Section 74 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 74 deals with a contract that names a sum payable on breach, or contains any other stipulation by way of penalty. In either case, the party complaining of the breach is entitled to reasonable compensation not exceeding the amount named or the penalty stipulated, whether or not actual loss is proved. The section then adds an Explanation about increased interest and an Exception for certain bonds. If you are drafting a delay or termination clause, our agreement drafting service can help you word it with this section in mind.
When a contract is broken and it names a sum payable on breach, or contains any other stipulation by way of penalty, the party complaining is entitled, whether or not actual damage or loss is proved, to reasonable compensation not exceeding the amount named or the penalty stipulated. A stipulation for increased interest from the date of default may be a stipulation by way of penalty. The Exception: a bail-bond, recognizance or similar instrument, or a bond for a public duty, makes the person liable to pay the whole sum on breach.
Amendment note
The first paragraph and the Explanation printed within the square brackets were substituted by Act 6 of 1899, section 4, for the original first paragraph of section 74. Illustrations (d) to (g) were added by the same Act. The Exception refers to the "Central Government" and "State Government"; footnotes record that these words were substituted by the Adaptation of Laws Orders of 1937 and 1950 for earlier expressions.
The first paragraph, limb by limb
"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."
| Phrase | What it tells you |
|---|---|
| "When a contract has been broken" | The section applies after a breach. |
| "a sum is named in the contract as the amount to be paid in case of such breach" | A pre-agreed sum for breach (often called liquidated damages). |
| "any other stipulation by way of penalty" | Penalty is not limited to a money sum; any stipulation by way of penalty counts. |
| "whether or not actual damage or loss is proved" | The complaining party does not have to prove actual loss to get compensation under this section. |
| "reasonable compensation" | The amount awarded is reasonable compensation. |
| "not exceeding the amount so named or ... the penalty stipulated for" | The named sum or penalty is a ceiling. |
The section does not say how reasonableness is judged and does not list factors. The illustrations show it as "such compensation, not exceeding , as the Court considers reasonable". We state no further rule.
The Explanation to the first paragraph
"A stipulation for increased interest from the date of default may be a stipulation by way of penalty."
Note the word "may". The section does not say that every increase in interest is a penalty; illustration (d) shows one that is.
The Exception: bail-bonds, recognizances and public-duty bonds
"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."
The second Explanation (to the Exception): "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." So a contract with Government is not, by that fact alone, within the Exception.
The Act's illustrations
| Illustration | Facts | Result |
|---|---|---|
| (a) | A contracts with B to pay Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A fails. | B is entitled to recover 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 there. | 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 it. | He is liable to pay the whole penalty. |
| (d) | A gives B a bond to repay Rs. 1,000 with interest at 12 per cent at the end of six months, stipulating that on default interest will be payable at 75 per cent from the date of default. | A stipulation by way of penalty; B is only entitled to such compensation as the Court considers reasonable. |
| (e) | A, who owes money to B, a money-lender, undertakes to repay by delivering 10 maunds of grain on a certain date, and stipulates that if he does not deliver by that date he shall deliver 20 maunds. | A stipulation by way of penalty; B is entitled only to reasonable compensation. |
| (f) | A undertakes to repay a loan of Rs. 1,000 by five equal monthly instalments, stipulating that on default of any instalment the whole becomes due. | Not a stipulation by way of penalty; the contract may be enforced according to its terms. |
| (g) | A borrows Rs. 100 from B and gives a bond for Rs. 200 payable by five yearly instalments of Rs. 40, stipulating that on default of any instalment the whole becomes due. | A stipulation by way of penalty. |
Illustrations (f) and (g) are instructive because they look alike and have opposite results: in (f) the whole of the same loan falls due; in (g) the bond is for Rs. 200 against a Rs. 100 loan.
A modern example (ours)
Tara Constructions agrees to hand over a flat to Umesh by 31 December and the agreement says Rs. 50,000 is payable for each month of delay. Tara hands over two months late. Under s.74, Umesh is entitled, whether or not he proves actual loss, to reasonable compensation not exceeding the amount named (here, Rs. 1 lakh on these round numbers). If the agreement had said "Rs. 50 lakh for any delay", the amount named would still be a ceiling, and reasonable compensation not exceeding it is what the section gives.
What can the parties change?
Section 74 has no "contrary intention" words. What the parties choose to write determines what sum is "named" or what stipulation is "by way of penalty", and so what the ceiling is. They cannot, by calling something "liquidated damages", prevent the section from applying to a sum named in the contract; the section applies to "a sum named" and to "any other stipulation by way of penalty". The effect of particular wording turns on case law not covered here.
Practical points
- Name a sum that is a realistic estimate of likely loss for the breach; the section gives reasonable compensation up to that sum.
- Do not rely on a very large figure being awarded in full. The Act's own illustrations speak of reasonable compensation.
- Check interest clauses. Under the Explanation, increased interest from the date of default may be a penalty.
- Check acceleration clauses. Illustrations (f) and (g) show a contrast.
- Bonds for public duties fall in the Exception and are payable in full on breach.
- Read with the general rule on damages: section 73. For stamp duty on bonds, see our guide on stamp duty on guarantee and indemnity deeds; this article gives no figures.
Need help drafting a delay or termination clause?
A clause that names a sum for breach should be drafted with section 74 in mind. Our agreement drafting team can help you set out the trigger, the sum, the interest terms and the notice steps. Share your draft and the commercial background and we will point out the clauses this section may affect.
Key takeaways
- Where a contract names a sum payable on breach, or has any other stipulation by way of penalty, the complaining party gets reasonable compensation not exceeding that sum, whether or not actual loss is proved.
- Increased interest from the date of default may be a penalty (Explanation).
- Bail-bonds, recognizances and bonds for public duties are payable in full (Exception).
- A contract with Government does not by itself involve a public duty.
- The amendment of 1899 substituted the first paragraph and added illustrations (d) to (g).
Read next
- Section 73 (first paragraph): compensation for breach of contract and remoteness of damage
- Section 75: compensation to party rightfully rescinding contract
- Stamp duty on guarantee and indemnity deed
Disclaimer: Based on the text of the Indian Contract Act, 1872 as consulted on 1 October 2026. Many questions under this Act turn on case law and on the wording of the particular contract, which this article does not cover. It is general information, not legal advice; check the official text and take advice before acting.