THE TAMIL NADU NATIONAL LAW SCHOOL,

TIRUCHIRAPPALLI.

ACADEMIC SESSION:

2014-2015

BUSINESS COMMUNICATION

LIQUADATED DAMAGES AND COMPENSATION FOR DAMAGES "

SUBMITTED TO: SUBMITTED BY:

DR.T.S AGILLA MOHIT AGARWAL

Asst. Professor. ROLL NO. 37

TNNLS B,Com.LL.B(HONS.) SEM-II

Tiruchirappalli.
 DECLARATION

I, Mohit Agarwal hereby declare that the project work entitled LIQUADATED DAMGES
AND COMPENSATION FOR DAMAGES submitted to Tamil Nadu National Law School;
Tiruchirappalli, is the record of a bonafide work done by me under the supervision and
guidance of Prof. Mrs T.S AGILLA , Faculty of business organisation, Tamil Nadu National
Law School; Tiruchirappalli.

All information furnished in the project is true to the best of my knowledge and belief devoid
of plagiarism. If under the circumstances plagiarism is truly established, then the Law School
may be pleased to proceed with any action against me according to the Universitys rules and
regulations.

MOHIT AGARWAL

B.Com.,LL.B(H).

20-04-2015.
 CERTIFICATE

This is to certify that the Research Project entitled:LIQUADATED DAMGES AND

COMPENSATION FOR DAMAGES submitted to the Tamil Nadu National Law School;
Tiruchirappalli, in fulfilment of the requirements for internal component for B.COM; LL.B
(HONS.), first Semester is an original and bonafide research work carried out by MOHIT
AGARWAL under my supervision and guidance. No part of this study has been submitted to
any University for the award of any Degree or Diploma whatsoever.

Date: 20-04-2015

Place: Tiruchirappalli.
 ACKNOWLEDGEMENTS

At the outset, I take this opportunity to thank my Professor T.S AGILLA from the bottom of
my heart who has been of immense help during moments of anxiety and torpidity while the
project was taking its crucial shape.

Secondly, I convey my deepest regards to the administrative staff of TNNLS who held the
project in high esteem by providing reliable information in the form of library infrastructure
and database connections in times of need.

Thirdly, the contribution made by my parents and friends by foregoing their precious time is
unforgettable and highly solicited. Their valuable advice and timely supervision paved the
way for the successful completion of this project. Hence as a student, I am extremely grateful
and forever deeply indebted to him.

Finally, I thank the Almighty who gave me the courage and stamina to confront all hurdles
during the making of this project. Words arent sufficient to acknowledge the tremendous
contributions of various people involved in this project--- as I know Words are Poor
Comforters. I once again wholeheartedly and earnestly thank all the people who were
involved directly or indirectly during this project making which helped me to come out with
flying colours.
 PREFACE

This project is intended to carry out an extensive research on the given topic by the
supervisor. The material evidence presented in this project is purely based on secondary
sources and also certain standard of textual analysis have been thoroughly detailed. The
research and analysis conducted by the researchers are bona-fide and purely for academic
purposes.

Every effort is made to keep the project error free. I would gratefully acknowledge the
suggestions to improve the project to make it more useful.
 TABLE OF CONTENTS:

CHAPTER I (7)

INTRODUCTION.7

CHAPTER II (8-11)

TYPES OF BUSINESS LETTER 8

OBJECTIVES9
ADVANTAGES AND DISADVANTAGES OF LETTER ..............................10

CHAPTER III (11)

METHODOLOGY11

CHAPTER IV (12-14)

ORDERS AND THEIR EXECUTION ----------------------------------------------12

HINTS FOR DRAFING ORDER LETTER -----------------------------------------13

CHAPTER V (15-17)

EXECUTION OF ORDERS - DEFINATION---------------------------------------15

FORMAT OF DELAY IN EXECUTION LETTER ---------------------------------16

CHAPTER VI (16-17)

LETTER------------------------------------------------------------------------------------16

CHAPTER VII (18-19)

