Shivprasad Swaminathan's latest article in the Chinese Journal of Comparative Law (link-subscription required) De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, 6 Chinese Journal of Comparative Law 103-127 (2018) presents an interesting read and is an article which every Indian lawyer- practitioner, judge or academician- should read, Good articles on Contract Law from an Indian perspective are rare and the paper provides deep insights on the subject.
Ask any lawyer about what are essentially required to be established in a court to be entitled for liquidated damages and he is likely to scratch his head or mislead you. If you file a claim in a court (or an arbitral tribunal) for liquidated damages and furnish some evidence, you can only hope to god on whether the court will award you the said amount. So the claimant ends up furnishing the best evidence he has, "whether or not actual damage or loss is proved to have been caused".
The key takeaways of the article are listed out below:
- The article provides a much-required drafting history of Section 74
- It also discusses the objective of Section 74- to no more get into the LD-penalty dichotomy and how the dichotomy was introduced through the 1899 amendments.
- The article notes how the supposedly "landmark" decisions on LD repeatedly brought the dichotomy into S. 74 when it was not warranted at all.
- "Reasonable" was a "trouser word": its determination was by establishing unreasonableness.
- The article also analyses the relatively recent judgement Kailash Nath v DDA and how the Supreme Court tried to construe Section 74 to mitigate the uncertainty brought about by the dichotomy.
The author argues that a "trichotomy" was introduced in Kailash Nath- liquidated damages, other liquidated amounts and penalty in place of the standard dichotomy (See, Part II of the article). This blawgger is not sure if RF Nariman, J did that in the case. We'll quote the relevant portion of the judgement from which the author seeks to draw this inference:
"Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.
The Section applies whether a person is a plaintiff or a defendant in a suit.
The sum spoken of may already be paid or be payable in future.
The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded."
Kailash Nath nowhere uses the phrase "other liquidated amounts". It appears that "liquidated amounts" referred to above is qualified by "payable by way of damages". Nariman's decision is that if the above said liquidated amount payable by way of damages is found by the court to be a genuine pre-estimate of damages fixed by both parties, then the said amount is reasonable compensation but if it is not a genuine pre-estimate of damages fixed by both parties, it is a penalty for which only reasonable compensation could be awarded. In sum, there seems to be no trichotomy.
Nevertheless, this is just a minor issue with the paper that's a brilliant read. The author admirably concludes that the Act has deviated from the drafter's design, which originally could accommodate the test of legitimate interests of the promisee in assessing reasonableness (and enforcement of) the LD clause. The test is currently in vogue post-Cavendish Square. The author argues that the Section as originally drafted without the dichotomy could accommodate the legitimate interest test "[b]ut it was not to be". Now that Canvedish is the law in the common law world, it is time for us to exorcise the dichotomy and embark on reforming the law.