De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872

De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872 Abstract The drafters of the Indian Contract Act, 1872 had boldly sought to dispense with the English law’s troublesome liquidated damages-penalty dichotomy by providing in Section 74 that sums stipulated in the contract were to be awarded notwithstanding any proof of ‘actual damage or loss’, and, as a safety valve, empowered courts to scale down the sum. The drafters astutely avoided any reference to ‘liquidated damages’ or ‘penalties’ by employing the neologism ‘sum named in the contract’. Fast-forward by a century and a half, however, and one finds a double dissonance between the drafters’ blueprint and the law. First, the liquidated damages–penalty distinction has now become firmly entrenched in Indian law without any real scholarly or judicial resistance. Second, ‘reasonable compensation’ is now confined to compensation for damage or loss. The article hypothesizes that much of this is attributable to an ambiguity unwittingly introduced by the—universally overlooked—1899 amendment to section 74, the chief architect of which was the ace draftsman and treatise writer Mackenzie Chalmers. The amendment had meant to ‘slightly extend’ section 74 so as to cover some hitherto unregulated cases—namely, increased interest stipulations, acceleration clauses, and payments in specie—but did so by using the poorly chosen phrase ‘or…any other stipulation by way of penalty’ to convey this extension. This drafting slip-up was to become the Trojan horse that let in the English law’s notion of ‘penalty’ and along with it, came tethered, the notion of ‘liquidated damages’. I. A troublesome knot in the common law In an apocryphal encyclopaedia, Jorge Luis Borges tells us, animals are divided into fourteen taxonomical categories, some of which are as follows: ‘those that belong to the Emperor’; ‘fabulous’ ones; those ‘included in the present classification’; and ‘those that from a long way off look like flies’.1 It would hardly require a professional logician to spot the snag in the classification. It is neither exhaustive nor mutually exclusive. Its criteria are arbitrary, and how one classified any given animal would be down to adventitious happenstance shorn of any constraining normative guidance from the categories themselves. A central doctrine of the English law of contract—the liquidated damages–penalty dichotomy—has revolved around the fulcrum of a dichotomy that, it could be argued, has operated in just this manner. The liquidated damages–penalty dichotomy is neither exhaustive of the entire spectrum of contractual stipulations nor are the categories mutually exclusive. If a stipulated sum is a genuine pre-estimate of damages expected on breach, the dichotomy went, it is a liquidated damages clause and, hence, to be enforced in its entirety—even if no loss were actually caused. If a clause is not that, it was deemed to be a penalty which is, in terrorem, meant as a sanction to goad a party into performance and, hence, to be not enforced.2 It was to be all or nothing at all, with nothing in between. Imposing a sliding scale and thereby tinkering with the agreement so as to ‘reflect a more equitable position’ was something unacceptable to the common law mind.3 Its lack of adaptability to a sliding scale was, however, the least of this taxonomy’s foibles. There were more existential problems afoot. Like Borges’ animals, there could be stipulations that could have simultaneously fallen in both categories—or, indeed, in neither. If the idea of in terrorem is to be understood in psychological terms, there is no good reason to suppose that a genuine liquidated damages clause would not deter. As a phenomenological matter, it would, in all probability, deter just as any other contractual remedy would.4 The classification supported another logical oddity. Stipulations in cases where it was not possible to offer a genuine pre-estimate of loss were because of the very reason of not being amenable to a genuine pre-estimate of damages, classified as liquidated damages clauses.5 This was something of an antinomy because the very definition of a liquidated damages stipulation was its susceptibility to a genuine pre-estimate of loss. Then, there was the case of forfeiture of deposits or advance payments. Here, it was recognized that creating ‘fear’ of sanctions to perform a contract was a genuine function of a deposit and accordingly reasonable deposits were allowed to be forfeited although they were not genuine pre-estimates of damage.6 If there was a bit of the common law to which T.E. Holland’s moniker of being in a state of ‘chaos’ applied on all fours, it was this. And it was here that—with apologies to Lord Denning—‘bold spirits’ of great judges past sagged to the resignation that no order was to be deciphered.7 In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, Lord Atkinson had suggested a more transparent approach to the problem.8 The test he proposed was to determine the propriety of interest that the agreed stipulation sought to protect. Dunlop, however, was destined to become synonymous with Lord Dunedin’s compensatory–penal dichotomy, which has since been sought to be used as a code-like formula by courts.9 When, in 2015, the United Kingdom Supreme Court eventually set right the ‘artificial categorization’ of the law in this area, it drew on Lord Atkinson’s approach and posited a test of ‘legitimate interest’ on which stipulated sums were to be policed. This brought the English law closer to the ‘reasonableness’ test used by courts in the USA, which adjudicates on stipulations on the basis of whether ‘the clause is reasonable under the totality of circumstances’.10 The contours of the liquidated damages–penalty dichotomy have, no doubt, shifted over the two centuries of its career, but by the 1860s, when the Indian Contract Act was being drafted, it had already earned notoriety for its obscurity. Best CJ observed in 1827 that ‘the law relative to liquidated damages has been in a state of great uncertainty’.11 The Privy Council noted in 1858 that the ‘great number of decisions’ on the subject at English law were ‘not strictly reconcilable’ with each other.12 This ‘arbitrary’ and ‘complicated’13 welter of precedent would hardly have commended itself to the drafters defining the contours of contract law de novo.14 The Indian law commissioners who produced the first draft of the contract code in 1866, among whom were Henry Maine and William Macpherson, were keen to give it a wide berth: In order to avoid the litigation which arises under the English law on the subject of the distinction between penalty and liquidated damages where a contract contains a stipulation that a specified sum shall be paid in case of its breach, we propose that the rule of law should have no regard to that distinction, but simply require payment of the specified sum.15 This proposal for ‘literal enforcement’16 of the stipulated sum appears to have been inspired by the French Civil Code, which represented the logical apotheosis of the will theory.17 The will theory sought to respect the ‘autonomy’ of parties by purporting to enforce whatever they willed.18 On a strict view of the will theory, the ‘harsh effect’, if any, of giving effect to such stipulations would be merely a collateral sacrifice at the altar of principle.19 In the mid-nineteenth century, when the Indian Contract Act was being drafted, the will theory had generated significant excitement in England, leading to frantic academic and judicial attempts to reorient all of the English law of contract law to its principles.20 The Indian Contract Act—unsurprisingly, for a mid-nineteenth century code—was influenced by the will theory, and where it conflicted with the orthodox English doctrine of contract, the drafters threw their weight behind the will theory.21 The Act was far from a straightforward codification of the English law and deviated from the English law on various points such as the one presently under discussion.22 Opinions were invited on the draft bill, and a good number of the opinions received on the proposed provision on stipulated sums revolved around a central concern: the lack of a safety valve. That the law ought not to ‘lend its aid’ to enforce stipulations that were ‘unreasonable and preposterous’;23 that it was ‘advisable to leave some discretion to the judge’ where the stipulated sum is ‘too exorbitant’ or ‘excessive’;24 that an ‘option’ ought to be ‘retained by the Courts for equitably mitigating’ clauses which were unduly severe;25 that the provision, as it stood, would lead to ‘hard cases’,26 and much ‘injustice’ would result, were such stipulations to be enforced with ‘undue rigour’;27 that people ‘need to be protected from their own rashness in entering into overreaching contracts’;28 and that there was also the concern that it would be unfair if the same amount was ‘exigible’ regardless of the extent to which contract was performed29—all these, it might be noted, were valid concerns that could have been met by providing for a scaling down mechanism in the provision that was to become operational in cases of excessive or unreasonable stipulations.30 Accordingly, the final version of the code contained a sliding scale appended to the draft provision. Such a measure is favoured in several civil law jurisdictions as the right way to deal with ‘unreasonably high’ stipulated sums:31 Compensation for breach of contract in which sum is named as payable in case of breach—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, 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.32 The drafting history and phraseology of the section strongly suggest that ‘reasonable’ here was meant in the sense of what J.L. Austin, called (in dated language) a ‘trouser word’33—where all the work was done by its opposite ‘unreasonable’. The courts were to scale down a stipulated sum only when the stipulation was ‘unreasonable’; if it was not unreasonable, all of it could be awarded as reasonable compensation. Section 74 achieved, a century and a half in advance, everything that a reasonableness-oriented standard such as that of Cavendish achieved—and more, as the idea of reasonableness here was attached to a sliding scale; it was not binary like that of Cavendish, which continues to remain tied to the all-or-nothing silos of liquidated damages and penalty. As Sir Frederick Pollock and Sir Dinshah Mulla noted in their influential commentary on the Indian Contract Act (1905), section 74 of the Act ‘boldly cut the most troublesome knot in the Common Law doctrine of damages’.34 Whitley Stokes, similarly, found in his 1888 commentary on the Indian Contract Act that the effect of the provision was to completely do away with the English liquidated damages–penalty dichotomy.35 An Indian court was to put section 74 to use, unencumbered by the complexities of English law’s liquidated damages–penalty.36 One of its obvious purposes was to ‘save labour’ for the courts by relieving them of the endless logic chopping over whether a given provision was a liquidated damages clause or a penalty clause.37 Labour would also be saved by dispensing with any need to prove damages or loss in awarding reasonable compensation—another legitimate function of contractual stipulations going back to its Roman law roots. In Roman law, one of the functions of the stipulateo poenae was to avoid difficulties of proof,38 and, by implication, ‘preempt unnecessary judicial investigation into the assessment of damages’.39Also, significantly, the provision ingeniously employed a neologism, ‘sum named in the contract’ (referred to here as ‘stipulated sums’) instead of the familiar common law terms ‘penalty’ and ‘liquidated damages’ or terms prevalent in the civil law world such a ‘penal stipulation’. The anxiety of the drafters, presumably, must have been to block any avenues for slipping back into the old penal–compensatory distinction that had troubled the English common law. This was a noteworthy innovation. Even now, as Reinhard Zimmermann has noted, phrases such as ‘agreed sums’ are considered as neologisms in the literature on contract law, motivated by the anxiety of avoiding the terms liquidated damages and penalties.40 Now, fast-forward by a century and a half for a quick glance at where the law relative to stipulated sums in India stands and what does one find? The latest edition of Pollock and Mulla’s treatise outlines the extant law in the following terms. A stipulated sum of money payable by one party to another in the event of breach will be liquidated damages, if the ‘sum is a genuine pre-estimate of damages likely to flow from the breach’. Should it not, however, be a genuine pre-estimate of loss, ‘but an amount intended to secure performance of the contract’, it will be a ‘penalty’.41 This could easily be mistaken for a description of English law.42 And while the latest edition of Pollock and Mulla does still retains pro forma Sir Frederick Pollock and Sir Dinshah Mulla’s laudatory note about the Act ‘boldly’ cutting ‘the most troublesome knot’ of English law,43 there is no concealing the fact that that knot has now been retied. Liquidated damages and penalties are now firmly a part of the Indian contract law, quite contrary to the intention of the drafters. In fact, the terms ‘liquidated damages’ and ‘penalties’ have become so axiomatic that the law on the subject is now almost universally discussed under the rubric of those terms. It is now de rigeur for standard textbooks on Indian contract law not to refer to the neutral ‘stipulated sums’ but to the concepts of English contract law, ‘liquidated damages’, and ‘penalties’ instead.44 A recent judgment of the Supreme Court of India, BSNL v Reliance, even goes straight to treatises by Chitty and Treitel and approvingly quotes the law on stipulated sums laid down there—the assumption being that their summary of the legal position of English law is also a good description of the Indian law on the point.45 Indeed, the Indian law on stipulated sums has now come to be almost identical to the pre-Cavendish English law.46 How did the Indian law manage to re-knot this ‘troublesome knot’ that section 74 had undone? Just how did the exact opposite of what the drafters had envisaged come to be the state of the law—and this, after they had been so careful about wanting to avoid the troublesome liquidated damages–penalty dichotomy? Like much else in Indian contract law, the answer lies in legislative history.47 The single most important contributing factor in bringing this about, it will be hypothesized, was an ambiguity unwittingly introduced by an amendment to section 74 in 1899 by a select committee headed by the ace draftsman Mackenzie Chalmers:48 When 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.49 Section 74 has come down to us in this form as amended by the 1899 amendment. As we will see later in this article, the amendment added the italicized words with the avowed and sole aim of making section 74 applicable to a wider range of contracts than it was hitherto applicable to. It was calculated to rectify an oversight on the part of the drafters of the Act, the effect of which was to render the provision inapplicable to a significant category of cases that came up before the court. However, the effect of the introduction of the word ‘penalty’ in the provision—in sharp contrast to the neologisms used by the original provision—was to prove troublesome. It was to create the misleading (and unintended) impression that the English concept of ‘penalty’ was being sought to be introduced into Indian law. Once penalty was in, liquidated damages was but not even a step away. A century and a half on, one finds that the life of section 74 has taken an altogether different trajectory from that envisioned by the drafters. First, the liquidated damages–penalties dichotomy that the drafters were so keen to avoid has now been read into section 74 by Indian courts. Second, despite the express language in section 74 that reasonable compensation is to be awarded notwithstanding proof of any loss or damage, Indian courts have insisted that reasonable compensation in section 74 is limited to compensation for loss or damage alone. This article seeks to bring out this double dissonance between the drafters’ blueprint and the extant law. A brief outline of the arguments to be advanced to this end might be in order here. Section II will outline the leading decisions of the Supreme Court of India on section 74, which have read the provision as having incorporated the liquidated damages–penalty dichotomy and allowing reasonable compensation for damage or loss alone. Section III will give a brief account of the drafting error of the 1899 amenders, led by Mackenzie Chalmers, in introducing the term ‘penalty’, which sent future interpreters of the Act adrift. Section IV will make out the case for why ‘reasonable compensation’ contemplated in section 74 is not to be read as compensation for loss or damage alone. And in Section V, we will conclude by taking stock of the perils of linguistic ambiguity in common law codification and by hypothesizing the possible function of ‘reasonable compensation’. II. Retying the knot This section will briefly adumbrate some key judgments of the Supreme Court of India that have interpreted section 74 as supporting the liquidated damages–penalty dichotomy and allowing reasonable compensation only for loss or damage caused by breach in case the stipulation is found to be a ‘penalty’ in English law’s sense of the term.50 At the very top of this catalogue of key judgments of the Supreme Court of India—both chronologically and in significance—is Fateh Chand v Balkishan Das.51 In Fateh Chand, a sum roughly amounting to a quarter of the sale price of a property was paid by the defendant to the plaintiff as an advance. This was in addition to earnest money amounting to roughly one per cent of the consideration that was also paid to the plaintiff. Were the defendant not to arrange for the sale deed to be executed within a specified period, the agreement was to stand terminated and both sums were to stand forfeited. The defendant failed to bring the sale to a timely completion, and the plaintiff sought to terminate the agreement