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

Under the Indian Contract Act, 1872, where a contract names a sum payable on breach and that sum is in the nature of a penalty, what is the party complaining of the breach entitled to receive from the party in breach?

The aggrieved party gets reasonable compensation not exceeding the named sum or penalty. Section 74 says this applies whether or not actual loss is proved, so the stipulated amount acts as a ceiling rather than an automatic award, and the court decides what is reasonable.

  1. AReasonable compensation not exceeding the amount named, whether or not actual loss is provedCorrect
  2. BThe whole sum named in the contract in every case
  3. COnly the actual loss, and only if it is proved by evidence
  4. DNothing, because penalty clauses are wholly unenforceable

Explanation

Section 74 gives the aggrieved party reasonable compensation not exceeding the named sum or penalty, and proof of actual damage is not required. Option B is wrong because the named sum is only a ceiling, not an automatic award. Option C is wrong because proof of loss is not a precondition.

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