A liquidated-damages clause is intended to estimate compensation for breach in advance, while a penalty is primarily designed to secure performance through a disproportionate consequence. Under section 74 of the Contract Act, 1872, however, neither label automatically decides the amount recoverable. The court may award reasonable compensation, but not more than the amount named in the contract or the penalty stipulated.
Governing law
Section 74 of the Contract Act, 1872 applies where a contract has been broken and the contract names a sum payable upon breach, or contains another stipulation by way of penalty. The party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused, to receive reasonable compensation not exceeding the amount named or the penalty stipulated.
Section 73 remains relevant because it states the general rules governing compensation, including causation, foreseeability, remoteness, and the available means of reducing loss.
Section 74 contains an explanation that a stipulation for increased interest from the date of default may amount to a penalty. It also contains a specific exception concerning certain bonds or instruments given for the performance of a public duty or an act in which the public is interested.
The traditional conceptual difference
A genuine liquidated-damages provision attempts to estimate in advance the loss likely to result from a specified breach. It is useful where actual loss will be difficult to calculate after the event, such as delay in commissioning a factory, failure to meet a service level, or late delivery within a time-sensitive project.
A penalty is designed principally to deter breach through an amount out of proportion to the likely loss. For example, a contract worth Tk 500,000 that requires payment of Tk 5 million for a one-day administrative delay may raise a penalty question.
This conceptual distinction helps a court assess reasonableness, but section 74 controls the remedy. A clause called “agreed liquidated damages” is not automatically enforceable in full. A clause called a “penalty” is not necessarily wholly void. The court’s statutory task is to determine reasonable compensation within the stated maximum.
What does “whether or not actual loss is proved” mean?
The claimant does not necessarily have to prove an exact amount of actual loss as a condition for invoking section 74. This is particularly important where the consequences of delay or non-performance are real but difficult to quantify precisely.
The provision does not state that the contractual amount must automatically be awarded. The award must still be reasonable. Where loss can readily be calculated, evidence of the actual financial effect, market difference, replacement cost, delay expense, or other consequence will assist the court.
A party claiming Tk 10 million should not merely produce the clause. It should explain why the sum was selected, what commercial interests the clause protects, what loss was anticipated, what breach occurred, and why the requested amount is reasonable.
The contractual sum is a ceiling
Section 74 prohibits an award greater than the sum named or penalty stipulated. The clause therefore fixes the maximum possible compensation under that provision, not necessarily the amount that will be awarded.
If a contract states Tk 100,000 for delay, the court may award Tk 100,000, a lower amount, or no compensation if the legal basis for liability is not established. It cannot award Tk 150,000 under that clause as section 74 compensation.
Other independently recoverable obligations, such as an unpaid contract price, return of property, or a distinct cause of action, must be analysed separately rather than artificially included in the penalty calculation.
Delay damages
Construction, supply, technology, and infrastructure contracts often specify a percentage of the contract price for each week of delay, subject to a total cap.
Such a clause should define the completion date, extension-of-time procedure, employer-caused delay, certification process, force majeure relief, cure rights, calculation base, and maximum liability. Otherwise, a dispute may arise over whether the contractor was actually responsible for the delay and when the calculation began.
A party that caused or contributed to the delay may not be able to calculate damages as though the other party alone was responsible. Detailed programmes, notices, approvals, variation orders, site records, and extension decisions are therefore essential.
Earnest money and forfeiture
Forfeiture of earnest money may fall within section 74 where it operates as a consequence of breach. The nature of the payment matters. A true earnest deposit securing performance may be treated differently from an advance part-payment.
In Mesbahuddin Ahmed v James Finlay, reported at 12 MLR (AD) 253, the Appellate Division is reported to have held that an auction-sale contract became absolute upon acceptance of the offer and that the seller could forfeit earnest money when the purchaser failed to pay the consideration within the stipulated time.
That decision should not be read as authorising every forfeiture clause. The court must examine whether a concluded contract existed, who committed breach, the character of the payment, the contractual wording, and section 74.
