An element of ambiguity and uncertainty always accompanies whenever liquidated damages or penalty is imposed under the contract law. This ambiguity is more specifically related to proving whether there was any ‘actual loss or damage’. Different courts and tribunals have shown to hold different opinions regarding this matter. Some judicial bodies have opined that if parties to a commercial contract have decided on a pre-estimated amount as liquidated damages or penalty under the contract law in case of a breach then even ‘actual proof’ wouldn’t be required. While this looks like a logical view as it can be assumed that the parties while negotiating the quantum of the damages or penalty would have taken all the pros and cons into consideration. While this is entirely possible, there are other scenarios in this situation which can also play out given the commercial nature of the contract. It happens more often than not that during the negotiation of said damages or penalty, one of the involved parties is in a position of no commercial leverage. Lack of commercial leverage prevents the party from participating in the negotiation as an equal. This makes it extremely important for the party claiming a breach of contract to prove the presence of damages or loss and if it did happen.

Section 74 of contract law is the provision for a sum to be received by the innocent party whose quantum was decided at the time of the formation of the contract. Apart from damages, there can be a stipulated penalty that can be agreed upon by the parties of the contract while entering it. This provision of contract law states that there exists no requirement for the innocent party to prove that it has suffered any actual loss or damages because of the breach of contract. The provision also makes it clear that the court can direct the breaching party to pay a sum either equal to the stipulated amount or less than the stipulated amount but never more than the amount. The first-ever case that tested the requirement of having to prove actual losses or damages suffered, was ‘Panna Singh v. Arjun Singh’. The Privy Council case laid down the following law:

“The effect of Section 74 of the Contract Act is to disentitle the plaintiffs to recover simpliciter the sum specified in the contract, whether as a penalty or liquidated damages and hence in a suit by vendors for damages for breach of contract of sale, the plaintiffs must prove the damages they have suffered.”

In other words, it was decided by the Privy Council in the above case that the innocent party has to prove if there were any losses or damages suffered due to the breach of contract for it to receive compensation. The rationale established in the Panna Singh case was refined in the case ‘Fateh Chand v. Balkishan Dass’ where among other things, it was acknowledged by the court that even though Section 74 dispenses the need to prove that the innocent party suffered losses or damages, the said party would be awarded reasonable compensation only when it's proven that it suffered any ‘legal injury’. The Constitutional Bench added that there should be the sort of legal injury that could be anticipated in the ordinary course of business at the time of entering the contract.