Contract Act Explained for Judiciary Exams Part 15

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📜 Indian Contract Act 1872: Sections 74 & 75 Explained

⚖️ Section 74 – Compensation where penalty is already stipulated for

Article 74: 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 other stipulation by way of penalty, the party complaining of breach is entitled to receive from the party who has broken contract reasonable compensation not exceeding the amount so named or the penalty stipulated for whether or not actual damage/loss is proved to have been caused thereby.

📌 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 or gives any bond for performance of a public duty or an act in which public are interested under any law or under orders of Govt he shall be liable upon breach of any condition to pay the whole sum mentioned therein.

ℹ️ Further Explanation

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

📖 Illustrations under Section 74

(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 as Court considers reasonable but not exceeding Rs. 1,000.

(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 as court considers reasonable but not exceeding Rs. 5,000.

(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 bond for 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 75 per cent from date of default. This is a stipulation by way of penalty. B is entitled to recover from A only such compensation as 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 and stipulates that, on not delivering it by due date, he shall be liable to deliver 20 maunds. This is a stipulation by way of penalty. B is entitled only to reasonable consideration 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.

⚖️ Section 75 – Compensation for rightful rescission of contract

A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through non-fulfilment of the contract.

📖 Illustration under Section 75

A, a singer, contracts with B, manager of a theatre, to sing at his theatre for two nights in every week. B engages to pay her 100 rupees for each night. On sixth night, A wilfully absents herself. B, in consequence, rescinds the contract. B is entitled to claim compensation for damage sustained by him.

📚 Continue Your Contract Act Preparation

Don’t stop here! Strengthen your knowledge of the Contract Act with our other fully solved tests:

👉 Read Contract Act Part 14

👉 Read Contract Act Part 16

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❓ Frequently Asked Questions (FAQs)

📌 What is Section 74 of the Indian Contract Act about?

Section 74 deals with situations where a contract specifies a penalty or fixed sum to be paid in case of breach. It ensures that only reasonable compensation, not exceeding the penalty amount, can be awarded even if no actual loss is proved.

⚖️ How does the court decide compensation under Section 74?

The court evaluates whether the stipulated penalty is reasonable. Even if the contract specifies a large penalty, the court will award only reasonable compensation based on facts of the case, not automatically the full penalty.

⛔ Is every penalty clause in a contract valid under Section 74?

Not always. While penalty clauses are recognized, courts scrutinize them carefully. Clauses that are excessive or disproportionate may be reduced, and only reasonable compensation is awarded.

💡 What is the difference between Section 74 and Section 75?

Section 74 covers compensation where a penalty is stipulated for breach of contract, while Section 75 grants compensation to a person who rightfully rescinds a contract due to non-performance by the other party.

🎭 Can you give an example of Section 75 in real life?

If a singer fails to perform at scheduled shows and the theatre manager rescinds the contract, the manager can claim damages for losses suffered due to the singer’s absence. This falls under Section 75.

📚 Why is Section 74 important for students of law?

Section 74 is crucial because it balances fairness in contracts. It prevents exploitation through harsh penalties while ensuring that the injured party still gets reasonable compensation. Law students often study its illustrations for exams and case law applications.

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