'B’ contracts with ‘C’ to pay him Rs. 500/- on a given day and if he fails to pay him then he will pay Rs. 1000/- to ‘C’. ‘B’ failed to pay on that day. Can ‘C’ recover Rs. 1000/- from ‘B’?

Question: Solve the following: ‘B’ contracts with ‘C’ to pay him Rs. 500/- on a given day and if he fails to pay him then he will pay Rs. 1000/- to ‘C’. ‘B’ failed to pay on that day. Can ‘C’ recover Rs. 1000/- from ‘B’? [UPJS 2000]

Find the answer to the mains question only on Legal Bites. ['B’ contracts with ‘C’ to pay him Rs. 500/- on a given day and if he fails to pay him then he will pay Rs. 1000/- to ‘C’. ‘B’ failed to pay on that day. Can ‘C’ recover Rs. 1000/- from ‘B’?]

Answer

In the given scenario, 'B' has entered into a contract with 'C' to pay him Rs. 500 on a specified day, with a provision that if 'B' fails to make the payment, he will be liable to pay Rs. 1000 to 'C'. However, 'B' has indeed failed to make the payment on the specified day. The question arises whether 'C' can recover Rs. 1000 from 'B' based on the provisions of Section 74 of the Indian Contract Act, 1872.

Section 74 of the Indian Contract Act deals with the concept of liquidated damages and penalties. It states that if a contract contains a provision specifying the amount of compensation to be paid in case of breach, or a penalty for non-performance, the court will have the discretion to determine whether the amount mentioned is reasonable and whether it represents genuine pre-estimated damages or is an unfair penalty.

In the given situation, 'B' has agreed to pay Rs. 1000 to 'C' as a penalty for failing to make the payment of Rs. 500 on the specified day. The question here is whether this amount of Rs. 1000 can be considered reasonable and whether it represents a genuine pre-estimated loss suffered by 'C' due to the breach of the contract.

Under Section 74, if the sum specified in the contract is considered by the court to be a genuine pre-estimate of the loss likely to arise from the breach, then 'C' would be entitled to recover that amount from 'B'. However, if the sum specified is found to be extravagant and unconscionable, in comparison to the actual loss suffered by 'C', then it may be treated as a penalty and unenforceable.

In the given scenario, the contract states that if 'B' fails to pay Rs. 500 on a given day, he will pay Rs. 1000 to 'C'. Since the sum of Rs. 1000 is double the amount of Rs. 500, it could potentially be considered excessive and punitive, rather than a genuine pre-estimate of the loss suffered by 'C' due to the breach.

Based on the provisions of Section 74, it is possible that the court may consider the amount of Rs. 1000 as a penalty rather than liquidated damages. If the court determines it to be a penalty, 'C' may not be entitled to recover the full amount of Rs. 1000 from 'B'. The court may instead award 'C' an amount that is reasonable and proportionate to the actual loss suffered as a result of 'B's breach.