Critical Analysis of Law of Damages under the Indian Contract Act, 1872 By- Prisha Bhardwaj
Critical Analysis of Law of Damages under the Indian Contract
Act, 1872
Authored By- Prisha Bhardwaj
Manav Rachna University
School of Law
Faridabad
ABSTRACT
There are
chances that a contract will be broken when it is signed or when parties enter
into one. The parties who have been the victims of the unlawful conduct or
violation shall be provided such remedies in this case, in order to defend the
preferences or goals of the contractual parties or parties entering the
contract and to provide them with justice. Damages are one of the remedies
offered for contract infringement or breach. In its most basic sense, it refers
to any type of monetary loss or compensation awarded once in the form of a lump
sum of money. This article aims to clarify the definition, nature, and purpose
of damages as a remedy for contract violation. In order to determine damages, it is necessary to consider the
plaintiff's position in the event that the contract had been properly carried
out. In this article, we will cover some of the different types of monetary
damages.
Keywords- Damages, Remedies, Breach, Compensation, Violation, Contract.
INTRODUCTION:
The agreement is the result of two
parties coming to a mutual understanding and reaching a consensus. Contracts
are agreements that are legally binding and enforceable. A proposal from one
party must be accepted by the other in order for there to be a contract. A
legally enforceable agreement between two or more parties is known as a
contract. A contract is essentially a commitment made by one party to another
to perform an act or refrain from performing one in exchange for payment from
the other party.
In exchange for consideration,
parties enter into a contract and promise to do or refrain from doing certain
things. This promise made by the parties, which is the subject of the contract,
is legally binding on both parties, and they are obligated to fulfill their
respective parts of the promises. A breach occurs when either party fails to do
something they promised to do or does something that is prohibited by the
contract.
The Law of Damages in India is
codified under Section- 73 of the Indian Contract Act, of 1872. The term
"Damages" is not defined under the Indian Contract Act of 1872. So,
what does it mean to sustain damages? The value of any injury or loss caused by
the person in breach of contract is referred to as damages.
In order to be eligible for
compensation, the plaintiff must first demonstrate that the harm they
experienced was a direct result of the violation. In every case of breach of
contract, the affected individual does not have to provide evidence of actual
damage or harm sustained before requesting a ruling, and the court is able to
award reasonable compensation for the breach of contract even without proof of
any actual harm. In reality, the breach of any contract will always provide
grounds for a claim for damages without proof of any damage. The sum of damages
that can be recovered will depend on the amount of loss caused by the
defendant's act.
WHAT IS A CONTRACT?
The
term “contract” generally refers to a legally binding enforceable agreement
signed between two parties that should include terms that courts have the
authority and obligation to enforce.
According
to Indian Contract Act, 1872 Section 2(h), A contract is an agreement
enforceable by law.
An
agreement becomes a “contract” only when it is intended to meet its legal
obligation.
BREACH OF CONTRACT:
Any party who refuses or fails to
carry out their obligation under a contract constitutes a breach of that
agreement. A legal claim for breach of contract arises when one or more parties
fail to uphold the terms of a contract by making it difficult for them to
fulfill their obligations. Section 37 of the Indian Contract Act,1872 provides
that the parties to the contract are under obligation to perform or offer to
perform, their respective promises under the contract, unless such performance
is dispensed with or excused under the provisions of the Indian Contract Act or
of any other law[1].
According to Section 39, where the party has refused to perform or disabled
himself from performing, his promise in its entirety, the other party may put
an end to the contract, unless that other party has expressly or impliedly
signified its consent for the continuance of the contract. If the other party
chooses to put an end to the contract, the contract is said to be broken and
amounts to a breach of contract by the party not performing or refusing to
perform its promise under the contract. This is called Repudiation. Repudiation
can happen when either party makes it hard for the other to fulfill their
obligations under the contract or refuses to carry out their respective
obligations in a way that indicates a desire to breach such obligations.
DAMAGES:
If a contract is broken, the affected
party has the right to sue for damages. If there is a breach of contract by any
one of the parties of the contract then the party can be sued for damages. The
plaintiff is entitled to compensation for any losses that occur, and the
offending party is responsible for providing the funds to the injured party. A
‘remedy’ is a right that the aggrieved party acquires when the other party
violates the terms of the contract[2]. The
Indian Contract Act of 1872 also offers a variety of remedies to the party
whose rights have been violated. ‘Damages’ is one such cure and is also the one
that is most frequently used. Damages refer to monetary restitution to the
amount of the victim's loss or damage.
