L eg a l Se rvice Ind i a.

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Compensation to the Victim of Crime: Assessing Legislative

Frame Work and Role of Indian Courts

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Written By : Abhishek Anand, 4th Year B.A., LL.B (Hons.), National Law University, Jodhpu

I. Introduction:
Criminal Law has always discouraged the acts or omissions which in general can affect right in rem and violators
have always been punished with strict sanctions but the crime rate is not falling and State is in regular quest to
preserve social solidarity and peace in society. The initial focus of criminologists were only on the aspect of
punishment but the focus started shifting when they encountered with the fact that the person who is victim of
crime is getting nothing out of the whole process of criminal justice system or is getting a so called satisfaction by
seeing the offender punished. Therefore jurists, penologist etc in all countries started giving their full attention to
the cause of victim in form of compensation and hence the whole debate started about ways, means and extent of
compensation. This paper is an addition to the same as it tries to look in to the position of compensation to victim
of crime in Indian Legal frame Work.
II. Meaning of Victim of Crime and Compensation to Victim of Crime:
Indian legislature has not bothered to define "Victim of Crime" under any law and probably the Indian Judiciary is
also on the same footing. The etymological meaning of phrase suggests that it would mean or will encompass:
Anyone suffering physical, emotional or financial harm as a direct result of a Crime.
Spouses and children of the person who has suffered.
Parents, foster parents, siblings, guardians or other custodians of minor victims, mentally or physically
incapacitated victims, or victims of homicide.
In this regard reliance can be placed upon United Nations General Assembly Declaration of Basic Principles of
Justice for Victim and Abuse of Power adopted in November 1985, which through Article 1&2 gives exhaustive
definition of the phrase:
Article1. "Victims" means persons who, individually or collectively, have suffered harm, including physical or
mental injury, emotional suffering, economic loss or substantial impairment of their fundamental rights, through
acts or omissions that are in violation of criminal laws operative within Member States, including those laws
proscribing criminal abuse of power.
Article2. A person may be considered a victim, under this Declaration, regardless of whether the perpetrator is
identified, apprehended, prosecuted or convicted and regardless of the familial relationship between the
perpetrator and the victim. The term "victim" also includes, where appropriate, the immediate family or
dependants of the direct victim and persons who have suffered harm in intervening to assist victims in distress or
to prevent victimization.
Therefore the combine effect of these Articles probably encompasses every thing under the sun that ought to
have been the part of definition of the phrase.
The word compensation in literal sense men's a thing that compensates or is given to compensate (for); a

