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Reshma (Legal Consultant)     15 September 2011

Penalty clause in contracts

Are penalty clause enforceable under the law ?

Pl revert.



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 4 Replies

Ajay Kumar (Administration)     16 September 2011

Yes penalty clauses are very much enforceable under law.

RK MEHTA (DEPUTY GENERAL MANAGER - LEGAL)     16 September 2011

The basic distinction between LD and penalty clauses is that whereas the former reflects a reasonable estimate of the contracting parties of the loss to be suffered in case of breach of contract, the latter is bereft of any such estimation. Section 74 of Indian Contract Act provides that in case of breach of contract containing penalty clause, the party complaining is entitled to receive from the party who has broken the contract reasonable compensation not exceeding the amount of penalty. In nutshell, normally courts would be guided by the doctrine of reasonable compensation in case of breach of contract containing penalty clause.
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Heaven 2011 (SERVE FRIENDS)     30 November 2011

Mr Meheta has properly explained....me too agree.

sanjay kumar (BE/ LLM in Corporate Laws)     12 December 2011

Penaty is a kind of Fine. And a fine is imposed wherever somebody breaks the law or an agreement clause. That way, if a penalty clause in incorporated in the agreement, it is enforceable provided the penalty is also indicated. It cannot be arbitrary. Further, penalities are to be event-specific like delay in supplies, delay in compeltion of work etc. It cannot be general in nature.

Liquidated Damages are a better option in commercial contracts because it is presumed that breach of any clause of contract , there will be a loss to the customer, irresepctive of the fact whether that 'loss" is quantifiable in terms of money or not. The LDs are much easier to impose than penalties.

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