Principle: Liquidated damages represent a genuine pre-estimate of loss agreed by parties, while a penalty is an extravagant sum intended to compel performance.
Facts: A contract provides that for each day of construction delay, the contractor pays ₹1,000, which reflects actual daily rental loss. Is this enforceable?
Answer and explanation
Correct answer: A. Yes, the court will award reasonable compensation not exceeding the agreed liquidated sum
- Step 1: Consult Section 74 of the Indian Contract Act 1872.
- Step 2: In Indian law, the distinction between liquidated damages and penalty is minimized: the court awards reasonable compensation not exceeding the penalty or sum stipulated.
- Step 3: Since ₹1,000 reflects genuine actual daily rental loss, it is reasonable compensation and enforceable.
Answer
Yes, the court will award reasonable compensation not exceeding the agreed liquidated sum.
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