counterbalancing feature or factor; amends, recompense; spec. money given to compensate loss or injury, or for
requisitioned property. When we talk about Compensation to the victims it means something given in recompense
i.e. equivalent rendered . It is to be noted that the whole purpose of compensation is to make good the loss
sustain by the victim or legal representative of the deceased. Generally when we talk about compensation in the
present context it only limits it self to monetary compensation which is calculated on the basis of two head i.e.
pecuniary loss and non-pecuniary loss.
III. Evolution of Concept of Compensation to Victim of Crime :
The evolution of the concept can be traced both historically and theoretically. Historically the concept of
victimology in crude sense was not only part of Hammurabi's code but also existed in developed sense in ancient
Greek city-states. The concept of compensation was also not new to India and existed in more developed sense
then the present. Manu in Chapter VIII, verse 287 clearly says that :
If limb is injured, a wound is caused or blood flows, the assailant shall be made to pay the expense of the cure or
the whole.
He further in verse 288 says that : He who damages the goods of another, be it intentionally or unintentionally,
shall give to the owner a kind of fine equal to damage.
The quotes regarding the same can be found even in the works of Brihaspati . This is in brief the law relating to
compensation to the victim of crime that even existed in ancient civilization of east as well as west. As far as
tracing of gradual evolution of the concept is concern the whole era till mid of 1900 can be generally divided in to
three parts. In initial year of human civilization when the human started living together especially after stone Age,
because of absence of rule of law and authoritative political institution, right to punish or rather might to punish
(in from of eye for eye or money) was with the individual and hence in crude sense the concept of compensation
existed at that time even but line of caution that need to be bear in mind is the fact that in primitive society
criminal victim relationship was based on brutal mentality of attack being the best defense. Then came the era in
which the social control in terms of mechanical solidarity creped in the society and the offence against an
individual lost its individualistic character and now the offence was considered to be against the tribe or clan to
which individual belongs and from this era, due to advent of concept of collective responsibility clan or tribe
started replacing the victim's right. The third stage started with the advent of strong monarch after medieval
period. In this stage on one hand criminal law saw far reaching change in all its discipline but on other the hand
position of victim right to compensation remained unheard due to advent of more strong institution named state
and crystallization of a notion that King/ State is parent of his subjects and Crime is breach of peace of King or
State. So it was King/State who had the right to punish and get monetary compensation. This position remained as
it is even with advent of democracy and the cause of victim remained unnoticed until 1950 and after that a
movement stared in U.S. and European countries and the concept again got prominence. Theoretically radical
criminologist championed the idea of cause of victim, which was result of reaction against the then criminological
thinking that was only concern with criminals and not the victims .
VI. Indian Legal Frame Work:
The Indian position regarding compensation to victim of crime can be studied under two heads or rather must be
studied under two head in order to get complete picture.
(i). Legislative Frame Work:
The legislative framework in Indian regarding compensation to victim of crime can be trace through two major
legislations i.e. Code of Criminal Procedure, 1973 and Probations of Offenders Act and Constitution of India. Under
the provisions of code of criminal Procedure the power to award compensation is vested under section 357 . The
plain reading of the section shows that sub-section (1) and (3) vests power on the trail court to award
compensation and sub-section (4) gives power even to appellant or revision court to order for compensation. Sub
section (1) empowers the courts to appropriate the whole or any portion of fine recovered for the purpose
mentioned in the clauses to the sub section, under which Clause (b) is most important and of our use . It demands
that claim of compensation must be accompanied by following conditions :
1. Loss or injury suffered
2. Loss or injury must be caused by the offence

3. Such person can recover the compensation in a civil court

Sub section (3) empowers the court, in its discretion, to order the accuse to pay compensation even though fine
does not form part of compensation and hence although inserted in 1973 added new positive dimension to Indian
philosophy of compensation.
Probation of Offenders Act vide its section 5 empowers the trail court to order for compensation. The plain reading
of this section clearly shows that the power in case of this Act vests only with the trail court and non-else . The
whole discussion about legislative framework is incomplete until Section 431 and 421 of Cr.P.C. is read with above
two substantive sections. Section 421 provides for means to recover the fine by attachment and sale of movable
property of the offender and also from both movable and immovable as arrears of land revenue . Section 431
empowers the courts to recover any money (other than fine) payable by virtue of any order made under as if it
were fine if method for its recovery is not expressly provided . As far as the Constitutional scheme is concern it is
to be noted that it is out come of various decision of Supreme Court of India either by reading Part third rights (in
some cases part four as well) with Art. 32, 136 and 142 of Constitution of India , which is to be given either by the
state or accuse.
Hence the whole gamete of legislative framework about compensation can be summarized in following way:
Compensation from State, which is out come of Judicial Imposition or some times, even ex-gratia under
Constitution of India.
Compensation from an offender which is out come either as a part of fine or allocation of specific sum to victim
either under Cr.P.C. or Constitution of India.
(ii). Judicial Response:
Their exist plethora of cases where the compensation has been awarded by the Supreme Court to the victims of
the crime which not only present the heart full moments but also exposed the sorry state of affairs that has been
prevalent in the lower courts even some times High Courts.
It is better to examine cases under two heads i.e. (i) under Cr.P.C. and P.O.A. and (ii) under Indian Constitution in
order to appreciate the judicial standpoint on this issue.
(a) Under Cr.P.C. or P.O.A.:
The first case in the line, which attracted the mind of the court came way back in 1952 where the Hon'ble
connected general principle of sentencing i.e. while passing a sentence the court must bear in mind the
proposnality between offence and penalty with granting of compensation and observed that while imposing the
fine court must consider gravity of offence and the pecuniary condition of the offender. Then came the case
of Prabhu Prasad Sha v State of Bihar where the Hon'ble not only uphold the conviction of 15 years old boy
(actually at the time of commission of crime the accuse was of 15 Yrs) but also observed that although
requirements of social justice demands the imposition of heavy fine but taking in to consideration the condition of
the accuse awarded fine of Rs 3000 to be paid by him to the children of the deceased. In another case
of Palaniappa Gounder v Sate of Tamil Nadu Supreme Court following the same view as of earlier not only reduced
the amount of fine imposed by the High Court from Rs 20,000 to Rs 3,000 but also observed that :
It appears to us that the High Court first considered what compensation ought to be awarded to the heirs of the
deceased and then imposed by way of fine an amount which was higher than the compensation because the
compensation has to come out of the amount of fine. Apart from the fact that even the compensation was not
fixed on any reliable data, the High Court, with respect, put the cart before the horse in leaving the propriety of
fine to depend upon the amount of compensation. The first concern of the Court, after recording an order of
conviction, ought to be a determine the proper sentence to pass. The sentence must be proportionate to the
nature of the offence and the sentence, including the sentence of fine, must be unduly excessive.
Next in the is land mark case of Sarwan Sing v State of Punjab where supreme court not only retreated it's
previous stand point but also laid down, in exhaustive manner, that what all should be taken in to account while