Illustration: A
contracts to repair B's house in a certain manner, and receive payment in
advance. A fixes the house, although not in accordance with the agreement. B is
qualified to receive compensation from A for the price of doing the agreed-upon
repairs.
THE RULE IN “Hadley v
Baxendale”
In the well-known case of Hadley vs.
Baxendale[3], a noble
attempt was made as early as 1854 to solve the problem by establishing certain
rules.
The plaintiffs ran a large miller
business. Their mill was shut down due to a crankshaft breakage. The
defendants, a carrier firm, were hired to transport the shaft to the
manufacturers as a pattern for a new one. The plaintiff's servant informed the
defendants that the mill had been shut down and that the shaft needed to be
delivered immediately. However, the defendants delayed delivery due to
negligence, and as a result, the plaintiffs did not receive the new shaft for
several days longer than they would have otherwise. The suit was brought for
the loss of profits that would have been made during the period of delay.
ALDERSON B laid down the following
rule[4]:
“Now we think the proper rule in such
a case as the present is this: Where two parties have made a contract which one
of them has broken, the damages which the other party ought to receive in
respect of such breach of contract should be such as may fairly and reasonably
be considered either arising naturally, i.e., according to the usual course of
things, from such breach of contract itself, or such as may reasonably be
supposed to have been in the contemplation of both parties, at the time they
made the contract, as the probable result of the breach of it.”
CONSEQUENCES OF BREACH OF CONTRACT:
For compensation to be payable, two
factors must be considered[5]:
(a) the loss or damage must have
occurred as a natural result of the breach, or
(b) it must have been something the
parties could have reasonably expected to occur as a result of a breach of the
contract.
(A) THE
LOSS OR DAMAGE MUST HAVE OCCURRED AS A NATURAL RESULT OF THE BREACH-
The Indian Contract Act, of 1872 uses the words loss or damage under section 73:
(i) COMPENSATION FOR LOSS
OR DAMAGE CAUSED BY BREACH OF CONTRACT:
When a contract is violated,
the party who was harmed by the breach is entitled to compensation from the party
that committed the breach for any loss or damage caused to him, which naturally
arose in the natural 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.
There will be no
compensation for any remote or indirect loss or damage caused by the breach.
(ii) COMPENSATION IN REGARD TO FAILURE TO
DISCHARGE OBLIGATION WHICH RESEMBLES THOSE CREATED BY THE CONTRACT
When a contract is broken, the party
that suffered loss or damage has a right to reimbursement from the party who
broke the agreement.
(iii) COMPENSATION FOR LOSS OR DAMAGE WHICH
NATURALLY AROSE IN THE USUAL COURSE OF THINGS FROM SUCH BREACH
Compensations to be
recovered for loss or damage which the parties knew or which would have
naturally arisen in the usual course, to be likely to result from the breach of
it.
CASE- Pannalal Jankidas
v Mohanlal[6], the Supreme Court
observed "that the party in breach must make compensation in respect of
the direct consequences flowing from the breach and not in respect of loss or
damage indirectly or remotely caused"
(B)
IT MUST HAVE BEEN SOMETHING THE PARTIES COULD HAVE REASONABLY EXPECTED TO OCCUR
AS A RESULT OF A BREACH OF THE CONTRACT
The Non-Defaulting Party bears the burden of proof under this
section. However, remote and indirect losses suffered by the Non-Defaulting
Party as a result of the Defaulting Party's breach of the terms of the contract
have been excluded from the scope of this section. As a result, the loss must
be a genuine loss or actual damage, rather than merely probable or possible.
(iv) DEALS WITH REMOTE AND INDIRECT LOSS OR
DAMAGE
It states that no compensation is payable for remote and
indirect loss or damage arising on account of a breach of contract. The
indirect loss cannot be said to arise in the usual course of things. Only when
it is expressly stated to the other party or foreseen by the contract that
breach of the terms of the agreement will cause some indirect loss or loss of
profit to the party, can the aggrieved party make a claim for compensation for
indirect loss or loss of profit. The legal standard used to determine whether
kind of harm brought on by a breach of contract may be compensated by the award
of damages is known as the remoteness of damage.
