Fatehchand v. Balkishan Das (1964) — Section 74 & Liquidated Damages

The Supreme Court clarified Section 74 of the Contract Act. A party gets only reasonable compensation for breach. A named sum or a forfeiture clause is only a limit, not an automatic award. In this case, only a small part could be kept as earnest money. The rest needed proof of loss.

• Penalty ≠ automatic payment.
• Reasonable compensation ≤ named sum.
• Earnest money may be forfeited if reasonable.

1. Who committed the breach — the seller or the buyer?
2. Can the seller forfeit the large deposit under the contract?
3. How does Section 74 control liquidated damages and penalties?

Section 74 (Contract Act): It applies to cases with a named sum or a penalty clause, and also when a party tries to forfeit money already received.

• The Court gives only reasonable compensation, never more than the named sum.
• The section is neutral: it gives no special benefit to either side.
• Forfeiture by way of penalty is controlled by the same rule.

The Supreme Court said the seller could keep only ₹1,000 as earnest money. The rest of the ₹25,000 could not be forfeited without proof of loss. Mesne profits were fixed at ₹140 per month from 1 June 1949 till delivery, with 6% interest.

• Reasonable compensation only; never exceed the named sum.
• Section 74 applies to claims and to forfeiture attempts alike.
• Earnest money may be forfeited if reasonable; penalties need proof of loss when loss is measurable.

This is the starting point for Section 74 in India. It guides how to draft and enforce liquidated damages clauses. It stops unfair penalties and protects both sides by insisting on reasonableness.

Mnemonic: “R-CAP” — Reasonable Compensation, Against Penalty.

1. Reasonable: Court fixes a fair amount.
2. Cap: Never more than the named sum.
3. Penalty check: Forfeiture cannot bypass proof.

Liquidated Damages

Amount named in the contract as a fair guess of loss if breach happens.

Penalty

Amount meant to punish, not to fairly cover loss; limited by law.

Earnest Money

Buyer’s deposit in a sale to show intent; reasonable forfeiture may be allowed.

Mesne Profits

Money for use and occupation of property by someone not lawfully entitled.