imposing fine or compensation. The Hon'ble Court Observed that :

The object of the section therefore, is to provide compensation payable to the persons who are entitled to recover
damage from the person sentenced even though fine does not form part of the sentence. Though Section 545
enabled the court only to pay compensation out of the fine that would be imposed under the law, by Section
357(3) when a Court imposes a sentence, of which find does not form a part, the Court may direct the accused to
pay compensation. In awarding compensation it is necessary for the court to decide whether the case is a fit one
in which compensation has to be awarded. If it is found that compensation should be paid, then the capacity of the
accused to pay compensation has to be determined. In directing compensation, the object is to collect the fine and
pay it to the person who has suffered the loss. The purpose will not be served if the accused is not able to pay the
fine or compensation for, imposing a default sentence for non-payment of fine would not achieve the object. If the
accused is in position to pay the compensation to the injured or his dependents to which they are entitled to, there
could be no reason for the court not directing such compensation. When a person, who caused injury due to
negligence or is made vicariously liable is bound to pay compensation it is only appropriate to direct payment by
the accused who is guilty of causing an injury with the necessary mens rea to pay compensation for the person
who has suffered injury. And also :
It is the duty of the court to take into account the nature of the crime, the injury suffered, the justness of the claim
for compensation, the capacity of the accused to pay and other relevant circumstances in fixing the amount of
fine or compensation. After consideration of all the facts of the case, we feel that in addition to the sentence of 5
years' rigorous imprisonment, a fine of Rs. 3500 on each of the accused under Section 304(1), I.P.C. should be
imposed.
The next important case is of Bhuperndar Singh v State of M.P. which was out come of quarrel between college
students where the Hon'ble Court although allowed the compounding of offence but did not forget the cause of
victim and granted the compensation of Rs 3000.
The Case of Harikishan and State of Haryana v Sukhbir Singh and others is the second most important case after
Sarwan Singh where court repeated its firm understanding once again in following words :
The payment by way of compensation must, however, be reasonable. What is reasonable, may depend upon the
facts and circumstances of each case. The quantum of compensation may be determined by taking into account
the nature of crime, the justness of claim by the victim and the ability of accused to pay. If there are more than
one accused they may be asked to pay in equal terms unless their capacity to pay varies considerably. The
payment may also vary depending upon the acts of each accused. Reasonable period for payment of
compensation, if necessary by instalments, may also be given. The court may enforce the order by imposing
sentence in default.
In the case of Balraj Singh v State of U.P. stated the same point as discussed above but in most appropriate word
by saying that the power to a award compensation is not ancillary to the other sentence but in addition thereto.
(b) Under Indian Constitution:
The principle of payment of compensation to the victim of crime was evolved by Hon'ble S.C. on the ground that it
is duty of the welfare state to protect the fundamental rights of the citizens not only against the actions of its
agencies but is also responsible for hardships on the victims on the grounds of humanitarianism and obligation of
social welfare, duty to protect it's subject, equitable Justice etc . It is to be noted that compensation by the State
for the action of it's official was evolved by the Hon'ble Court against the doctrine of English law: "King can do no
Wrong" and clearly sated in the case of Nilabati Behra v State of Orissa that doctrine of sovereign immunity is only
applicable in the case of tortuous act of government servant and not where there is violation of fundamental rights
and hence in a way stated that in criminal matters (of course if there is violation of fundamental rights) this
doctrine is not applicable.
Rudal Sah v State of Bihar is the most celebrated case where the Hon'ble S.C. directed the state to pay

