Why a 150-Year-Old Law is Stalling Modern Contracts

Indian Contract Law Reform and Economic Modernization

By Adv. Mamta Singh Shukla, Supreme Court of India

India, a rising economic titan with a $4.5 trillion dream, is being shackled by a 150-year-old ghost. Its law of damages, rooted in the paternalistic anxieties of colonial rule, is no longer a functional legal framework but an economic drag. Consequently, modern commerce faces unnecessary hurdles.

Foundation of India’s Law of Damages

The current law is derived from English common law principles distinguishing between compensation and penalties:

Section 73 – Compensation for loss or damage caused by a breach of contract.
Section 74 – Compensation for breach of contract where a penalty is stipulated.

Distinction between Liquidated and Unliquidated Damages

Sections 73 & 74 were originally shields for the illiterate farmer against exploitative landlords. However, the insistence on proving actual loss (The Fateh Chand Rule) now limits commercial freedom.

Fateh Chand vs Balkishan Das (1963)

The Supreme Court held that even when damages are pre-agreed, proof of actual loss is required—a rule intended to prevent exploitation, not to hinder commerce.

Proof of Loss: The stipulated sum serves as the ceiling, not an automatic entitlement.
Compensation, Not Penalty: Courts award reasonable compensation instead of punishment.

The Disconnect in the Modern Context

Today, India’s economy and contracts are far removed from the colonial socio-economic structure:

Changed Economy: India’s growth is now driven by complex, capital-intensive industries.
Sophisticated Parties: Modern contracts occur between corporations advised by legal counsel.
Judicial Skepticism: Requiring proof of loss undermines negotiated risk allocation.

Moreover, these factors make Sections 73 and 74 increasingly impractical for modern business.

Problem with the Current Jurisprudence

Kailash Nath Associates vs DDA (2015) – Reaffirmed proof of actual loss.
ONGC vs Saw Pipes Ltd. (2003) – Allowed recovery when loss is impossible to quantify.

As a result, these conflicting rulings create uncertainty and contribute to India’s 53 million case backlog.

International Practice

Modern jurisdictions emphasize commercial freedom:

Cavendish v. Makdessi (UK, 2015) – Focused on proportionality and legitimate interests.
Andrews v. ANZ (Australia, 2012) – Broadened enforceable clauses.
UAE DIFC: Presumes enforceability unless a clause is unconscionable.

Clearly, India lags behind in recognizing negotiated damages as a tool for efficient commerce.

Required Reforms

1. Legislative Reform

Amend Section 74 to presume validity of freely negotiated liquidated damages.
Reject only if clearly penal or exploitative.

2. Judicial Restraint

Respect contracts between sophisticated, advised parties.
Avoid mandatory proof of loss in commercial settings.

3. Integration with Dispute Resolution

Clarifying damages law complements the Mediation Act 2023.
It also promotes faster arbitration outcomes and reduces court backlog.

Furthermore, a harmonized approach between legislation and judicial practice will foster confidence among domestic and foreign investors.

Conclusion

Contractual autonomy in modern commerce is not just a legal reform—it is an economic necessity. By updating Sections 73 and 74, India can:

Enhance investor confidence
Streamline dispute resolution
Demonstrate readiness to lead global economic growth

Ultimately, India must recognize that modern contracts require flexibility, certainty, and respect for negotiated risk, not outdated colonial safeguards.

About the Author

Adv. Mamta Singh Shukla is an Advocate at the Supreme Court of India and Founder of Vijay Foundations — a social initiative focused on justice, education, and empowerment.