This document discusses penalty and liquidated damages clauses in contracts. It provides definitions and examples. Specifically: 1) Penalty refers to a sum named in a contract as payment for breach that is not a genuine pre-estimate of loss. Liquidated damages is a sum that is a genuine pre-estimate of the loss from breach. 2) Indian contract law allows for reasonable compensation for breach not exceeding any penalty or liquidated damages stipulated in the contract. Courts can reduce such sums if not a true estimate of damages. 3) Examples are provided of cases where courts reduced stipulated damages, including one where damages for delay in supplying pipes were reduced to reasonable compensation. 4) Stip

1. PENALTY & LIQUIDATED
DAMAGES
Madhusudhan Narasimhamurthy
RA1512002010027

2. WHY??
1. Breach of contract by any of the two parties in a contract.
2. To compensate the loss suffered.

3. What?
In a contract, the parties may name a sum to be payable in the event of
breach.
1. Liquidated damages: If such sum is a genuine pre estimate of loss.
2. Penalty: If the sum is not a reflection of loss.
http://www.legalserviceindia.com/articles/li2.htm

4. Provisions
• Indian Contract Act – Section 73 & 74
• PWD for B-1 & B-2- Cl. 2
• CPWD form - Cl.2
• M.E.S form – Cl.50

5. • Sec. 73 states that “when a contract has been broken, the aggrieved
party is entitled to get compensation or any loss or damages which has
been inflicted to him/her naturally during the usual course of breach
of contract or about which the parties to the contract has prior
knowledge when they entered the contract .”
• Sec 74 states “When a contract has been broken, and if a sum is
named in the contract as the amount to be paid for 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”.
http://blog.ipleaders.in/liquidated-damages-and-penalty-in-india/

6. Law Suit-1: Reasonable Compensation
• ONGC vs. Saw pipes Ltd
• ONGC had claimed the liquidated damages for delay in supply of
casing pipes.
• Saw pipes opposed the action.
• Court directed the arbitral tribunal to assess the case with reference to
Fateh chand, Maula Baux and Rampur distillery
• Lastly, stipulated money was reduced and termed it as reasonable
compensation.

7. Stipulations in construction contracts
• Transgression – Delay in Handover
• Stipulations
1. General: 0.5-1% of contract price per day/per week
2. Govt. standards: 0.5-10% of contract price per week of delay.
Objections
1. It should be genuine estimate
2. Factors

8. Law suit-2
• Case: “A” did not supply five machines to “B” in stipulated time.
• Agreed terms: Penalty of 1% on the total value of the supply for
every three days up to 10% .
• A (Plaintiff) filed a suit against B (defendant) to relax the penalty.
• Defendant did not justify the loss, hence, the penalty was relaxed.

9. Other rules of Penalty/Liquidated damages
• When to evoke: Either during or after completion of contract
• Relaxation:
1. By communication (only for time)
2. Absence of terms
3. Satisfactory completion
• Only a right to sue.

10. Thank You