India needs to revamp its outdated legal system principles
In the rapidly evolving world of commerce, India's damages law, based on Sections 73 and 74 of the Indian Contract Act, 1872, appears obsolete. This law, designed to prevent the exploitation of weaker parties by onerous or extortionate penalty clauses, was enacted in an era when the Indian economy was primarily agrarian.
Today, India aspires to become a developed, high-income nation by its centenary of independence. To achieve this goal, respecting the contractual autonomy of parties and updating damages law is an economic imperative. This is not just a matter of legal reform, but a signal to the world that India is ready to lead in both commerce and the rule of law.
Other jurisdictions have already taken steps in this direction. Australia, for instance, has evolved its penalty doctrine, starting with Andrews v. ANZ Banking Group (2012), expanding the scope of enforceable clauses to meet commercial realities. Jurisdictions like the UAE, particularly in the DIFC, have enacted contract frameworks that presume enforceability of agreed damages unless clearly unconscionable. Singapore and Malaysia have adopted approaches more respectful of party autonomy, recognizing the sophistication of modern contracting parties.
The UK Supreme Court in Cavendish Square Holding BV v. Makdessi [2015] modernized the law by moving away from the 'genuine pre-estimate of loss' test and focusing on whether a liquidated damages clause protects a legitimate interest and whether the stipulated sum is proportionate.
In India, reform is needed. 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. Courts must defer to bargains between sophisticated parties and abandon the insistence on proof of loss in every case.
Integration with India's dispute resolution reforms, such as the Mediation Act 2023 and the promotion of arbitration, can only succeed if damages law is clarified, reducing evidentiary battles and delays. The uncertainty in India's damages law has broader economic implications, as it contributes to India's court backlog and disincentivizes cross-border contracting with Indian entities.
The Confederation of Indian Industry estimates that 10% nominal growth is required for India's future development. With India's GDP already at ₹331 lakh crore (2024-25), making it the world’s fourth-largest economy, such growth is not unattainable. However, it is crucial to address the inconsistency, unpredictability, and unnecessary litigation caused by insisting on proof of actual loss for liquidated damages clauses.
The author of an article on the reform of the damages compensation rule in India, Dr. Sanjeev Gemawat, Managing Director and Group General Counsel at Essar Group, underscores the urgency of these reforms. The World Bank projects that India will need sustained average growth of 7.8% annually for the next two decades to meet its economic goals. Continuing with a damages jurisprudence designed for a protectionist era is illogical in the current landscape of large corporations and sophisticated contracts.
In conclusion, reforming India's damages law is not just a legal issue, but a matter of economic survival and growth. It is a step towards modernizing India's legal system, making it more conducive to commerce and investment, and ultimately, helping India achieve its ambitious goals.
Read also:
- Planned construction of enclosures within Görlitzer Park faces delays
- Foreign financial aid for German citizens residing abroad persists
- Hulk Hogan's successful transformation of his wrestling persona into a lucrative business entity
- United States and Russia prepared to delve deeper into negotiations regarding the Sakhalin 1 oil and gas project
