

(b) A contracts with B that, if A practises as a surgeon within Karachi, he will pay B Rs. 5,000. A practices as a surgeon in Karachi B is entitled to such compensation, not exceeding Rs. 5,000 as. the Court considers reasonable.

(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.

(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent, at the end of six months, with a stipulation that in case of default, interest shall be payable at the rate of 75 per cent. from the date of default. This is a stipulation byway of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable.

(e) A, who owes money to B, a money-lender, undertakes to repay him by delivering to him 10 maunds of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 maunds. This is a stipulation by way of penalty, and B is only entitled to reasonable compensation in case of breach.

(f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly installments, with a stipulation that, in default of payment of any installment, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms.

(g) A borrows Rs. 100 from B and gives hint a bond for Rs. 200, payable by five yearly installments of Rs. 40, with a stipulation that in default of payment of any installment, the whole shall become due. This is a stipulation by way of penalty.

Penalty and liquidated damages.---This section boldly cuts the most trouble some knot in the Common Law doctrine of damages. By the Common Law parties may name a penal sum as due and payable on a breach of contract, that sum being, according to the true intention of the parties, only a maximum of damages. In that case the real damages, and no more, are recoverable. On the other hand, they may by consent assess a fixed measure of damages, liquidated damages as they are called, to avoid the difficulty that must often be found in setting a pecuniary value on obligations not referable, on the face of them, to any commercial standard. So far this looks very well. The trouble is that even now the Courts have not arrived at clear or certain rule for deciding to which of these two classes a given stipulation for a penal or seemingly penal sum belongs. The only thing that is quite certain is that the use of the words "penalty" or "liquidated damages" is not decisive; and that even the addition of negative words purporting to exclude the other alternative, for example "as liquidated damages and not as a penalty" will not make it so. Two causes appear to have conspired to produce this anomalous result: a well meant but perhaps not wholly well-informed endeavour to imitate the equitable doctrine of giving relief against forfeiture, and, reinforcing this, a logical or arithmetical repugnance of the Common Law (perhaps connected with the canonical prohibition of usury to admit that a greater sum of money can ever be due for the breach of an obligation to pay a smaller one. That a very large sum should become immediately payable in consequence of the non-payment of a very small sum, and that the former should not be considered as a penalty, appears to be a contradiction in terms. Accordingly a conventional larger sum agreed upon as payable in the event of failure to pay a smaller sum, or in such an event among others, is treated as penal only. Further, it is understood that where a sum is made payable by a contract to secure performance of several stipulations the damages for the breach of which respectively must be substantially different....that sum is prima facie to be regarded as a penalty, and not as liquidated damages. The truth is that here, as in some other branches of the law, what once was a rule of policy overriding the intention of the parties has been turned into an artificial and more or less arbitrary rule of construction. The nearest approximation to a general test yet arrived at is that so-called liquidated damages will not be recoverable in full when the Court thinks this would be extra-vagant or unconscionable, having regard to the circumstances of the particular case. But it is quite needless to enter in this place upon the somewhat confusing application of the resulting distinctions, for the manifest purpose of the present section is to get rid of all these questions.

There may, again, be a conventional sum which is neither damages nor penalty, but, as it has been called a "liquidated satisfaction" the agreed price of liberty to do or omit something. In such a case there is merely a conditional or alternative promise which, if not open to any other objection, will take effect according to its terms.

It has been held by a Full Bench of the High Court of Allahabad that the section applies to a compromise decree and that it is open to a Court executing such a decree to go behind it if it contains a stipulation which is by way of penalty.

The original section has been amended by the Contract (Amendment) Act, 1899. The intalicised words indicate the portion newly added in the section. Illustrations (d), (e), (f) and (g), were also inserted by the same Act. There is no doubt that; as the Section originally stood, it was intended to do away with the distinction between a penalty and liquidated damages. The sole object of the section appears to have been to provide for the class of cases in which the distinction between "liquidated damages" and 'penalty' has given rise to so much difference of opinion. A Court would inevitably reach the same conclusion on the wording of S. 74. The solution seems to be a just one. It does appear, however, that the rigid application of S. 74 to charter parties might lead to injustice. In India, such words, would, by virtue of S. 74, inevitably have a limiting effect. The amended section does not apply to covenants in a lease of which the breach involves forfeiture. A stipulation in a lease that brick works on the land will be forfeited if not removed on the expiry of the lease or within three months thereafter, is not a penalty.

