India: Can Damages Provided Under Law Be Prevented By Agreement?

The general rule as provided under Section 73 of the Contract Act is that when a contract is broken, the party suffering from the breach of contract is entitled to receive compensation from the party who has broken the contract. While Section 74 provides that the parties to a contract may agree at the time of contracting, that in the event of a breach the party in default shall pay a 'stipulated sum of money' to the aggrieved party. Further, if that stipulated sum of money is a genuine pre-estimate of loss, then that amount is called Liquidated Damages, and if it is not a genuine pre-estimate of loss, but an amount intended to secure performance of contract, it may be a penalty. However, in the case of Maharashtra State Electricity Board vs. Sterlite Industries (India)1, it has been held that it is open to the parties to contract to agree to a special provision for the computation of damages and the mode of computation under Section 73 will thus be excluded.

Similarly, there may be cases whereby damages provided under law may be prevented by agreement, whereby a contract may contain within itself, the element of its own discharge, in the form of provisions, whether express or implied, for its determination in certain circumstances.

Exclusion of Right to Claim Damages by Express Contract

There may be a situation where the parties may exclude or restrict liability for damages.2 The question that arose for consideration under the case of Bharathi Knitting Company vs. D.H.L. Worldwide Express Courier Division of Air Freight Ltd, was whether the State Commission or the National Commission under the Act could give relief for damages in excess of the limits prescribed under the contract; wherein the apex court held that the Commission was right in limiting the liability undertaken in the contract entered by the parties and in awarding the amount of deficiency in service to the extent of the liability undertaken by the respondent.

Hence, when the parties have expressly made provisions in their contract regarding limitation of liability or exclusion of liability, the court will not award more than the extent of liability undertaken.3 In some cases, parties may provide that in the event of breach, no compensation will be payable, except for the refund of amounts paid.4

Damages cannot be awarded when the contract provides that in case of delay in handing over possession of site to contractor or delay due to any other cause, the contractor was entitled to extension of time for completion of the contract but was not entitled to compensation of damages.5

In this case, [Union of India vs. Chandalavada Gopalkrishna Murthy and Ors.], clause 17(3) of the contract stated that, in the event of failure or delay by the Railway to hand over to the contractor, possession of land necessary for execution of works, the said failure shall not vitiate the contract or entitle the contractor to damages of compensation thereof, but the railway may grant reasonable extension of completion date. Hence it was held in this case that the contractor shall not be entitled to compensation.

Similar question was raised in the case Ch. Ramalinga Reddy vs. Superintending Engg. And Anr6, whereby it was held that if the contract is extended under the terms of the contract, compensation cannot be awarded by the arbitrator.

In the case of General Manager Northern Railways and Ors. vs. Sarvesh Chopra7, the court stated that it was impermissible to award claim for compensation because the arbitrator was required to decide the claims referred to him with regard to the contract between the parties and, therefore, his jurisdiction was limited by the terms of the contract.

In the case of Numaligarh Refinery Ltd. vs. Daelim Industrial Company Ltd8, it was held that a contractor was not entitled to duties levied for the first-time after the contract, because he had agreed to bear all duties. It was held that as per various clauses of the contract since it was the duty of the DIC to pay all taxes, customs duty and levies, they cannot escape their liability to bear the countervailing duty imposed by the Government.

However, in case of Simplex Infrastructure Ltd. vs. Siemens Ltd9, it was stated that if the limitation of liability clause is limited in scope, amounts which are outside the scope of the clause can be awarded. It was held that it was a settled law that the bank guarantee is an independent contract and a challenge to the invocation/encashment of an irrevocable and unconditional bank guarantee has to be considered without any reference to the underlying or main contract or to the disputes/claims thereunder. Therefore, bank guarantee could not be restrained.


As discussed in the aforesaid judgments, it can be concluded that if in a contract the parties have specifically restricted or excluded liability for damages, then no compensation can be awarded to the party claiming the same.


1. AIR 2000 Bom 204 affirmed in Maharashtra State Electricity Board vs. Sterlite Industries (India) AIR 2001 SC 2933, (2001) 8 SCC 482

2. Bharathi Knitting Co. vs. DHL Worldwide Express Courier Division of Air Freight Ltd. (1996) 4 SCC 704, AIR 1996 SC 2508

3. Ibid.

4. Syed Israr Masood vs. State of Madhya Pradhesh (1981) 4 SCC 289, AIR 1981 SC 2010

5. Union of India vs. Chandalavada Gopalkrishna Murthy and Ors. (2010) 14 SC 633

6. 1999 (9) SCC 610

7. Civil Appeal No. 1791 of 2002, decided on 01.03.2002, MANU/SC/0145/2002

8. 2007 AIR SCW 5948, (2007) 8 SCC 466

9. (2015) 5 Mah LJ 135, (2015) 2 Bom CR 72

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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