and forfeit the sums. When the appeal reached the Supreme Court, the Attorney General for India, M.C. Setalvad—who, incidentally, was also the co-editor of the eighth edition of Pollock and Mulla’s treatise—appearing for the defendant, conceded that the earnest money deposit could be forfeited by the plaintiff and restricted his challenge to the larger amount of advance. The Supreme Court held in favour of the defendant. The court began by repeating the gist of—albeit without quoting or citing—Pollock and Mulla’s famous observation that section 74 had sought to ‘cut across’ the liquidated damages and penalties distinction that had long hobbled the English common law ‘by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach’.52 Puzzlingly, however, within a few inches of text, this lesson is ignored: Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases: (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by section 74 reasonable compensation not exceeding the penalty stipulated for.53 This passage in Fateh Chand set the stage to bring back into play the liquidated damages–penalty dichotomy. Although Shah J (as he was then) did not use the term liquidated damages, it is tolerably clear that this is just the idea he had in mind when he distinguishes ‘sum named to be paid in case of breach’ from a ‘penalty’.54 And it is equally clear that Shah J read the term ‘penalty’ in section 74 in the sense in which English law understood the term. The court held that if the stipulated sum was a ‘penalty’, only reasonable compensation for loss or damage was payable. What was implied in Fateh Chand—although the court never spelled it out in so many words—was that if a stipulated sum amounted to a liquidated damages clause, it was payable in its entirety. Maula Bux v Union of India further deepened the lines drawn by Fateh Chand.55 In Maula Bux, the plaintiff entered into two contracts with the government (defendant): one to supply potatoes and the other to supply poultry, eggs, and fish. Both contracts provided for separate amounts deposited with the defendant, to be forfeited in case of unsatisfactory supplies by the plaintiff. A dispute about the quality of some supplies led to the defendant forfeiting the deposits, which was challenged by the plaintiff. The Supreme Court set aside the forfeiture as it found it to be in the nature of a penalty. It also recognized—albeit without applying the label liquidated damages—that sums that were a genuine pre-estimate of damages fell outside the ambit of section 74 and were to be awarded in their entirety. Section 74 was therefore engaged only in case the contractual stipulation was a penalty: [I]f forfeiture is of the nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty.56 Shah ACJ reaffirmed the proposition in Fateh Chand that if a stipulation amounted to a penalty, only compensation for loss or damage could be awarded as ‘reasonable compensation’. The matter was quite different in the case of liquidated damages; there the stipulated sum was to be taken as measure of reasonable compensation and awarded irrespective of any loss or damage: In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine preestimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. Here again, as in Fateh Chand, nowhere in the judgment was the phrase ‘liquidated damages’ used, but that was the only concept that answered to Shah ACJ’s description in the above passage of being a ‘genuine pre-estimate’ of damages. With Maula Bux, the liquidated damages–penalty dichotomy was firmly a part of Indian law, with liquidated damages being alluded to elliptically rather than being openly invoked. Fateh Chand and Maula Bux brushed under the carpet a glaring antinomy. If section 74 is not engaged at all in the case of ‘liquidated damages’ clauses, the phrase ‘sum named to be paid in case of breach’ in the provision could not possibly mean liquidated damages. And, on the other hand, if the reference of ‘sum named to be paid in case of breach’ was taken to be to ‘liquidated damages’, one could not easily explain away why the provision provided for the same consequences to follow in the case of all stipulations including stipulation for a ‘penalty’, for what is good for the goose ought to be good for the gander—and since the provision speaks of scaling down to reasonable compensation regardless of the nature of the clause, there was no basis whatsoever for claiming on the basis of section 74 that ‘liquidated damages’ clauses were to enforced in full notwithstanding any loss, but penalties were to be met with scaling down to reasonable compensation for damage or loss. As the decades wore on, the liquidated damages–penalty dichotomy only grew in strength. Oil and Natural Gas Corporation Ltd v Saw Pipes (ONGC) represents another landmark in its ascendency.57 Here, the respondent was to supply casing pipes to the appellant Oil and Natural Gas Corporation, a state-owned producer of oil and natural gas, to put to use in its offshore exploration and maintenance. The contract provided for ‘liquidated damages’ amounting to 1 per cent of the consideration price for every week of delay or part thereof, subject to a maximum ceiling of 10 per cent. The contract also contained the usual stock language certifying that the amount of liquidated damages was ‘not a penalty’ and was a ‘genuine pre-estimate’ of loss. When Saw Pipes delayed supply of the pipes by 45 days, the appellant deducted the amount of ‘liquidated damages’ calculated in accordance with the agreed formula and paid the balance of the contracted consideration to the respondent. The respondent contested this in an arbitral claim. The evidence suggested that the delayed supply of casing pipes did not, by itself, cause loss to the appellant as there were also other contributing factors that delayed deployment of equipment for which the pipes were meant. The arbitral tribunal held—and was confirmed by the Bombay High Court—that since the Appellant did not make out a case for loss, in accordance with Fateh Chand and Maula Bux, it was not entitled to the sum stipulated in the contract.58 Reversing the Bombay High Court, the Supreme Court of India held that the appellant was entitled to the stipulated sum despite no proof of loss since the contractual stipulation in question was ‘liquidated damages’, which was a genuine pre-estimate of damage: Therefore, the emphasis [of section 74] is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him.59 It is only in the case of penalty that the scaling down to a reasonable amount was permissible, MB Shah J held—and that is where the question of the loss caused would arise. If it was a genuine pre-estimate of damage—which denoted the idea of liquidated damages albeit without use of that label—the entire amount was to be awarded. Whatever little hesitation there was in openly invoking the term ‘liquidated damages’ vanished by the time BSNL v Reliance was decided later in the decade. Here the Supreme Court went straight to treatises by Chitty and Treitel and approvingly quoted the definitions of liquidated damages and penalties therefrom—the assumption being that the Indian law on stipulated sums was the same as English law.60 With this, the Indian law had comprehensively endorsed the English law’s liquidated damages and penalties distinction. The latest, and in many respects, most systematic, restatement of law in this area is due to Kailash Nath Associates v Delhi Development Authority.61 Nariman J offers the following restatement of the law on stipulated sums: 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…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 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.62 Nariman J seeks to introduce a trichotomy—‘liquidated damages’, other ‘liquidated amounts’, and ‘penalty’—in place of the standard dichotomy ‘liquidated damages’ and ‘penalty’. This appears to be an attempt to smooth, for the first time in five decades, the crease in the carpet left by Fateh Chand’s and Maula Bux’s antinomy that we had the occasion to consider earlier. If section 74 is not engaged at all in the case of liquidated damages, reference to the ‘sum’ to be paid in case of breach in section 74 could not be to liquidated damages. And if the same consequences are prescribed to follow regardless of the type of stipulation, it counts against reading any possible liquidated damages–penalty dichotomy into the provision. Nariman J attempts to harmonize the liquidated damages–penalty dichotomy with section 74 by positing a trichotomy in the place of the earlier, ostensibly wobbly dichotomy. The implication of Nariman J’s restatement is that liquidated damages fall outside section 74—the requirement of loss or damage which is a ‘sine qua non for the applicability of the Section’ does not apply to cases of liquidated damages. The ‘sum’ to be paid in case of breach referred to in section 74 is not liquidated damages, but another type of ‘liquidated amount’. But the crease in the carpet is not so easily smoothed—caused as it is by an antimony that Shah ACJ had brushed under it—and now it just ends up someplace else. The second category of ‘liquidated amount’ as distinct from liquidated damages and penalties appears to be a redundancy as it could be argued that it is entirely subsumed under the category of penalties. If a penalty is a stipulated sum that is not liquidated damages (and liquidated damages is a genuine pre-estimate of damages) then so is, by definition, a liquidated sum that is not a genuine pre-estimate of damages. Also, for all practical purposes, liquidated sums that are not liquidated damages and penalties operate in the same manner, which is to say, they constitute the upper limit for compensation and faced with them, the court can only award ‘reasonable compensation’ for damage or loss. After all is said and done, we are left with nothing other than the English liquidated damages-penalty dichotomy and a provision upon which it cannot be easily superimposed. The resulting position of law is that Indian courts have substantially adopted the pre-Cavendish liquidated damages–penalty dichotomy of English law by reading it into section 74. If a stipulated sum is a liquidated damages clause, it will be awarded in its entirety. This is subject to one limitation, which was first posited in Maula Bux and later confirmed in ONGC and Kailash Nath Associates—that a liquidated damages clause will be awarded in its entirety only if it is a genuine pre-estimate of damage and it is ‘difficult or impossible’ to prove damages.63 This means that liquidated damages in India are restricted to the kind of situations envisaged in Clydebank. In Clydebank the loss or damage caused by failure to supply a torpedo boat on time was found to be of a kind where the loss was impossible to estimate.64 The loss in ONGC was—somewhat tenuously, it might be argued—held by the court to be a loss of this kind. On the other hand, if a stipulated sum is found to be a ‘penalty’, it will not be enforced, and the claimant will only get reasonable compensation for loss or damage to be measured in accordance with the principles in section 73—which provides for compensation for damage or loss caused by breach of contract in cases where no sum is stipulated for in the contract.65 III. The 1899 amendment: source of the confusion In drafting section 74, there was one crucial class of case the drafters did not appear to have provided for, or at any rate that is what the phraseology of the provision suggested. The phrase ‘sum named in the contract’ ostensibly meant that the provision applied only to in solido sums, thus leaving out stipulations for variations of interest, acceleration clauses which affected payment schedules rather than sums, and payments in specie.66 This ambiguity led to a great divergence of opinion among Indian courts on the applicability of section 74 to such clauses.67 A good fraction of the litigation on section 74 involved such stipulations. Unsure about the applicability of this provision to such cases, Indian courts increasingly began to fall back on the English law to decide these cases. And given the ambiguity associated with the terms ‘penalties’ and ‘liquidated damages’ in English law, this was a far from satisfactory state of affairs; and it drove a coach-and-four through the design of the drafters who had wanted to avoid the troublesome liquidated damages–penalty dichotomy. But it was not some concern for doctrinal acuity that would eventually lead the legislature to intervene. In 1899, the Governor General-in-Council for India, alarmed by the extent of usurious money lending transactions, moved to take steps to curb it, to which end it proposed to amend the Indian Contract Act. Incidentally, a similar problem was being tackled in England more or less contemporaneously, leading to the enactment of the Money Lenders Act 1900.68 Referring the amendment bill to the Select Committee, Mackenzie Chalmers—eminent treatise writer and draftsman—who was law member of the Governor General-in Council set out the problem requiring legislative intervention: [T]he problem of agricultural indebtedness and of money-lenders and their dealings with the poorer and more ignorant classes has been engaging the attention of the Government. Opinions may differ—and may fairly differ—as to the nature of remedies we ought to adopt to meet an admitted evil….69 [O]ur proposals are considerably less drastic than those of the English Committee. We have no desire to eliminate or unduly harass the people who make loans to the agricultural and poorer classes. It is the abuses and excesses and not legitimate uses of the system we wish to curb.70 Two amendments were proposed to the Indian Contract Act to produce the desired effect of regulating such transactions. One was to widen section 16—the provision on undue influence—to incorporate a ‘general principle’ against dominating the will of another to impose unfair terms on the other.71 The other was ‘slightly extending’72 section 74 to a wider range of cases beyond just in solido sums.73 Some words were added to the main provision to reflect this extension: ‘or if the contract contains any other stipulation by way of penalty’.74 An explanation was added specifically providing for revisions in interest payments. It reads: ‘A stipulation for increased interest from the date of default may be a stipulation by way of penalty’. It also added to the three existing illustrations (a) to (c) four new illustrations (d) to (f) for clarification, each of which covered various kinds of stipulations. Illustration (d) describes that provision of increased interest at 75 per cent from date of default ‘is a stipulation by way of penalty and B is entitled to recover from A such compensation as the court considers reasonable’. Illustration (e) provides that undertaking to pay 10 maunds of grain in event of default ‘is a stipulation by way of penalty and B is entitled to reasonable compensation’. The third, illustration (f) provides that when all instalments of repayment become due at once on default ‘[t]his stipulation is not by way of penalty, and the contract may be enforced according to its terms’. Illustration (g) to s.74 provides that when a borrower agrees to pay double to loan in five yearly instalments and makes the whole amount payable on default ‘[t]his is a stipulation by way of penalty’. The explanation specifically targeting ‘stipulations for increased interest from date of default’ seems to have been put in by way of abundant caution; the main body of the amended section would have sufficed to apply to any stipulation, and not only in solido sums. What the amendment really sought to do was to make the provision applicable to all possible stipulations envisaged to be performed upon breach, not just in solido sums. Treitel notes about the illustrations introduced by the amendment that they convey ‘that a stipulation for a performance other than the payment of a sum of money is intended to be included’ in the provision.75 Uncertainty about applicability of section 74 to a whole range of stipulations was, after all, precisely the mischief the amendment sought to remedy. Between them, stipulations ‘for sum named in the contract’ and the ‘any other stipulation by way of penalty’—added by the amendment—were meant to exhaust the entire spectrum of contractual stipulations. This idea was no doubt conveyed by the expression ‘any other stipulation by way of penalty’, but only very poorly, and it was to come at a heavy price. The perilous word ‘penalty’, which carried much baggage in English law, was carelessly—the term is used advisedly, as will be borne out by the discussion that follows—floated into the provision (and the marginal note) where the point could have been conveyed perfectly well without it.76 The imprecision in drafting afflicted not only the amendment in the body of the provision but also the explanation and illustrations. The explanation read that stipulation for increased interest ‘may be by way of penalty’. The phrase ‘any other stipulation by way of penalty’ expanded the width (applicability) of section so as to apply to the whole spectrum of speculations actionable on breach. Accordingly, the explanation should have said that such a stipulation ‘is’ one of the many stipulations by way of penalty—not ‘may be’. The oddly worded explanation that read that stipulation for increased interest ‘may be by way of penalty’ implied that a stipulation for increased interest would be ‘penal’ only under certain circumstances. This carried the further implication that ‘penalty’ in the explanation did more work than just confirming the applicability of section 74. And that read with illustration (d) which envisages that provision of increased interest at 75 per cent from date of default ‘is [is as opposed to the may be used in the explanation] a stipulation by way of penalty’ could potentially have unwittingly led one to the conclusion that the term ‘penalty’ is being used in the unenforceable sense familiar to English law.77 This reading is rendered all the more plausible by illustration (f), which envisages that when all instalments of repayment become due at once on default ‘[t]his stipulation is not by way of penalty, and the contract may be enforced according to its terms’. Now, surely