Effect of the Indian Contract Act Amendment Act, 1899.---The section as it stood before the amendment applied only to those stipulations for enhanced interest when a sum was named in the contract as the amount to be paid in case of breach. It was held not to apply to any stipulation for increased interest when the higher rate commenced from a date of default. Relief, therefore, where such a stipulation was penal, was given not under the provisions of the section, but in the exercise of the Court’s equitable jurisdiction. The section as it now stands brings within its operation all stipulations in the nature of a penalty, as will be seen from the words "any other stipulation by way of penalty." The result, therefore, is that in the case of a stipulation for a higher rate of interest from the date of default relief will now be granted, wherever such a stipulation is penal under the provisions of this section, and it will not be necessary for Courts to resort to their equitable jurisdiction to grant relief on that score. In other respects, the law as to stipulations for enhanced rate of interest remains what it was under the old section.
.
On the. whole the law as to enhanced rate of interest under the section as. amended may now be stated as follows:---

(a) A stipulation for increased interest from the date of the bond is always in the nature of a penalty, and relief will be granted against it.

(b) A stipulation for increased interest from the date of default may be a stipulation by way of penalty, and whenever it is so relief will be granted under the section as amended, and not independently of it as before the amendment. Whether such a stipulation is penal is a question of construction dependent upon the considerations set out above.

It should be stated that the current of decisions in Calcutta and Madras laying down the distinction between a proviso for retrospective enhancement of interest and a proviso for enhanced interest from the date of default, and treating the former as a penalty, was for some time broken owing to a decision of the Privy Council. That case related to the construction of a decree which was founded on a solehnama between the parties and to the right of the appellant to execute to the extent of the provisions of that decree when properly construed. The decree was for payment of money by installments with interest at 6 per cent., and it was construed to provide for three contingencies, one of which was that on default of payment of the first installment interest should be paid at 12 per cent from the date of the decree. The Privy Council held that the stipulation for the higher rate of interest from the date of the decree was not a penalty, and added that, even if it were so, the stipulation was not unreasonable, in as much as it was a mere stipulation for interest at 12 instead of 6 per cent, per annum in a given state of circumstances. Following this decision, it was held in some cases that a stipulation in a contract for a higher rate of interest from the date of the contract is not unenforceable, and that it cannot be treated as a penalty, but must be interpreted, as other parts of a written contract should be interpreted, according to the expressed intention of the parties.

A provision for reduction of interest if paid if advance is not penal. In a less simple case, A lends money to B at interest at Rs. 2-8-0 per cent per month. Subsequently, on a settlement of account between the parties it is agreed that A should charge interest at the rate only of 8 annas per cent per month on the balance of due, if the same was paid within a certain date; but if not so paid, B should pay the balance with interest at the original rate of Rs. 2-8-0 per cent per month. The stipulation for the payment of interest at Rs. 2-8-0 per cent per month in default of payment of the balance within the fixed period is not by way of penalty. "Here the higher rate of interest was only that originally payable under the bond; and the new bargain was merely a concession to the debtor of which he failed to take advantage. This is not the case of lower rate of interest being mentioned in the bond, with a provision that, if the debt be not paid, higher rate shall prevail as from the date of the loan."

Stipulation for compound interest.---A stipulation in a bond for payment of compound interest on failure to pay simple interest at the same rate as was payable upon the principal is not a penalty within the meaning of this section. But a stipulation for the payment of compound interest at a rate higher than that of simple interest is a penalty within the meaning of this section, and would be relieved against.

Similarly it was laid down in an Allahabad case that a stipulation that in default of payment of interest when due the debtor should pay an increased rate of interest as compound interest amount to penalty. The ground of the decision was that the two stipulations put together could not regard as a fair agreement with reference to the loss sustained by the lender by reason of the breach of the contract. By the terms of the bond in that case the interest was to be at the rate of. 9 per cent per annum, and was payable yearly, and there was a proviso that if it was not paid when due it should be increased to 15 per cent per annum, and should be calculated as compound and not as Simple interest.

