When a contract has been broken, is a party, who suffers from such breach, entitled to compensation and in what circumstances? What are liquidated damages? What is a stipulation by way of penalty?

Question: When a contract has been broken, is a party, who suffers from such breach, entitled to compensation and in what circumstances? What are liquidated damages? What is a stipulation by way of penalty? 

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Answer

Under the Indian Contract Act, when a contract has been breached, the party who suffers from such breach is generally entitled to compensation. The law recognizes the principle of compensatory damages, which means that the injured party should be put in the same position they would have been if the contract had been performed properly.

The circumstances in which a party is entitled to compensation depend on the nature and terms of the contract, as well as the extent of the breach. Generally, compensation may be awarded when there is a material breach of contract, which means that the breaching party has failed to perform a significant part of their contractual obligations. In such cases, the non-breaching party can claim damages for any loss or harm suffered as a result of the breach.

Liquidated damages are a specific form of compensation that is agreed upon by the parties at the time of contract formation. They are predetermined and fixed amounts of money specified in the contract itself, which will be payable in case of a breach. Liquidated damages are meant to provide a reasonable estimate of the potential loss that may occur due to a breach. They serve as a form of pre-determined compensation and are enforceable if they are a genuine pre-estimate of damages and not a penalty.

A stipulation by way of penalty, on the other hand, is a provision in a contract that imposes a disproportionate and excessive amount of damages in case of a breach. Such a stipulation imposes a penalty on the defaulting party rather than compensating the injured party for the actual loss suffered. Under the Indian Contract Act, a stipulation by way of penalty is deemed to be void and unenforceable. The injured party can only claim actual damages suffered rather than the penalty amount specified in the contract.

It's important to note that the specific provisions and remedies for breaches of contract may vary depending on the terms of the contract, applicable laws, and the jurisdiction in which the contract is governed.