illustration (f) did not convey that section 74 did not apply to such a stipulation—and the function of ‘penalty’ in the main provision was precisely to apply the provision to such stipulations. Then ‘penalty’ here in illustration (f) was being used in a sense different from that in the main provision—and it would not be far-fetched for a reader to understand it in the sense of ‘penalty’ in English law—that is, an unenforceable stipulation. And if something was not a ‘penalty’ and therefore enforceable on its terms, to the mind of someone trained in English law, it could mean but one and only one thing: ‘liquidated damages’. The common lawyer, after all, is schooled in the notion that liquidated damages is the opposite of penalties and that the penalty cannot be enforced, whereas liquidated damages clauses may be enforced on their terms. Without meaning to do so, the provision and explanation created the impression of having introduced the English notion of ‘penalty’ and the illustrations not only confirmed this but also suggested that ‘liquidated damages’ was also intended to be introduced, although the term was not used. Evidently, the amenders had not intended to undo section 74 as it originally stood, and import in its place, the English liquidated damages–penalty dichotomy. In fact, from the space devoted to it, neither Chalmers’ reference to the Select Committee nor the Select Committee’s Report gave the impression of having treated the proposed amendment to section 74 as anything more than an extension of the existing provision to some classes of stipulations not hitherto covered by the provision. Were it meant to alter the very basis of the provision and introduce a regime the drafters had been so careful to avoid, we should have expected to find at the very least a mention, if not a detailed discussion. Unfortunately, the amenders used the term ‘penalty’ in different senses in the explanation and in the illustrations. And, in doing so, they set the scene for the unintended injection of the liquidated damages-penalty dichotomy in Indian law. To anyone reading section 74 along with its explanation and illustrations and not having the benefit of carefully perusing the drafting history of the provision, the amended text of the provision conveyed the misleading impression that it meant to introduce the English law on liquidated damages and penalties, albeit through inexplicably and inefficiently circular language. Although, the Select Committee also clearly put in a caveat in its Report to the Governor General-in-Council that the illustrations were not meant to ‘lay down any hard and fast rule’ or ‘pre-judge the issue’ but were ‘merely’ illustrations,78 the caveat was always going to amount to nothing more than a pious hope that the provision be interpreted in a certain way since it was tucked away in a document the interpreters of the statute would likely never see or bring to bear upon their deliberations. Mackenzie Chalmers, the chief architect of the 1899 amendment, appears to have been particularly prone to the error of being less than careful with terminology when it came to this area of the law. In a note on the 1899 amendment published in the Journal for the Society of Comparative Legislation in 1900, Chalmers referred to the original un-amended section 74 as the provision on ‘liquidated damages’—which it certainly was not.79 This imprecision in language, however, it would appear, was not peculiar to Chalmers alone, but was quite widespread among those schooled in English law.80 It was as if they knew of no way of speaking of stipulated sums except by reference to liquidated damages and penalties. For an illustration consider an early 1879 commentary on the Indian Contract Act by D. Sutherland: In order to avoid the intricacy in which the English law on the subject was involved, the Indian Law Commissioners proposed to enact that in all cases such penalties should be treated as liquidated damages. The Select Committee of the Legislative Council, although agreeing in the intricacy referred to, took a somewhat different view as to the remedy to be applied, and ultimately, by this section of the Act, the intricacy has been removed by the converse operation of turning all liquidated damages into penalties.81 Sutherland argues in the above paragraph that the drafters of the Act sought to avoid the intricacies of the liquidated damages–penalty dichotomy in English law—and he does so by using the very same concepts the drafters had wanted to so carefully avoid. It would be manifestly incorrect to claim, as Sutherland does, that the drafters of the Act had purported to turn all liquidated damages into penalties for not only were these terms (liquidated damages and penalties) not used but nor was there a blanket proscription on awarding sums named in the contract, which is what one would have found if they had meant to ‘turn’ all stipulations into penalties. The entire amount could be awarded if it was ‘reasonable’; a fortiori it would only have to be scaled down if it was unreasonable. It is the inescapable tendency to speak of section 74 in terms of liquidated damages and penalties, so prevalent among lawyers schooled in English law, that lead Sutherland, as it did many others, to this error.82 IV. Reasonable compensation and damage or loss There is a double dissonance between the drafters’ blueprint and what has come to pass for the law of stipulated sums in India. One is the superimposition of the liquidated damages and penalty dichotomy on the provision; the other is the view that ‘reasonable compensation’ in section 74 could only mean compensation for loss or damage. The first we attributed to the imprecise phraseology of the 1899 amendment. The second, however, is not—at least not entirely—attributable to the 1899 amendment. Section 74 as amended gave courts the jurisdiction to award reasonable compensation not exceeding the sum or penalty named in the contract whether or not there was any proof of loss or damage. How was this jurisdiction to be exercised? The provision did not prescribe anything in the way of guidelines.83 When the Supreme Court, in Fatehchand, sought to restrict ‘reasonable compensation’ to compensation for loss or damage, it did so while being dimly aware that it ran against the plain reading of section 74—the provision empowered the courts to give reasonable compensation ‘whether or not actual damage or loss is proved to have been caused thereby’. In purporting to get around this, Shah J reasoned in Fatehchand that the provision only dispensed with proof of loss, not the fact of loss.84 It followed that there must be loss or damage which alone can be compensated by section 74. This was more of an un-argued for conclusion than an argument, let alone a persuasive one. And it did not hold up to scrutiny. There is no practical difference between saying ‘whether or not actual damage or loss is caused’ and ‘whether or not actual damage or loss is proved to have been caused’.85 ‘Proof’ is precisely just how a court ordinarily takes cognizance of a fact except in the small minority of cases where it can take ‘judicial notice’ of facts even in the absence of proof.86 The class of such facts that the court can cognize without proof is limited and for all practical purposes they are unlikely to come into play in any significant way in contractual damages claims.87 To say that some loss was ‘caused’ is therefore no different from ‘proving’ that some loss was caused. It is along these lines that section 74 is properly understood. The implication of Fateh Chand is that it left it to the court to determine loss or damage by some means other than its proof. Surely the provision can hardly be read as having left it to the court to divine loss or damage and base its ‘reasonable compensation’ on its divination of such loss.88 If the provision maintains that the court’s jurisdiction is to be exercised ‘whether or not damage or loss is proved to be caused by a breach’ it means the jurisdiction is to be exercised whether or not damage or loss is caused. A fortiori, what they are supposed to be compensating under section 74 is not loss or damage at all. In Kailash Nath, an alternative justification is offered for the proposition that ‘reasonable compensation’ in section 74 is to compensate for loss or damage: Section 74 occurs in Chapter 6 of the Indian Contract Act, 1872 which reads ‘Of the consequences of breach of contract’. It is in fact sandwiched between Sections 73 and 75 which deal with compensation for loss or damage caused by breach of contract and compensation for damage which a party may sustain through non-fulfillment of a contract after such party rightfully rescinds such contract. It is important to note that like Sections 73 and 75, compensation is payable for breach of contract under Section 74 only where damage or loss is caused by such breach.89 Nariman J reasons that section 74 is ‘sandwiched’ between section 73 and section 75, both of which only seek to compensate for damage or loss caused by breach of contract. Section 74, therefore, only compensates loss or damage caused by breach. However, it could be argued that the fact that section 74 is ‘sandwiched’ between sections 73 and 75, which provide for ‘compensation for loss or damage’ and ‘compensation for damage’ respectively, establishes quite the opposite of the proposition Nariman J advances.90 The conspicuous absence of the phrase ‘reasonable compensation for loss or damage’ from section 74—while such phrases are used in sections 73 and 75—it could be argued, shows deliberate intent on part of the drafters to exclude any need for loss or damage for section 74 to be engaged. The assumption that ‘compensation’ is isomorphic with ‘compensation for damage or loss’ is also unwarranted for two further reasons. First, in the draft contract code, the provision on stipulated sums (clause 53) was placed under the unnumbered chapter titled ‘Compensation’.91 This was despite the fact that the provision did not provide for any compensation—the words ‘reasonable compensation’, it will be recollected, were then absent from the provision. Therefore, not much can be made out of the mere occurrence of section 74 in the company of other provisions that only compensate for damage or loss, in a chapter on compensation for breach of contract. Second, clause 53 as it originally stood provided that the question of compensation for loss or damage would only kick in ‘if no sum has been named in the contract itself’. Clause 53 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, 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, but if no sum has been named in the contract itself, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for loss or damage caused to him thereby.92 Clause 53 was split into two sections in the enacted statute. The first part became section 74 (with a sliding scale appended to it) and the second part became section 73. Consequently, the conditional ‘but if no sum has been named in the contract itself’ was dropped. But the splitting up of the sections should not change the fact that the architecture of the Act envisaged the two as the antecedent and consequent of a single conditional. Section 73 was to kick in in case no sum was agreed in the contract. If there was a stipulated sum, the terms of section 74 would apply. To suppose otherwise would be to render section 74 practically otiose. This is what the interpretation given to the provision by the courts does; ‘reasonable compensation’ even in section 74 is to be determined entirely on the basis of section 73. V. De-inventing the wheel When one takes stock after a century and a half, one finds that there are many points at which the course the Indian Contract Act has taken has deviated from the drafters’ design. No single explanation can account for all these deviations—but two factors go some distance towards illuminating them. One is the problem of ambiguity induced by language. If some term is used in the Act, there is a tendency to assume that the term cannot but mean what it means in English law. The doctrine of consideration provides a familiar illustration.93 The drafters of the Act had clearly intended to reform many of the shortcomings of the English doctrine of consideration by proposing a novel definition of consideration that had avoided reference to the English terms ‘benefit’ and ‘detriment’ and included induced reliance. There was no mistaking the fact that this conception of consideration had little to do with the English definition of consideration except for the label. But the courts superimposed upon this the English definition of consideration replete with ‘benefit’ and ‘detriment’. Whenever a term is used in a code, the courts have a tendency to understand the word not on the terms in which it is defined in the code but on the terms in which it is understood in the antediluvian law that the code is replacing. This, it appears, was the problem with consideration. One promising way around this problem is the use of neologisms. Not only can the use of neologisms clearly chart a path at variance from the pre-code law, it can also disabuse the courts of any potential relapse to an antediluvian understanding of the term. This is precisely what the drafters had done with section 74. They gave the liquidated damages–penalties a wide berth and operated with a neologism—‘sum named in the contract’—or what we refer to as stipulated sums. Had the 1899 amenders of the Act, led by Mackenzie Chalmers, stuck to this strategy, events could well have taken a different turn. The 1899 amenders unwittingly introduced the word ‘penalty’, which turned out to be the Trojan horse that let in the liquidated damages–penalty distinction the drafters had been so keen on avoiding. Related to the above problem of ambiguity is the marked tendency of courts in India to fall back on English law in interpreting provisions of the Indian Contract Act.94 Underlying this, it would seem, is the assumption that the Indian Contract Act sought to do nothing more than codify the English common law of contract and that, therefore, one is entitled to turn to the source—which would include not just English law, but also English scholarship—for the elucidation of some provision in the Act or gloss on some concept or doctrine. As a consequence, courts have often ended up transplanting English rules of contract—even in cases where such transplants were patently not warranted.95 This tendency has also been aided to a great extent by the prescription of the Privy Council that to fill in gaps in Anglo-Indian statutory law, resort may be had to principles of the English common law.96 This, as Richard Gooderson noted—in the context of the Indian Contract Act, in fact—was to lead to an excessive reliance on English law, to the neglect of Indian statutory law in many cases.97 Short of the clearest expression of intent by the legislature to deviate from English law, there was every chance that an Anglo–Indian statute would be read in a manner as to align it with English law. Arguably, only a heightened awareness of the legislative history of a particular provision—lacking from judicial and scholarly treatment of the Indian Contract Act—could provide a counterweight to this tendency by illuminating whether a deviation from English law was deliberately intended by the drafters and outlining the reasons for such deviation.98 Short of evidence of deliberate deviation from the English law found by a court, following English law is, more or less, an inevitable eventuality in the interpretation of an Anglo-Indian code. The idea of ‘reasonable compensation’ in section 74 was meant to strike a balance between the freedom of parties to agree on any stipulated sums they willed and protecting weak parties from excessively unfair bargains where the situation warranted it. To be sure, the power to award ‘reasonable compensation’ given to the court was wide and open-ended. Whitley Stokes hypothesized that this jurisdiction was to be exercised with ‘care, caution and on sound principles’.99 Not the clearest of criteria. But one could perhaps do better in defining them. One of the biggest flaws of the English liquidated damages–penalty regime was to suppose that there could be no ‘legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract’.100 If ‘reasonable compensation’ awarded on a sliding scale is to address this problem, it must award reasonable compensation to protect the whole gamut of legitimate interests that can be protected by contractual stipulations. This can be illustrated with the decision of the United Kingdom Supreme Court in ParkingEye Limited v Beavis (ParkingEye), which tested the validity of a stipulation imposing a parking charge of £85 on anyone who exceeded two hours of free parking. In no sense of the term could this be classified as a ‘genuine pre-estimate of damage’—the sum was much higher than any standard parking fee for an occupied parking slot. As the orthodox English law would have had it, this would be a penal stipulation, in terrorem, and struck down. But if one were to consider the legitimate interest in a parking scheme that provided free parking for two hours for shoppers financed by the over-stayers and attach value to such an arrangement, a different outcome would result. The English law as it stands after Cavendish and ParkingEye recognizes this legitimate interest test. But the enforcement of the stipulation still remains all-or-nothing as the court cannot scale down to a sum reflective of what it considers the most reasonable sum that protects such legitimate interests. Section 74, as intended by the drafters, is flexible enough to achieve this. A stipulation of the kind under consideration in ParkingEye does create incentives for the party to perform the contract, but that in itself is not unreasonable or morally objectionable. The only relevant moral question is whether the incentives are sought to be created for a legitimate or justifiable reason. The orthodox common law position was flawed in having supposed that any valid stipulation had to compensate for loss. The Indian Contract Act would have been the first to remedy this in the common law world. But it was not to be.101 Acknowledgements Many thanks are due to Prashant Iyengar for generously making available, archival material pertaining to Legislative Department Proceedings, 1872; to Niranjan Venkatesan and Ragini Surana who gave insightful comments on an earlier draft of the paper; and to Tejasvini Puri and Radhika Kothari for their research assistance. The author benefitted greatly from the use of the library of the Max Planck Institute for Comparative and International Private Law, Hamburg; and from having interacted with Reinhard Zimmermann, Director of the Institute. Footnotes 1 Jorge Luis Borges, ‘John Wilkins’ Analytic Language’ in E Weinberger (ed), Selected Non-Fictions (Penguin 1999) 229–32, 231. 