Bhavya Bhasin
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Liquidated Damages and Penalty an Analysis

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1 BREACH OF CONTRACT

2 MEANING OF LIQUIDATED DAMAGES AND PENALTY

3 DIFFERENCE BETWEEN LIQUIDATED DAMAGES AND PENALTY

BREACH OF CONTRACT

A breach of a contract occurs when a party to a contract. Violates any of the agree- upon terms and conditions. Which is detrimental to the other party’s cause. The breach can be of whole or part of the agreement. The violation could be of anything from late payment to non-delivery of assets. In order to claim a breach of contract in a court. It is important to prove that a breach has occurred.

To prove that the breach of contract has been committed some conditions are needed to be fulfilled. The first and foremost condition is that the contract should be valid. Which can be enforced in a court of law. Secondly, the plaintiff seeking remedies from the court. Should satisfy that the defendant has violated the terms and conditions of the contract. Due to which the plaintiff has suffered monetary loss. Lastly, the plaintiff has fulfilled all the duties on his part and has notified the defendant. About committing a breach of contract. After the breach of contract has been committed there are few remedies like liquidated damages and penalty are available under The Indian Contract Act, 1872.

MEANING OF LIQUIDATED DAMAGES AND PENALTY

As per the Black law dictionary liquidated damages means, “an amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches the contract[i]”. It is a pre-estimated amount stipulated by the parties before entering into a contract which will be paid by the one who has breached the contract. In the case of liquidated damages, the parties are aware of the quantum of the damages which will be followed by breach of contract. The objective behind awarding the liquidated damages is protecting the commercial interest of the parties and to bring back the affected party in a stable economic condition as if a breach has not occurred.

The amount is fixed without considering any loss but the only intention is to deter the party from breaching the contract or ensuring the enforcement of the contract is termed as a penalty. In penalty. the amount is not related to a loss the only object here is to encourage the party for the performance of the contract. Penalty operates as a punishment for the party who has breached the contract and not as compensation for enduring the loss.

DIFFERENCE BETWEEN LIQUIDATED DAMAGES AND PENALTY

Liquidated Damages and Penalty an Analysis

Liquidated damages are pre-estimate damages that are compensatory in nature whereas penalty loss can greater than pre-estimated loss. The purpose of liquidated damages is to create certainty in the commercial transaction whereas the main purpose of the penalty is to ensure the payment of money and securing the performance of a contract. Liquidated damages are based on the genuine pre-estimate of the loss, whereas the penalty is based on the doctrine of reasonable compensation. The objective behind the liquidate damages is ensuring the damages to the suffering party that is pre-estimate by the parties, on the other hand, a penalty is the payment of money as a terrorem of the defaulting party.

POSITION IN INDIA

Indian law does not make any distinction between liquidated damages and penalty. The Courts in India focus on granting reasonable compensation to the suffering party which cannot exceed the amount that has been fixed by the parties at the time of making the contract. The Court must determine whether the case is of liquidated damages or penalty it can be adjudged by looking into the facts of the case. The court also looks into the nature of the transaction, any other obligation that is arising from the transaction and, the relative situation of the parties. In Indian courts, a suit for damages can filed under Section 73&74 of The Indian Contract Act 1872

Section 73. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.[ii]

Section 74. 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.[iii]

In the case of Fateh Chand v. Bal Kishan Das [iv]the Supreme Court said that the aggrieved party is entitled to get reasonable compensation but it should exceed that amount of penalty or liquidated damages that have been mentioned in the contract by the parties in case of breach of contract. The Court interpreted Sec.74 as legal liability in the case of breach of contract, whether either through pre-determine agreement compensation is pay or through penalty.

[v]The court further discussed the advantages of pre-estimating the damages for instance facilitates the recovery of damages, negates the expense and inconvenience of proving the actual loss and damage also reduces calculation error and avoids the problem in the assessment. The scope of section 74 has been divided into two classes of cases firstly, where there is pre-determination of an amount which has to be paid in cases of breach of contract. Secondly, where the contract may contain any further stipulation in form of a penalty.

In the case of Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.[vi]the Supreme Court laid down an obiter dicta that if the parties have contemplated a named sum as a genuine pre-estimate of the damages that would be payable in case of a breach, then in the occurrence of such breach no “actual loss or damage” needs to be proved.

Section 73 and 74 are needs to be read together. In awarding the damages but it has to be a reasonable compensation. While deciding the compensation the court needs to assess the terms and conditions of the contract. The party who claims that there is no damage and the breach of contract has not occurred. Has to provide evidence to support his claim. In cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract. If a genuine pre-estimate of damage or loss, can be awarded. [vii]

In the case of BSNL v Reliance Communication Ltd. [viii]there was a dispute was relating to the Caller Line Identification device. And as was recover that the calls of CLI have manipulate which invoke method of computing charges. And hence resulted in BSNL, levying a charge of Rs. 9.89 cr.[ix] The court relied on the concept of giving reasonable compensation to the aggrieved party. Which was derive from the case of Fateh Chand. Here court also expanded the scope of liquidated damages. And said that “liquidated damages serve the purpose of avoiding litigation. Which is very useful and promotes certainty in commercial cases”.[x]

CONCLUSION

Liquidated Damages and Penalty an Analysis

Liquidated damages have significant importance in commercial contracts. It protects the parties from foreseen losses that can evaluated in advance by the parties while making the contract. The Penalty can be enforced in a certain situation where there is a delay in supply or non-completion of work. Hence, liquidate damages are easy to enforce comparing to penalties. Indian law does not make any distinction between liquidated damages or penalty while English Law does. Both legal regimes protect the interest of the contracting parties and prevent the payment of penalties that may be excessive.