THE LAW OF DAMAGES UNDER INDIAN CONTRACT ACT, 1872

Introduction

There is an underlying difference between ‘damage’ and ‘damages’. While ‘damage’ is loss or injury to a person or property, ‘damages’ is the amount of money that is paid as compensation for the injury suffered by a person. Even in damages, we can find several forms of damages like liquidation, nominal, compensatory, special, ordinary, and so on. The purpose of damages is pretty clear and that is to cover the loss the non-breaching party incurred as a result of the breach of contract and to replace the loss caused by a breach. The Indian Contract Act, 1872 is the key act regulating Indian contract law and includes laws relating to the sale of goods; special contracts like indemnity, guarantee, bailment & pledge; agency and contracts relating to partnership.

Essentials of Contract

What makes a contract valid? This is very crucial to know because if the essential elements under Indian Contract Act are ignored then the contract becomes invalid and then one cannot claim for damages. Section 10 of the Indian Contract Act lays down conditions to form a contract and they are:

a. Offer

b. Acceptance

c. Lawful object and lawful consideration

d. Intention to create a legal relationship

e. Consideration should not be forbidden by law

f. Capacity to contract

g. Possibility of Performance

i. Legal Formalities

j. Free consent

These essential elements are further elaborated through provisions under the Act. It should also be noted that sections 24-30, section 36[i] and 56[ii] of the Indian Contract Act declare certain types of contracts to be void.

Breach of Contract and It’s Remedies

Breach of contract is when a party fails to fulfil any of its contractual obligations. The remedy is primarily determined by the severity of the breach of the contract, as well as the damage caused to the opposite party. The breaching party, however, may be ordered to pay if the loss has been extensive and severe. The monetary payments are often referred to as “damages”.

The main remedies for a breach of contract are:

1. Damages,

2. Specific Performance

3. Cancellation and Restitution.

The monetary payment is the most common remedy preferred by the aggrieved parties. To claim damages, whether liquidated or unliquidated, there must be a breach of the contract.[iii] The breach must be adjudicated upon and proved, not simply decided by the parties. In the absence of such proof or an honest estimate by the claimant, the court will make an award for liquidated damages below the stipulated amount after taking into account a reasonable assessment of the consequences of the breach.[iv] The burden of proof lies with the injured party to prove that he/she is entitled to compensation.

Damages under Contract Act

The damages are the solution or the remedy for the damage caused to the party. Damages can be caused in two ways: consequential or incidental. The estimated money should equal the harm or detriment suffered by either party, as directed by law. The non-performance or non-compliance of either party with the terms of the contract results in restitution or compensation. Through non-performance of contract, a person may suffer physical harm, disabilities, loss of enjoyment, loss of comfort, inconvenience or disappointment, hurt feelings, vexation, mental distress, and loss of reputation. The financial loss also comes under this and any party who is in loss financially have a right to ask for damages.

The ‘damages’ under Contract Act is in many forms. It can be nominal damages, liquidated damages or any other damages. It all depends on what type of contract it is and the court will direct the breaching party to put you in the place where you were before the loss or any disadvantages occurred. The measurement of damages is done by the concerned legal principles governing the recovery system. The provision relating to damages can be found under Section 73 of the Indian Contract Act, 1872. It deals with actual damages following a breach of a contract and the injury resulting from such breach which is like unliquidated damages. Section 73 states- “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained because of the breach.”

This provision stipulates that a party breaching a contract is liable to compensate the injured party for any loss or damage caused as a result. For compensation to be paid, two requirements must be met:

a. The loss or damage should have arisen as a natural consequence of the breach.

b. It should have been something that the parties could reasonably have expected to arise from the breach.[v]

In the former case, an objective test would be applied, while in the latter case a subjective test would be applied. It is up to the injured party to prove that he or she is entitled to compensation. Nevertheless, this section states that compensation shall not be granted for any remote or indirect loss suffered by the parties. Section 73 also provides that the same principles will apply if quasi-contractual obligations are breached; in such a case, if an obligation like a contractual obligation is unfulfilled, the injured party is entitled to compensation as if it were a contractual obligation. The damages provided under Section 73 of the Indian Contract Act, 1872 are compensatory and not penal in nature. The explanation to this section further provides that in estimating the loss or damage arising from a breach of contract, the existing cost of remedying the inconvenience caused may be taken into account.

This section outlines two principles regarding compensation. The two principles are:

i. where money can replace the loss incurred, the aggrieved party should be put in the same position it would have been in had the contract been performed.

ii. the defaulting party should take reasonable steps to mitigate the consequences of the breach.

If a loss is suffered, the court has the discretion to award nominal damages to the aggrieved party as recompense. A party may also receive additional damages if their positive interests or exceptional interests are lost.

Section 74 deals with liquidated damages, i.e., damages that are stipulated for.  To claim damages, there must be a breach of the contract, which excludes any cases in which the contract can be terminated legitimately without any violation of its terms. Section 74 lays deals with compensation for breach of contract where a penalty is stipulated for. It lays down –

“When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”

Section 73 and Section 74 are important provisions dealing with remedies (damages) for breach of contract. However, the availability of all of these remedies is subjective and it all depends on court’s discretion.

Conclusion

The whole idea of damages is to put the aggrieved parties back into the position they were in before the contract. There are other remedies except for damages but this remedy is most common among the parties. When there is a breach of contract, the non-breaching party will be awarded damages by the court. If the amount of breach is not stipulated the court will decide on reasonable damages and put the aggrieved party in the place when there was no breach.

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[i] Section 36. Agreements contingent on impossible event void— “Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.”

[ii] Section 56. Agreement to do impossible act— “An agreement to do an act impossible in itself is void.”

[iii] Managing Director, Army Welfare Housing Organisation v. Sumangal Services Pvt. Ltd. (2004) 9 SCC 619

[iv] Oil and Natural Gas Corporation Ltd v. Saw Pipes Ltd AIR 2003 SC 2629; BSNL v. Reliance Communication Ltd. (2011) 1 SCC 394

[v] Section 73, Indian Contract Act, 1872.