A stipulation that interest in arrear shall be capitalised and added to the principal sum and that the whole shall carry interest at the contract rate is not by way of penalty.

Stipulations for payment of interest if principal not paid on due date.---We next proceed to consider cases where the bond does not provide for the payment of two rates of interest, one lower and the other higher, but for the payment of interest at one specified rate if the principal money or part thereof is not paid within a stipulated period. The decisions on the subject are not quite uniform and require examination. But before doing so it may be as well to note the provisions of the Usury Laws Repeal Act, 1855, as they have a close bearing on the subject. That Act abolished all usury laws, and S. 2 thereof provides that "in any suit in which interest is recoverable the amount shall be adjudged or decreed by the Court at the rate (if any) agreed upon by the parties, and if no rate shall have been agreed upon at such a rate as the Court shall deem reasonable." It will have been observed from what has proceeded that the provisions of the Act of 1855 do not apply, and the Court will not decree interest at the agreed rate where the agreement provides for alternative rates of interest and the stipulation for the higher rate of interest is one by way of penalty. Such stipulations would now come within the scope of S. 74, and the provisions of the said Act are so far modified by that section. Where, however, there is a stipulation for a single rate of interest, the question arises whether the provisions of S. 2 of the Usury Laws Repeal Act invariably apply to all such. cases, so that the Court should award the agreed rate of interest, or whether any relief could be granted where such rate appears to the Court to be penal, and if so whether this could be done under S. 74 as now amended. Where a promissory note, after stipulating for payment by monthly installments without interest, provided for interest at the rate of 75 per cent. per annum in default of payment of any one installment, it was held by the High Court of Bombay that the stipulation for interest was a penalty. A promissory note provided for repayment of principal without interest within three months from the date thereof, and that in default interest should be paid at 75 per cent. per annum. It was held by the same Court, that the rate of interest was a penalty, and that the Usury Laws Repeal Act, 1855 did not destroy the equitable jurisdiction of the Courts to relieve against a penalty.

As 1o S. 2 of the Usury Laws Repeal Act, it was said that if the terms of that section strictly applied in every case it would be impossible to say to what extravagant and extortionate extent the most usurious claims under the name of "interest" might not be carried.

The bond provided for the repayment of the loan within a certain period, and in default for interest from the date of the bond at 150 per cent. per annum. The High Court of Calcutta awarded interest at the agreed rate, holding that the agreement was one for payment of interest within the meaning of S. 2 of the Usury Laws Repeal Act, 1855, anti did not fall trader S. 74, as there was only one rate of interest agreed to be paid, and the bond did not provide for the payment of two rates of interest. The same view has been taken by the Chief Court of the Punjab.

It was held by the High Court of Calcutta that simple or compound interest (which was 75 per cent. per annum in the case) is not in itself penalty. The interest in that case ran from the date of the bond, and was not payable on default only of payment of the principal sum as in the preceding cases. The case, therefore, does not belong to the group of cases now under examination, but it is noted here, as the Court said that the case was governed by the revised section.

On the other hand, the Court declined to grant any relief, though the rate of interest in one case was 150 per cent. per annum, and in the other it was 180 per cent. The effect of these two decisions as well as the decisions in Prayag v. Sham Lal is that, the rate of interest having been agreed upon between the parties, it should be allowed under the provisions of the Usury Laws Repeal Act, and the mere fact that the rate of interest is exorbitant is no ground of relief unless the transaction amounts to an "unconscionable bargain." The principle of these decisions, it is submitted, is not sound, for, following it to its logical consequences, any rate of interest, however, exorbitant, would not be regarded as penal. The correct principle, it is conceived, is the one laid down in the first group of the cases mentioned above, namely, that relief should be granted Whenever the rate of interest appears to the Court to be penal notwithstanding the provisions of the Act. This view had been adopted by the High Court of Calcutta in Mianjan Patari case where it was held,. that a stipulation for the payment of interest at the rate of 75 per cent. per annum from the dale of the bond, on failure to pay principal sum in two installments on the dates fixed, was in the circumstances of the case a penalty. There are later decisions to the same effect by a Full Bench of the Madras High Court, who held, that where no interest is payable until default, but interest at an exorbitant rate is payable as from the date of default, the Court has power to treat the latter stipulation as a penalty; and by the High Court of Bombay, following its previous opinion and by the Lahore High Court.