(v) DEALS WITH BREACH OF RESEMBLING CONTRACT
Even if there may not be a contract to pay compensation, it
grants a party a statutory right to receive compensation from a person that has
incurred a statutory obligation to do so in the event of default. The party in
default is under obligation to pay compensation to the injured party as if
there was a contract and has broken such a contract.
(vi) DEALS WITH: MITIGATION OF LOSSES
It explains that the means which existed of remedying the
inconvenience caused by the non-performance of the contract must be considered
while calculating the damage or loss for breach of the contract[7].
CASE-Brahmdeo Narain Singh v Members of the
Notified Area Committee[8], it was held that
“When it is not possible to calculate accurately or in a reasonable manner the
actual amount of loss incurred or when the plaintiff has not been able to proof
loss suffered, he will be, all the same, entitled to recover nominal damages
for a breach of contract”.
The first rule is "objective," as it bases liability
on a reasonable man's foresight of the loss that will inevitably result from
the breach of the contract. The second rule is "subjective," as it
states that the extent of liability is determined by the parties' knowledge of
the likely outcome of the breach at the time of the contract.
DAMAGE CAN BE RECOVERED BY:
Only those parties who have performed or are willing to perform
their part of the contract's obligations may seek damages for breach of
contract. Sections 73 and 74 are intended to benefit the party willing to
perform the contract, not the defaulting party. Loss caused by a party's
failure to perform his duties is not recoverable from the other party. A party
to a contract cannot be in a better position because of his own default than if
he had fulfilled his obligations. Damages cannot be claimed by anyone who is
not a party to the contract.
CAN THIRD-PARTY DAMAGE OR
LOSS BE RECOVERED?
The party claiming the
damage does not have to suffer any loss as a result of the breach of contract.
When the contract allows for it. When it is contemplated by the contract that a
breach by any of the contracting parties is likely to cause loss to an
identified or identifiable stranger to the contract, rather than to the
contracting party, a party not in default can claim damages for the loss caused
to an identified or identifiable stranger to the contract. Thus, the party may
recover substantial damages even if it does not personally bear the cost of
correcting the defects or suffers the decline in value; provided, however, that
this was intended or was within the parties' contemplation; and if such
intention or contemplation
CASE- In the case of Alfred
McAlpine Construction (AMC) Ltd v Panatown Ltd [2001][9], the appeal by AMC was allowed. In
light of the fact that the employer was not a party to the original contract,
it was determined that they lacked standing to sue for delays and faults,
particularly in cases where the terms of the duty of care deed have already
been put to use. The employer could only seek the nominal damages set forth in
the duty of care deed since it had not experienced any financial loss.
CONDITIONS TO CLAIM DAMAGES:
Every claim for damages raises two issues. The first is the
remoteness of the damage problem, and the second is the measurement of damages.
i.
The remoteness of Damages:
In the case of a
contract, a much higher degree of foreseeability is required, i.e., a serious
possibility or real damages that the loss will occur. Damages are hence more
strictly limited in contracts than in torts as a result.
The test for determining whether the
claimed damages are too remote is whether the damage is such that the parties
must have considered it as a possible result of the breach. If it is, it cannot
be considered too far away. The damage will be calculated based on the natural
and probable consequences of the breach. Actual knowledge must be demonstrated.
Knowledge is more than just prudence and carelessness.
The defendant is only liable for
reasonably foreseeable losses—those that a normally prudent person would have
reason to foresee as likely consequences of a future breach if he were
contracting in his place with his information.
There must be a limit to liability
and beyond that limit, the damage is said to be too remote and, therefore,
irrecoverable.
When two parties enter into a contract
and one party breaches the contract, the other party is entitled to
compensation for the loss or damage caused by the breach in the terms of the
contract. Only in such cases, where the loss is the result of a breach of
contract, is the person who breached the contract obligated to pay
compensation. If the loss is even remotely related to the breach, the party who
breached the contract is not obligated to compensate the injured party. This is
known as the remoteness of damages. This rule was laid in the case of Hadley v Baxendale as we discussed above[10].
ii.
The measure of Damages:
Once it is determined that the loss
is a direct result of the breach of contract and is not too remote, the amount
of compensation to be paid or the assessment of compensation must be
determined. So, determining the quantum of damages (i.e., how much damages must
be paid to the injured party) is the measure of damages. It can be difficult to
assess and determine damages at times, but this does not absolve the party who
breached the contract of liability. In the case of a sale contract, the measure
of damages is the difference between the contract amount and the market price
on the date of the breach. Also, if the breach was on the part of the seller, the
buyer can seek damages on the date of the breach but is not required to
repurchase the item on that date. Similarly, if the breach was caused by the
buyer, he can seek damages on the date of the breach but is not required to
resell the goods on that date.
