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

Ramesh agreed to buy a painting from Sheela for Rs 5 lakh, and the contract says that if Ramesh breaches, he shall pay Rs 1 lakh. Ramesh breaches, but Sheela proves actual loss of only Rs 40,000. Under Section 74, what can Sheela recover?

Sheela can recover Rs 40,000. Under Section 74 the stipulated Rs 1 lakh is only a ceiling, and the court awards reasonable compensation not exceeding it. Since the proved loss is Rs 40,000, that is the reasonable compensation. Indian law does not treat the clause as void.

  1. AReasonable compensation not exceeding Rs 1,00,000, here Rs 40,000Correct
  2. BRs 1,00,000 in all cases
  3. CRs 5,00,000
  4. DNothing, as the clause is a penalty and void

Explanation

Under Section 74, where a sum is named as payable on breach, the aggrieved party is entitled to reasonable compensation, not exceeding the amount named, whether or not actual loss is proved. Where the loss is proved to be Rs 40,000, reasonable compensation is Rs 40,000, within the Rs 1 lakh ceiling. The stipulated sum is a maximum, not automatic. Indian law does not void such clauses.

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