The Indian Contract Act 1872 (‘ICA’) draws a statutory distinction between unliquidated damages under Section 73 and liquidated damages (‘LD’) or predetermined compensation under Section 74. However, the judicial interpretation of Section 74 has evolved substantially over time. While Section 73 entitles an aggrieved party to compensation for losses naturally arising from a breach irrespective of contractual stipulation, Section 74 governs cases where the contract itself prescribes a sum payable upon breach. In Fateh Chand v. Balkishan Das (1963) and ONGC v. Saw Pipes Ltd (2003), the Supreme Court held that the amount stipulated in an LD clause operates only as the maximum limit of compensation, remains subject to judicial scrutiny for reasonableness, and may be awarded without strict proof of loss where such loss is difficult or impossible to quantify. However, the compensation is determined by evaluating whether the stipulated sum was a genuine pre-estimate of anticipated harm.In Indian Oil Corporation Ltd v. Lloyds Steel Industries Ltd (2008), the Delhi High Court held that liquidated damages cannot be awarded where no loss has been suffered. The Court held that mere delay in construction and commissioning of the terminal did not entitle IOC to recover liquidated damages in the absence of proof of loss. The Court further held that while there may be cases where loss is difficult to prove, where loss is capable of proof, the claimant must establish the same.In Maula Bux v. Union of India (1970), the Supreme Court held that where it is impossible for the court to assess compensation, a genuine pre-estimate may be taken as reasonable compensation. However, where loss in monetary terms can be determined, the party claiming compensation must prove the loss suffered.In Construction & Design Services v. Delhi Development Authority (2015), the Supreme Court held that the court must determine the reasonable compensation and then grant it to the injured party. The same principle was reiterated by the Delhi High Court in Herbicides (India) Ltd. v. Shashank Pesticides Pvt Ltd (2011), where it was held that reasonable damages may be awarded even without strict proof unless it was established that no loss was caused by the breach. However, in Engineers India Ltd v. Tema India Ltd (2016), the Delhi High Court held that since the party failed to prove any loss or damage, it was clearly not entitled to any amount on that account.In Kailash Nath Associates v. Delhi Development Authority (2015), the Supreme Court held that loss or damage is a sine qua non for applicability of Section 74 and that reasonable compensation must be determined on well-known principles applicable to the law of contract. The Court further held that forfeiture of amounts by a public authority in the absence of loss would be arbitrary.The judgement in Kailash Nath has been understood to impose a burden on the party claiming liquidated damages to establish actual loss and, where possible, quantify such loss. Where quantification is impossible, the claimant must demonstrate that the stipulated sum represents a genuine pre-estimate. Relying upon Kailash Nath, the Delhi High Court in Rakesh Brothers v. Areva T and D India Ltd (2019) held that even where liquidated damages are provided for, the claimant must prove actual loss in terms of Sections 73 and 74 of the ICA. Similarly, in Vinod Seth (deceased) through Kunal Seth v. Sudershan Kumar Bhayana (2023), the Delhi High Court reiterated that damages cannot be awarded solely on the basis of a penalty clause. It was held that the claimant must establish breach, resulting loss and a causal link between the two. In the absence of evidence of loss, the award of damages was set aside.In conclusionThe judicial principles emerging from the above decisions are consistent. The stipulated amount in a liquidated damages clause represents the maximum compensation payable. Liquidated damages are recoverable only upon proof of loss, except in cases where loss is impossible or impracticable to quantify, and the stipulated amount reflects a genuine pre-estimate. Where loss is capable of proof, the claimant must establish the same in accordance with Section 73 of the ICA.About the author: Ronak Desai is a construction lawyer and heads International Construction Law Offices (ICLO), Mumbai, Email: rd@constructionlawoffices.comAssisted by Divya Pahade, Associate, ICLO.