Before the amendment of the section relief was property granted by Courts in the class of cases under consideration in the exercise of their equitable jurisdiction, for S. 74 as originally enacted could not apply to the case. Whether after the amendment relief should be granted under the amended section is open to some doubt. On the one hand, the section as now amended extends to "any... stipulation by way of penalty," and this expression is wide enough to cover the class of cases now under consideration, and this is now the opinion of almost all the High Courts. On the other hand, the subject-matter of the section relates to what is known in English law as the doctrine of penalty and liquidated damages, and stipulations for interest of the class we are now dealing with do not fall under either of those two heads. If so, we venture to think that where a proper case is made out for relief the Courts could grant it as before trader their equitable jurisdiction. The question is not, however, of much practical importance, for the relief, however, granted would be the same in its nature of extent.

Stipulation for payment of interest at a lower rate if interest paid regularly on due dates.---Where a bond provides for payment of interest at 24. per cent. per annum with a proviso that, if the debtor pays interest punctually at the end of every year, the creditor would accept interest at the rate of 18 per cent. per annum, the creditor is entitled on failure of payment of interest on the due date to interest at the higher rate of 24 per cent. per annum. Such a clause is not in the nature of a penalty. This principle was applied to a consent decree, by which the full claim was decreed but which provided for the payment of a lesser sum if paid within a stated time.

Stipulations for payment of interest from date of bond, the rate of interest being exorbitant.---The question to be considered under this head is, whether a stipulation for payment of interest can be deemed a "stipulation by way of penalty" within the meaning of this section, if the bond provides for payment of interest at one rate from the date of the bond, provided the rate is high and exorbitant. This may be put in the form of an illustration thus:--- A borrows Rs. 500 from B on 15th October, 1917, and gives him a bond for that amount, promising to pay the principal with interest thereon at the rate of 75 per cent. per annum on 15th January, 1918. A does not repay the loan on 15th January, 1918. B sues A to recover the amount of the loan with interest at 75 per cent. per annum. Is B entitled to interest at the rate of 75 per cent. per annum, or has the Court power under this section to reduce the rate of interest? It is assumed that B was not in a position to dominate the will of A within the meaning of S. 16 above and that the only question to be considered is whether the Court has power under the present section to reduce the rate of interest. It has been held by the High Court of that there being a breach of the contract by A as contemplated by this section, the only other point to consider is whether the stipulation to pay interest at the rate of 75 per cent. per annum is a "stipulation by way of penalty" within the meaning of this section. Whether the stipulation to pay interest at the rate of 75 per cent. per annum is a stipulation by way of penalty is, according to that Court, a question of fact depending on the circumstances of each case, and if the Court finds that the rate of interest is of a penal character, the Court has power under this section to grant relief.

Deposit on agreement for purchase.---Forfeiture of earnest money by a defaulting purchaser is not a penalty, but a term that a lump sum shall be paid in addition is penal, and only actual damage can be recovered under it.

Deposits other than earnest money.---Moneys are often deposited as security for the performance of a contract, without such moneys being earnest money. In such a case there may be a forfeiture clause or not. Where there is no forfeiture clause, the party committing a breach of the contract is liable only to pay damages and is entitled to the return of the remainder of the moneys deposited. The question is whether such a case falls within the terms of Sec. 74, so that only reasonable compensation has to be paid whether the amount deposited is by way of liquidated damages or by way of penalty. It is submitted that the words "any other stipulation by way of penalty" are sufficiently ample to cover the case of a deposit with regard to which there is a stipulation for forfeiture. There is however, a large body of case law which adopts the view that Sec. 74 does not apply to deposits. If that is so, then the common law applies, and cases bearing on "liquidated damages or penalty" are applicable.

Gentle J. in Younie v. Talsiram's case mainly proceeded on the footing that Sec. 74 did not cover a case of deposit. This decision was based on the principle, enunciated by Jessel, M.R. that "where a deposit is to be forfeited for the breach of a number of stipulations, some of which may be trifling, some of which may be for the payment of money on a given day, in all these cases the Judges have held that this rule (that is, the rule as to penalties) does not apply, and that the bargain of the parties is to be carried out."

