33.

Section 74 occurs in Chapter 6 of the Indian Contract Act, 1872 which reads "Of
the consequences of breach of contract". It is in fact sandwiched between Sections
73 and 75 which deal with compensation for loss or damage caused
by breach of contract and compensation for damage which a party may sustain
through non-fulfillment of a contract after such party rightfully rescinds
such contract. It is important to note that like Sections 73 and 75, compensation is
payable for breach of contract under Section 74 only where damage or loss is caused
by such breach.

Section 74 of the Indian Contract Act deals with the measure of damages in two
classes of cases (i) where the contract names a sum to be paid in case of breach and
(ii) where the contract contains any other stipulation by way of penalty. We are in the
present case not concerned to decide whether a covenant of forfeiture of deposit for
due performance of a contract falls within the first class. The measure of damages in
the case of breach of a stipulation by way of penalty is by Section 74 reasonable
compensation not exceeding the penalty stipulated for. In assessing damages the Court
has, subject to the limit of the penalty stipulated, jurisdiction to award such
compensation as it deems reasonable having regard to all the circumstances of the
case. Jurisdiction of the Court to award compensation in case of breach of contract is
unqualified except as to the maximum stipulated; but compensation has to be
reasonable, and that imposes upon the Court duty to award compensation according to
settled principles. The section undoubtedly says that the aggrieved party is entitled to
receive compensation from the party who has broken the contract, whether or not
actual damage or loss is proved to have been caused by the breach. Thereby it merely
dispenses with proof of "actual loss or damages"; it does not justify the award of
compensation when in consequence of the breach no legal injury at all has resulted,
because compensation for breach of contract can be awarded to make good loss or
damage which naturally arose in the usual course of things, or which the parties knew
when they made the contract, to be likely to result from the breach."(At page 526,
527) Section 74 declares the law as to liability upon breach of contract where
compensation is by agreement of the parties pre-determined, or where there is a
stipulation by way of penalty. But the application of the enactment is not restricted to
cases where the aggrieved party claims relief as a plaintiff. The section does not
confer a special benefit upon any party; it merely declares the law that
notwithstanding any term in the contract predetermining damages or providing for
forfeiture of any property by way of penalty, the court will award to the party
aggrieved only reasonable compensation not exceeding the amount named or penalty
stipulated. The jurisdiction of the court is not determined by the accidental
circumstance of the party in default being a plaintiff or a defendant in a suit. Use of
the expression "to receive from the party who has broken the contract" does not
predicate that the jurisdiction of the court to adjust amounts which have been paid by
the party in default cannot be exercised in dealing with the claim of the party
complaining of breach of contract. The court has to adjudge in every case reasonable
compensation to which the plaintiff is entitled from the defendant on breach of
the contract. Such compensation has to be ascertained having regard to the conditions
existing on the date of the breach."(At page 530)
"64. It is apparent from the aforesaid reasoning recorded by the Arbitral Tribunal that
it failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid
down in Fateh Chand case [AIR 1963 SC 140:
(1964) 1 SCR 515 at p. 526] wherein it is specifically held that jurisdiction of the
court to award compensation in case of breach of contract is unqualified except as to
the maximum stipulated; and compensation has to be reasonable. Under Section 73,
when a contract has been broken, the party who suffers by such breach is entitled to
receive compensation for any loss caused to him which the parties knew when they
made the contract to be likely to result from the breach of it. This section is to be
read with Section 74, which deals with penalty stipulated in the contract, inter alia
(relevant for the present case) provides that 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, the party
complaining of breach is entitled, whether or not actual 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. Section 74 emphasizes that in case
of breach of contract, the party complaining of the breach is entitled to receive
reasonable compensation whether or not actual loss is proved to have been caused by
such breach. Therefore, the emphasis is on reasonable compensation. If the
compensation named in the contract is by way of penalty, consideration would be
different and the party is only entitled to reasonable compensation for the loss
suffered. But if the compensation named in the contract for such breach is genuine
pre-estimate of loss which the parties knew when they made the contract to be likely
to result from the breach of it, there is no question of proving such loss or such party
is not required to lead evidence to prove actual loss suffered by him.

Counsel for the Union, however, urged that in the present case Rs. 10,000/- in respect
of the potato contract and Rs. 8,500 in respect of the poultry contract were genuine
pre-estimates of damages which the Union was likely to suffer as a result
of breach of contract, and the plaintiff was not entitled to any relief against
forfeiture. Reliance in support of this contention was placed upon the expression (used
in Section 74 of the Contract Act), "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". It is true that
in every case of breach of contract the person aggrieved by the breach is not
required to prove actual loss or damage suffered by him before he can claim a decree,
and the Court is competent to award reasonable compensation in case of breach even
if no actual damage is proved to have been suffered in consequence of
the breach of contract. But the expression "whether or not actual damage or loss is
proved to have been caused thereby" is intended to cover different classes
of contracts which come before the Courts. In case of breach of some contracts it
may be impossible for the Court to assess compensation arising from breach, while in
other cases compensation can be calculated in accordance with established rules.
Where the Court is unable to assess the compensation, the sum named by the parties if
it be regarded as a genuine pre-estimate may be taken into consideration as the
measure of reasonable compensation, but not if the sum named is in the nature of a
penalty. Where loss in terms of money can be determined, the party claiming
compensation must prove the loss suffered by him.

Under Section 73, when a contract has been broken, the party who suffers by
such breach is entitled to receive compensation for any loss caused to him which the
parties knew when they made the contract to be likely to result from the breach of it.