Question 2 (b)
Damages and penalties
6 marks
- Time to write
- About 12 minutes
- Topic
- Breach and remedies
- Notes
- Crux notes
Question
Question 2 (b) · 6 marksDistinguish between damages and penalties under Indian Contract Act, 1872.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Distinguish betweenSet the differences out in a table, basis by basis, not as two separate essays.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Damages under section 73 2 marks 3 min
- 2 Penalty and liquidated damages; section 74 2 marks 3 min
- 3 Points of distinction 2 marks 3 min
- Check: every ask answered, key terms underlined 2 min
Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Damages. Under section 73 of the Indian Contract Act, 1872, the party who suffers by a breach of contract is entitled to compensation for loss or damage that naturally arose in the usual course of things from the breach, or that “the parties knew, when they made the contract, to be likely to result from” it. Damages are compensatory: they make good the actual loss and are not given for remote or indirect loss.
1The contract itself names the sum: it goes down on paper beside the money bag.
Liquidated damagesLiquidated damages are a sum the parties themselves name in the contract as payable on breach
2The flour never came, the stall stood closed—the usual, natural loss of a broken promise.
Ordinary (general) damagesFor loss arising naturally in the usual course of things from the breach.
3The judge allows the wedding orders too—but only because they were told of them at signing.
Special damagesFor loss arising from special circumstances communicated to the other party at the time of the contract
4A breach proved, no loss shown: the court presses a single token coin into his palm.
Nominal damagesA token sum where a breach is proved but no real loss is suffered.
Penalty and liquidated damages. The parties may fix in advance the sum payable on breach. It is liquidated damages if it is a reasonable (genuine) pre-estimate of the likely loss; it is a penalty if it is an amount arbitrarily fixed, larger than any loss that could follow, to frighten the other party into performing. Section 74 provides that where a sum is named in the contract, the aggrieved party is entitled to reasonable compensation not exceeding the amount so named. Indian law makes no distinction between penalty and liquidated damages: the court will never allow more than the named sum but may allow less.
| Basis | Damages (s. 73) | Penalty (s. 74) |
|---|---|---|
| Fixed when | Assessed by the court after the breach | Named in the contract before any breach |
| Nature | Compensation for the actual loss | A sum stipulated in terrorem, not a pre-estimate of loss |
| Amount recoverable | The loss arising naturally or within the parties' contemplation | Only reasonable compensation, not exceeding the named sum; e.g. where A agrees to pay B ₹50,000 if he practises as a surgeon in Kolkata, B gets reasonable compensation up to ₹50,000 |
| Proof of loss | Loss must be shown | Compensation may be awarded whether or not actual loss is proved, but never beyond the named sum |
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Damages under section 73 | 2 |
| 2 | Penalty and liquidated damages; section 74 | 2 |
| 3 | Points of distinction | 2 |
| Total | 6 |
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