Compensation for breach of contract where penalty stipulated for
Section 74 of the Indian Contract Act, 1872 deals with 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 the breach is entitled, whether or not actual damage or loss is proved to have been cause The Act came into force on 01 Sep 1872.
1[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.
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 bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 2 [Central Government] or of any 3[State Government], gives any bond for the performance of any public duty 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 duty, or promise to do an act in which the public are interested.
Illustrations
(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 exceeding Rs. 1,000, as the Court considers reasonable.
(b) A contracts with B that, if A practises as a surgeon within Calcutta, he will pay B Rs. 5,000. A practises as a surgeon in Calcutta. 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.
4 [(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 by way 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 instalments, with a stipulation that in default of payment of any instalment, 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 him a bond for Rs. 200 payable by five yearly instalments of Rs. 40, with a stipulation that, in default of payment of any instalment, the whole shall become due. This is a stipulation by way of penalty.]
Section 74, The Indian Contract Act, 1872 (Act 9 of 1872).
Related judgements & precedents
These are some judgments that construed this section, and hold precedence value. They hold authority on how to read, interpret and use this section.
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Kailash Nath Associates v. Delhi Development Authority
Court's Decision & Legal Precedent
Judgment of Main Case order-12.pdf 2015-01-09 (not same-date ROPs order-11/13). CA 193/2015. Contract Act 74: a stipulated sum or forfeiture of earnest money is reasonable compensation only; it is not a windfall. Proof of actual loss is the ordinary rule, and s.73 supplies the measure. Earnest-money forfeiture is not automatic. Map contract-act 74 and 73.
On this section: s.74 awards reasonable compensation for breach, whether or not actual damage is proved in the old penalty sense, but it is not a windfall. A stipulated sum or earnest-money forfeiture is capped at proven loss; Kailash Nath is the modern restatement.
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Phulchand Exports LTD vs Ooo Patriot
Court's Decision & Legal Precedent
In a CIF contract, when a seller breaches fundamental terms regarding shipment timing and vessel destination (loading goods on a vessel not bound to the contract destination as first port of discharge), the prima facie rule of risk and property transfer under Section 26 of the Sale of Goods Act, 1930 is rebutted. The seller remains liable for non-delivery even after shipment of goods or delivery of shipping documents. A reimbursement clause in a CIF contract requiring the seller to reimburse the price paid if goods do not arrive within a specified period is a legitimate contractual term and not an unenforceable penalty under Section 74 of the Indian Contract Act, 1872, nor an unconscionable bargain under Section 23, when agreed between experienced businessmen with equal bargaining power in conformity with international trade practices. The expression 'public policy of India' under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 must be given a wider meaning to include awards that are patently illegal, in addition to awards violating fundamental policy of Indian law, interests of India, or justice and morality.
On this section: Cited by appellant to argue reimbursement clause is a penalty; Court held that Section 74 does not make liquidated damages illegal and the reimbursement clause is not a penalty but a legitimate contractual term
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Authorised Officer State Bank of India vs C. Natarajan
Court's Decision & Legal Precedent
When a bidder in an auction conducted under the SARFAESI Act and the Security Interest (Enforcement) Rules, 2002 fails to deposit the entire sale price within the period allowed (maximum 90 days), the Authorized Officer's power to forfeit the initial deposit under Rule 9(5) is a statutory penalty that must be exercised reasonably but cannot be interfered with by courts merely because the secured creditor suffered no financial loss. The forfeiture serves the dual purpose of facilitating enforcement of security interest and preventing manipulation of auctions by defaulting borrowers. The SARFAESI Act, being special legislation, overrides general contract law principles. Validity of forfeiture must be judged on circumstances existing when the order was made, not on supervening events. Judicial review of forfeiture orders should be extremely reluctant unless a very exceptional case of patent arbitrariness or unreasonableness is established.
On this section: Provides for liquidated damages; Court held that this section does not override forfeiture provision in SARFAESI Act
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Inderpal vs Krishna
Court's Decision & Legal Precedent
A cheque issued under a property settlement agreement does not constitute a legally enforceable debt or liability under Section 138 of the Negotiable Instruments Act unless the petitioner establishes: (1) proof of the underlying transaction or debt for which the cheque was issued; (2) that the cheque was issued in repayment of that debt; and (3) actual loss or damage caused by the breach of the underlying obligation, not merely reliance on a stipulated penalty clause.
On this section: Applied through the cited Fateh Chand case to determine that compensation for breach of contract must be reasonable and based on actual loss, not merely the stipulated penalty amount
The holding above is the ratio decidendi as extracted from the judgment by eCourts India, reproduced unaltered — it is a rendering of the court's reasoning, not a substitute for its words. Read the order itself before relying on it.
Questions about Section 74
What have the courts held on Section 74 of the Indian Contract Act?
Kailash Nath Associates v. Delhi Development Authority (09 Jan 2015) is the leading judgment on this section among those set out below: s.74 awards reasonable compensation for breach, whether or not actual damage is proved in the old penalty sense, but it is not a windfall. A stipulated sum or earnest-money forfeiture is capped at proven loss; Kailash Nath is the modern restatement. Another 3 judgments on this section are set out below, 3 of them from the Supreme Court. They run from 2011 to 2023.
How do I find court cases under Section 74 of the Indian Contract Act?
In judgments and charge sheets this section is written several ways, and each form finds a different set of orders. These search the full text of every order eCourtsIndia holds, best matches first: Contract Act 74, section 74 Contract Act, section 74 of the Indian Contract Act. People searching for it also type indian contract act 74 and contract act 73 and 74. Each opens the full list of orders on eCourtsIndia, where it can be narrowed by court, year and outcome. 4 reported judgments on this section are set out on this page, beginning with Kailash Nath Associates v. Delhi Development Authority (09 Jan 2015).
When did Section 74 of the Indian Contract Act come into force?
Section 74 of the Indian Contract Act, cited as Contract Act 74, came into force on 01 Sep 1872, having been enacted on 25 Apr 1872. It is in force as at the date shown on this page.
Other sections of this Act
- 73. Compensation for loss or damage caused by breach of contract1822 words
- 23. What considerations and objects are lawful, and what not596 words
- 28. Agreements in restraint of legal proceeding void512 words
- 25. Agreement without consideration, void, unless it is in writing and registered, or is a promise to compensate for something done, or is a promise to pay a debt barred by limitation law423 words
- 16. "Undue influence" defined397 words
- 133. Discharge of surety by variance in terms of contract393 words
Source and method. Compiled from the enactments of Parliament and of the State legislatures as published on India Code, and republished together with commentary and other original matter under section 52(1)(q)(ii) of the Copyright Act, 1957. Structured, cross-referenced and maintained by eCourtsIndia. Text as in force on 14 Oct 2026. This page is not a substitute for legal advice.