Forfeiture of salary.---Where under the terms of a contract of employment it is agreed that the servant shall forfeit all arrears of wages that had not yet become payable though due, in default of giving his employer notice before leaving his service, the stipulation is not by way of penalty, nor is it illegal under S. 23. Thus, where a servant is engaged by the month, and the salary of each month is to be paid on the 22nd of the next month, and fifteen days' notice is to be given before leaving service, the servant leaving on 20th April without giving notice is not entitled to his salary either for March which had become due (though not payable) or the broken period of April. But a stipulation that an employee should work on holidays, including Sundays, if required by the employer to do so, and should be liable on refusal to forfeiture of fifteen days' wages, has been held to be in the nature Of a penalty and one which the Court should not enforce.

"Reasonable compensation."---The words of the section give a wide discretion to the Court in the assessment of damages. "The only restriction is that the Court cannot decree damages exceeding the amount previously agreed upon by the parties. The discretion of the Court in the matter of reducing the amount of damages agreed upon is left unqualified by any specific limitation, though, of course, the expression 'reasonable compensation' used in the section necessarily implies that the discretion so vested must be exercised with care, caution, and on sound principles. In the exercise of this discretion the Privy. Council has affirmed a judgment giving, as reasonable in the particular case compensation at the same rate as the increased interest stipulated for. And generally it is open to the Court under this section to award as compensation a sum equal to the agreed penalty, provided that it does not appear to the Court to exceed what is reasonable. The words "whether or not actual damage or loss is proved to have been caused thereby" are sufficiently ample to cover the different kinds of contracts which come before the Courts. There are some contracts in which it would be impossible for the Courts to assess damages, while in other contracts damages can be calculated in accordance with well established rules. Where the Court is unable to assess damages, the sum named by the parties if it is genuine pre-estimates of damages may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. But where damages can be calculated, it is incumbent upon the party claming damages to prove it.

Illustration (a).---The case put in this illustration is that of a penalty to a common bond to secure the payment of money. It may, however, be noted that where a certain sum of money is due, and the creditor agrees to take a lesser sum if that sum is paid on a certain day, and the debtor in default agrees to pay the larger amount actually due, it is not a case of a penalty.

Illustration (b).---This illustration shows that the penalty contemplated by this section may not only be to secure the payment of money, as in illustration (a), but to secure the performance of some collateral act. It must be presumed that the agreement mentioned, being in partial restraint of trade, is made in circumstances bringing it within one of the exceptions to S. 27 of the Act.

Illustration (f) and (g).---A stipulation in a bond by which, on default of payment of one installment, double to entire amount of the debt due under an installment bond was to become at once payable, is in the nature of a penalty, not because payment is accelerated, but because the amount is enhanced.

Suit for recovery of loss suffered on breach of contract. Municipal Corporation leasing out Sullage Farm to appellants through auction but they failed to pay auction amount within time. Lease in favour of appellants cancelled by Municipal Corporation and reauctioned to a third party at lower amount. Municipal Corporation claiming that they were entitled to recover loss sustained by them due to difference of auction amount actually offered by appellants and auction amount offered by third party, Appellants contending that no contract was signed between parties, that auction was not confirmed by Controlling Authority i.e. Commissioner and that possession of leased land was not delivered to them. Evidence on record showing that one of appellants was already in possession of Sullage Farm and both of them were jointly leased out both were as such considered to be in possession thereof; that they paid a part of auction money and auction was confirmed by Controlling Authority i.e. Commissioner, a contract had, therefore, reached between parties and there was nothing wrong or illegal in procedure. Held, both appellants were jointly and severally liable for loss suffered by Municipal Corporation on account of reduction of lease of disputed land. Appeal against order of Trial Court decreeing suit of respondent Corporation dismissed in circumstances.

Damages in case of infringement of terms of surely bond furnished by an employee to employer at time of entry into service. Employer cannot claim by way of damages entire amount of bond but would be entitled to receive only reasonable damages. Amount of penalty prescribed in surety bond may be proportionately reduced to a reasonable extent. It is not necessary, as a matter of rule, that this reduction be according to mathematical proportion. What is required is that all facts be kept in view while awarding reasonable amount of damages."