CONCLUSION..18

BIBLIOGRAPHY..
 LIQUADATED DAMAGES

The Indian Contract Act, 1872, provides a basic structure of the law of contract in
India, its enforcement, various provisions regarding non-performance and the breach
of contract. This report is aimed to highlight provisions regarding liquidated damages
in case of the breach of the contract and to bring about a comparative study between
India and England regarding it. Thus, before knowing what exactly liquidated
damages are, it is important to understand the consequences of breach of contract and
the damages awarded in case of breach. A party who is injured by the breach of a
contract may bring an action for damages and Damages means compensation in terms
of money for the loss suffered by the injured party. Thus, in contract when these
damages are awarded it is known as liquidated damages

Privity of contract and third party beneficiary in a contract:

The doctrine of privity of contract means that only those involved in striking a bargain
would have standing to enforce it. In general this is still the case, only parties to a
contract may sue for the breach of a contract, although in recent years the rule of
privity has eroded somewhat and third party beneficiaries have been allowed to
recover damages for breaches of contracts they were not party to. There are two times
where third party beneficiaries are allowed to fall under the contract. The duty owed
test looks to see if the third party was agreeing to pay a debt for the original party. The
intent to benefit test looks to see if circumstances indicate that the promisee intends to
give the beneficiary the benefit of the promised performance. Any defense allowed to
parties of the original contract extend to third party beneficiaries[1]. A recent example
is in England, where the Contract (Rights of Third Parties) Act 1999 was introduced

Contract Ratification:
Ratification is in law equivalent to previous authority it may be expressed or it may be
affected impliedly by conduct.[1] Section 196 and 197 of the act show that an act done
by person who is not authorized to do it, but who purports to act as an agent for
another person, can retrospectively ratified by such other person. From this it follows
logically, that such an act on the part of the person purporting to act as agent is not
void but voidable. If it is not ratified it becomes void but if it is ratified it will be
validated.

Relevance of Quasi-Contracts:

There are certain situations wherein certain persons are required to perform an
obligation despite the fact that he hasnt broken any contract nor committed any tort.
For instance, a person is obligated to restore the goods left at his home, by mistake,
and keep it in good condition. Such obligations are called quasi-contracts

Choice of law by the parties to the contract:

In this era of globalization where a contract contains one or more foreign elements,
the difficult and complicated question in proceeding that arises is that of ascertaining
its applicable law. Such difficulty stems from the multiplicity and diversity of
connecting factors and each of them may arise in a different jurisdiction for instance
the place where the contract was made; the place of performance; the place of
business of the parties; the place of payment; the currency of payment; domicile or
nationality o the parties and so on. So to avoid this situation parties are granted with
the freedom to select the law to govern their contract under the provisions of Rome
convention. The inclusion of a choice of law clause is such an everyday matter in
international contracts that its absence would be to ignore commercial realities

74. Compensation for breach of contract where penalty stipulated for.

1. 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 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.

Explanation.-A stipulation for increased interest from the date of default may be a
stipulation by way of penalty.

Illustrations

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

(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, not
exceeding Rs.5,000, as the Court considers reasonable.

(c). A gives B a bond for the 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 the rate of 75 per cent. from the date of default. This is a stipulation by way of
penalty, and B is only entitled to recover from A such compensation as the Court
considers reasonable.

(d) 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

Section 74 of the Act deals with the situation where the parties to a contract agree that
the contract itself will stipulate the penalty for the breach of the contract i.e.
liquidated damages. The main principle behind this section is to promote certainty in
commercial contracts. Section 74 provides that damages, not exceeding the amount
stipulated in the contract, must be given to the injured party on breach of the contract.
It further provides that such damages must be given to the injured party irrespective of
any actual loss or damage proved by them. The explanation to Section 74
distinguishes between a genuine pre-estimate of the damages and a penalty.

This distinction between estimated damages and a penalty is significant when

enforcing one's rights in court. In the former, the courts do not have the discretion to
question the amount agreed upon as damages by the parties. However, in the case of a
penalty that is stipulated, even though the courts may not reject the claim in its
entirety, they have the discretion to reduce an unconscionable amount to what they
may perceive as reasonable. However, it is pertinent to note that no claim of liquidated
damages is maintainable unless the promisee is proved to have sustained loss due to
the default of the promisor. One cannot compensate a person who has not suffered any
loss or damage. Therefore, in the absence or proof of damage for any breach of
obligations, no sum of money named in a contract can be claimed. There may be cases
where the actual loss or damage is incapable of proof. Section 74 exempts a party
from such responsibility and enables him to claim compensation in spite of his failure
to prove the actual extent of the loss or damage, but the party must establish that he
has suffered some loss or damage. The proof of this basic requirement of
loss/damage is not dispensed with by Section 74. It merely dispenses with the proof
of the actual loss/damage. The courts, in such cases where it is difficult to ascertain
the precise amount of damages, have the discretion to award reasonable compensation
to the aggrieved party.

