Punitive v predetermined damages

By Vivek Vashi, Bharucha & Partners

Is a provision that imposes an obligation to pay up if a certain event takes place a penal provision or is it a pre-estimate of damages to be imposed?

Vivek Vashi Bharucha & Partners
Vivek Vashi
Bharucha & Partners

In BSNL v Reliance Communication Ltd the Supreme Court stated that if the predominant function of the provision was to deter a party from breaking a contract, it would be penal. However, if the provision had been included in an attempt to estimate losses resulting from a breach, it would amount to liquidated damages.

As such clause 6.4.6 in a contract between Bharat Sanchar Nigam Limited (BSNL) and Reliance was not a penal clause. Instead, it represented a pre-estimate of reasonable compensation for loss suffered by BSNL.

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Vivek Vashi is the mainstay of the litigation department at Bharucha & Partners.


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