Liquidated Damages under Section 74 of the Contract Act: Does a Claimant Still Have to Prove Loss?

Commercial contracts routinely include a liquidated damages clause that fixes a sum payable for breach, such as a specified amount for each week of delay or a percentage of the contract value. The commercial purpose is certainty, but liquidated damages under Section 74 of the Indian Contract Act, 1872 are not automatically recoverable in full. Indian courts have developed the law considerably, and a party seeking liquidated damages may still be required to establish the legal injury caused by the breach.

The Statutory Text

Section 74 provides that when a contract has been broken, and a sum is named in the contract as the amount to be paid in case of such breach, 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 in breach reasonable compensation not exceeding the amount so named.

Two features stand out: the named sum is a ceiling, not an entitlement; and what is awarded is “reasonable compensation”.

How the Courts have Read It?

• Fateh Chand v. Balkishan Dass (Supreme Court, 1963): Section 74 dispenses with proof of the precise amount of loss, but the court must award reasonable compensation, and compensation does not follow where no legal injury results from the breach.
• Maula Bux v. Union of India (Supreme Court, 1969): where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered; where it is difficult or impossible to prove, the named sum may be taken as a reasonable pre-estimate.
• ONGC Ltd. v. Saw Pipes Ltd. (Supreme Court, 2003): where loss is difficult to prove and the parties have agreed a genuine pre-estimate after understanding the position, it would be unjustified to let the party in breach escape liability by insisting on proof of actual loss.
• Kailash Nath Associates v. Delhi Development Authority (Supreme Court, 2015): damage or loss is a sine qua non for the application of Section 74, and the sum named must be a genuine pre-estimate of the loss likely to be suffered; recovery is limited to reasonable compensation.

The tension between Saw Pipes and Kailash Nath explains why the outcome so often turns on how a tribunal characterises the evidence: if loss is genuinely incapable of proof, the pre-estimate carries weight; if it is provable and not proved, the claim fails or is reduced.

The Delhi High Court Decision

In Bharat Heavy Electricals Ltd. v. Kanohar Electricals Ltd. (Delhi High Court, 26 February 2024), a Division Bench considered a challenge to an arbitral award which had directed refund of liquidated damages retained by the purchaser for delay in the supply of transformers. The arbitrator had noted that of the transformers supplied, only a proportion had been installed and fewer still commissioned by the relevant date, which undercut the claim that the delay in supply had caused the purchaser loss.

The Court held that liquidated damages under Section 74 are not automatically recoverable merely because the contract specifies a particular sum. The aggrieved party must demonstrate legal injury, while the agreed amount represents the maximum that may be awarded because damages are compensatory rather than punitive. The Court therefore did not interfere with the arbitral award.

The Position in 2026

Subsequent High Court decisions have continued in the same direction. Commentary published in 2026 records, among others, decisions of the Delhi High Court in 2025 and 2026 holding that a liquidated damages clause does not entitle a party to claim the whole stipulated sum automatically, and that factual loss must be established notwithstanding the clause. Readers should verify the current status of any particular decision before relying on it.

The practical position on liquidated damages under Section 74 as on 16 September 2026 may be summarised as follows:

Drafting and Enforcement Points

• Record, at the time of contracting, the basis on which the sum was calculated. Evidence that it was a genuine pre-estimate is what gives the clause weight later.
• Keep contemporaneous records of the consequences of delay or breach: idle plant, substitute procurement, delayed revenue, penalties suffered under other contracts.
• Distinguish a genuine pre-estimate from a sum designed to compel performance; the latter risks being treated as a penalty and cut down.
• In arbitration, remember that an award on liquidated damages can be challenged only on the grounds in Section 34 of the Arbitration and Conciliation Act, 1996; a difference of view on the evidence is ordinarily not enough.

A note on Insolvency

Where the counterparty is in a corporate insolvency resolution process, a liquidated damages claim is a claim to be filed with the resolution professional and dealt with in the plan. Under Section 31(6) of the Insolvency and Bankruptcy Code, 2016, as amended with effect from 26 May 2026, claims not provided for in an approved resolution plan are extinguished and no proceedings may be continued or instituted in respect of them, subject to the Explanations, which preserve claims against promoters, persons in management or control and guarantors.

Frequently Asked Questions

1. Is a liquidated damages clause automatically enforceable in India?

No. Section 74 on liquidated damages allows reasonable compensation up to the stipulated amount, but the agreed sum is not automatically recoverable in full.

2. Is proof of actual loss required for liquidated damages?

Not necessarily. The claimant need not prove the exact amount of loss, but must establish legal injury. Where loss is difficult to quantify, a genuine pre-estimate can carry significant weight.

3. Can a court award less than the liquidated damages amount?

Yes. The stipulated sum is the maximum limit; the court or arbitral tribunal may award only the reasonable compensation justified by the circumstances.

4. What is the effect of Section 74 of the Indian Contract Act?

Section 74 treats the stipulated amount as a ceiling and requires reasonable compensation for breach, subject to the evidence of legal injury and the circumstances of the case.

5. What happens to a liquidated damages claim during CIRP?

A liquidated damages claim must be filed with the resolution professional and dealt with under the insolvency process. Claims not provided for in an approved resolution plan may be extinguished under the amended Section 31(6) of the IBC.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. Indian Contract Act, 1872 — Sections 73 and 74
2. Fateh Chand v. Balkishan Dass, Supreme Court of India, 1963
3. Maula Bux v. Union of India, Supreme Court of India, 1969
4. ONGC Ltd. v. Saw Pipes Ltd., Supreme Court of India, 2003
5. Kailash Nath Associates v. Delhi Development Authority, Supreme Court of India, 2015
6. Bharat Heavy Electricals Ltd. v. Kanohar Electricals Ltd., Delhi High Court, 26 February 2024 — Indian Kanoon
7. Commentary on Section 74 and proof of loss, SCC Online Blog, 27 July 2026 — SCC Online
8. Insolvency and Bankruptcy Code, 2016 — Section 31(6) (as amended) — IBBI – Legal Framework