By S&S Co. Advocates & Solicitors · Published 18 March 2026 · Informational content, not legal advice: see our disclaimer
Section 74 and the Indian Approach
Section 74 of the Indian Contract Act, 1872 takes a distinctive approach compared to some other jurisdictions: it does away with the strict common law distinction between a genuine 'liquidated damages' clause and an unenforceable 'penalty', and instead allows a court to award reasonable compensation not exceeding the amount stipulated in the contract, regardless of how the clause is labelled.
What Courts Actually Look At
Despite Section 74's wording, Indian courts have in practice continued to scrutinise whether a stipulated sum genuinely reflects a reasonable pre-estimate of likely loss, or whether it is an arbitrary, disproportionate figure designed to penalise breach rather than compensate for it. A clause that is graduated to the severity or duration of the breach, proportionate to the contract's overall value, and grounded in some rational basis for the figure chosen is far more likely to be enforced at or near its stipulated amount.
By contrast, a large flat sum payable on any breach however trivial, with no relationship to actual likely loss, invites a court to award a lesser sum as 'reasonable compensation' under Section 74, effectively discounting the clause regardless of its label.
Practical Drafting Guidance
Delay damages clauses in supply and construction contracts should ideally be structured as a percentage of contract value per week or month of delay, with a sensible overall cap. This structure signals to a court that the figure was calculated with reference to likely loss rather than fixed arbitrarily. Where possible, parties should also record, even briefly, the commercial reasoning behind the stipulated figure at the time of contracting, since this can be useful evidence if the clause is later challenged.
Businesses should also avoid duplicating remedies unnecessarily: combining a liquidated damages clause with an additional, unrelated penalty for the same breach increases the risk that a court will view the overall structure as punitive rather than compensatory.
Frequently Asked Questions
Does labelling a clause 'liquidated damages' guarantee it will be enforced as written?
No. Indian courts look past the label to assess whether the stipulated sum is a genuine, reasonable pre-estimate of likely loss, and can award a lesser 'reasonable compensation' under Section 74 regardless of how the clause is described.
Must a claimant prove exact loss to enforce a liquidated damages clause?
Not always. Where the clause is a genuine, reasonably structured pre-estimate and some loss is a natural and probable consequence of the breach, courts have upheld the stipulated sum without demanding forensic proof of exact quantum.
Is there a maximum percentage that liquidated damages clauses in India typically use?
There is no fixed statutory cap, but delay damages clauses commonly range from a small percentage of contract value per week of delay, capped at around 5-10% of total contract value: figures well beyond this range attract closer scrutiny.
Can a liquidated damages clause and a right to terminate coexist in the same contract?
Yes, and this is common. But both should be drafted consistently so the overall remedy structure reads as compensatory rather than as a cumulative penalty for the same breach.
References & Further Reading
This article references the following statutory provisions. Readers should always verify current rules, fees and timelines against the applicable statute and rules as amended, since these are revised from time to time.
- The Indian Contract Act, 1872, Section 74 (Compensation for breach of contract where penalty stipulated for).
- The Indian Contract Act, 1872, Section 73 (Compensation for loss or damage caused by breach of contract).