A penalty can be said to be a sum so stipulated in terrorem (with the object of

coercing the party into performing the contract), and thus an amount qualifies to be a
penalty if the sum named is extravagant and unconscionable. It is also a penalty if the
breach consists in paying of money and the sum stipulated is greater than the sum
which ought to have been paid. However, liquidated damages are a genuine,
covenanted pre-estimate of damages as seen above. They are both to be so judged
on the facts of each case. The question whether a particular stipulation in a contract is
in the nature of the penalty has to be determined by the court against the background
of various relevant factors, such as the character of transaction and its special nature,
if any, the relative situation of the parties, the rights and obligations accruing from
such a transaction under the law and the intention of the parties incorporating in the
contract, the particular stipulation which is contended to be penal in nature. If on such
a comprehensive consideration, the court finds that the real purpose for which the
stipulation was incorporated in the contract was that by reason of its burdensome or
oppressive character, it may operate in terrorem over the promisor so as to drive him
to fulfill the contract, and then the provision will be held to be of Penalty.

Under English Common Law, parties may name a sum to be payable in case of
breach, which if classified by the court as a penalty is irrecoverable but if classified as
liquidated damages is recoverable. However, the Law of Contracts in India does not
recognise any qualitative difference in the nature of damages, as section 74 eliminates
the somewhat elaborate refinement under Common Law. In case of a penal clause,
damages will be assessed in the usual way, and the plaintiff may even recover a sum
greater than the stipulated amount. In discerning the true nature of the contract and the
compensation payable, the court must have regard to the terms and inherent
circumstances at the time of the making of the contract and not at the time the breach
occurred. The terms used by the parties are not conclusive and the court is not bound
by their phraseology. If the term is stated to be a penalty but turns out to be a genuine
pre-estimate of loss, it will be treated as liquidated damages.

Sometimes there is a very thin line dividing provisions relating to liquidated damages
and penalty. A distinction as to whether the stipulation is one by way of liquidated
damages or penalty has been summed up by the House of Lords inDunlop Pneumatic
Tyre Co. Ltd. Vs New Garage and Motor Company Ltd as follows:

The parties who use the expression `penalty' or liquidated `damages' may prima facie
mean what they say, yet the expressions are not conclusive.

The essence of a penalty is a payment of money in terrorem of an offending party; the

essence of liquidated damages is a genuine pre-estimate of probable loss.
 The question whether a sum is a penalty or liquidated damages is a matter of
construction of the particular contract, to be judged at the time of its formation and
not at the time of its breach.

To assist in this task of construction, various tests have been suggested, which if
applicable to the case under construction may prove helpful or even conclusive.
Some of the such tests are: -

i. The sum stipulated shall be a penalty if it is extravagant and unconscionable in

amount in comparison with greatest loss that could conceivably be proved to follow
from breach.

ii. It would be a penalty if breach consists only in not paying sum of money and sum
stipulated is greater than sum which ought to have been paid;

iii. Presumption (but no more) that it is a penalty when single sum made payable by
way of compensation, or occurrence of one or more or all of such events, which
may occasion serious damage or trifling damage, on the other hand; and

iv. No obstacle to sum stipulated being a genuine pre-estimate of damage that

consequences of breach are such as to make precise pre-estimation almost
impossible. On the contrary, that is the situation when probably the pre-estimated
damage was true bargain between parties.