2 Edwin Peel, Treitel on the Law of Contract (13th edn, Sweet & Maxwell 2011) 1073. The term in terrorem is of Roman legal heritage, where it was regarded as a perfectly legitimate function of a provision for stipulated sums that it exerts pressure for compliance with the agreement. Pascal Hachem, Agreed Sums Payable upon Breach of Agreements: Rethinking penalty and Liquidated Damages Clauses (Eleven International Publishers 2011) 29–30. 3 Martin Hogg, Promises and Contract Law: Comparative Perspectives (CUP 2011) 395. 4 Mindy Chen-Wishart, ‘Controlling Power to Agree Damages’ in Peter Birks (ed), Wrongs and Remedies in the Twenty First Century (OUP 1996) 271–300. 5 Clydebank Engineering and Shipbuilding Company Ltd v Don Jose Ramos Yzquierdo y Castenada & Others (1905) AC 6. 6 ‘It [deposit]…creates by the fear of its forfeiture, a motive in the payer to perform the rest of the contract’ Howe v Smith (1884) 27 ChD 89, 101 (Fry LJ). 7 Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis [2016] AC 1172, 1192 (Lord Nueberger and Lord Sumption) (Cavendish). 8 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. 9 Cavendish (n7) 1199 (Lord Nueberger and Lord Sumption). 10 Lon Fuller, Melvin Eisenberg, Mark Gregen, Basic Contract Law (West 2013) 352–3; Restatement, Contracts § 339; Restatement, Contracts 2d § 356. See Shivprasad Swaminathan ‘A Centennial Refurbishment of Dunlop’s Contractual Concepts’ (2016) 45 Common Law World Review 248–256. 11 Crisdee v Bolton (1827) 3 Car & Pay 240. 12 Dimech v Corlett (1858) 12 Moore PC 199, 230. The older understanding of the terms was that the decision in each particular case was to turn on an individual construction of parties’ intention. Here, as elsewhere, construing the intention of parties was shorthand for the imposition of external standards by the judge. 13 Chagla CJ’s description of the English law purported to be supplanted by s 74. Abba Gani v Trustees of the Port of Bombay (1952) ILR (Bom) 747, 752 (Bombay High Court). 14 Lord Neuberger and Lord Sumption, in a similar vein observed in Cavendish, ‘[w]e rather doubt that the courts would have invented the rule today if their predecessors had not done so three centuries ago’. Cavendish [2016] AC 1172, 1206. Their lordships also observed: ‘For many years, the courts have struggled to apply standard tests formulated more than a century ago for relatively simple transactions to altogether more complex situations. The application of the rule is often adventitious. The test for distinguishing penal from other principles is unclear.’ Ibid 1192. 15 Parliamentary Papers, House of Commons (1867–68) 4–5. The provision in question was Clause 50 in the Report (Clause 53 of the draft Act), which provided for situations with stipulated sums and those without. It reads as follows: ‘50. When a contract has been broken, if a sum is named in the contract itself as the amount to be paid in case of such breach, the amount so named shall be paid accordingly; but if no sum has been named in the contract itself, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for loss or damage caused to him thereby, provided that it has naturally arisen in the usual course of things from such breach or that it was in the knowledge of the parties at the time they made the contract that such loss or damage would probably result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.’ Ibid 16 (illustrations omitted). 16 Guenter Heinz Treitel, Remedies for Breach of Contract: A Comparative Account (Clarendon Press 1987) 221. 17 Norman S Marsh, ‘Penal Clauses in Contracts: A Comparative Study’ (1950) 32 J Comp Legislation & Intl L 66, 66–7. But French law has since been modified to empower ‘the courts to award less where the sum is “manifestly excessive”.’ Treitel (n 16) 221. In the civil law world, stipulated sums are generally rewarded. In some cases, they are literally enforced in other cases, they may be scaled down. But on the whole, the civlian orientation towards contractual stipulations is quite the opposite to that of the common law–this might have something to do with the civilian affinity to the ‘will theory’. (Ibid). 18 Hogg (n 3) 87. 19 Ibid 394. 20 David Ibbetson, A Historical Introduction to the Law of Obligations (OUP 1999) 220–44. 21 The doctrines of ‘consideration’ and ‘privity’ were obvious examples. For a general discussion of will theory and the Indian Contract Act see: Warren Swain, The Law of Contract 1670–1870 (CUP 2015); and for a discussion of consideration and privity in Indian Contract Act, see Shivprasad Swaminathan, ‘The Great Indian Privity Trick: Hundred Years of Misunderstanding Nineteenth Century English Contract Law’ (2016) 16 OUCLJ 160; Shivprasad Swaminathan, ‘Eclipsed by Orthodoxy: The Vanishing Point of Consideration and the Forgotten Ingenuity of the Indian Contract Act’ (2017) 12 Asian J Comp Law 141. 22 The drafters said this in so many words. Parliamentary Papers (n 15) 3; Swain (n 21) 264. 23 Legislative Department Proceedings (India) May 1872 [Nos 513, 615] 93 (Note by JD Sandford Esq, Registrar to the High Court of Judicature North Western Provinces). 24 Ibid 86, 87 (observation by Major JL Pearce, Superintendent, Nundidroog Disctrict). 25 Ibid 88, 89 (observation by Captain AC Hay, Officiating Superintendent, Nuggur Division). 26 Ibid 89, 92 (observation by Captain FG Cumming, Officiating Deputy Superintendent of Chituldroog District). 27 Ibid 93, 94 (note by JD Sandford Esq, Registrar to the High Court of Judicature North Western Provinces). 28 Ibid 58, 59, 113 (observation by D Fitzpatrick, Officiating Deputy Commissioner, Delhi Division). 29 Ibid 94 (note by JD Sanford (n23)). 30 The European business community in India also appears to have expressed its wariness at this proposal and Sir George Rankin has pointed out that some Calcutta traders wanted the ‘converse’ of the provision—presumably a provision to the effect that no stipulations were to be awarded at all. George Rankin, Background to Indian Law (CUP 1946) 108; see also Justice M Jagannadha Rao, ‘Liquidated Damages and Penalties: Ex Ante or Ex Post Methodology’ (2013) 1 Supreme Court Cases – Journal Section 1, 8–9. 31 Treitel (n 16) 225. See also report of the European Committee on Legal Cooperation. Council of Europe, ‘Penalty Clauses in Private Law’ (1972) CCJ 37ff. 32 S 74 of the Indian Contract Act (explanations and illustrations omitted, marginal note included). 33 John Langshaw Austin, Sense and Sensibilia (OUP 1962) 70. 34 Sir Frederick Pollock and Dinshah Fardunji Mulla, The Indian Contract Act, with a Commentary, Critical and Explanatory (2nd edn, Sweet & Maxwell 1909) 322 (reference here is to the second edition). 35 Whitley Stokes, Anglo-Indian Codes, vol 1 (London 1888) 506; Treitel similarly notes that s 74 ‘rejects the common law distinction between penalty and liquidated damages clauses’. Treitel (n 16) 218. 36 Macintosh v Crow (1883) 9 ILR Cal 689, 692 (Calcutta High Court). 37 Muthukrishna Iyer v Sankaralingam Pillai (1913) 36 ILR 229, 263 (Madras High Court). 38 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (Clarendon Press 1996) 97. 39 Hogg (n 3) 394. 40 Reinhard Zimmermann, ‘Agreed Payment for Non Performance in European Contract Law’ in Troy L Harris (ed), Studies in Canon Law and Common Law in Honour of R.H. Helmholz (Princeton 2015) 355–78, 359. 41 Sir Frederick Pollock and Sir Dinshah Fardunji Mulla in Nilima Bhadbhade (ed), The Indian Contract Act, 1872 (14th edn, Lexis Nexis 2012) 1277. 42 Which is to say, English law as it stood prior to Cavendish. 43 Pollock and Mulla (n 41) 1286. 44 See eg Avtar Singh, Contract and Specific Relief (10th edn, Eastern Book Company 2010) 534. 45 Bharat Sanchar Nigam Limited v Reliance Communications Limited (2011) 1 SCC 394, 427 (Supreme Court of India). 46 See Section II for a discussion of the similarities and differences between Indian and the English law. In brief, the law as it currently stands in India is that when the sum named in the contract is a liquidated damages clause, the stipulated sum is payable in full. If the sum is a penalty, the court will grant only reasonable compensation for the damage or loss caused by breach. The point of difference is that unlike in English law, in India, a liquidated damages clause will be awarded in its entirety only if it is a genuine pre-estimate of damage and it is ‘difficult or impossible’ to prove damages. 47 Niranjan Venkatesan rightly notes that when it comes to Indian contract law, as in ‘many areas of Indian private law, the answers to contentious questions in the modern law lie in…neglected legislative history’. V Niranjan, ‘Specific and Agreed Remedies for Breach of Contract in Indian Law: A Code of English Law?’ in Mindy Chen-Wishart, Alexander Loke and Burton Ong (eds), Studies in the Contract Laws of Asia: Remedies for Breach of Contract (OUP 2016) 59, 59. 48 For an overview of work of Chalmers, see FH Lawson, ‘Doctrinal Writing: A Foreign Element in English Law?’ in Ernst Von Caemmerer, Sonia Mentschikoff and Konrad Zweigert (eds), Ius Privatum Gentium (JCB Mohr 1969) 191, 198. 49 Emphasis added (explanation, exceptions, and illustrations omitted). 50 We will restrict ourselves to a discussion of these judgments of the Supreme Court for two reasons. First, an overwhelming number of the pre-independence (earlier than 1947) cases pertain to interest payments and acceleration clauses in the context of money-lending transactions; and this entire branch of law has now become obsolete as it been overridden by legislation, starting with the Usurious Loans Act, 1918, which was the forerunner of numerous similar state legislations. Second, it is these Supreme Court judgments that are regarded as being normatively dispositive of potential cases arising in this area. Judgments of the High Courts have not been included so as to keep the length of the article within limits. In any event, High Courts are bound by the law laid down by the Supreme Court of India. 51 Fateh Chand v Balkishan Dass [1964] 1 SCR 515 (Supreme Court of India). Subsequent judicial treatment of s 74 has orbited around the fulcrum of this decision. 52 Ibid para 8. 53 Ibid para 10. 54 This is how this phrase was also understood in ONGC v Saw Pipes, a case we will discuss later in the section. 55 Maula Bux v Union of India [1969] 2 SCC 554 (Supreme Court of India). 56 Ibid 559. 57 Oil and Natural Gas Corporation Ltd v Saw Pipes Ltd [2003] 5 SCC 705 (Supreme Court of India) (ONGC). 58 Ibid 740. 59 Ibid 740–1. 60 Bharat Sanchar Nigam Limited v Reliance Communications Limited (2011) 1 SCC 394, 427 (Supreme Court of India). 61 Kailash Nath Associates v Delhi Development Authority [2015] 4 SCC 136 (Supreme Court of India) 62 Ibid 162. 63 ‘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’. Ibid 162 (Nariman J). Similar propositions can also be found in ONGC (n 57) 705, 741–2 (MB Shah J) and Maula Bux v Union of India [1969] 2 SCC 554, 559. 64 Clydebank Engineering and Shipbuilding Company Ltd v Don Jose Ramos Yzquierdo y Castenada & Others (1905) AC 6, 11 (Lord Halsbury). See also para 4(d) of Lord Dunedin’s canonical summary of propositions relating to the law of liquidated damages and penalty in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 87–8. 65 S 73, which is modelled after Hadley v Baxendale, reads as follows: ‘ Compensation for loss or damage caused by breach of contract—When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it’ (explanation and illustrations omitted). 66 Muthukrishna Iyer v Sankaralingam Pillai 36 [1913] ILR 229, 268–70 (Madras High Court) (Sundara Ayyar J). 67 Ibid 270; Rao (n 30) 13. 68 As Chalmers pointed out in an essay: ‘Both England and India were dealing with the same problem at the same time but they have solved it in different fashions.’ Mackenzie Chalmers, ‘British India: Acts of Governor General in Council’ (1900) 2 J Society Comp Legislation 539, 540. 69 Gazette of India 1899 Part VI 10–12, 19–22; For a discussion on Chalmers’ legislative drafting career, see Swain (n 21) 270. 70 Gazette of India (n 69) 12. 71 Ibid 11. 72 Chalmers (n 68) 540. 73 In his reference to the select committee, Chalmers’ entire emphasis was on consent and undue influence. The amendment to s 74 barely gets a mention. Gazette of India (n 69) 10–12. 74 ‘When 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’ (emphasis added). 75 Treitel (n 16) 210. 76 The amended marginal note now read: ‘Compensation for breach of contract where penalty stipulated for.’ A number of alternative formulations could have done the job better. 77 This is astutely noted by Sadasiva Ayyar J in Muthukrishna Iyer v Sankaralingam Pillai (1913) 36 ILR 229, 250–2 (Madras High Court). The same phraseology—‘is a stipulation by way of penalty’—is also used in illustration (g) to s.74. 78 Gazette of India (n 69) 20. 79 Chalmers (n 68) 540. 80 A good number of the opinions received on the draft contract law, some of which were discussed in Section I, expressed their view on the provision by using the language liquidated damages and penalties although the authors of the opinions were perfectly aware—and referred to the statement of objects and reasons on this point—that the drafters had wanted to deliberately avoid the distinction. 81 D Sutherland, Indian Contract Act and the Specific Relief Act (Thacker, Spink & Co 1879) 109. 82 A recent Indian article approvingly quotes from Sutherland and concludes that s 74 had meant to turn all liquidated damages into penalties. Justice M Jagannadha Rao, ‘Liquidated Damages and Penalties: Ex Ante or Ex Post Methodology’ (2013) 1 Supreme Court Cases J 1. 83 See discussion in the fifth section of this article. 84 Fateh Chand (n 51) para 10. As Niranjan Venkatesan notes, Fateh Chand cannot be reconciled with Maula Bux where Shah ACJ holds that ‘the party claiming compensation must prove the loss suffered by him’. Niranjan (n 47) 78. In ONGC (n 57), MB Shah J seems to say different things about loss or damage at different places. At one place he suggests plaintiff must prove loss or damage (733). At another place he suggests no proof is required (740). These statements apart, the basis on which he actually decides the case is that proof of damage or loss is required only in the case of penalty clauses, not liquidated damages clauses. 85 Shah ACJ himself seems to have reached this conclusion in Maula Bux. 86 The Indian Evidence Act, 1872 allows the court to take judicial notice of certain facts under ss 56 and 58. The court can proceed on these facts even if not proved. 87 The exceptions include the following cases: (i) where the market fluctuation is so well known a fact as to be a matter of public knowledge that some loss or damage has occurred in a contract; and (ii) where it is evident from the pleadings that there is or is not a loss or damage—such as in case where the contracted price and price actually received are both on record—and that is not controverted by the other party. Apart from these obvious cases, there is no way for a court to know either the quantum or factum of the loss without proof. 88 But Maula Bux and ONGC insist on proof of loss or damage (in case it is a penalty clause) and as we will see later in the Section, so does Kailash Nath. 89 Kailash Nath Associates v Delhi Development Authority [2015] 4 SCC 136, 155. 90 S 73: ‘Compensation for loss or damage caused by breach of contract—When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it’ (explanation and illustrations omitted). S 75: ‘Party rightfully rescinding contract, entitled to compensation—A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract’ (illustrations omitted). 91 This was clause 50 in the Commissioners Report and Clause 53 in the draft statute: Parliamentary Papers (n 15) 16, 61. 92 Ibid (emphasis added). 93 This discussion follows Swaminathan, ‘Eclipsed By Orthodoxy’ (n 21). 94 RN Gooderson, ‘English Contract Problems in Indian Code and Case Law’ (1958) 16 CLJ 67. 95 The doctrine of ‘privity’ of contract provides a good illustration of this problem. Despite there being no ‘privity’ requirement in the Act, the courts in India have presumed that the drafters would not have wanted to deviate from English law. Swaminathan (n 21). 96 Waghela Rajsanji v Shekh Masluddin (1887) 14 IA 89, 96 (Privy Council). Lord Hobhouse held that if there is a gap in the law, the case ought to be decided in accordance with ‘equity and good conscience generally interpreted to mean rules of English law’. 97 Gooderson (n 94) 68. 98 See Niranjan (n 47) 59. 99 Stokes (n 35) 592. 100 Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis [2016] AC 1172 1226 (Lord Neuberger and Lord Sumption). 101 There is one potentially curious residual issue which all this leaves us with—the case of the stipulated sum being sought to be used as a limitation of liability clause in a case where the ordinary measure of damages is likely to exceed the stipulated sum. Treitel argues that a limitation clause of this sort would be invalid in Indian law: Treitel (n 16) 218. On the available evidence the most one can say about this with any degree of certitude is that drafters do not seem to have considered this problem at all, leaving it an unregulated issue. It could be argued, however, that in so far as the statute does not impose any limitation on the courts’ plenary power to award damages under s 73, one would be licenced to infer, as does Treitel, that a limitation clause will not be valid. © The Author(s) (2018). Published by Oxford University Press. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Chinese Journal of Comparative Law Oxford University Press

De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872