Earnest money deposited by purchaser---Breach of contract---Forfeiture of earnest money not always ordered---Compensation may be determined on facts of case. It is true that the aggrieved party was made payable in installments. The judgment-debtor failed to pay the amount as per terms of the compromise and an execution application was filed by the decree-holder praying for the attachment and sale of the immovable property of the surely. Held: The compromise decree had absolved the surety from his liability under the bond.

Penalty clause in contract---Not enforceable.---Where in an agreement of sale of a truck on installments it was provided (i) that if the plaintiff failed to make payment of installments, the defendant would be entitled to take back the. possession of the truck, and (ii) to forfeit all the payments which might have been made by the plaintiff to the defendant. Under this second provision it was contended on behalf of the defendant that the whole amount of Rs. 45,000 had been forfeited by the defendant. Held: this provision is in the nature of a penalty clause and is, unenforceable.

Penalty clause in agreement---Not enforceable---Court may grant reasonable damages.--It is not legally correct that agreement of penalty in terrorem is entirely unenforceable. It is open to Court to award reasonable compensation even in case of such agreement.

Applicability---Not applicable to void contracts.---S. 74. deals with cases where there is breach of valid contract and not an agreement void ab- initio.

Compensation for breach of contract---How may be calculated---Stipulated damages may or may not be awarded.---Section 74 seeks to resolve the difficulties in the common law doctrine of damages. it dispenses with fine distinctions between the claim for damages based on the principle of liquidated damages and those imposed by way of penalty. It makes provisions for both and the principle laid down is that where a sum is named or a penalty is stipulated the party complaining of the breach is entitled to a reasonable compensation not exceeding the amount so named or the penalty so stipulated. And though it says that "Where no actual damage or loss is proved to have been caused" it lays down that the compensation to be given to the injured party should be a reasonable one within the maximum stipulated in the contract. It must, therefore, follow that merely because a sum has been named in the contract the party complaining of the breach cannot claim that sum as a matter of course, because the court will grant only a reasonable compensation and no more, whatever may be the figure named. It must follow that where a sum has been named in the contract the party complaining of breach is entitled to some damages. In exercising the unqualified discretion granted to it by this section the Court will naturally act with care and caution and in accordance with recognised principles. Where therefore the sum named is the result of an honest anti genuine pre-estimate of damages having regard to the nature of the transaction and the circumstances of the case, the Court may not find much difficulty in awarding an amount not for different from the one named unless the contrary is proved. But where the sum has been stipulated as "in terrorem" to work as a deterrent to compel a party to fulfill the main contract and no certain data can b found for the determination of a reasonable compensation," the Judge may experience a real difficulty. In such cases the Court will look to the nature of the transaction, the position of the parties at the time of the bargain and the comparative undue advantage or disadvantage which might result to the parties by the enforcement of the penal Clause.

Compensation for breach of contract---Penalty not recoverable.--- The buyer of a Chevrolet motor car covenanted with the dealer that he will not during the space of two years after the delivery of the vehicle to him transfer the same by sale, mortgage, etc., to third persons, in case of breach of which covenant, he was to pay to the dealer "as and by way of liquidated damages and not as a penalty" the sum of Rs. 1,000.

Held: that the amount stipulated was a penalty and was not recoverable.

Compensation---How calculated---Court should award reasonable compensation---Sum named in contract as compensation for breach may be taken into consideration.---Section 74 does not make the right of the party complaining of the breach to receive reasonable compensation dependent on the proof of the actual loss or damage.

In cases where there is evidence of actual damage or loss that evidence must be taken as the basis for assessing reasonable compensation.

In assessing reasonable compensation one of the important criteria is the parties, own estimate of the contemplated damages.

Section 74 of the Contract Act has done away with the difference between liquidated damages and penalty. The sum named may partake of the character of one or the other, it is the duty of the Court to assess and award only reasonable compensation.

Earnest money---Liable to forfeiture for breach of contract by purchaser---The primary object of term "deposit money" and the "Earnest money" is to serve as security for the performance of the contract.