POSITION UNDER INDIAN LAW

Section 74 of the Indian Contract Act reads as follows:- 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 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. InFateh Chand v Balkishan Das , the Supreme Court
stated:
Section 74 declares the law as to liability upon breach of contract where compensation
is by agreement of parties predetermined or where there is a stipulation by way of
penalty. But the application of the enactment is not restricted to cases where the
aggrieved party claims relief as a plaintiff. The section does not confer a special
benefit upon any party. It merely declares the law that notwithstanding any term in the
contract for determining the damages or providing for forfeiture of any property by
way of penalty, the Court will award to the party aggrieved only reasonable
compensation not exceeding the amount named or penalty stipulated. The Court also
held that the jurisdiction of the court to award compensation under section 73 in case
of breach of contract is unqualified except as to the maximum stipulated, and
compensation has to be reasonable. This section has to be read in conjunction with
section 74, section 74 emphasizes that in case of breach of contract, the party
complaining of the breach is entitled to receive reasonable compensation whether or
not the actual loss is proved.
 MAULA BUX CASE

One has to go further and see how the relevant part of section 74 has been interpreted.

MAULA BUX Vs. UNION OF INDIA (AIR 1970 SC 1955), another case referred to
by the SAW PIPES BENCH , throws considerable light on the interpretation of the
section . This was also a case of penalty . The petitioner, entered into two separate
contracts with Government Of India , one for the supply of potatoes and the other , for
poultry eggs etc. , to the MILITARY HEADQUATERS , UP . He committed breach of
both the contracts . The contracts provided for forfeiture of the amounts he had
deposited as security for performance under each contract . On his breach , the
contracts decision , but held that the Government of India was not entitled to forfeiture
the amounts as it had not suffered any loss as the consequent on breach of contracts by
the petitioner. The High Court of Allahabad modified the decree and awarded the sum
of RS with interest . In the view of high court , even if the deposits were held to be in
nature of penalty , the Government was entitled , on breach of contracts , to reasonable
compensation under section 74 , under the part "whether or not actual damage or loss
was proved to have been caused "

The plaintiff appealed to the supreme court . the supreme court did not agree with the
view of the high court that the amounts deposited by the Plaintiff with the
Government could be regarded as earnest money , because they were not part of the
purchase price , but deposited as security for guaranteeing due performance of the two
contracts . the supreme court quoted from FATEH CHAND , for the propositions that
Section 74 would apply to any cause providing for forfeiture , whether of money
already paid to the claimant or of money which the claimant may be seeking, and is in
nature of a penalty .It also added that forfeiture of a reasonable amount paid as
earnest money would not amount to imposing a penalty and that of would be outside
Section 74 , but if the forfeiture were to be of the nature of penalty , section 74 would
apply .The Court explained when the terms would become a penalty in the following
words "where under the terms of has already paid to the party complaining of a breach
of contract , the undertaking is of the nature of a penalty" . Proof of Loss or Damage ,
under section 74 of Contracts ACT 1872 Articles Articles

PROOF OF ACTUAL DAMAGE OR LOSS

Dealing with the argument for the government that the amounts were a genuine pre
-0estimate of damages which the union was like to suffer consequent to a breach and
that according to Section 74 it was entitled to claim reasonable compensation whether
or not actual damage or loss was proved to have been caused thereby , proved to have
been caused thereby " is intended to cover . The court ruled that where compensation
that may be ordered cannot be assessed,

by the court , according to established rules , the sum named by the parties if it
regarded as a genuine pre-estimate may be taken into consideration as the measure of
reasonable compensation , but not if the sum name is in the nature of a penalty . As the
Government had failed to prove that it had suffered any loss or damage consequent to
the breach of contract , the Supreme court decreed that the amounts deposited by the
plaintiff be returned to him with interest

WHAT IS THE SUBSTANCE OF THESE DECISIONS

If one were to go back to the text of the section , the principle that can be ascertained
is that a person complaining of a breach of contract is entitled to reasonable
compensation , within the limits of the sum named or the penalty , without having to
prove actual loss or damage caused by the breach . That is the basic clear , it is where
a contract provides for liquidated damages , several variables could change the rights
of provided for liquidated damage payable on breach and neither the breach nor the
reasonableness of the estimated damages disputed by SAW Pipes . If there is no loss
or damage at all and could be proved , no compensation may be ordered . actually ,
SAW Pipes could also treated as establishing the burden of proof .
BIBLIOGRAPHY

WEBSITES

www.manupatra.co.in

www.indiakannon.orm

www.google.com

www.wikipedia.com

BOOKS

R.K. BANGIA LAW OF CONTRACTS -I