In National Bank Ltd v Pragati Industries Ltd, reported at 10 BLC (AD) 189, the seller was reported to have been unable to forfeit the buyer’s money where the seller itself was in default.
Increased interest after default
Section 74 expressly recognises that increased interest from the date of default may be penal.
A loan clause increasing interest after default should therefore be examined for its commercial purpose and proportionality. This does not mean every default rate is automatically invalid. It means that a substantial increase may be treated as a penalty and subjected to the reasonable-compensation rule.
The statutory illustration referring to a very high rate is an illustration of a possible penalty. It is not a statutory maximum interest rate applicable to every loan.
Practical drafting
A well-drafted liquidated-damages clause should identify the specific breach, explain the commercial interest protected, state the calculation method, provide a reasonable cap, and avoid double recovery.
The contract record should show that the parties considered likely loss when negotiating the amount. Internal calculations, project forecasts, expected financing costs, storage costs, anticipated operational losses, and industry standards may support the reasonableness of the estimate.
Avoid using the same fixed amount for every possible breach regardless of seriousness. A clause imposing identical compensation for a minor reporting delay and total abandonment is more vulnerable to challenge.
Claim procedure and documents
The claimant should first establish a valid contract, the relevant obligation, breach, responsibility, compliance with notice requirements, and the contractual calculation. Preserve the contract, amendments, project schedules, correspondence, warning notices, extension requests, completion certificates, invoices, accounts, market evidence, and proof of loss.
The demand should state whether the amount is claimed as a debt, agreed damages, reasonable compensation under section 74, restitution, or another remedy. These categories should not be blurred.
If the contract contains an arbitration clause, the dispute may belong in arbitration. Otherwise, the ordinary forum is generally a competent civil court under section 9 of the Code of Civil Procedure, 1908.
Relationship with section 73
Section 74 does not authorise recovery for an event that was not a breach or for loss unrelated to the breach. Section 73 remains relevant to the compensatory nature of the remedy.
In The Project Director, P.L. v A. Latiff Company Ltd, 14 ALR (AD) 45, the Appellate Division is reported to have emphasised that contractual compensation should place the injured party, so far as money can, in the position performance would have produced and should not result in an absurd award disconnected from the contract’s value.
Exceptions and open questions
The distinction between advance part-payment, security deposit, earnest money, and an amount stipulated for breach can be difficult. The terminology in the contract is relevant but not conclusive.
It may also be disputed whether a sum is payable upon breach or upon occurrence of an independent contractual event. Section 74 applies to compensation triggered by breach or a stipulation by way of penalty. A genuine alternative-performance obligation may require separate analysis.
Bangladesh decisions specifically analysing modern liquidated-damages clauses in complex commercial contracts are not consistently accessible through the official online judgment database. Publication should therefore avoid importing English or Indian doctrinal formulas as though they were binding Bangladesh rules.
Common mistakes
Common mistakes include assuming the entire stated amount is automatically recoverable, failing to prove breach, ignoring employer-caused delay, claiming both full actual damages and full liquidated damages for the same loss, treating every advance as forfeitable earnest money, and using an excessive default interest rate without commercial justification.
Another error is describing section 74 as invalidating all penalties. The section instead authorises reasonable compensation within the contractual ceiling.
For related Ain.bd guidance, see Breach of Contract: Available Remedies and Compensation, Force Majeure Clauses: What Happens When Performance Becomes Impossible?, and Offer, Acceptance and Consideration Explained with Practical Examples.
Law updated as of 13 July 2026.
Primary-source references
The Contract Act, 1872, sections 73 and 74; the Code of Civil Procedure, 1908, section 9; Mesbahuddin Ahmed v James Finlay, 12 MLR (AD) 253; National Bank Ltd v Pragati Industries Ltd, 10 BLC (AD) 189; and The Project Director, P.L. v A. Latiff Company Ltd, 14 ALR (AD) 45.
Disclaimer
This article provides general legal information and is not legal advice. The enforceability and amount of stipulated compensation depend on the clause, nature of breach, evidence, contractual allocation of risk, and applicable procedural rules. Consult a licensed advocate in Bangladesh for a particular contract or dispute.