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CMA Foundation · Fundamentals of Business Laws and Business Communication · Breach of Contract and Remedies for Breach of Contract

A contract between two firms states that the defaulting party will pay Rs. 50,000 if it breaks the contract. The contract is broken, but the innocent party cannot prove any actual loss. Under Section 74 of the Indian Contract Act, 1872, what is the innocent party's position?

The innocent party can recover reasonable compensation not exceeding Rs. 50,000. Section 74 applies whether or not actual loss is proved, but the named sum is only a ceiling. The court decides what is reasonable, so the full amount is not automatic.

  1. AIt can recover nothing, because no actual loss is proved
  2. BIt can recover reasonable compensation not exceeding Rs. 50,000, even without proof of actual lossCorrect
  3. CIt must be paid the full Rs. 50,000 automatically in every case
  4. DIt can recover any amount above Rs. 50,000 that the court considers fair

Explanation

Section 74 entitles the complaining party to reasonable compensation not exceeding the named sum, whether or not actual damage or loss is proved. So proof of loss is not needed. The option claiming the full sum automatically is wrong because the court awards only reasonable compensation up to the cap.

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