compensation of Rs 35,000 to Rudal Sah who was kept in jail for 14 years even after his acquittal on the ground of
insanity and held that it is violation of Article 21 done by the State of Bihar. The case of Bhim Singh v State of
J&K is another important case where Bhim Singh an MLA was arrested by the police only to prevent him to
attended the Legislative Assembly, the Hon'ble Court not only entertained the writ petition of his wife but also
awarded the compensation of Rs 50,000 to be paid by the state. The case of Meja Singh v SHO Police Station Zira
is another unfortunate case where this time High Court of P&H took the cause of victim and awarded the
compensation of Rs 25,000 for illegal detention of son of the petitioner. This time it was High Court Bombay, which
took the cause of the victim in the case of Ravikant Patil v DG Police, State of Maharastra where the petitioner was
taken handcuffed to court in clear violation of Judgment of Hon'ble S.C., that is law, as decided in the case of Prem
Shanker Shukla v Delhi Administration . Custodial Death is another burning issue where the courts have awarded
compensation to the victims of crime and the most important case under this heading is of Mrs. Cardino v
UOI where although the accuse was arrested on the charge of misappropriation of some plastic ware and hospital;
utensils worth Rs1500 but tortured like hard core criminal and hence he succumbed to the torture. Here when the
matter was brought before the Hon'ble High Court of Bombay which gave the compensation of Rs 2,00,000 to be
paid by the state. In the case of Nilabati Behra v State of Orissa where the son of petitioner was arrested by the
police and next morning his body was found laying down with several injuries on the railway track, the Hon'ble
S.C. awarded the compensation of Rs 1,50,000 that is to be paid by the State. On the issue of brutal use of force
and misuse of authority by the police out side the police station case ofSAHELI v Commissioner of Police is land
mark where the son of Kamlesh Kumari died due to ill treatment by a S.I. of Delhi Police, the Hon'ble S.C. directed
the Delhi Adm. to pay the compensation of Rs 75,000. The next important case is of Gudalure Cherian v UOI where
Hon'ble S.C. following an innovative approach first directed the whole matter to be investigated by the CBI afresh
and completion of investigation directed the Govt. of U.P. to first suspend the police officials and medical officers
who tried to save the accuse but also directed the state to pay compensation of Rs 2,50,000 to the victim of rape
and Rs 1,00,000 to victim of other crime. The next in the line is the case of Bodhi Satta Gautam v Subhra
Chakraborty where the Hon'ble S.C. invented the concept of interim compensation and enforced the part third
right against an individual by saying that:
This decision recognises the right of the victim for compensation by providing that it shall be awarded by the Court
on conviction of the offender subject to the finalisation of Scheme by the Central Government. If the Court trying
an offence of rape has jurisdiction to award the compensation at the final stage, there is no reason to deny to the
Court the right to award interim compensation, which should also be provided in the Scheme. On the basis of
principles set out in the aforesaid decision in Delhi Domestic Working Women's Forum, the jurisdiction to pay
interim compensation shall be treated to be part of the overall jurisdiction of the Courts trying the offences of rape
which, as pointed out above is an offence against basic human rights as also the Fundamental Right of Personal
Liberty and Life.
The court also stated that :
Having regard to the facts and circumstances of the present case in which there is a serious allegation that
Bodhisaltwa Gautam had married Subhra Chakraborty before the God he worshipped by putting Vermilion on her
forehead and accepting her as his wife and also having impregnated her twice resulting in abortion on both the
occasions, we, on being prima facie satisfied, dispose of this matter by providing that Bodhisattwa Gautam shall
pay in Subhra Chakraborty a sum of Rs. 1,000/-every month as interim compensation during the pendency of
Criminal Case in the Court of Judicial Magistrate, Ist Class, Kohima, Nagaland. He shall also be liable to pay
arrears of compensation at the same rate from the date on which the complaint was filed, till this date.
Therefore it can be observed that the Hon'ble Courts have taken little softer view ( with regard to monetary
aspect) when question of the award of compensation come under Cr.P.C. as compare to when it come under
Constitution.
VII. Assessment of the Role of Legislative Frame work and Indian Courts:
The exit no doubt that Code of Criminal Procedure provided for the compensation to victim in the year 1898, when
even the concept has not developed properly but now it submitted that the whole scheme under Cr.P.C. or P.O.A.
needs renovation. The most important attack on the present legislative frame work lies on the desertion given to

