Breach of the stipulation | ‘A’ who owes a money-lender, undertakes to repay him by delivering to him 10 maunds of grain on a certain date and stipulates…Discuss the nature of this stipulation and state the extent of the liability.

Question: Breach of the stipulation | ‘A’ who owes 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.

Discuss the nature of this stipulation and state the extent of the liability of ‘A’ in case of breach of the stipulation.[BJS 1978]

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Answer

Section 74 of The Indian Contract Act, 1872 deals with the measure of damages where the court is not to allow more of the parties has fix the damage. The rule is that where a sum is named in a contract as the amount to be paid in case of a breach, regardless whether it is a penalty or not, the party suffering from the breach is entitled to receive reasonable compensation not exceeding the amount so named. The named sum constitutes the maximum limit of liability. The court cannot order damages beyond that.

The courts award reasonable compensation not exceeding the stipulation. The courts knock down agreements that are unconscionable and extravagant. The court has the latitude to reduce the amount to what appears to be reasonable in the circumstances.

In the leading Fateh Chand case, the court laid down the scope of Section 74 while stating that section 74 deals with damages divided into two categories:

1. 1. Firstly, if there is a pre-determination of the amount to be paid in the event of contract breach.
   2. And secondly, where the contract may contain any further penalty stipulation.

In Carl Estate (P) Ltd v. Jagdish J.N. Counte, (2005) 4 Bom CR 630, for failure to refund earnest money, the stipulation was that the defendant was to pay Rs l000/- as daily fine after the expiry of 30 days’ notice in addition to compound interest at 4 per cent. The stipulation was held to be penal in nature and so not enforceable. Only 10 per cent was allowed on the amount.

In the Fateh Chand v. Balkishan Dass, [AIR 1963 SC 1405] case the Supreme Court observed as follows:

“Section 74 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 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 the amount to be paid in case of breach and stipulations by way of penalty.”

The facts of the present case at hand have been borrowed from the illustration (e) appended to Section 74. In this case. ‘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.

Thus, the court has to make its own assessment of the amount of loss caused by the breach. It cannot blindly follow the contract clause in awarding damages without any adjudication.

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X