Why a 150-Year-Old Law Is Holding Back India’s Modern Contracts
Why a 150-Year-Old Law is Stalling Modern Contracts
By Adv. Mamta Singh Shukla, Supreme Court of India
India, a rising economic titan with a $4.5 trillion dream, is being shackled by a 150-year-old ghost. Its law of damages, rooted in the dusty, paternalistic anxieties of colonial rule, is no longer a legal framework but an economic drag.
Foundation of India’s Law of Damages
The current law is derived from English common law principles distinguishing between compensation and penalties:
- Section 73 of Indian Contract Act 1872 – Deals with unliquidated damages providing compensation for loss or damage caused by breach of contract.
- Section 74 of Indian Contract Act 1872 – Deals with liquidated damages, situations where the parties stipulate the amount of damages in advance.
Jurisprudence built on Sections 73 & 74 of the Indian Contract Act was a necessary shield for the illiterate farmer against the extortionist landlord. The course on their wisdom insisted on proof of actual loss (The Fateh Chand Rule) to prevent exploitation.
The central tenet of the Fateh Chand Rule is that a plaintiff claiming damages under Section 74—where the contract stipulates a fixed amount of damages (liquidated damages)—is still required to prove actual loss due to breach of contract.
The socio-economic context of 1872, characterized by a primarily agrarian economy, low literacy, and massive disparity in bargaining power, led the courts to adopt a paternalistic approach. This was meant to prevent exploitation of weaker parties by extortionate penalty clauses.
Fateh Chand vs Balkishan Das (1963)
The Hon’ble Supreme Court held in this landmark case that even where parties have freely agreed to liquidate damages, the claimant must furnish proof of actual loss to receive the stipulated sum. The judicial intervention was a safeguard against inequality.
- Proof of Loss is Necessary: The stipulated sum is the maximum amount that can be awarded, but the plaintiff must still prove the actual loss or damages sustained.
- Compensation, Not Penalty: Section 74 grants reasonable compensation, not a penalty irrespective of the actual loss.
- Reasonable Compensation: The court may award only reasonable compensation not exceeding the stipulated amount. If the actual loss is less, only the lesser amount is awarded.
The Disconnect in the Modern Context
The current jurisprudence is sharply disconnected from present-day economic reality of India.
- Changed Economy: India is now the world’s fourth largest economy, aspiring to become a high-income nation by 2047. Economic growth is driven by high-value infrastructure, technology, energy, and cross-border commercial agreements—not small agrarian contracts.
- Sophisticated Parties: Modern contracts are often between large corporations advised by experienced counsel. Their risk allocation—including liquidated damages—reflects commercial wisdom.
- Judicial Skepticism: Insisting on proof of actual loss undermines contractual freedom and the deliberate calibration of risk by parties.
Problem with the Current Jurisprudence
Current rulings create a patchwork of uncertainty:
- Kailash Nath Associates vs DDA (2015): Reinforced the requirement of proving actual loss under Section 74.
- ONGC vs Saw Pipes Ltd. (2003): Allowed recovery of stipulated sum when proving actual loss is difficult or impossible.
This judicial reassessment leads to inconsistency, unpredictability, and unnecessary litigation, contributing to India’s massive backlog of over 53 million pending cases.
International Comparisons
India’s approach is increasingly isolated compared to international counterparts that modernized their laws to respect party autonomy:
- Cavendish Square Holding BV vs Talal EI Makdessi (UK, 2015): Shifted focus from “genuine pre-estimate of loss” to whether the clause protects a legitimate interest and is proportionate.
- Andrews vs ANZ Banking Group (Australia, 2012): Expanded enforceable clauses respecting commercial realities and autonomy.
- Singapore & Malaysia: Adopted modern approaches recognizing the sophistication of contracting parties.
- UAE (DIFC): Presumes enforceability of agreed damages unless clearly unconscionable.
Proposed Reforms for India
To align India’s legal system with its economic aspirations and contemporary commercial reality, the following reforms are essential:
1. Legislative Reform
- Amend Section 74 to presume enforceability of liquidated damages agreed between experienced commercial parties.
- Deny recovery only if the clause is unconscionable or penal.
2. Judicial Restraint
- Courts should defer to bargains between sophisticated parties negotiating at arm’s length.
- Reduce blanket insistence on proof of loss in commercial contracts.
3. Integration with Dispute Resolution
- Clear rules on damages reduce litigation, support mediation, and promote arbitration under Mediation Act 2023.
Conclusion
Respecting contractual autonomy in high-value commerce is not just a legal reform but an economic imperative to ensure certainty for global investors and facilitate India’s growth story. In essence, respecting the contractual freedom of commercial entities is not merely a matter of legal coherence; it is an economic necessity that signals to the world India’s readiness to lead in global commerce and uphold the modern rule of law.
About the Author
Adv. Mamta Singh Shukla is an Advocate at the Supreme Court of India and Founder of Vijay Foundations — an initiative dedicated to social justice, education, and empowerment. Through her writings, she advocates for human dignity, equality, and systemic change.
Contact: 📧 adv.mamtasinghshukla@gmail.com
Website: 🌐 www.vijayfoundations.com
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"Respecting contractual freedom is not merely a matter of legal coherence; it is an economic necessity."
© Adv. Mamta Singh Shukla | Supreme Court of India
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