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Abstract

Abstract The drafters of the Indian Contract Act, 1872 had boldly sought to dispense with the English law’s troublesome liquidated damages-penalty dichotomy by providing in Section 74 that sums stipulated in the contract were to be awarded notwithstanding any proof of ‘actual damage or loss’, and, as a safety valve, empowered courts to scale down the sum. The drafters astutely avoided any reference to ‘liquidated damages’ or ‘penalties’ by employing the neologism ‘sum named in the contract’. Fast-forward by a century and a half, however, and one finds a double dissonance between the drafters’ blueprint and the law. First, the liquidated damages–penalty distinction has now become firmly entrenched in Indian law without any real scholarly or judicial resistance. Second, ‘reasonable compensation’ is now confined to compensation for damage or loss. The article hypothesizes that much of this is attributable to an ambiguity unwittingly introduced by the—universally overlooked—1899 amendment to section 74, the chief architect of which was the ace draftsman and treatise writer Mackenzie Chalmers. The amendment had meant to ‘slightly extend’ section 74 so as to cover some hitherto unregulated cases—namely, increased interest stipulations, acceleration clauses, and payments in specie—but did so by using the poorly chosen phrase ‘or…any other stipulation by way of penalty’ to convey this extension. This drafting slip-up was to become the Trojan horse that let in the English law’s notion of ‘penalty’ and along with it, came tethered, the notion of ‘liquidated damages’. I. A troublesome knot in the common law In an apocryphal encyclopaedia, Jorge Luis Borges tells us, animals are divided into fourteen taxonomical categories, some of which are as follows: ‘those that belong to the Emperor’; ‘fabulous’ ones; those ‘included in the present classification’; and ‘those that from a long way off look like flies’.1 It would hardly require a professional logician to spot the snag in the classification. It is neither exhaustive nor mutually exclusive. Its criteria are arbitrary, and how one classified any given animal would be down to adventitious happenstance shorn of any constraining normative guidance from the categories themselves. A central doctrine of the English law of contract—the liquidated damages–penalty dichotomy—has revolved around the fulcrum of a dichotomy that, it could be argued, has operated in just this manner. The liquidated damages–penalty dichotomy is neither exhaustive of the entire spectrum of contractual stipulations nor are the categories mutually exclusive. If a stipulated sum is a genuine pre-estimate of damages expected on breach, the dichotomy went, it is a liquidated damages clause and, hence, to be enforced in its entirety—even if no loss were actually caused. If a clause is not that, it was deemed to be a penalty which is, in terrorem, meant as a sanction to goad a party into performance and, hence, to be not enforced.2 It was to be all or nothing at all, with nothing in between. Imposing a sliding scale and thereby tinkering with the agreement so as to ‘reflect a more equitable position’ was something unacceptable to the common law mind.3 Its lack of adaptability to a sliding scale was, however, the least of this taxonomy’s foibles. There were more existential problems afoot. Like Borges’ animals, there could be stipulations that could have simultaneously fallen in both categories—or, indeed, in neither. If the idea of in terrorem is to be understood in psychological terms, there is no good reason to suppose that a genuine liquidated damages clause would not deter. As a phenomenological matter, it would, in all probability, deter just as any other contractual remedy would.4 The classification supported another logical oddity. Stipulations in cases where it was not possible to offer a genuine pre-estimate of loss were because of the very reason of not being amenable to a genuine pre-estimate of damages, classified as liquidated damages clauses.5 This was something of an antinomy because the very definition of a liquidated damages stipulation was its susceptibility to a genuine pre-estimate of loss. Then, there was the case of forfeiture of deposits or advance payments. Here, it was recognized that creating ‘fear’ of sanctions to perform a contract was a genuine function of a deposit and accordingly reasonable deposits were allowed to be forfeited although they were not genuine pre-estimates of damage.6 If there was a bit of the common law to which T.E. Holland’s moniker of being in a state of ‘chaos’ applied on all fours, it was this. And it was here that—with apologies to Lord Denning—‘bold spirits’ of great judges past sagged to the resignation that no order was to be deciphered.7 In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, Lord Atkinson had suggested a more transparent approach to the problem.8 The test he proposed was to determine the propriety of interest that the agreed stipulation sought to protect. Dunlop, however, was destined to become synonymous with Lord Dunedin’s compensatory–penal dichotomy, which has since been sought to be used as a code-like formula by courts.9 When, in 2015, the United Kingdom Supreme Court eventually set right the ‘artificial categorization’ of the law in this area, it drew on Lord Atkinson’s approach and posited a test of ‘legitimate interest’ on which stipulated sums were to be policed. This brought the English law closer to the ‘reasonableness’ test used by courts in the USA, which adjudicates on stipulations on the basis of whether ‘the clause is reasonable under the totality of circumstances’.10 The contours of the liquidated damages–penalty dichotomy have, no doubt, shifted over the two centuries of its career, but by the 1860s, when the Indian Contract Act was being drafted, it had already earned notoriety for its obscurity. Best CJ observed in 1827 that ‘the law relative to liquidated damages has been in a state of great uncertainty’.11 The Privy Council noted in 1858 that the ‘great number of decisions’ on the subject at English law were ‘not strictly reconcilable’ with each other.12 This ‘arbitrary’ and ‘complicated’13 welter of precedent would hardly have commended itself to the drafters defining the contours of contract law de novo.14 The Indian law commissioners who produced the first draft of the contract code in 1866, among whom were Henry Maine and William Macpherson, were keen to give it a wide berth: In order to avoid the litigation which arises under the English law on the subject of the distinction between penalty and liquidated damages where a contract contains a stipulation that a specified sum shall be paid in case of its breach, we propose that the rule of law should have no regard to that distinction, but simply require payment of the specified sum.15 This proposal for ‘literal enforcement’16 of the stipulated sum appears to have been inspired by the French Civil Code, which represented the logical apotheosis of the will theory.17 The will theory sought to respect the ‘autonomy’ of parties by purporting to enforce whatever they willed.18 On a strict view of the will theory, the ‘harsh effect’, if any, of giving effect to such stipulations would be merely a collateral sacrifice at the altar of principle.19 In the mid-nineteenth century, when the Indian Contract Act was being drafted, the will theory had generated significant excitement in England, leading to frantic academic and judicial attempts to reorient all of the English law of contract law to its principles.20 The Indian Contract Act—unsurprisingly, for a mid-nineteenth century code—was influenced by the will theory, and where it conflicted with the orthodox English doctrine of contract, the drafters threw their weight behind the will theory.21 The Act was far from a straightforward codification of the English law and deviated from the English law on various points such as the one presently under discussion.22 Opinions were invited on the draft bill, and a good number of the opinions received on the proposed provision on stipulated sums revolved around a central concern: the lack of a safety valve. That the law ought not to ‘lend its aid’ to enforce stipulations that were ‘unreasonable and preposterous’;23 that it was ‘advisable to leave some discretion to the judge’ where the stipulated sum is ‘too exorbitant’ or ‘excessive’;24 that an ‘option’ ought to be ‘retained by the Courts for equitably mitigating’ clauses which were unduly severe;25 that the provision, as it stood, would lead to ‘hard cases’,26 and much ‘injustice’ would result, were such stipulations to be enforced with ‘undue rigour’;27 that people ‘need to be protected from their own rashness in entering into overreaching contracts’;28 and that there was also the concern that it would be unfair if the same amount was ‘exigible’ regardless of the extent to which contract was performed29—all these, it might be noted, were valid concerns that could have been met by providing for a scaling down mechanism in the provision that was to become operational in cases of excessive or unreasonable stipulations.30 Accordingly, the final version of the code contained a sliding scale appended to the draft provision. Such a measure is favoured in several civil law jurisdictions as the right way to deal with ‘unreasonably high’ stipulated sums:31 Compensation for breach of contract in which sum is named as payable in case of breach—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, 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.32 The drafting history and phraseology of the section strongly suggest that ‘reasonable’ here was meant in the sense of what J.L. Austin, called (in dated language) a ‘trouser word’33—where all the work was done by its opposite ‘unreasonable’. The courts were to scale down a stipulated sum only when the stipulation was ‘unreasonable’; if it was not unreasonable, all of it could be awarded as reasonable compensation. Section 74 achieved, a century and a half in advance, everything that a reasonableness-oriented standard such as that of Cavendish achieved—and more, as the idea of reasonableness here was attached to a sliding scale; it was not binary like that of Cavendish, which continues to remain tied to the all-or-nothing silos of liquidated damages and penalty. As Sir Frederick Pollock and Sir Dinshah Mulla noted in their influential commentary on the Indian Contract Act (1905), section 74 of the Act ‘boldly cut the most troublesome knot in the Common Law doctrine of damages’.34 Whitley Stokes, similarly, found in his 1888 commentary on the Indian Contract Act that the effect of the provision was to completely do away with the English liquidated damages–penalty dichotomy.35 An Indian court was to put section 74 to use, unencumbered by the complexities of English law’s liquidated damages–penalty.36 One of its obvious purposes was to ‘save labour’ for the courts by relieving them of the endless logic chopping over whether a given provision was a liquidated damages clause or a penalty clause.37 Labour would also be saved by dispensing with any need to prove damages or loss in awarding reasonable compensation—another legitimate function of contractual stipulations going back to its Roman law roots. In Roman law, one of the functions of the stipulateo poenae was to avoid difficulties of proof,38 and, by implication, ‘preempt unnecessary judicial investigation into the assessment of damages’.39Also, significantly, the provision ingeniously employed a neologism, ‘sum named in the contract’ (referred to here as ‘stipulated sums’) instead of the familiar common law terms ‘penalty’ and ‘liquidated damages’ or terms prevalent in the civil law world such a ‘penal stipulation’. The anxiety of the drafters, presumably, must have been to block any avenues for slipping back into the old penal–compensatory distinction that had troubled the English common law. This was a noteworthy innovation. Even now, as Reinhard Zimmermann has noted, phrases such as ‘agreed sums’ are considered as neologisms in the literature on contract law, motivated by the anxiety of avoiding the terms liquidated damages and penalties.40 Now, fast-forward by a century and a half for a quick glance at where the law relative to stipulated sums in India stands and what does one find? The latest edition of Pollock and Mulla’s treatise outlines the extant law in the following terms. A stipulated sum of money payable by one party to another in the event of breach will be liquidated damages, if the ‘sum is a genuine pre-estimate of damages likely to flow from the breach’. Should it not, however, be a genuine pre-estimate of loss, ‘but an amount intended to secure performance of the contract’, it will be a ‘penalty’.41 This could easily be mistaken for a description of English law.42 And while the latest edition of Pollock and Mulla does still retains pro forma Sir Frederick Pollock and Sir Dinshah Mulla’s laudatory note about the Act ‘boldly’ cutting ‘the most troublesome knot’ of English law,43 there is no concealing the fact that that knot has now been retied. Liquidated damages and penalties are now firmly a part of the Indian contract law, quite contrary to the intention of the drafters. In fact, the terms ‘liquidated damages’ and ‘penalties’ have become so axiomatic that the law on the subject is now almost universally discussed under the rubric of those terms. It is now de rigeur for standard textbooks on Indian contract law not to refer to the neutral ‘stipulated sums’ but to the concepts of English contract law, ‘liquidated damages’, and ‘penalties’ instead.44 A recent judgment of the Supreme Court of India, BSNL v Reliance, even goes straight to treatises by Chitty and Treitel and approvingly quotes the law on stipulated sums laid down there—the assumption being that their summary of the legal position of English law is also a good description of the Indian law on the point.45 Indeed, the Indian law on stipulated sums has now come to be almost identical to the pre-Cavendish English law.46 How did the Indian law manage to re-knot this ‘troublesome knot’ that section 74 had undone? Just how did the exact opposite of what the drafters had envisaged come to be the state of the law—and this, after they had been so careful about wanting to avoid the troublesome liquidated damages–penalty dichotomy? Like much else in Indian contract law, the answer lies in legislative history.47 The single most important contributing factor in bringing this about, it will be hypothesized, was an ambiguity unwittingly introduced by an amendment to section 74 in 1899 by a select committee headed by the ace draftsman Mackenzie Chalmers:48 When 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.49 Section 74 has come down to us in this form as amended by the 1899 amendment. As we will see later in this article, the amendment added the italicized words with the avowed and sole aim of making section 74 applicable to a wider range of contracts than it was hitherto applicable to. It was calculated to rectify an oversight on the part of the drafters of the Act, the effect of which was to render the provision inapplicable to a significant category of cases that came up before the court. However, the effect of the introduction of the word ‘penalty’ in the provision—in sharp contrast to the neologisms used by the original provision—was to prove troublesome. It was to create the misleading (and unintended) impression that the English concept of ‘penalty’ was being sought to be introduced into Indian law. Once penalty was in, liquidated damages was but not even a step away. A century and a half on, one finds that the life of section 74 has taken an altogether different trajectory from that envisioned by the drafters. First, the liquidated damages–penalties dichotomy that the drafters were so keen to avoid has now been read into section 74 by Indian courts. Second, despite the express language in section 74 that reasonable compensation is to be awarded notwithstanding proof of any loss or damage, Indian courts have insisted that reasonable compensation in section 74 is limited to compensation for loss or damage alone. This article seeks to bring out this double dissonance between the drafters’ blueprint and the extant law. A brief outline of the arguments to be advanced to this end might be in order here. Section II will outline the leading decisions of the Supreme Court of India on section 74, which have read the provision as having incorporated the liquidated damages–penalty dichotomy and allowing reasonable compensation for damage or loss alone. Section III will give a brief account of the drafting error of the 1899 amenders, led by Mackenzie Chalmers, in introducing the term ‘penalty’, which sent future interpreters of the Act adrift. Section IV will make out the case for why ‘reasonable compensation’ contemplated in section 74 is not to be read as compensation for loss or damage alone. And in Section V, we will conclude by taking stock of the perils of linguistic ambiguity in common law codification and by hypothesizing the possible function of ‘reasonable compensation’. II. Retying the knot This section will briefly adumbrate some key judgments of the Supreme Court of India that have interpreted section 74 as supporting the liquidated damages–penalty dichotomy and allowing reasonable compensation only for loss or damage caused by breach in case the stipulation is found to be a ‘penalty’ in English law’s sense of the term.50 At the very top of this catalogue of key judgments of the Supreme Court of India—both chronologically and in significance—is Fateh Chand v Balkishan Das.51 In Fateh Chand, a sum roughly amounting to a quarter of the sale price of a property was paid by the defendant to the plaintiff as an advance. This was in addition to earnest money amounting to roughly one per cent of the consideration that was also paid to the plaintiff. Were the defendant not to arrange for the sale deed to be executed within a specified period, the agreement was to stand terminated and both sums were to stand forfeited. The defendant failed to bring the sale to a timely completion, and the plaintiff sought to terminate the agreement and forfeit the sums. When the appeal reached the Supreme Court, the Attorney General