If the contract goes forward the deposit is treated as part of the purchase price; if it falls through in consequence of the depositor's failure to perform, the deposit would stand forfeited to the seller, although there is no specific forfeiture clause in the contract.

Employment contract---Clause giving three years salary to the employee in case of removal---Twelve months salary decreed to employee.---Where there was a clause in the contract of service of an employee that in case of breach of contract by his removal he would be granted three years salary in advance. The Court granted him twelve month's salary because that was considered reasonable and this would also be in consonance with the principle of reciprocity considering that the plaintiff had only to give twelve months notice if he wanted to leave the job.

Relief against penal clause---Where refused.---Section 74, Contract Act, is as much applicable to consent decrees as to any other contracts and an executing Court has power to relieve against penal clause or forfeiture contained in a consent decree. But a relief against forfeiture being only equitable, a Court of equity will refuse to grant such relief when there is laches or delay on the part of the party seeking assistance.

Amount to be forfeited not mentioned in contract---Section not applicable.---Where the amount of damages to be recovered or the amount to be forfeited in any eventuality is not mentioned in the contract, section 74 does not apply to the cast.

Compensation for breach of contract---How may be calculated---Stipulated damages may or may not be awarded.---Section 74 seeks to resolve the difficulties in the common law doctrine of damages. It dispenses with fine distinctions between the claim for damages based on the principle of liquidated damages and those imposed by way of penalty. It makes provision for both and the principle laid down is that where a sum is named or a penalty is stipulated the party complaining of the breach is entitled to a reasonable compensation not exceeding the amount so named or the penalty so stipulated. And though it says that "Where no actual damage or loss is proved to have been caused" it lays down that the compensation to be given to the injured party should be a reasonable one within the maximum stipulated in the contract. It must, therefore, follow that merely because a sum has been named in the contract the party complaining of the breach cannot claim that sum as a matter of course, because the court will grant only a reasonable compensation and no more, whatever may be the figure named. It must follow that where a sum has been named in the contract the party complaining of breach is entitled to some damages. In exercising the unqualified discretion granted to it by this section the Court will naturally act with care and caution and in accordance with recognised principles. Where therefore the sum named is the result of an honest and genuine pre-estimate of damages having regard to the nature of the transaction and the circumstances of the case, the Court may not find much difficulty in awarding an amount not far different from the one named unless the contrary is proved. But where the sum has been stipulated as "in terrorem" to work as a deferent to compel a party to fulfill the main contract and no certain data can be found for the determination of a reasonable compensation," the Judge may experience a real difficulty. In such cases the Court will look to the nature of the transaction, the position of the parties at the time of the bargain and the comparative undue advantage or disadvantage which might result to the parties by the enforcement of the penal Clause.

Earnest money---What is---Forfeiture of---Relief which the purchaser may claim in equity.---There is no charm in the expression "earnest money" and whether the amount is described as a deposit the true import of both of them is that it is a part of the purchase price and is at the same time intended to be a guarantee for the performance by the purchaser and liable to forfeiture in case of breach by him. The position would be quite different where either a sum is named or is even deposited that it will not form part of the purchase price if the contract goes forward but was to be treated as a penalty to be awarded against the party in default or against the purchaser only. Such sum are frequently named in contracts and there have been cases where a deposit of this nature has been taken by the seller over and above the earnest money. In such cases there should be no difficulty in applying section 74 of the Contract Act or the principle contained therein.

The question, however, whether section 74 of the Contract Act applies to deposits made for the due performance of a contract presents difficulty and has been subject of considerable judicial exposition.

Employment contract---Clause giving three years' salary to the employee in case of removal---Twelve months' salary decreed to employee.---Where there was a clause in the contract of service of an employee that in case of breach of contract by his removal he would be granted three years' salary in advance. The court granted him twelve months' salary because that was considered reasonable and this would also be in consonance with the principle of reciprocity considering that the plaintiff had only to give twelve months notice if he wanted to leave the job.