the courts i.e. it depends upon them to grant compensation and absence of recording any reason when they
abstain them self from grating compensation. Another criticism of the present legislative framework lies in the
absence of right of victim to claim compensation. Critics also argue for the absence of any institutional scheme
under the present legislative framework that has now become the important part of victim- Crime relationalship in
countries of southern hemisphere such as USA, UK, New Zealand, France etc . The laxity on the part of Indian
legislature is so much so that India has not made any legislation to give compensation to victim of crime when
accused is acquitted despite of its obligation under various International Covenants . In this regard even Hon'ble
S.C. in the case of Delhi Domestic Working Forum v UOI has shown its concern in flowing words:
It is necessary, having regard to the Directive Principles contained under Article 38(1) of the Constitution of India
to set up Criminal Injuries Compensation Board........Compensation for victims shall be awarded by the court on
conviction of the offender and by the Criminal Injuries Compensation Board whether or not a conviction has taken
place. The Board will take into account pain, suffering and shock as well as loss of earnings due to pregnancy and
the expenses of child birth if this occurred as a result .......
So this in brief set out the major defaults in the present legislative framework due to which the whole concept of
compensation has become akin to flop show in India. However it is to be noted that part of responsibility of being
the concept flop show lies on Indian judiciary as well, especial the lower courts. In this regard the observation of
Hon'ble S.C. in the case of State of Gujarat v Hon'ble High Court of Gujarat is relevant where following was stated:
Section 357 of the Criminal Procedure Code, 1973 provides some reliefs to the victims as the court is empowered
to direct payment of compensation to any person for any loss or injury caused by the offence. But in practice the
said provision has not proved to be of much effectiveness. Many persons who are sentenced to long term
imprisonment do not pay the compensation and instead they choose to continue in jail in default thereof. It is only
when fine alone is the sentence that the convicts invariably choose to remit the fine. But those are cases in which
the harm inflicted on the victims would have been far less serious. Thus the restorative and reparative theories are
not translated into real benefits to the victims.
Case of Harikishan Singh is also of importance where the Hon'ble S.C. observed that:
It is an important provision but courts a have seldom invoked it. Perhaps due to ignorance of the object of it. It
empowers the court to award compensation to victims while passing judgment of conviction. In addition to
conviction, the court may order the accused to pay some amount by way of compensation to victim who has
suffered by the action of accused. It may be noted that this power of courts to award compensation is not ancillary
to other sentences but it is in addition thereto. This power was intended to do something to reassure the victim
that he or she is not forgotten in the criminal justice system. It is a measure of responding appropriately to crime
as well of reconciling the victim with the offender. It is, to some extent, a constructive the victim crimes. It is
indeed a step forward in our criminal justice system. We, therefore, recommend to all courts to exercise this power
liberally so as to meet the ends of justice in a better way.
Moreover the comment High Court in case of In Re Drug Inspector is very important where it was stated that
efficacy of a law and its social utility depends largely on the manner4 and the extent of its application by the
courts . It was further stated that the good law badly administered may fail its social purpose and if overlooked in
practice fail in the purpose and utility . The Law Commission of India in its 41st report clearly sated that our courts
are not liberal in utilizing these provisions and went to the extent of saying that it is regrettable that our courts do
not exercise their statutory powers under this section as freely and liberally as they could desire.
However in this regard it is to be noted that the attempt of Hon'ble S.C. and some of the High Courts as discussed
above clearly shows that they are championing the cause of victim even in the given set up but still looking to the
problem as a whole, inherent weakness on the legislative framework as well as laxity on the part of court has
made the proper functioning of whole concept a distant dream in strict sense.
VIII. Conclusion and Suggestions:

