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The parties agree in advance on a genuine estimate of the loss that a breach would cause. How is the…

A genuine advance estimate of loss is a liquidated damages stipulation. A penalty is a stipulation designed to secure performance by threatening a payment out of proportion…

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The parties agree in advance on a genuine estimate of the loss that a breach would cause. How is the stipulated sum classified?

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Answer and explanation

Correct answer A

A genuine advance estimate of loss is a liquidated damages stipulation. A penalty is a stipulation designed to secure performance by threatening a payment out of proportion to the protected interest. Section 74 of the Indian Contract Act, 1872 limits recovery to reasonable compensation up to the stipulated amount. Whether the agreed amount is recoverable depends on the loss and the application of Section 74.

Option feedback

Option A

A genuine pre-estimate of likely loss is the hallmark of liquidated damages.

Option B

A penalty is not a genuine pre-estimate of loss in this classification.

Option C

The stated advance estimate determines the classification. The actual loss may affect recovery under Section 74.

Option D

The facts place the stipulation within liquidated damages.

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