Why India must overhaul its damages jurisprudence

The law of damages in India finds its foundation in Sections 73 and 74 of the Indian Contract Act, 1872, provisions that were inserted at a time when the Indian economy and society were vastly different from today.

These provisions were modelled on English common law principles that distinguished between compensatory damages and penalties. Section 73 provides for compensation for loss or damage caused by breach of contract, while Section 74 deals with situations where parties stipulate damages in advance.

When enacted in 1872, India was under colonial rule. The economy was primarily agrarian, literacy rates were abysmally low and there existed a wide disparity in bargaining power between landlords, traders and workers. The law was designed in a paternalistic manner to prevent the exploitation of weaker parties who might otherwise be subjected to onerous or extortionate penalty clauses. This socio-economic-political context explains why courts, starting from Fateh Chand v. Balkishan Das 1963, insisted on proof of actual loss, even where parties had freely agreed to liquidated damages. Judicial intervention was seen as a safeguard against inequality.

Fast forward to 2025: India is now the world’s fourth-largest economy, with a GDP of ₹331 lakh crore (2024–25) compared to ₹106 lakh crore in 2014–15. The country is aspiring to become a developed, high-income nation by its centenary of independence. The World Bank projects that India will need sustained average growth of 7.8% annually for the next two decades, while the Confederation of Indian Industry estimates that 10% nominal growth is required. This journey will be driven not by small agrarian contracts, but by high-value infrastructure, technology, energy and cross-border commercial arrangements worth billions.

In this changed landscape, continuing with a damages jurisprudence designed for a protectionist era is illogical. Today, parties entering sophisticated contracts are often large corporations, advised by experienced counsel, negotiating at arm’s length. Their agreements on risk allocation, including liquidated damage reflect commercial wisdom. Yet, Indian courts often insist that even such clauses require proof of actual loss, creating inconsistency, unpredictability and unnecessary litigation.

Cases such as Kailash Nath Associates v. DDA (2015) have reinforced this requirement, though ONGC v. Saw Pipes Ltd (2003) carved out exceptions when loss is difficult to prove. The outcome is a patchwork of rulings that undermines contractual certainty.

For sophisticated, well-counselled parties negotiating at arm’s length, this judicial scepticism is misplaced. They deliberately calibrate risk through liquidated damages to ensure certainty. Insisting on judicial reassessment undermines contractual freedom and increases litigation costs.

Contrast this with international practice. The UK Supreme Court in Cavendish Square Holding BV v. Makdessi [2015] decisively modernised the law by moving away from the rigid 'genuine pre-estimate of loss' test. Instead, the focus is on whether the clause protects a legitimate interest and whether the stipulated sum is proportionate, not whether it mirrors a pre-calculated loss. Australia has similarly evolved its penalty doctrine, beginning with Andrews v. ANZ Banking Group (2012), expanding the scope of enforceable clauses to meet commercial realities. Singapore and Malaysia have adopted approaches more respectful of party autonomy, recognising the sophistication of modern contracting parties. Jurisdictions like the UAE, particularly in the DIFC, have enacted contract frameworks that presume enforceability of agreed damages unless clearly unconscionable.

By comparison, India’s damages law appears obsolete. It still reflects the anxieties of a society concerned about exploitation of vulnerable parties, overlooking that much of modern commerce involves highly capable entities. While consumer protection and employment contracts may still warrant judicial oversight, high-value commercial contracts should not be subjected to the same paternalism.

The uncertainty in this area of law has broader economic implications. India has over 53 million pending cases in its courts. Contractual disputes form a significant share of this backlog and damages-related litigation often prolongs resolution. In a global economy where investors prioritise certainty, such unpredictability disincentivises cross-border contracting with Indian entities.

The way forward is clear. First, legislative reform: Section 74 should be amended to presume enforceability of liquidated damages freely agreed between commercially experienced parties, except where the clause is unconscionable or penal in nature. This would draw from the Makdessi test and similar reforms elsewhere. Second, judicial restraint: courts must defer to bargains between sophisticated parties and abandon the insistence on proof of loss in every case. Third, integration with India’s dispute resolution reforms: the Mediation Act 2023 and the promotion of arbitration can only succeed if damages law is clarified, reducing evidentiary battles and delays.

India’s damages jurisprudence was born in an era of inequality and limited economic sophistication. Today, as the nation marches towards its 2047 vision, its legal system must reflect contemporary commercial realities. Respecting the contractual autonomy of parties is not just a matter of legal coherence but an economic imperative. Without reform, India risks allowing an archaic framework to impede its growth story; with reform, it can signal to the world that it is ready to lead in both commerce and the rule of law.

Dr Sanjeev Gemawat is the Managing Director and Group General Counsel at Essar Group.