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CA Foundation · Business Laws · The Indian Contract Act, 1872

A contract between Om Events and Pooja provides that if Pooja cancels the booking she will pay Rs 50,000 as a genuine pre-estimate of loss. Pooja cancels, and Om Events proves actual loss of only Rs 30,000. How much can Om Events recover?

Om Events can recover reasonable compensation not exceeding Rs 50,000. Where a contract names a sum payable on breach, the court allows only reasonable compensation up to that cap. It is neither automatically the full amount nor void, and the proven loss of Rs 30,000 guides what is reasonable.

  1. AUp to Rs 50,000 as reasonable compensation not exceeding the stipulated amountCorrect
  2. BAlways exactly Rs 50,000 regardless of loss
  3. CRs 30,000 plus Rs 50,000
  4. DNothing, since penalty clauses are void

Explanation

Under the Act, where a sum is named as payable on breach, the aggrieved party is entitled to reasonable compensation not exceeding that amount, whether it is liquidated damages or a penalty. Courts award reasonable compensation, which here is the proven loss of Rs 30,000, within the Rs 50,000 cap. Hence recovery is capped at Rs 50,000, not guaranteed.

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