Section 54

Section 54 of the Indian Contract Act, 1872, states: '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.' This section deals with the situation where the contract itself provides for a specific amount to be paid in case of a breach. The courts have held that the party claiming compensation is entitled to receive the amount specified in the contract, provided it is reasonable and not punitive in nature. In the case of Fateh Chand vs. Bal Kishan Das, the Supreme Court observed that the amount named in the contract as liquidated damages must be reasonable and should not be considered as a penalty.