Chapter VI - Of the Consequences of Breach of Contract
Section 74
Section 74: Stipulated penalties and reasonable compensation
Section 74 addresses a named breach payment or another contractual penalty stipulation. The ordinary rule is reasonable compensation capped by the named amount or penalty, rather than automatic recovery of the whole figure.
On this page
Need advice on Section 74?
This article is for general information. Refer to the Indian Contract Act, 1872 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
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.
Exception.—When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation.—A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.
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 Apractises 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 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 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.
(e) A, who owes money to B a money-lender, undertakes to repay him by delivering to him 10 maunds of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 maunds. This is a stipulation by way of penalty, and B is only entitled to reasonable compensation 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.
Rule and business relevance
The statutory wording applies whether or not actual damage or loss is proved, but still describes reasonable compensation following breach. An increased interest rate from default may be a penalty. A separate exception concerns the specified bonds and public-duty instruments, with an explanation that a Government contract is not necessarily a public-duty undertaking.
Limits and related provisions
Do not promise that the entire stipulated sum is recoverable merely because it appears in the contract, or assume every named sum is void. The breach, clause, loss context, evidential position and applicable legal interpretation require review. Historical statutory illustrations must not be used to bypass current rules on the underlying agreement's validity, including restraint of trade.
Hypothetical business example
Hypothetical: a service agreement states a large fixed payment for any breach. On an alleged breach, the parties examine reasonable compensation and the statutory ceiling instead of treating the printed figure as an automatic invoice payable in full.
Practical decision flow
Identify the actual breach and the named-sum or penalty clause relied on.
Gather evidence relevant to reasonable compensation and distinguish the ceiling from the amount justified.
Check whether the narrow bond/public-duty exception genuinely applies and obtain advice on enforcement.
Check the applicable legal framework
This guide explains the central provision. Applicable State amendments, the agreement, transaction date and other governing laws can affect its application. Check the current legal framework before relying on it for a commercial decision.
Practical checklist
Do
- Identify the actual breach and the named-sum or penalty clause relied on.
- Gather evidence relevant to reasonable compensation and distinguish the ceiling from the amount justified.
- Check whether the narrow bond/public-duty exception genuinely applies and obtain advice on enforcement.
Avoid
- Do not promise that the entire stipulated sum is recoverable merely because it appears in the contract, or assume every named sum is void. The breach, clause, loss context, evidential position and applicable legal interpretation require review. Historical statutory illustrations must not be used to bypass current rules on the underlying agreement's validity, including restraint of trade.
Glossary
- Reasonable compensation
- The compensation standard in the ordinary Section 74 rule.
- Statutory ceiling
- The maximum named amount or stipulated penalty, not necessarily the sum awarded.
Frequently asked questions
Is the whole named sum automatically recoverable?
No. The ordinary rule provides reasonable compensation not exceeding that sum or penalty.
Can increased default interest be a penalty?
The explanation says such a stipulation may be a penalty; assess the actual clause.
Does every Government contract fall within the public-duty exception?
No. The statutory explanation expressly rejects that assumption.
Does the wording eliminate every evidential issue about loss?
No. Reasonable compensation and the applicable legal interpretation still require a case-specific evidential assessment.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026