Damages for breach of contract---Sum mentioned in contract cannot be paid---Actual damage or loss suffered must be stated.---According to section 74 of the Contract Act, 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, the party complaining of the breach is entitled to receive from the party who has broken the contract reasonable compensation, not exceeding the amount so named, or the penalty provided for. The aggrieved party cannot recover simpliciter that sum whether as penalty or liquidated damages, but must prove the actual damages they have suffered. It was, therefore, obligatory for the appellants to show how much loss if any, had been caused to them, on account of the failure on the part of the respondents to complete the work in time, and it was then only that the Court could have awarded them reasonable compensation for the damage suffered. As no such evidence was given, on this further ground, the appellant's suit was liable to be dismissed.

Penal clause into an agreement of sale of land---Its enforcement---Absence of fixed period for performance of Penal clause---Does not deprive one party to enforce penal clause in case where other partly fails to perform his part of contract within reasonable time---Second appeal against concurrent finding upholding right to enforce penal clause dismissed---Civil Procedure Code (V of 1908)S. 100.

Breach of contract---Damages, recovery of---Difference existing under English Law between liquidated damages and penalty---Not recognised by S. 74 of Contract Act, 1872---Irrespective of fact whether amount mentioned in agreement amounts to penalty or liquidated damages, party complaining of breach of contract, held, entitled to recover damages, whether or not actual damage suffered by it, subject of course to maximum limit of such damages being amount so mentioned in agreement---Merely because of a specific sum by way of liquidated damages being mentioned as payable in event of breach of agreement Court not bound to grant same to party complaining of breach, reason being that such amount only represents maximum limit of damages recoverable in event of breach---Court, held further, has still to hold that such amount would normally arise as damages to such party in case of breach by other---Party complaining of breach in fact suffering no damages at all and on contrary gaining some advantage inspire of breach, or Court finding sum mentioned as damages in agreement not likely to reasonably arise from such breach, Court in such cases could refuse to grant same.

Contract---Breach of---Penalty---Stipulation of---Parties mutually agreeing not to resort to legal proceedings for recovery of (balance) amount before certain date---Agreement also contemplating forfeiture of amount due on initiation ,of such proceedings---Respondent subsequently addressing letter to Martial Law Administrator regarding financial status and conduct of appellant in living beyond his status---Held: Relevant stipulation in agreement having contemplated proceedings in court for adjudication. of claim upon evidence, letter to Martial Law Authorities not to constitute "proceedings" for recovery of out standing amount due from appellant.

"Penal interest"---"Liquidated damages"---Court, held, was not bound to allow amount mentioned as "liquidated damages" in a contract.

Scope of section 74 does not recognize difference between liquidated damages and penalty---Section provides for cases where a sum is named in contract itself as amount to be paid in case of breach of contract or if contract contains any other stipulation by way of penalty, party complaining of breach has to be compensated regardless of proof of any actual damages or loss, and is entitled to receive from party breaking contract reasonable compensation not exceeding amount so named, or penalty so stipulated---Where default clause in agreement which was incorporating therein all contingencies specially for breach of contract, did not mention any thing about damages---Party claiming damages on breach of contract, therefore, was not entitled to receive any amount exceeding amount as provided in contract itself in circumstances.

Breach of contract---Compensation for---Held · Difference existing in English law between liquidated damages and penalty not to be recognised (under S. 74).

75. Party rightfully rescinding contract entitled to compensation.---A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.

Illustration

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights in every week during the next two months, and B engages to pay her 100 rupees for each night's performance. On the sixth night, A willfully absents herself from the theatre, anti B, in consequences, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfillment of the contract.

This section is to be read as supplementary to Ss. 39, 53 (which, however, already contains a similar provision), 55, 64, and 65. The facts of the illustration resemble those of illustration (a) to S. 39, above. In such case English usage is to describe the promisee's right not as an option to rescind the contract, but as an option to treat it as finally broken and have the damages assessed once for all. The difference, however, seems rather verbal than substantial. A party who rescinds on the ground of fraud or the like is in a different position: he rescinds the contract not because fulfillment has been refused or prevented, but because the contract, by reason of the fraud, or as the case may be, is altogether to his disadvantage. It is sometimes said that a party who rescinds for fraud cannot also recover damages. This limitation on the available remedies must be confined to wholly executory contracts. In the case of a partially executed contract, the two remedies should be cumulative.