Legitimate Interest test and Party Autonomy: Correcting the discourse on Liquidated Damages within the Indian Contract Act 1872

Abstract

The Indian Contract Act 1872 (the Act) is largely a codification of the principles, fundamental to the English Contract law. Accordingly, party autonomy is securely entrenched amongst the various provisions of the Act. The provision on liquidated damages too continue to retain the spirit of party autonomy. Unfortunately, the Indian Courts have misread the provision on liquidated damages and ignore the theoretical underpinnings on party autonomy. Consequently, the discourse on liquidated damages is in disarray. In contrast the English Contract Law has witnessed tectonic shifts in the theoretical terrain on liquidated damages. The legitimate interest test, as developed by the UK Supreme Court (UKSC), has forced a re-think on the issue of liquidated damages. Importantly the legitimate interest test reinforces the role of party autonomy in ascertaining the validity of the clause on pre-determined damages. This article argues that the Act is no stranger to the legitimate interest test. The provision on liquidated damages is proof of the same. The article concludes that the time has come for the Indian Courts to unapologetically adapt the legitimate interest test and promote party autonomy. For such adaptation will bring about the much needed course correction in the narrative on liquidated damages.