CASE- In
State of Kerala v. K. Bhaskaran[11],
the government breached the Works Contract, causing the contractor to lose 10%
of his profit. He filed a lawsuit against the government, and it was determined
that he was entitled to compensation and the 10% profit that the contractor
lost, which is the element for contract estimation.
LIQUIDATED AND UNLIQUIDATED DAMAGES:
‘Liquidated damages’ are those agreed
upon by the parties when they signed the contract. Liquidated damages are
damages in which the compensation that must be paid to the aggrieved party when
a breach occurs is pre-determined and agreed upon by the parties when they
enter into an agreement. However, the fixed amount should be reasonably
pre-estimated by taking into account the potential damages. It must be genuine[12]
Section 74 talks about Liquidated damages and
Penalty[13],
The parties to the contract
may agree at the time of contracting that, in the event of a breach, the party
in default must pay a specified sum of money to the other, or that, in the
event of breach by one party, any amount paid by him shall be forfeited. If
this sum is a genuine pre-estimate of the damage likely to result from the
breach, it is referred to as 'liquidated damages'. It may be called a 'penalty'
if it is not a genuine pre-estimate of the loss, but rather an amount intended
to secure contract performance.
LIQUIDATED DAMAGE:
A penalty is a
monetary payment made to a non-defaulting party that puts the other party in
fear and forces the other party to perform its contractual obligations. The
penalty has a deterrent effect.
Liquidated damage is
a genuine and reasonable damage estimate. Liquidated damages are defined as the
sum that the parties have agreed to pay as damages under the contract,
regardless of the actual damage[14].
CASE- In Fateh Chand Vs Balkishan Das[15], the Hon’ble Supreme Court
held that :- “Section 74 of the Indian Contract Act deals with the measure of
damages in two classes of cases (i) where the contract names a sum to be paid
in case of breach and `ii) where the contract contains any other stipulation by
way of penalty.
‘Unliquidated damages’
are those that were not pre-determined by the parties when they signed the
contract. The amount of compensation to be paid in the event of a breach is not
fixed and must be decided or estimated after the breach occurs by assessing it.
Section 73 discusses unliquidated damages, which are made available by courts
in the event of a breach after assessing the damage or loss caused by the
breach.
CASE- The Supreme Court
held in the case of ONGC v. Saw Pipes Ltd[16]. that, in the case of
damages, sections 73 and 74 must be read together and, where there are
liquidated damages they must be granted. In cases where the exact amount of
damage or loss suffered cannot be determined, a reasonable decision to provide
reasonable compensation must be made.
In this case, it has been held with regards to damages and
penalty as under:
1. The stipulation
providing for damages is by way of penalty, it can grant reasonable
Compensation upon proof of damages.
2. Damages
must be justified in cases of penalties.
3. Damages are reasonable
compensation whereas penalties are not.
Unliquidated Damages are of the following types:
A.
General or ordinary Damages: These are limited to monetary
compensation to place the injured party in the position he would have been in
if the contract had been fulfilled. It is the estimated amount of loss
suffered. As a result, it only applies to the immediate consequences of
contract breach, and the remote consequences are generally ignored[17]. In a contract for the sale of
goods, for example, the damages payable are the difference between the contract
price and the price at which the goods are available on the date of the breach.
B.
Special Damages: Special damages are those that
result from a breach of contract in unusual circumstances that make special
loss the likely result of the breach in the normal course of things. The party
who violated will be held responsible for the special loss[18].
Illustration: A delivered goods to the Railway Administration to be
transported to a location where an exhibition was being held and informed the
goods clerk that if the goods did not arrive at the destination on the
specified date, he would suffer a special loss. The merchandise arrived late. He
had the right to sue for special damages.
Relevant Case Laws:
I. The Supreme Court held in Bharathi
Knitting Company v. DHI Worldwide Express, Courier Division of Airfreight Ltd[19].
that when a person signs a document containing certain contractual terms,
the parties are normally bound by such contract.
II. The Court recently held in
MIs. Classic Motors Ltd. v. Maruti Udyog
Ltd[20].
that the parties are bound by the terms of the Contract and that once a
party has signed the document, it cannot be claimed that he was unaware of the
terms and conditions contained therein.
