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Indian Contract Act, 1872 · Chapter VI: Of the Consequences of Breach of Contract

Section 74: Compensation for breach of contract where penalty stipulated for

In plain words

If a contract names a sum payable on breach, or contains any other penalty term, the party complaining of the breach can recover reasonable compensation up to that amount, whether or not actual loss is proved.

  • A term for increased interest from the date of default may be a penalty.
  • Exception: a person who gives a bail-bond, recognizance or similar bond for a public duty under any law or government order is liable for the whole sum on breach.
  • Contracting with the Government does not by itself mean undertaking a public duty.

Example: A agrees to pay B Rs. 1,000 if A fails to pay Rs. 500 on a set day, and A fails. B can recover reasonable compensation set by the court, up to Rs. 1,000.

A simplified explanation, prepared with AI assistance from the official text below and checked automatically against it for numbers and cross-references. The official text is the law and prevails over this summary. Not legal advice.

Read the in-depth explanation, with key Supreme Court rulings ↓

Official text

[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, or if the contract contains any other stipulation by way of penalty, 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 not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Explanation.— A stipulation for increased interest from the date of default may be a stipulation by way of penalty.]

Exception.— When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the [Central Government] or of any [State Government], gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

Explanation.— A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.

Illustrations

(a) A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceeding Rs. 1,000, as the Court considers reasonable.

(b) A contracts with B that, if A practises as a surgeon within Calcutta, he will pay B Rs. 5,000. A practises as a surgeon in Calcutta. B is entitled to such compensation; not exceeding Rs. 5,000, as the Court considers reasonable.

(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.

[(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent. at the end of six months, with a stipulation that, in case of default, interest shall be payable at the rate of 75 per cent. from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable.

(e) A, who owes money to B a money-lender, undertakes to repay him by delivering to him 10 maunds of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 maunds. This is a stipulation by way of penalty, and B is only entitled to reasonable compensation in case of breach.

(f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that in default of payment of any instalment, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms.

(g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly instalments of Rs. 40, with a stipulation that, in default of payment of any instalment, the whole shall become due. This is a stipulation by way of penalty.]

Source: India Code (indiacode.gov.in), the consolidated text published by the Legislative Department, Government of India. Text as updated on India Code on 15 October 2026. Words in square brackets [ ] were inserted or substituted by later amending Acts, and *** marks words omitted by an amendment. The amendment footnotes are not reproduced here. Official text on India Code.

Understanding this section

Section 74 deals with contracts that name a sum payable on breach, or contain a penalty. Indian law does not draw the English distinction between a genuine pre-estimate of damages (enforceable) and a penalty (unenforceable). Instead, the court awards reasonable compensation up to the amount named, whatever the clause is called.

The rule

Where a contract names a sum to be paid on breach, or contains any other stipulation by way of penalty, the injured party gets reasonable compensation not exceeding the named sum, whether or not actual loss is proved. The named sum is a ceiling, not an automatic entitlement.

Is proof of loss required

The section says compensation is payable whether or not actual damage is proved. Courts have read this as dispensing with proof where loss is difficult or impossible to prove. But where loss can be proved, a party claiming compensation must show that some legal injury occurred; section 74 is not a licence for a windfall.

Forfeiture of earnest money

A forfeiture clause is a stipulation by way of penalty, so only a reasonable amount can be forfeited. The decisions on earnest money are not fully aligned: some hold that true earnest money, paid as a guarantee for performance, can be forfeited in full under the agreement, while Kailash Nath applied section 74 to earnest money and required proof of loss. The Supreme Court has itself noted this difference, so check the latest ruling before relying on either line.

Public duty bonds

The Exception covers bail bonds, recognizances and bonds given for public duties: the whole sum is payable on breach, without any reduction to reasonable compensation.

Key Supreme Court rulings

  • Fateh Chand v. Balkishan Dass AIR 1963 SC 1405

    A five judge bench held that section 74 applies to every stipulation by way of penalty, including forfeiture of money already paid; the court awards only reasonable compensation not exceeding the penalty stipulated.

  • Kailash Nath Associates v. Delhi Development Authority 2015 INSC 22

    Forfeiture of earnest money by DDA was held arbitrary on the facts; in applying section 74, actual damage or loss must have been suffered, and the provision does not allow recovery where no legal injury results.

  • Satish Batra v. Sudhir Rawal 2012 INSC 480

    Part payment of price cannot be forfeited unless it is a guarantee for due performance; where earnest money was a security for performance, its forfeiture in full according to the agreement was justified.

  • Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. 2003 INSC 241

    Where liquidated damages are clearly agreed, the claimant need not prove the actual loss, and the burden is on the defaulting party to show the agreed amount is unreasonable.

  • K.R. Suresh v. R. Poornima 2025 INSC 617

    Reviewed the case law on forfeiture, noting that Kailash Nath took a different view in holding that proof of actual damage or loss is a sine qua non for invoking section 74 against forfeiture of earnest money.

Common mistakes

  • Applying the English penalty versus liquidated damages distinction.
  • Treating the named sum as automatically payable in full.
  • Confusing earnest money with an ordinary part payment of price.

Read with: Section 73 Indian Contract Act, 1872, Section 75 Indian Contract Act, 1872

Prepared with AI assistance as a study aid. Every ruling listed was checked against the Supreme Court's own judgments on this site, and quoted words appear in those judgments; linked names open the full judgment. Read the judgments themselves before relying on them. Not legal advice.

Supreme Court judgments citing the section 74