for India, M.C. Setalvad—who, incidentally, was also the co-editor of the eighth edition of Pollock and Mulla’s treatise—appearing for the defendant, conceded that the earnest money deposit could be forfeited by the plaintiff and restricted his challenge to the larger amount of advance. The Supreme Court held in favour of the defendant. The court began by repeating the gist of—albeit without quoting or citing—Pollock and Mulla’s famous observation that section 74 had sought to ‘cut across’ the liquidated damages and penalties distinction that had long hobbled the English common law ‘by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach’.52 Puzzlingly, however, within a few inches of text, this lesson is ignored: Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases: (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by section 74 reasonable compensation not exceeding the penalty stipulated for.53 This passage in Fateh Chand set the stage to bring back into play the liquidated damages–penalty dichotomy. Although Shah J (as he was then) did not use the term liquidated damages, it is tolerably clear that this is just the idea he had in mind when he distinguishes ‘sum named to be paid in case of breach’ from a ‘penalty’.54 And it is equally clear that Shah J read the term ‘penalty’ in section 74 in the sense in which English law understood the term. The court held that if the stipulated sum was a ‘penalty’, only reasonable compensation for loss or damage was payable. What was implied in Fateh Chand—although the court never spelled it out in so many words—was that if a stipulated sum amounted to a liquidated damages clause, it was payable in its entirety. Maula Bux v Union of India further deepened the lines drawn by Fateh Chand.55 In Maula Bux, the plaintiff entered into two contracts with the government (defendant): one to supply potatoes and the other to supply poultry, eggs, and fish. Both contracts provided for separate amounts deposited with the defendant, to be forfeited in case of unsatisfactory supplies by the plaintiff. A dispute about the quality of some supplies led to the defendant forfeiting the deposits, which was challenged by the plaintiff. The Supreme Court set aside the forfeiture as it found it to be in the nature of a penalty. It also recognized—albeit without applying the label liquidated damages—that sums that were a genuine pre-estimate of damages fell outside the ambit of section 74 and were to be awarded in their entirety. Section 74 was therefore engaged only in case the contractual stipulation was a penalty: [I]f forfeiture is of the nature of penalty, Section 74 applies. Where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty.56 Shah ACJ reaffirmed the proposition in Fateh Chand that if a stipulation amounted to a penalty, only compensation for loss or damage could be awarded as ‘reasonable compensation’. The matter was quite different in the case of liquidated damages; there the stipulated sum was to be taken as measure of reasonable compensation and awarded irrespective of any loss or damage: In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine preestimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. Here again, as in Fateh Chand, nowhere in the judgment was the phrase ‘liquidated damages’ used, but that was the only concept that answered to Shah ACJ’s description in the above passage of being a ‘genuine pre-estimate’ of damages. With Maula Bux, the liquidated damages–penalty dichotomy was firmly a part of Indian law, with liquidated damages being alluded to elliptically rather than being openly invoked. Fateh Chand and Maula Bux brushed under the carpet a glaring antinomy. If section 74 is not engaged at all in the case of ‘liquidated damages’ clauses, the phrase ‘sum named to be paid in case of breach’ in the provision could not possibly mean liquidated damages. And, on the other hand, if the reference of ‘sum named to be paid in case of breach’ was taken to be to ‘liquidated damages’, one could not easily explain away why the provision provided for the same consequences to follow in the case of all stipulations including stipulation for a ‘penalty’, for what is good for the goose ought to be good for the gander—and since the provision speaks of scaling down to reasonable compensation regardless of the nature of the clause, there was no basis whatsoever for claiming on the basis of section 74 that ‘liquidated damages’ clauses were to enforced in full notwithstanding any loss, but penalties were to be met with scaling down to reasonable compensation for damage or loss. As the decades wore on, the liquidated damages–penalty dichotomy only grew in strength. Oil and Natural Gas Corporation Ltd v Saw Pipes (ONGC) represents another landmark in its ascendency.57 Here, the respondent was to supply casing pipes to the appellant Oil and Natural Gas Corporation, a state-owned producer of oil and natural gas, to put to use in its offshore exploration and maintenance. The contract provided for ‘liquidated damages’ amounting to 1 per cent of the consideration price for every week of delay or part thereof, subject to a maximum ceiling of 10 per cent. The contract also contained the usual stock language certifying that the amount of liquidated damages was ‘not a penalty’ and was a ‘genuine pre-estimate’ of loss. When Saw Pipes delayed supply of the pipes by 45 days, the appellant deducted the amount of ‘liquidated damages’ calculated in accordance with the agreed formula and paid the balance of the contracted consideration to the respondent. The respondent contested this in an arbitral claim. The evidence suggested that the delayed supply of casing pipes did not, by itself, cause loss to the appellant as there were also other contributing factors that delayed deployment of equipment for which the pipes were meant. The arbitral tribunal held—and was confirmed by the Bombay High Court—that since the Appellant did not make out a case for loss, in accordance with Fateh Chand and Maula Bux, it was not entitled to the sum stipulated in the contract.58 Reversing the Bombay High Court, the Supreme Court of India held that the appellant was entitled to the stipulated sum despite no proof of loss since the contractual stipulation in question was ‘liquidated damages’, which was a genuine pre-estimate of damage: Therefore, the emphasis [of section 74] is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him.59 It is only in the case of penalty that the scaling down to a reasonable amount was permissible, MB Shah J held—and that is where the question of the loss caused would arise. If it was a genuine pre-estimate of damage—which denoted the idea of liquidated damages albeit without use of that label—the entire amount was to be awarded. Whatever little hesitation there was in openly invoking the term ‘liquidated damages’ vanished by the time BSNL v Reliance was decided later in the decade. Here the Supreme Court went straight to treatises by Chitty and Treitel and approvingly quoted the definitions of liquidated damages and penalties therefrom—the assumption being that the Indian law on stipulated sums was the same as English law.60 With this, the Indian law had comprehensively endorsed the English law’s liquidated damages and penalties distinction. The latest, and in many respects, most systematic, restatement of law in this area is due to Kailash Nath Associates v Delhi Development Authority.61 Nariman J offers the following restatement of the law on stipulated sums: 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…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 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.62 Nariman J seeks to introduce a trichotomy—‘liquidated damages’, other ‘liquidated amounts’, and ‘penalty’—in place of the standard dichotomy ‘liquidated damages’ and ‘penalty’. This appears to be an attempt to smooth, for the first time in five decades, the crease in the carpet left by Fateh Chand’s and Maula Bux’s antinomy that we had the occasion to consider earlier. If section 74 is not engaged at all in the case of liquidated damages, reference to the ‘sum’ to be paid in case of breach in section 74 could not be to liquidated damages. And if the same consequences are prescribed to follow regardless of the type of stipulation, it counts against reading any possible liquidated damages–penalty dichotomy into the provision. Nariman J attempts to harmonize the liquidated damages–penalty dichotomy with section 74 by positing a trichotomy in the place of the earlier, ostensibly wobbly dichotomy. The implication of Nariman J’s restatement is that liquidated damages fall outside section 74—the requirement of loss or damage which is a ‘sine qua non for the applicability of the Section’ does not apply to cases of liquidated damages. The ‘sum’ to be paid in case of breach referred to in section 74 is not liquidated damages, but another type of ‘liquidated amount’. But the crease in the carpet is not so easily smoothed—caused as it is by an antimony that Shah ACJ had brushed under it—and now it just ends up someplace else. The second category of ‘liquidated amount’ as distinct from liquidated damages and penalties appears to be a redundancy as it could be argued that it is entirely subsumed under the category of penalties. If a penalty is a stipulated sum that is not liquidated damages (and liquidated damages is a genuine pre-estimate of damages) then so is, by definition, a liquidated sum that is not a genuine pre-estimate of damages. Also, for all practical purposes, liquidated sums that are not liquidated damages and penalties operate in the same manner, which is to say, they constitute the upper limit for compensation and faced with them, the court can only award ‘reasonable compensation’ for damage or loss. After all is said and done, we are left with nothing other than the English liquidated damages-penalty dichotomy and a provision upon which it cannot be easily superimposed. The resulting position of law is that Indian courts have substantially adopted the pre-Cavendish liquidated damages–penalty dichotomy of English law by reading it into section 74. If a stipulated sum is a liquidated damages clause, it will be awarded in its entirety. This is subject to one limitation, which was first posited in Maula Bux and later confirmed in ONGC and Kailash Nath Associates—that a liquidated damages clause will be awarded in its entirety only if it is a genuine pre-estimate of damage and it is ‘difficult or impossible’ to prove damages.63 This means that liquidated damages in India are restricted to the kind of situations envisaged in Clydebank. In Clydebank the loss or damage caused by failure to supply a torpedo boat on time was found to be of a kind where the loss was impossible to estimate.64 The loss in ONGC was—somewhat tenuously, it might be argued—held by the court to be a loss of this kind. On the other hand, if a stipulated sum is found to be a ‘penalty’, it will not be enforced, and the claimant will only get reasonable compensation for loss or damage to be measured in accordance with the principles in section 73—which provides for compensation for damage or loss caused by breach of contract in cases where no sum is stipulated for in the contract.65 III. The 1899 amendment: source of the confusion In drafting section 74, there was one crucial class of case the drafters did not appear to have provided for, or at any rate that is what the phraseology of the provision suggested. The phrase ‘sum named in the contract’ ostensibly meant that the provision applied only to in solido sums, thus leaving out stipulations for variations of interest, acceleration clauses which affected payment schedules rather than sums, and payments in specie.66 This ambiguity led to a great divergence of opinion among Indian courts on the applicability of section 74 to such clauses.67 A good fraction of the litigation on section 74 involved such stipulations. Unsure about the applicability of this provision to such cases, Indian courts increasingly began to fall back on the English law to decide these cases. And given the ambiguity associated with the terms ‘penalties’ and ‘liquidated damages’ in English law, this was a far from satisfactory state of affairs; and it drove a coach-and-four through the design of the drafters who had wanted to avoid the troublesome liquidated damages–penalty dichotomy. But it was not some concern for doctrinal acuity that would eventually lead the legislature to intervene. In 1899, the Governor General-in-Council for India, alarmed by the extent of usurious money lending transactions, moved to take steps to curb it, to which end it proposed to amend the Indian Contract Act. Incidentally, a similar problem was being tackled in England more or less contemporaneously, leading to the enactment of the Money Lenders Act 1900.68 Referring the amendment bill to the Select Committee, Mackenzie Chalmers—eminent treatise writer and draftsman—who was law member of the Governor General-in Council set out the problem requiring legislative intervention: [T]he problem of agricultural indebtedness and of money-lenders and their dealings with the poorer and more ignorant classes has been engaging the attention of the Government. Opinions may differ—and may fairly differ—as to the nature of remedies we ought to adopt to meet an admitted evil….69 [O]ur proposals are considerably less drastic than those of the English Committee. We have no desire to eliminate or unduly harass the people who make loans to the agricultural and poorer classes. It is the abuses and excesses and not legitimate uses of the system we wish to curb.70 Two amendments were proposed to the Indian Contract Act to produce the desired effect of regulating such transactions. One was to widen section 16—the provision on undue influence—to incorporate a ‘general principle’ against dominating the will of another to impose unfair terms on the other.71 The other was ‘slightly extending’72 section 74 to a wider range of cases beyond just in solido sums.73 Some words were added to the main provision to reflect this extension: ‘or if the contract contains any other stipulation by way of penalty’.74 An explanation was added specifically providing for revisions in interest payments. It reads: ‘A stipulation for increased interest from the date of default may be a stipulation by way of penalty’. It also added to the three existing illustrations (a) to (c) four new illustrations (d) to (f) for clarification, each of which covered various kinds of stipulations. Illustration (d) describes that provision of increased interest at 75 per cent from date of default ‘is a stipulation by way of penalty and B is entitled to recover from A such compensation as the court considers reasonable’. Illustration (e) provides that undertaking to pay 10 maunds of grain in event of default ‘is a stipulation by way of penalty and B is entitled to reasonable compensation’. The third, illustration (f) provides that when all instalments of repayment become due at once on default ‘[t]his stipulation is not by way of penalty, and the contract may be enforced according to its terms’. Illustration (g) to s.74 provides that when a borrower agrees to pay double to loan in five yearly instalments and makes the whole amount payable on default ‘[t]his is a stipulation by way of penalty’. The explanation specifically targeting ‘stipulations for increased interest from date of default’ seems to have been put in by way of abundant caution; the main body of the amended section would have sufficed to apply to any stipulation, and not only in solido sums. What the amendment really sought to do was to make the provision applicable to all possible stipulations envisaged to be performed upon breach, not just in solido sums. Treitel notes about the illustrations introduced by the amendment that they convey ‘that a stipulation for a performance other than the payment of a sum of money is intended to be included’ in the provision.75 Uncertainty about applicability of section 74 to a whole range of stipulations was, after all, precisely the mischief the amendment sought to remedy. Between them, stipulations ‘for sum named in the contract’ and the ‘any other stipulation by way of penalty’—added by the amendment—were meant to exhaust the entire spectrum of contractual stipulations. This idea was no doubt conveyed by the expression ‘any other stipulation by way of penalty’, but only very poorly, and it was to come at a heavy price. The perilous word ‘penalty’, which carried much baggage in English law, was carelessly—the term is used advisedly, as will be borne out by the discussion that follows—floated into the provision (and the marginal note) where the point could have been conveyed perfectly well without it.76 The imprecision in drafting afflicted not only the amendment in the body of the provision but also the explanation and illustrations. The explanation read that stipulation for increased interest ‘may be by way of penalty’. The phrase ‘any other stipulation by way of penalty’ expanded the width (applicability) of section so as to apply to the whole spectrum of speculations actionable on breach. Accordingly, the explanation should have said that such a stipulation ‘is’ one of the many stipulations by way of penalty—not ‘may be’. The oddly worded explanation that read that stipulation for increased interest ‘may be by way of penalty’ implied that a stipulation for increased interest would be ‘penal’ only under certain circumstances. This carried the further implication that ‘penalty’ in the explanation did more work than just confirming the applicability of section 74. And that read with illustration (d) which envisages that provision of increased interest at 75 per cent from date of default ‘is [is as opposed to the may be used in the explanation] a stipulation by way of penalty’ could potentially have unwittingly led one to the conclusion that the term ‘penalty’ is being used in the unenforceable sense familiar to English law.77 This reading is rendered all the more plausible by illustration (f), which envisages that when all instalments of repayment become due at once on default ‘[t]his stipulation is not by way of penalty, and the contract may be enforced according to its terms’. Now, surely illustration (f) did not convey that