It is need less to point out that the whole legislative paradigm coupled with lack of judicial determination has
exposed numerous flaws of the present legal system about the compensation therefore there is need for
revamping the whole legal system once. The mandatory changes that are needed are as follows:
The suggestion given by the law commission of India in its 42nd report on Indian Penal Code must be taken in to
consideration and it would be better if the legislature also take in to account the separate note of Justice R.L.
Narsimha a member of the commission .
The law must also provide recording of reason for not providing or providing the compensation as we have in the
case of death sentence in Cr.P.C.
The law must also provide for institutional set up as we have in western countries.
If possible it would be better to give the compensation as a right to victim.

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Liquidated Damages
The Indian Contract Act, 1872, provides a basic structure of the law of contract in India, its enforcement,
various provisions regarding non-performance and the breach of contract. This report is aimed to highlight
provisions regarding liquidated damages in case of the breach of the contract and to bring about a
comparative study between India and England regarding it. Thus, before knowing what exactly liquidated
damages are, it is important to understand the consequences of breach of contract and the damages
awarded in case of breach. A party who is injured by the breach of a contract may bring an action for
damages and Damages means compensation in terms of money for the loss suffered by the injured
party. Thus, in contract when these damages are awarded it is known as liquidated damages.
Liquidated Damages means that it shall be taken as the sum which the parties have by the contract
assessed as damages to be paid whatever may be the actual damage. The parties to the contract may
agree at the time of contracting that, in the event of a breach, the party in default shall pay a stipulated
sum of money to the other, or may agree that in the event of breach by one party any amount paid by him
to the other shall be forfeited. It is a genuine pre-estimate of damages likely to flow from the breach.
However, this liquidated damage shall be distinguished from the term penalty which is an amount
intended to secure performance of the contract.
Penalty And Liquidated Damages
Often the term liquidated damages is mistaken or rather confused with the term penalty. Thus,

understanding the terms, we can clearly distinguish between the two.

