The drafters of the Indian Contract Act, 1872 had boldly sought to dispense with the English law’s troublesome liquidated damages-penalty dichotomy by providing in Section 74 that sums stipulated in the contract were to be awarded notwithstanding any proof of ‘actual damage or loss’, and, as a safety valve, empowered courts to scale down the sum. The drafters astutely avoided any reference to ‘liquidated damages’ or ‘penalties’ by employing the neologism ‘sum named in the contract’. Fast-forward by a century and a half, however, and one finds a double dissonance between the drafters’ blueprint and the law. First, the liquidated damages–penalty distinction has now become firmly entrenched in Indian law without any real scholarly or judicial resistance. Second, ‘reasonable compensation’ is now confined to compensation for damage or loss. The article hypothesizes that much of this is attributable to an ambiguity unwittingly introduced by the – universally overlooked – 1899 amendment to section 74, the chief architect of which was the ace draftsman and treatise writer Mackenzie Chalmers. The amendment had meant to ‘slightly extend’ section 74 so as to cover some hitherto unregulated cases – namely, increased interest stipulations, acceleration clauses, and payments in specie – but did so by using the poorly chosen phrase ‘or … any other stipulation by way of penalty’ to convey this extension. This drafting slip-up was to become the Trojan horse that let in the English law’s notion of ‘penalty’ and along with it, came tethered, the notion of ‘liquidated damages’.
Shivprasad Swaminathan, De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, Chinese Journal of Comparative Law, Volume 6, Issue 1, 1 June 2018, Pages 103–127, https://doi.org/10.1093/cjcl/cxy001.