section 74 did not apply to such a stipulation—and the function of ‘penalty’ in the main provision was precisely to apply the provision to such stipulations. Then ‘penalty’ here in illustration (f) was being used in a sense different from that in the main provision—and it would not be far-fetched for a reader to understand it in the sense of ‘penalty’ in English law—that is, an unenforceable stipulation. And if something was not a ‘penalty’ and therefore enforceable on its terms, to the mind of someone trained in English law, it could mean but one and only one thing: ‘liquidated damages’. The common lawyer, after all, is schooled in the notion that liquidated damages is the opposite of penalties and that the penalty cannot be enforced, whereas liquidated damages clauses may be enforced on their terms. Without meaning to do so, the provision and explanation created the impression of having introduced the English notion of ‘penalty’ and the illustrations not only confirmed this but also suggested that ‘liquidated damages’ was also intended to be introduced, although the term was not used. Evidently, the amenders had not intended to undo section 74 as it originally stood, and import in its place, the English liquidated damages–penalty dichotomy. In fact, from the space devoted to it, neither Chalmers’ reference to the Select Committee nor the Select Committee’s Report gave the impression of having treated the proposed amendment to section 74 as anything more than an extension of the existing provision to some classes of stipulations not hitherto covered by the provision. Were it meant to alter the very basis of the provision and introduce a regime the drafters had been so careful to avoid, we should have expected to find at the very least a mention, if not a detailed discussion. Unfortunately, the amenders used the term ‘penalty’ in different senses in the explanation and in the illustrations. And, in doing so, they set the scene for the unintended injection of the liquidated damages-penalty dichotomy in Indian law. To anyone reading section 74 along with its explanation and illustrations and not having the benefit of carefully perusing the drafting history of the provision, the amended text of the provision conveyed the misleading impression that it meant to introduce the English law on liquidated damages and penalties, albeit through inexplicably and inefficiently circular language. Although, the Select Committee also clearly put in a caveat in its Report to the Governor General-in-Council that the illustrations were not meant to ‘lay down any hard and fast rule’ or ‘pre-judge the issue’ but were ‘merely’ illustrations,78 the caveat was always going to amount to nothing more than a pious hope that the provision be interpreted in a certain way since it was tucked away in a document the interpreters of the statute would likely never see or bring to bear upon their deliberations. Mackenzie Chalmers, the chief architect of the 1899 amendment, appears to have been particularly prone to the error of being less than careful with terminology when it came to this area of the law. In a note on the 1899 amendment published in the Journal for the Society of Comparative Legislation in 1900, Chalmers referred to the original un-amended section 74 as the provision on ‘liquidated damages’—which it certainly was not.79 This imprecision in language, however, it would appear, was not peculiar to Chalmers alone, but was quite widespread among those schooled in English law.80 It was as if they knew of no way of speaking of stipulated sums except by reference to liquidated damages and penalties. For an illustration consider an early 1879 commentary on the Indian Contract Act by D. Sutherland: In order to avoid the intricacy in which the English law on the subject was involved, the Indian Law Commissioners proposed to enact that in all cases such penalties should be treated as liquidated damages. The Select Committee of the Legislative Council, although agreeing in the intricacy referred to, took a somewhat different view as to the remedy to be applied, and ultimately, by this section of the Act, the intricacy has been removed by the converse operation of turning all liquidated damages into penalties.81 Sutherland argues in the above paragraph that the drafters of the Act sought to avoid the intricacies of the liquidated damages–penalty dichotomy in English law—and he does so by using the very same concepts the drafters had wanted to so carefully avoid. It would be manifestly incorrect to claim, as Sutherland does, that the drafters of the Act had purported to turn all liquidated damages into penalties for not only were these terms (liquidated damages and penalties) not used but nor was there a blanket proscription on awarding sums named in the contract, which is what one would have found if they had meant to ‘turn’ all stipulations into penalties. The entire amount could be awarded if it was ‘reasonable’; a fortiori it would only have to be scaled down if it was unreasonable. It is the inescapable tendency to speak of section 74 in terms of liquidated damages and penalties, so prevalent among lawyers schooled in English law, that lead Sutherland, as it did many others, to this error.82 IV. Reasonable compensation and damage or loss There is a double dissonance between the drafters’ blueprint and what has come to pass for the law of stipulated sums in India. One is the superimposition of the liquidated damages and penalty dichotomy on the provision; the other is the view that ‘reasonable compensation’ in section 74 could only mean compensation for loss or damage. The first we attributed to the imprecise phraseology of the 1899 amendment. The second, however, is not—at least not entirely—attributable to the 1899 amendment. Section 74 as amended gave courts the jurisdiction to award reasonable compensation not exceeding the sum or penalty named in the contract whether or not there was any proof of loss or damage. How was this jurisdiction to be exercised? The provision did not prescribe anything in the way of guidelines.83 When the Supreme Court, in Fatehchand, sought to restrict ‘reasonable compensation’ to compensation for loss or damage, it did so while being dimly aware that it ran against the plain reading of section 74—the provision empowered the courts to give reasonable compensation ‘whether or not actual damage or loss is proved to have been caused thereby’. In purporting to get around this, Shah J reasoned in Fatehchand that the provision only dispensed with proof of loss, not the fact of loss.84 It followed that there must be loss or damage which alone can be compensated by section 74. This was more of an un-argued for conclusion than an argument, let alone a persuasive one. And it did not hold up to scrutiny. There is no practical difference between saying ‘whether or not actual damage or loss is caused’ and ‘whether or not actual damage or loss is proved to have been caused’.85 ‘Proof’ is precisely just how a court ordinarily takes cognizance of a fact except in the small minority of cases where it can take ‘judicial notice’ of facts even in the absence of proof.86 The class of such facts that the court can cognize without proof is limited and for all practical purposes they are unlikely to come into play in any significant way in contractual damages claims.87 To say that some loss was ‘caused’ is therefore no different from ‘proving’ that some loss was caused. It is along these lines that section 74 is properly understood. The implication of Fateh Chand is that it left it to the court to determine loss or damage by some means other than its proof. Surely the provision can hardly be read as having left it to the court to divine loss or damage and base its ‘reasonable compensation’ on its divination of such loss.88 If the provision maintains that the court’s jurisdiction is to be exercised ‘whether or not damage or loss is proved to be caused by a breach’ it means the jurisdiction is to be exercised whether or not damage or loss is caused. A fortiori, what they are supposed to be compensating under section 74 is not loss or damage at all. In Kailash Nath, an alternative justification is offered for the proposition that ‘reasonable compensation’ in section 74 is to compensate for loss or damage: Section 74 occurs in Chapter 6 of the Indian Contract Act, 1872 which reads ‘Of the consequences of breach of contract’. It is in fact sandwiched between Sections 73 and 75 which deal with compensation for loss or damage caused by breach of contract and compensation for damage which a party may sustain through non-fulfillment of a contract after such party rightfully rescinds such contract. It is important to note that like Sections 73 and 75, compensation is payable for breach of contract under Section 74 only where damage or loss is caused by such breach.89 Nariman J reasons that section 74 is ‘sandwiched’ between section 73 and section 75, both of which only seek to compensate for damage or loss caused by breach of contract. Section 74, therefore, only compensates loss or damage caused by breach. However, it could be argued that the fact that section 74 is ‘sandwiched’ between sections 73 and 75, which provide for ‘compensation for loss or damage’ and ‘compensation for damage’ respectively, establishes quite the opposite of the proposition Nariman J advances.90 The conspicuous absence of the phrase ‘reasonable compensation for loss or damage’ from section 74—while such phrases are used in sections 73 and 75—it could be argued, shows deliberate intent on part of the drafters to exclude any need for loss or damage for section 74 to be engaged. The assumption that ‘compensation’ is isomorphic with ‘compensation for damage or loss’ is also unwarranted for two further reasons. First, in the draft contract code, the provision on stipulated sums (clause 53) was placed under the unnumbered chapter titled ‘Compensation’.91 This was despite the fact that the provision did not provide for any compensation—the words ‘reasonable compensation’, it will be recollected, were then absent from the provision. Therefore, not much can be made out of the mere occurrence of section 74 in the company of other provisions that only compensate for damage or loss, in a chapter on compensation for breach of contract. Second, clause 53 as it originally stood provided that the question of compensation for loss or damage would only kick in ‘if no sum has been named in the contract itself’. Clause 53 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, 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, but if no sum has been named in the contract itself, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for loss or damage caused to him thereby.92 Clause 53 was split into two sections in the enacted statute. The first part became section 74 (with a sliding scale appended to it) and the second part became section 73. Consequently, the conditional ‘but if no sum has been named in the contract itself’ was dropped. But the splitting up of the sections should not change the fact that the architecture of the Act envisaged the two as the antecedent and consequent of a single conditional. Section 73 was to kick in in case no sum was agreed in the contract. If there was a stipulated sum, the terms of section 74 would apply. To suppose otherwise would be to render section 74 practically otiose. This is what the interpretation given to the provision by the courts does; ‘reasonable compensation’ even in section 74 is to be determined entirely on the basis of section 73. V. De-inventing the wheel When one takes stock after a century and a half, one finds that there are many points at which the course the Indian Contract Act has taken has deviated from the drafters’ design. No single explanation can account for all these deviations—but two factors go some distance towards illuminating them. One is the problem of ambiguity induced by language. If some term is used in the Act, there is a tendency to assume that the term cannot but mean what it means in English law. The doctrine of consideration provides a familiar illustration.93 The drafters of the Act had clearly intended to reform many of the shortcomings of the English doctrine of consideration by proposing a novel definition of consideration that had avoided reference to the English terms ‘benefit’ and ‘detriment’ and included induced reliance. There was no mistaking the fact that this conception of consideration had little to do with the English definition of consideration except for the label. But the courts superimposed upon this the English definition of consideration replete with ‘benefit’ and ‘detriment’. Whenever a term is used in a code, the courts have a tendency to understand the word not on the terms in which it is defined in the code but on the terms in which it is understood in the antediluvian law that the code is replacing. This, it appears, was the problem with consideration. One promising way around this problem is the use of neologisms. Not only can the use of neologisms clearly chart a path at variance from the pre-code law, it can also disabuse the courts of any potential relapse to an antediluvian understanding of the term. This is precisely what the drafters had done with section 74. They gave the liquidated damages–penalties a wide berth and operated with a neologism—‘sum named in the contract’—or what we refer to as stipulated sums. Had the 1899 amenders of the Act, led by Mackenzie Chalmers, stuck to this strategy, events could well have taken a different turn. The 1899 amenders unwittingly introduced the word ‘penalty’, which turned out to be the Trojan horse that let in the liquidated damages–penalty distinction the drafters had been so keen on avoiding. Related to the above problem of ambiguity is the marked tendency of courts in India to fall back on English law in interpreting provisions of the Indian Contract Act.94 Underlying this, it would seem, is the assumption that the Indian Contract Act sought to do nothing more than codify the English common law of contract and that, therefore, one is entitled to turn to the source—which would include not just English law, but also English scholarship—for the elucidation of some provision in the Act or gloss on some concept or doctrine. As a consequence, courts have often ended up transplanting English rules of contract—even in cases where such transplants were patently not warranted.95 This tendency has also been aided to a great extent by the prescription of the Privy Council that to fill in gaps in Anglo-Indian statutory law, resort may be had to principles of the English common law.96 This, as Richard Gooderson noted—in the context of the Indian Contract Act, in fact—was to lead to an excessive reliance on English law, to the neglect of Indian statutory law in many cases.97 Short of the clearest expression of intent by the legislature to deviate from English law, there was every chance that an Anglo–Indian statute would be read in a manner as to align it with English law. Arguably, only a heightened awareness of the legislative history of a particular provision—lacking from judicial and scholarly treatment of the Indian Contract Act—could provide a counterweight to this tendency by illuminating whether a deviation from English law was deliberately intended by the drafters and outlining the reasons for such deviation.98 Short of evidence of deliberate deviation from the English law found by a court, following English law is, more or less, an inevitable eventuality in the interpretation of an Anglo-Indian code. The idea of ‘reasonable compensation’ in section 74 was meant to strike a balance between the freedom of parties to agree on any stipulated sums they willed and protecting weak parties from excessively unfair bargains where the situation warranted it. To be sure, the power to award ‘reasonable compensation’ given to the court was wide and open-ended. Whitley Stokes hypothesized that this jurisdiction was to be exercised with ‘care, caution and on sound principles’.99 Not the clearest of criteria. But one could perhaps do better in defining them. One of the biggest flaws of the English liquidated damages–penalty regime was to suppose that there could be no ‘legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract’.100 If ‘reasonable compensation’ awarded on a sliding scale is to address this problem, it must award reasonable compensation to protect the whole gamut of legitimate interests that can be protected by contractual stipulations. This can be illustrated with the decision of the United Kingdom Supreme Court in ParkingEye Limited v Beavis (ParkingEye), which tested the validity of a stipulation imposing a parking charge of £85 on anyone who exceeded two hours of free parking. In no sense of the term could this be classified as a ‘genuine pre-estimate of damage’—the sum was much higher than any standard parking fee for an occupied parking slot. As the orthodox English law would have had it, this would be a penal stipulation, in terrorem, and struck down. But if one were to consider the legitimate interest in a parking scheme that provided free parking for two hours for shoppers financed by the over-stayers and attach value to such an arrangement, a different outcome would result. The English law as it stands after Cavendish and ParkingEye recognizes this legitimate interest test. But the enforcement of the stipulation still remains all-or-nothing as the court cannot scale down to a sum reflective of what it considers the most reasonable sum that protects such legitimate interests. Section 74, as intended by the drafters, is flexible enough to achieve this. A stipulation of the kind under consideration in ParkingEye does create incentives for the party to perform the contract, but that in itself is not unreasonable or morally objectionable. The only relevant moral question is whether the incentives are sought to be created for a legitimate or justifiable reason. The orthodox common law position was flawed in having supposed that any valid stipulation had to compensate for loss. The Indian Contract Act would have been the first to remedy this in the common law world. But it was not to be.101 Acknowledgements Many thanks are due to Prashant Iyengar for generously making available, archival material pertaining to Legislative Department Proceedings, 1872; to Niranjan Venkatesan and Ragini Surana who gave insightful comments on an earlier draft of the paper; and to Tejasvini Puri and Radhika Kothari for their research assistance. The author benefitted greatly from the use of the library of the Max Planck Institute for Comparative and International Private Law, Hamburg; and from having interacted with Reinhard Zimmermann, Director of the Institute. Footnotes 1 Jorge Luis Borges, ‘John Wilkins’ Analytic Language’ in E Weinberger (ed), Selected Non-Fictions (Penguin 1999) 229–32, 231. 