A penalty can be said to be a sum so stipulated in terrorem (with the object of coercing the party into
performing the contract), and thus an amount qualifies to be a penalty if the sum named is extravagant
and unconscionable. It is also a penalty if the breach consists in paying of money and the sum stipulated
is greater than the sum which ought to have been paid. However, liquidated damages are a genuine,
covenanted pre-estimate of damages as seen above. They are both to be so judged on the facts of each
case. The question whether a particular stipulation in a contract is in the nature of the penalty has to be
determined by the court against the background of various relevant factors, such as the character of
transaction and its special nature, if any, the relative situation of the parties, the rights and obligations
accruing from such a transaction under the law and the intention of the parties incorporating in the
contract, the particular stipulation which is contended to be penal in nature. If on such a comprehensive
consideration, the court finds that the real purpose for which the stipulation was incorporated in the
contract was that by reason of its burdensome or oppressive character, it may operate in terrorem over
the promisor so as to drive him to fulfil the contract, and then the provision will be held to be of Penalty.
Indian Perspective
Section 74 of the Indian Contract Act reads as follows:- When a contract has been broken, if a sum is
named in the contract as the amount to be paid in case of such breach, or if the contract contains any
other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby, to receive from the party who has broken the
contract reasonable compensation not exceeding the amount so named or, as the case may be, the
penalty stipulated for.
In Fateh Chand v Balkishan Das,[1] the Supreme Court stated:
Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of
parties predetermined or where there is a stipulation by way of penalty. But the application of the
enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does
not confer a special benefit upon any party. It merely declares the law that notwithstanding any term in the
contract for determining the damages or providing for forfeiture of any property by way of penalty, the
Court will award to the party aggrieved only reasonable compensation not exceeding the amount named
or penalty stipulated.
The purpose of such clauses is to promote certainty, especially in commercial contracts. Parties to a
contract would fix such a sum in advance at the time of making the contract because it facilitates
calculation of risks; it reduces the difficulty and expense of proving actual damage or loss and facilitates
recovery of damages. It also avoids the difficulty in assessment, even where the consequences of breach
are ascertainable and avoids the risk of under-compensation; the party may otherwise not be able to
recover indirect, consequential loss by the rule of remoteness. It gives promisee an assurance that he
may safely rely on the fulfilment of the promise.
The Supreme Court also framed the following guidelines in the Saw Pipes[2] case for arriving at the
reasonable compensation vide section 74 of the Contract Act:
Before deciding that a claimant is entitled to any compensation the terms of the contract must be
considered; where such terms are unambiguous the sum named therein must be awarded unless such
sum is found to be by way of a penalty or in any case unreasonable. In all cases of breach, section 74 is
to be read with section 73 and therefore it is not essential for a party to prove actual losses before
claiming a decree; a court is competent to award reasonable compensation in case of breach irrespective
of the existence of any such proof. Sometimes it is impossible for the court to determine the damages with
certainty in which case the court can safely award the stipulated sum if it is the genuine pre-estimate of
damages by the parties as the measure of reasonable compensation.
Position In England
Under English Common Law, parties may name a sum to be payable in case of breach, which if classified
by the court as a penalty is irrecoverable but if classified as liquidated damages is recoverable. However,
the Law of Contracts in India does not recognise any qualitative difference in the nature of damages, as
section 74 eliminates the somewhat elaborate refinement under Common Law. In case of a penal clause,
damages will be assessed in the usual way, and the plaintiff may even recover a sum greater than the

stipulated amount. In discerning the true nature of the contract and the compensation payable, the court
must have regard to the terms and inherent circumstances at the time of the making of the contract and
not at the time the breach occurred. The terms used by the parties are not conclusive and the court is not
bound by their phraseology. If the term is stated to be a penalty but turns out to be a genuine pre-estimate
of loss, it will be treated as liquidated damages.
Conclusion: Common Features Between English And Indian Law
After seeing the various provisions both under Indian law and English law we can conclude the common
analogy between them. Yet the distinction between liquidated damages and penalty is not all together
irrelevant to the section. Its relevance, in the first place, arises from the fact that the amount contemplated
by the parties will be reduced only if it appears to be by way of penalty. Otherwise the whole of it is
recoverable as liquidated damages. Secondly, the first explanation to this section uses the word penalty.
It provides that a stipulation for increased interest from the date of default may be a stipulation by way of
penalty. Still another common feature between the English common law and Indian law is shown by the
decision of the Supreme Court in Chunilal V. Mehta &Sons Ltd. v. Century Spg. & Mfg Co. Ltd.[3], where it
has been held that by providing for compensation in express terms the right to claim damages under the
general law is necessarily excluded