Compensation for damage payable even if no damage proved

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.

The Court in the case namely Fateh Chand vs. Bal Kishan Das, decided on 15.01.1963 and reported as [(1964) 1 SCR 515] dealt with the application of Section 74 of the Indian Contract Act pertaining to claim of damages in the event of breach of contract. The provision provides that 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.

It was held that the section is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. The Indian Legislature enacted a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.

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. 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 tile case. 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.

The expression “the contract contains any other stipulation by way of penalty” 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. In all cases 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.