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.