Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and ii) where the contract contains any other stipulation by way of penalty. This section clearly elaborates refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrors is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.
Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalty.
Supreme Court of India held in case of Fateh Chand vs Balkishan Das on 15 January, 1963(1963 AIR 1405, 1964 SCR (1) 515), (source: Source: http://www.indiankanoon.org/doc/584252/) the expression u/s 74,
I. WHERE THE CONTRACT NAMES A SUM TO BE PAID IN CASE OF BREACH :-
The claim made by the plaintiff to forfeit the amount of as stipulated in the contract may be adjudged in the light of s. 74 of the Indian Contract Act, which in its material part provides :- "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 maybe, the penalty stipulated for."
II. WHERE THE CONTRACT CONTAINS ANY OTHER STIPULATION BY WAY OF PENALTY:-
This comprehensively applies to every covenant involving a penalty, whether it is for payment on breach of contract of money, or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by s. 74 of the Indian Contract Act. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of a contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture.
The expression "if the contract contains any other stipulation by way of penalty" widens the operation of the section so as to make it applicable to all stipulations by way of penalty, whether the stipulation is to pay an amount of money, or is of another character, as, for example, providing for forfeiture of money already paid
The measure of damages in the case of breach of a stipulation by way of penalty is by s. 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case and the jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according, to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
s. 74 also shall apply to stipulations for forfeiture of amounts deposited or paid under the contract within purview of reasonable compensation to be awarded in case of breach.
S.74 casts statutory duty on the court to only award reasonable compensation instead of enforcing the penalty clause. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture.
s.74 merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated.
The court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of the breach. There is no evidence that any loss was suffered by the plaintiff in consequence of the default by the defendant save as to the loss suffered by him by being kept out of possession of the property.
In BHULEY SINGH v/s KHAZAN SINGH & Others, (date of decision: 9th November, 2011, HIGH COURT OF DELHI) pursuant to Order 7 Rule 7 CPC, the court is empowered to grant lesser relief than as originally claimed. Statutory duty imposed by S.74 of Indian Contract Act on court, in absence of proof of actual damages, the court can even grant lesser relief than the amount stipulated to be forfeited or payable under the contract.
In the absence of any proof of damage or absence of any stipulation capping the penalty or damages in the contract for liquidated damages or penalty, arising from the breach of the contract, the court shall determine a reasonable compensation by placing the non-defaulting party in position of the advantage that such party would have gained keeping in mind the permissible limits specified by respective law governing the benefits eg. Prevailing interest rate on the amount paid as advance or mesne profits to the value of the use of land to the person in wrongful possession, as per the rent control act with respect to dispossession from the land or property and interest thereof vide s. 2(12) of the Code of Civil Procedure.
THE NEXT QUESTION IS WHO IS ENTITLED TO THE COMPENSATION UNDER S.74, THE PLAINTIFF OR DEFENDANT IN THE LAWSUIT.
The courts u/s 74, is entitled to award reasonable compensation to Plaintiff or Defendant, in lawsuit after determining who has breached or defaulted.
No comments:
Post a Comment