1.

Issue

Whether damages other than the liquidated damages stipulated in the contract can be claimed under
sections 73 and 74 of the Contract Act 1872 (hereafter the 1872 Act).

2. Discussion

The law of contract is primarily governed by the 1872 Act. Section 73 and 74; deal with
consequences for Breach of Contract. Section 73 lays down the general provisions for loss or
damage caused by Breach of Contract, while section 74 specifically deals with Breach of Contract
where penalty is stipulated for.

Before damages can be claimed the plaintiff has to satisfy the burden of proof on him, i.e. prove
that there has been a breach of contract by the defendant and that the breach has resulted in damage
or loss caused to him. Thus breach of contract has to be proved before any enquiry can be made
into the quantum of damages. Where the defendant is found guilty of breach, he is liable to pay
damages: 1991 SCMR 1436.

Section 73 of the 1872 Act provides a general provision for compensation for loss or damage
caused by breach of contract. When a contract has been broken, the party who suffers by such
breach is entitled to receive, from the party who has broken the contract compensation for any loss
or damage caused to him: PLD 1973 SC 311, which naturally arose in the usual course of things
from such breach, or which the parties knew, when they made the contract to be likely to result
from the breach of it. Such compensation is not to be given for any remote and indirect loss or
damage sustained by reason of the breach: 1995 SCMR 1431.

However, section 73 is a general provision dealing with damages that may be payable in contracts
which are silent on the question of damages in case of a breach. The law recognizes the right of
the parties to create their own private law via contracts and the courts seeks to enforce the terms
of the contract as much as possible. In cases where the contract itself stipulates the provisions for
liquidated damages recoverable in case of breach there the correct section of the 1872 Act to apply
is section 74.

According to Section 74 of the 1872 Act, when a contract has been broken (breached), 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 damages 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.

Section 74 speaks of all agreements in which the damages to be paid for breach of contract are
stated as a certain sum of money or are otherwise specified: AIR 1926 Nag. 473. Where the amount
of damages to be recovered or forfeited in any eventuality is not mentioned in the contract, section
74 does not apply to the case: PLD 1963 Kar 653 (DB). Where the parties in a contract reduced to
writing, a sum of money to be paid as liquidated damages, they must be deemed to exclude the
right to claim an unascertained sum of money as damages. The right to claim liquidated damages
is enforceable under section 74 of the 1872 Act and where such a right is found to exist no question
of ascertaining damages really arises. Where the parties have deliberately specified the amount of
liquidated damages there can be no presumption they at the same time, intend to allow the party
who has suffered by the breach to give a go-by to the sum specified and claim instead a sum of
money which was not ascertained or ascertainable on the date of the breach: PLD 1985 Kar 71.

According to the jurisprudence developed by the courts the purpose behind setting an amount for
liquidated damages in a contract was to overcome difficulties that would be found in settling the
actual damages that might accrue against the defaulting party on breach of contract. The manifest
intention of such clauses is to get rid of future calculations and disputes. An amount mentioned in
a contract can either be a penalty or liquidated damages. The difference between the two is that
liquidated damages must be a genuine pre-estimate of damages agreed between the parties. It
does not include a sum fixed in terrorem. Penalty is generally considered to be a liability over and
above that which a debtor would be liable to pay under the main contract. The question whether a
clause in a contract provides for liquidated damages or penalty (in the sense of punishment),
irrespective of damages sustained is a question of substance, depending upon the real nature of the
transaction, in order to decide which the Courts must take into consideration the intention of the
parties, as evidenced by the language in the contract and circumstances of each case taken as a
whole as at the time the contract was executed (see generally: AIR 1960 Pat. 87). However, in the
present case, the evidence is quite clear as clause 36 (1) (b) of the General Conditions of Contract
clearly states that all sums payable by the contractor to the owner shall be paid as damages and not
in any event as a penalty and the contractor agrees that such sum is a genuine pre-estimate of the
loss to be suffered by the owner.

It is pertinent to note that according to PLD 1969 S.C. 80, it is not necessary for the courts in
Pakistan to decide whether the amount fixed in the contract has been fixed as liquidated damages
or as penalty, because the result in either case is that the court must determine reasonable
compensation. Where the parties to a contract have stipulated an amount or penalty to become
payable upon a breach of the contract, then the party complaining of the breach is entitled to receive
not the penalty or amount specified but reasonable compensation not exceeding the amount
mentioned in the contract (see generally: 1999 YLR 500). The Court is unfettered in awarding
reasonable compensation not exceeding the maximum fixed/agreed by the parties, whether actual
loss or damage is proved or not. Where court considers that sum mentioned in contract was not
excessive or unreasonable, such court may allow the same otherwise, would reduce the same to a
figure that it considers reasonable (See: PLJ 2005 Lah. 314 (DB)).

Status of Liquidated damages clause in other jurisdictions: The nature and effect of a
liquidated damages clause will always depend on its construction. However, applying Temloc v
Errill (1987) 39 BRL 30, the general position is that a liquidated damages clause will cover all
damages for non-completion and will therefore amount to an exhaustive remedy for all losses
arising as a result of the delay. The employer will not be able to elect to pursue a claim for general
damages in the hope of recovering sums over and above the contractual rate of liquidated damages.
Nor will the employer be able to claim general damages in addition to the liquidated damages
provided in the contract. In, Biffa Wasteland Ltd v Machinfabrik Ernst Hese GMBH [2008] EWHC
6 (TCC,) the contract provided for liquidated damages capped at 7.5% of the contract price. In
addition to claiming liquidated damages, the employer also tried to recover unliquidated damages
for delays to completion caused by breaches of other contractual obligations. Applying Temloc v
Errill, the Court rejected the claim, holding that if there is a failure to complete then the liquidated
damages will be an exhaustive remedy for the default and, "[i]f there is a breach of another
obligation and that breach causes a failure to complete then liquidated damages are still the only
monies due for that default, that is a breach of contract causing a failure to complete on time".

CONCLUSION: When parties named sum of money as liquidated damages they must be deemed
to exclude the right to claim an unascertained sum of money as damages. The right to claim
liquidated damages is enforceable under section 74 of the 1872 Act and when such right is found
to exist no question of ascertaining damages really arises. Where the parties have deliberately
specified the amount of liquidated damages there can be no presumption that they, at the same
time intended to allow the party who has suffered by the breach to give a go-by to the sum specified
and claim instead a sum if money which was not ascertainable at the date of the breach.