2 Edwin Peel, Treitel on the Law of Contract (13th edn, Sweet & Maxwell 2011) 1073. The term in terrorem is of Roman legal heritage, where it was regarded as a perfectly legitimate function of a provision for stipulated sums that it exerts pressure for compliance with the agreement. Pascal Hachem, Agreed Sums Payable upon Breach of Agreements: Rethinking penalty and Liquidated Damages Clauses (Eleven International Publishers 2011) 29–30. 3 Martin Hogg, Promises and Contract Law: Comparative Perspectives (CUP 2011) 395. 4 Mindy Chen-Wishart, ‘Controlling Power to Agree Damages’ in Peter Birks (ed), Wrongs and Remedies in the Twenty First Century (OUP 1996) 271–300. 5 Clydebank Engineering and Shipbuilding Company Ltd v Don Jose Ramos Yzquierdo y Castenada & Others (1905) AC 6. 6 ‘It [deposit]…creates by the fear of its forfeiture, a motive in the payer to perform the rest of the contract’ Howe v Smith (1884) 27 ChD 89, 101 (Fry LJ). 7 Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis [2016] AC 1172, 1192 (Lord Nueberger and Lord Sumption) (Cavendish). 8 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. 9 Cavendish (n7) 1199 (Lord Nueberger and Lord Sumption). 10 Lon Fuller, Melvin Eisenberg, Mark Gregen, Basic Contract Law (West 2013) 352–3; Restatement, Contracts § 339; Restatement, Contracts 2d § 356. See Shivprasad Swaminathan ‘A Centennial Refurbishment of Dunlop’s Contractual Concepts’ (2016) 45 Common Law World Review 248–256. 11 Crisdee v Bolton (1827) 3 Car & Pay 240. 12 Dimech v Corlett (1858) 12 Moore PC 199, 230. The older understanding of the terms was that the decision in each particular case was to turn on an individual construction of parties’ intention. Here, as elsewhere, construing the intention of parties was shorthand for the imposition of external standards by the judge. 13 Chagla CJ’s description of the English law purported to be supplanted by s 74. Abba Gani v Trustees of the Port of Bombay (1952) ILR (Bom) 747, 752 (Bombay High Court). 14 Lord Neuberger and Lord Sumption, in a similar vein observed in Cavendish, ‘[w]e rather doubt that the courts would have invented the rule today if their predecessors had not done so three centuries ago’. Cavendish [2016] AC 1172, 1206. Their lordships also observed: ‘For many years, the courts have struggled to apply standard tests formulated more than a century ago for relatively simple transactions to altogether more complex situations. The application of the rule is often adventitious. The test for distinguishing penal from other principles is unclear.’ Ibid 1192. 15 Parliamentary Papers, House of Commons (1867–68) 4–5. The provision in question was Clause 50 in the Report (Clause 53 of the draft Act), which provided for situations with stipulated sums and those without. It reads as follows: ‘50. When a contract has been broken, if a sum is named in the contract itself as the amount to be paid in case of such breach, the amount so named shall be paid accordingly; but if no sum has been named in the contract itself, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for loss or damage caused to him thereby, provided that it has naturally arisen in the usual course of things from such breach or that it was in the knowledge of the parties at the time they made the contract that such loss or damage would probably result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.’ Ibid 16 (illustrations omitted). 16 Guenter Heinz Treitel, Remedies for Breach of Contract: A Comparative Account (Clarendon Press 1987) 221. 17 Norman S Marsh, ‘Penal Clauses in Contracts: A Comparative Study’ (1950) 32 J Comp Legislation & Intl L 66, 66–7. But French law has since been modified to empower ‘the courts to award less where the sum is “manifestly excessive”.’ Treitel (n 16) 221. In the civil law world, stipulated sums are generally rewarded. In some cases, they are literally enforced in other cases, they may be scaled down. But on the whole, the civlian orientation towards contractual stipulations is quite the opposite to that of the common law–this might have something to do with the civilian affinity to the ‘will theory’. (Ibid). 18 Hogg (n 3) 87. 19 Ibid 394. 20 David Ibbetson, A Historical Introduction to the Law of Obligations (OUP 1999) 220–44. 21 The doctrines of ‘consideration’ and ‘privity’ were obvious examples. For a general discussion of will theory and the Indian Contract Act see: Warren Swain, The Law of Contract 1670–1870 (CUP 2015); and for a discussion of consideration and privity in Indian Contract Act, see Shivprasad Swaminathan, ‘The Great Indian Privity Trick: Hundred Years of Misunderstanding Nineteenth Century English Contract Law’ (2016) 16 OUCLJ 160; Shivprasad Swaminathan, ‘Eclipsed by Orthodoxy: The Vanishing Point of Consideration and the Forgotten Ingenuity of the Indian Contract Act’ (2017) 12 Asian J Comp Law 141. 22 The drafters said this in so many words. Parliamentary Papers (n 15) 3; Swain (n 21) 264. 23 Legislative Department Proceedings (India) May 1872 [Nos 513, 615] 93 (Note by JD Sandford Esq, Registrar to the High Court of Judicature North Western Provinces). 24 Ibid 86, 87 (observation by Major JL Pearce, Superintendent, Nundidroog Disctrict). 25 Ibid 88, 89 (observation by Captain AC Hay, Officiating Superintendent, Nuggur Division). 26 Ibid 89, 92 (observation by Captain FG Cumming, Officiating Deputy Superintendent of Chituldroog District). 27 Ibid 93, 94 (note by JD Sandford Esq, Registrar to the High Court of Judicature North Western Provinces). 28 Ibid 58, 59, 113 (observation by D Fitzpatrick, Officiating Deputy Commissioner, Delhi Division). 29 Ibid 94 (note by JD Sanford (n23)). 30 The European business community in India also appears to have expressed its wariness at this proposal and Sir George Rankin has pointed out that some Calcutta traders wanted the ‘converse’ of the provision—presumably a provision to the effect that no stipulations were to be awarded at all. George Rankin, Background to Indian Law (CUP 1946) 108; see also Justice M Jagannadha Rao, ‘Liquidated Damages and Penalties: Ex Ante or Ex Post Methodology’ (2013) 1 Supreme Court Cases – Journal Section 1, 8–9. 31 Treitel (n 16) 225. See also report of the European Committee on Legal Cooperation. Council of Europe, ‘Penalty Clauses in Private Law’ (1972) CCJ 37ff. 32 S 74 of the Indian Contract Act (explanations and illustrations omitted, marginal note included). 33 John Langshaw Austin, Sense and Sensibilia (OUP 1962) 70. 34 Sir Frederick Pollock and Dinshah Fardunji Mulla, The Indian Contract Act, with a Commentary, Critical and Explanatory (2nd edn, Sweet & Maxwell 1909) 322 (reference here is to the second edition). 35 Whitley Stokes, Anglo-Indian Codes, vol 1 (London 1888) 506; Treitel similarly notes that s 74 ‘rejects the common law distinction between penalty and liquidated damages clauses’. Treitel (n 16) 218. 36 Macintosh v Crow (1883) 9 ILR Cal 689, 692 (Calcutta High Court). 37 Muthukrishna Iyer v Sankaralingam Pillai (1913) 36 ILR 229, 263 (Madras High Court). 38 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (Clarendon Press 1996) 97. 39 Hogg (n 3) 394. 40 Reinhard Zimmermann, ‘Agreed Payment for Non Performance in European Contract Law’ in Troy L Harris (ed), Studies in Canon Law and Common Law in Honour of R.H. Helmholz (Princeton 2015) 355–78, 359. 41 Sir Frederick Pollock and Sir Dinshah Fardunji Mulla in Nilima Bhadbhade (ed), The Indian Contract Act, 1872 (14th edn, Lexis Nexis 2012) 1277. 42 Which is to say, English law as it stood prior to Cavendish. 43 Pollock and Mulla (n 41) 1286. 44 See eg Avtar Singh, Contract and Specific Relief (10th edn, Eastern Book Company 2010) 534. 45 Bharat Sanchar Nigam Limited v Reliance Communications Limited (2011) 1 SCC 394, 427 (Supreme Court of India). 46 See Section II for a discussion of the similarities and differences between Indian and the English law. In brief, the law as it currently stands in India is that when the sum named in the contract is a liquidated damages clause, the stipulated sum is payable in full. If the sum is a penalty, the court will grant only reasonable compensation for the damage or loss caused by breach. The point of difference is that unlike in English law, in India, a liquidated damages clause will be awarded in its entirety only if it is a genuine pre-estimate of damage and it is ‘difficult or impossible’ to prove damages. 47 Niranjan Venkatesan rightly notes that when it comes to Indian contract law, as in ‘many areas of Indian private law, the answers to contentious questions in the modern law lie in…neglected legislative history’. V Niranjan, ‘Specific and Agreed Remedies for Breach of Contract in Indian Law: A Code of English Law?’ in Mindy Chen-Wishart, Alexander Loke and Burton Ong (eds), Studies in the Contract Laws of Asia: Remedies for Breach of Contract (OUP 2016) 59, 59. 48 For an overview of work of Chalmers, see FH Lawson, ‘Doctrinal Writing: A Foreign Element in English Law?’ in Ernst Von Caemmerer, Sonia Mentschikoff and Konrad Zweigert (eds), Ius Privatum Gentium (JCB Mohr 1969) 191, 198. 49 Emphasis added (explanation, exceptions, and illustrations omitted). 50 We will restrict ourselves to a discussion of these judgments of the Supreme Court for two reasons. First, an overwhelming number of the pre-independence (earlier than 1947) cases pertain to interest payments and acceleration clauses in the context of money-lending transactions; and this entire branch of law has now become obsolete as it been overridden by legislation, starting with the Usurious Loans Act, 1918, which was the forerunner of numerous similar state legislations. Second, it is these Supreme Court judgments that are regarded as being normatively dispositive of potential cases arising in this area. Judgments of the High Courts have not been included so as to keep the length of the article within limits. In any event, High Courts are bound by the law laid down by the Supreme Court of India. 51 Fateh Chand v Balkishan Dass [1964] 1 SCR 515 (Supreme Court of India). Subsequent judicial treatment of s 74 has orbited around the fulcrum of this decision. 52 Ibid para 8. 53 Ibid para 10. 54 This is how this phrase was also understood in ONGC v Saw Pipes, a case we will discuss later in the section. 55 Maula Bux v Union of India [1969] 2 SCC 554 (Supreme Court of India). 56 Ibid 559. 57 Oil and Natural Gas Corporation Ltd v Saw Pipes Ltd [2003] 5 SCC 705 (Supreme Court of India) (ONGC). 58 Ibid 740. 59 Ibid 740–1. 60 Bharat Sanchar Nigam Limited v Reliance Communications Limited (2011) 1 SCC 394, 427 (Supreme Court of India). 61 Kailash Nath Associates v Delhi Development Authority [2015] 4 SCC 136 (Supreme Court of India) 62 Ibid 162. 63 ‘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’. Ibid 162 (Nariman J). Similar propositions can also be found in ONGC (n 57) 705, 741–2 (MB Shah J) and Maula Bux v Union of India [1969] 2 SCC 554, 559. 64 Clydebank Engineering and Shipbuilding Company Ltd v Don Jose Ramos Yzquierdo y Castenada & Others (1905) AC 6, 11 (Lord Halsbury). See also para 4(d) of Lord Dunedin’s canonical summary of propositions relating to the law of liquidated damages and penalty in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 87–8. 65 S 73, which is modelled after Hadley v Baxendale, reads as follows: ‘ Compensation for loss or damage caused by breach of contract—When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it’ (explanation and illustrations omitted). 66 Muthukrishna Iyer v Sankaralingam Pillai 36 [1913] ILR 229, 268–70 (Madras High Court) (Sundara Ayyar J). 67 Ibid 270; Rao (n 30) 13. 68 As Chalmers pointed out in an essay: ‘Both England and India were dealing with the same problem at the same time but they have solved it in different fashions.’ Mackenzie Chalmers, ‘British India: Acts of Governor General in Council’ (1900) 2 J Society Comp Legislation 539, 540. 69 Gazette of India 1899 Part VI 10–12, 19–22; For a discussion on Chalmers’ legislative drafting career, see Swain (n 21) 270. 70 Gazette of India (n 69) 12. 71 Ibid 11. 72 Chalmers (n 68) 540. 73 In his reference to the select committee, Chalmers’ entire emphasis was on consent and undue influence. The amendment to s 74 barely gets a mention. Gazette of India (n 69) 10–12. 74 ‘When 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’ (emphasis added). 75 Treitel (n 16) 210. 76 The amended marginal note now read: ‘Compensation for breach of contract where penalty stipulated for.’ A number of alternative formulations could have done the job better. 77 This is astutely noted by Sadasiva Ayyar J in Muthukrishna Iyer v Sankaralingam Pillai (1913) 36 ILR 229, 250–2 (Madras High Court). The same phraseology—‘is a stipulation by way of penalty’—is also used in illustration (g) to s.74. 78 Gazette of India (n 69) 20. 79 Chalmers (n 68) 540. 80 A good number of the opinions received on the draft contract law, some of which were discussed in Section I, expressed their view on the provision by using the language liquidated damages and penalties although the authors of the opinions were perfectly aware—and referred to the statement of objects and reasons on this point—that the drafters had wanted to deliberately avoid the distinction. 81 D Sutherland, Indian Contract Act and the Specific Relief Act (Thacker, Spink & Co 1879) 109. 82 A recent Indian article approvingly quotes from Sutherland and concludes that s 74 had meant to turn all liquidated damages into penalties. Justice M Jagannadha Rao, ‘Liquidated Damages and Penalties: Ex Ante or Ex Post Methodology’ (2013) 1 Supreme Court Cases J 1. 83 See discussion in the fifth section of this article. 84 Fateh Chand (n 51) para 10. As Niranjan Venkatesan notes, Fateh Chand cannot be reconciled with Maula Bux where Shah ACJ holds that ‘the party claiming compensation must prove the loss suffered by him’. Niranjan (n 47) 78. In ONGC (n 57), MB Shah J seems to say different things about loss or damage at different places. At one place he suggests plaintiff must prove loss or damage (733). At another place he suggests no proof is required (740). These statements apart, the basis on which he actually decides the case is that proof of damage or loss is required only in the case of penalty clauses, not liquidated damages clauses. 85 Shah ACJ himself seems to have reached this conclusion in Maula Bux. 86 The Indian Evidence Act, 1872 allows the court to take judicial notice of certain facts under ss 56 and 58. The court can proceed on these facts even if not proved. 87 The exceptions include the following cases: (i) where the market fluctuation is so well known a fact as to be a matter of public knowledge that some loss or damage has occurred in a contract; and (ii) where it is evident from the pleadings that there is or is not a loss or damage—such as in case where the contracted price and price actually received are both on record—and that is not controverted by the other party. Apart from these obvious cases, there is no way for a court to know either the quantum or factum of the loss without proof. 88 But Maula Bux and ONGC insist on proof of loss or damage (in case it is a penalty clause) and as we will see later in the Section, so does Kailash Nath. 89 Kailash Nath Associates v Delhi Development Authority [2015] 4 SCC 136, 155. 90 S 73: ‘Compensation for loss or damage caused by breach of contract—When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it’ (explanation and illustrations omitted). S 75: ‘Party rightfully rescinding contract, entitled to compensation—A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract’ (illustrations omitted). 91 This was clause 50 in the Commissioners Report and Clause 53 in the draft statute: Parliamentary Papers (n 15) 16, 61. 92 Ibid (emphasis added). 93 This discussion follows Swaminathan, ‘Eclipsed By Orthodoxy’ (n 21). 94 RN Gooderson, ‘English Contract Problems in Indian Code and Case Law’ (1958) 16 CLJ 67. 95 The doctrine of ‘privity’ of contract provides a good illustration of this problem. Despite there being no ‘privity’ requirement in the Act, the courts in India have presumed that the drafters would not have wanted to deviate from English law. Swaminathan (n 21). 96 Waghela Rajsanji v Shekh Masluddin (1887) 14 IA 89, 96 (Privy Council). Lord Hobhouse held that if there is a gap in the law, the case ought to be decided in accordance with ‘equity and good conscience generally interpreted to mean rules of English law’. 97 Gooderson (n 94) 68. 98 See Niranjan (n 47) 59. 99 Stokes (n 35) 592. 100 Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis [2016] AC 1172 1226 (Lord Neuberger and Lord Sumption). 101 There is one potentially curious residual issue which all this leaves us with—the case of the stipulated sum being sought to be used as a limitation of liability clause in a case where the ordinary measure of damages is likely to exceed the stipulated sum. Treitel argues that a limitation clause of this sort would be invalid in Indian law: Treitel (n 16) 218. On the available evidence the most one can say about this with any degree of certitude is that drafters do not seem to have considered this problem at all, leaving it an unregulated issue. It could be argued, however, that in so far as the statute does not impose any limitation on the courts’ plenary power to award damages under s 73, one would be licenced to infer, as does Treitel, that a limitation clause will not be valid. © The Author(s) (2018). Published by Oxford University Press. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

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The Chinese Journal of Comparative LawOxford University Press

Published: May 10, 2018

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