Q- Elucidate with example difference between damages, liquidated damages and penalty under

the Indian contract Act

Answer:
Introduction
The aim of the Indian Contract Act 1872, (hereinafter referred to as the Contract Act) is to do
equity, therefore through various provisions the contract Act provides for remedies. One such
remedy is to provide damages for the breach of the contract.
Given below are the key differences between damages, liquidated damages and penalty:

Basis of differentiation Damages Liquidated damages Penalty

Purpose To award To provide certainty and To go beyond

Monetary predictability regarding the
compensating for actual
compensation to compensation that would losses and are intended
the aggrieved be payable in case of to inflict additional
party for the loss breach, without the need financial consequences
suffered as a for extensive proof of on the breaching party
result of a breach actual loss. as a form of punitive
of contract. measure to keep the
sanctity of contract
Nature of relief section 73 of the Section 74 of the Act No differentiation is
contract Act deals deals with liquidated made under the Indian
with damages. damages. law between liquidated
Here the amount Specific amount agreed damages and
of damages is upon by parties in contract unliquidated damages,
determined by Amount not predetermined under section 74, if the
the court after the or specified in contract. amount of
contract stands compensation exceeds
breached. the likely estimated loss
the it is termed as
penalty.
burden of proof Here actual proof Here since the amount is The burden of proof
of actual losses predetermined by the lies on the plaintiff to
and damages is to parties’ actual losses are prove that an injury is
be given by the proved only to the extent caused to him which is
plaintiff. of showing losses, so as to extraordinary in nature
Hadley v make sure that there is no
Baxendale, windfall gain to plaintiff.
(1845). It was
held that in the In Fateh Chand v Bal
event of a breach Krishan Das, 1963, a
of contract, the constitutional bench ruled
breaching party that there is no need to
shall compensate prove actual losses to the
the aggrieved plaintiff to award
party for the liquidated damages.
damages which
 arose in the
ordinary or usual
course of things .
Determination of the The court Since the amount is The court determines
amount damages determines the already decided by the the amount of penalty,
amount of parties the courts decide such penalty shall be in
damages as per upon the amount of nature of an exemplary
the losses damages keeping the amount, But shall be
incurred by the amount agreed by the declared unenforceable
plaintiff in the parties as the threshold if is excessive or unjust.
ordinary course limit of damages.
of business.

Illustrative difference between damages and liquidated damages Under the Indian
Contract Act : A and B entered into a contract.5 A agreed to sell B, 2 tons of rice biryani to
his party B for business and agreed to pay rupees 20000 to A and due to the negligence of A
the Rice was Destroyed by Rodents, due to which biryani could not be delivered, here B
suffered actual losses and such losses were anticipated hence B can claim damages under
section 73 of the Indian Contract Act, 1872, where if in the same case while entering into the
contract A and B had agreed upon a fixed amount (say rupees 15000) in case of breach then B
could have approached the court for claiming the said liquidated damages under section 74 if
the Act whereby he could get rupees 15000 maximum as damage for such a breach.
Conclusion :In summary, damages aim to compensate the aggrieved party for actual losses
suffered, liquidated damages provide a predetermined amount for breach, and penalties impose
punitive measures for breach. While damages and liquidated damages are enforceable under
contract law, penalties are generally not upheld and may be considered void if they are deemed
to be punitive rather than compensatory in nature.