India: Liquidated Damages – A Chimera Without Proven Loss

The present article aims at discussing various issues that invariably arise concerning a provision/term in the contract on 'Liquidated Damages' ("LD"). The first and foremost being 'if the whole of the LD provided in the contract is recoverable by the aggrieved party without proving the actual losses suffered by it'. The expression 'Liquidated Damages' is not per se defined under the Indian Contract Act but the relevant Sections, i.e. 73 and 74 which are extracted below, set out the elements, which constitute LD.

Section 73 provides as under:

"When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it".

Section 74 of the Contract Act reads as under:

"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 provided to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named, or the case may be, the penalty stipulated for."

For a better understanding of the concept of LD it will be useful to look at the definition of 'Liquidated Damages' in The Black's Law Dictionary, and the same is as under:

"An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches; also

If the parties to a contract have agreed on Liquidated Damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages."

A perusal of the above clarifies that LD is nothing but a pre-estimated damage, which the parties agree while making the contract, as likely to arise in case of a breach.

The Courts, while dealing with the issue of validity of imposition of LD by one party to the contract on the other, read Section 73 & 74 of the Contract Act together.

Under the Indian Law, the damages are awarded to recompense the aggrieved party. In other words, the aggrieved party has to be placed, as far as the money can do, in the same position in which it would have been if no breach had occurred. As a necessary corollary, it means that the damages are to compensate the aggrieved party for the consequences directly and naturally arising from the breach and no one can be allowed to make an unjust enrichment under the garb of claiming compensation for a breach.

The definition in Section 73 of the Indian Contract Act necessarily pre-supposes that the damages are payable only if some loss has been occasioned by the breach. Succinctly stated, the principle is – No loss from the breach no damages. The same principle would, therefore, apply to a case of LD i.e. to be entitled to claim LD the aggrieved party must prove that it had suffered some loss arising out of the breach. To put it differently, even the LD cannot be claimed if it is proved that no actual damages were caused by the breach as held by the Delhi High Court in [Indian Oil Corporation Vs. Messrs Lloyds Steel Industries Limited; 2007 (144) DLT 659)]. In this case the Court held mere delay in construction and commissioning of the terminal at Jodhpur by the contractor did not entitle IOC to recover Liquidated Damages because there was no loss suffered by IOC. The Court found that pipeline reached Jodhpur terminal (on 31.8.1996) much after the date of completion of construction (31.3.1996) and the terminal could not be put to commercial use without pipeline reaching the terminal.

Few questions/concerns that generally arise concerning LD and our response thereto are mentioned herein below:

Difference between LD and a Penalty

A question frequently asked is 'what is the difference between LD and a Penalty'. While the LD is a pre-assessed loss agreed to between the parties at the time of making a contract, as likely to arise from the breach. On the other hand, a Penalty is a stipulation in the contract in the nature of terroram. A Penalty, generally speaking is a stipulation to award an imposition which is so disproportionate or excessive that no prudent person would consider the same as a reasonable assessment of damages arising out of the breach. For example, a stipulation in the contract providing that the party in breach would be liable to pay ten times of the contract price to the aggrieved party in case of a breach is in the nature of Penalty. Therefore, while both the LD as well as a Penalty are based on the stipulations mentioned in the contract itself, there is a stark distinction between the two terms. LD represents reasonable stipulation of likely losses, a Penalty is far from being reasonable and is intended to secure performance of the contract.

Whether the use of expression "genuine pre-estimate of likely damages" is essential or indicative of a stipulation in the nature of LD?

More often than not, a party opposing imposition of LD raises a point that unless the contract clause, which is said to be providing stipulation for imposition of LD, uses the expression "genuine pre-estimate of likely losses", it cannot be considered as a provision for LD. The parties then attempt to equate every such provision with that of Penalty to avoid imposition of damages as provided under the contract. Whether a provision is in the nature of LD or is a stipulation as a Penalty has to be seen from the quantum of damages provided for therein. Mere use of expression "genuine pre-estimate damages agreed between the parties" is not at all determinative of the nature of stipulation. The Court before which such stipulation is challenged will have to decide the same based on the facts and circumstances of each case and the relevant contractual clause. To qualify as a provision for LD, it must pass the test of being 'reasonable estimation of the parties'.

Can the Liquidated Damages be reduced proportionately depending upon the status of performance of the contract till the date of imposition of Liquidated Damages?

Another concern that engages the attention of the Courts and the Arbitrators is whether the amount of Liquidated Damages provided for under the contract can be reduced proportionately depending on the quantum of work done till the date of occurrence of breach. While it is true that wherever it is possible to prove actual damages, the party claiming LD will have to prove the losses actually suffered by it and confine its claim to that limit alone and not the full amount of agreed Liquidated Damages. However, it would not be correct to state that the provision of LD would itself get proportionately reduced depending on the quantum of performance achieved till the date of breach. This would amount to re-writing the contract, which is not permissible in law. Furthermore, such concept goes contrary to the basic idea of providing the LD, i.e. the parties taking informed decision at the time of entering into a contract and providing for pre-estimated damages.

Whether LD can be recovered without proving actual loss?

The Courts have repeatedly held that the provision for LD is not different from non-liquidated damages and in both the situations i.e. LD and non-Liquidated Damages, breach and the damage has to be proved [Egon Zhender Internaional Pvt. Ltd. Vs. Namgayal Institute For Research On Ladakhi Art and Culture; 2013(4) Arb.L.R. 273 (Delhi)]. However, when in certain situations it would be impossible for the Courts to assess the compensation arising from the breach, the Court can award the full liquidated damages if it is found to be a genuine pre-estimate by the parties as a measure for reasonable compensation. In Oil & Natural Gas Commission v. Saw Pipes Ltd – (2003) 5 SCC 705, the Supreme Court held that Arbitral Tribunal was wrong in refusing to award LD in favour of ONGC for want of proof of actual losses. Supreme Court held that delay in deployment of rigs resulted in change of the actual production of gas by ONGC. The Apex Court held that in such contracts it would be difficult to prove exact loss and after finding that the compensation provided for in the contract was not unreasonable, the Court upheld imposition of LD by ONGC on Saw Pipes Ltd.

Whether in all cases the Courts should allow full amount of Liquidated Damages?

The answer to the above question is obviously in the negative. Merely because the stipulation of LD is available in the contract, the aggrieved party cannot claim full amount of Liquidated Damages as a matter of right. Its entitlement would be to recover damages only to the extent of actual losses proved to have been suffered by it. In those cases, where no actual loss is proved, but undeniably losses have been caused, the Courts would not be powerless to award reasonable damages to the aggrieved party. There can be yet another type of situation i.e. where the nature of contract is such that assessing damages is not possible. In such a situation, the Court would be empowered to grant full amount of Liquidated Damages provided it is of the view that the same are fair and reasonable pre-estimate of damages agreed between the parties. [Herbicides (India) Ltd. vs. Shashank Pesticides Pvt. Ltd. 180 (2011) DLT 243].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Link Legal India Law Services
Singh & Associates
Singh & Associates
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Link Legal India Law Services
Singh & Associates
Singh & Associates
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions