Section 74

Section 74 of the Indian Contract Act deals with the compensation for breach of contract where a penalty is stipulated for. The section 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, 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." The section aims to prevent parties from stipulating excessive penalties for breach of contract. The Supreme Court has held that the stipulated penalty must be reasonable and must not be a penalty, but rather a genuine pre-estimate of damages.