III. It was determined in the case of Reliance General Insurance v.
Anish Sebastian[21]
that special damages are superior to general damages. They are not the
result of a party's actions, but of some wrongful act. They are primarily
concerned with the price outside of the contract.
C.
Exemplary or punitive Damages: These damages are awarded to punish
the defendant and are not usually granted in cases of contract breach. However,
in two cases, the court may award such damages[22]:
(i) breach of marriage promise; and
(ii) wrongful dishonor of a
customer's cheque by the banker.
The number of damages in a breach of
promise to marry will be determined by the extent of the party's emotional
injury. In the banker's case, the smaller the amount of the cheque dishonored,
the greater the damages, because the customer's credit is harmed far more
severely if a small amount of a cheque is wrongfully dishonored.
D.
Nominal Damages: Nominal damages are those that the
person who breaches the contract must pay, even if the injured party cannot
prove any damage occurred. For example, if a person's legal right is violated,
he has the right to seek compensation even if no loss or damage has occurred[23].
E.
Vindictive Damages: When one party breaches a contract
and the other party suffers mental harm, vindictive damages are awarded. It is
intended to compensate the aggrieved party for mental stress or injury suffered
as a result of the other party's wrongdoing. When the defendant, in this case,
has no intention of compensating the injured party, he is sentenced.
CASE- In Diesen
v. Samson[24], it was decided that compensation for a
mental injury can be awarded where the contract itself is for providing
enjoyment or pleasure, such as taking photographs at a wedding ceremony.
F.
Substantial Damages: When a person commits an offense
and is found guilty, all authorities affected by the offense must be
compensated as substantial damages because the offense is against society. If
determining or estimating the societal damage is difficult, the court may order
the defendant to pay compensation to the authorities affected by the offense.
CONCLUSION:
The Indian Contract Act 1872 is
designed to safeguard the interests of those involved in a contract, from the
moment the agreement is made up until the resolution of any issues that may
have arisen from it. This act enforces the parties who have entered a contract
to remain consistent with the terms they have agreed upon, while also
establishing guidelines to provide remedies if an injustice has been done.
Thus, The Indian Contracts Act
ensures to provide the fullest extent of remedies for the breach of the
contract. This may vary depending on the situation and extent of a breach that
has been committed, such as in certain cases particular damages can also be
claimed. This is because they are meant to protect the injured party’s legal
rights and ensure that they are fully compensated for the breach of contract
cases and to alleviate the damages suffered.
Despite difficulties in calculating
the exact losses incurred by breaking the law, courts will endeavor to provide
a respectable payment to the wronged party following an evaluation of the
ensuing damage. The purpose of these stipulations and restitutions is to
safeguard the person or persons affected from monetary losses, resulting from
any violation.
[1] A Brief Overview on
Breach of Contract, available at:
https://blog.ipleaders.in/a-brief-overview-on-breach-of-contract (Last Modified January 16, 2020)
[2] Damages under the Indian
Contract Act 1872, available at:
https://vidhinama.com/damages-under-the-indian-contract-act-1872/#DAMAGES (Last Modified December 19, 2022)
[3] [EWHC J70, (1854) 156 ER 145, 9 ExCh 341, (1854) 23 LJ Ex
179, 18 Jur 358, All ER Rep 461]
[4] Avtar Singh, Avtar
Singh’s Law of Contract & Specific Relief 466 (Eastern Book Company,
Lucknow, 13th edn., 2022)
[5] A Brief Overview on
Breach of Contract, available at:
https://blog.ipleaders.in/a-brief-overview-on-breach-of-contract (Last Modified January 16, 2020)
[6] [1951 AIR 144 1950 SCR 979]
[7] A Brief Overview on
Breach of Contract, available at:
https://blog.ipleaders.in/a-brief-overview-on-breach-of-contract (Last Modified January 16, 2020)
[8] AIR
1965 Patna 179
[9] [2001] 1 AC 518;
[2000] 3 WLR 946; [2000] 4 All ER 97; [2000] CLC 1604; [2000] BLR 331; [2000]
EG 102 (CS); (2000) 150 NLJ 1299
[10] A Brief Overview on
Breach of Contract, available at:
https://blog.ipleaders.in/a-brief-overview-on-breach-of-contract (Last Modified January 16, 2020)
[11] AIR
1985 Ker 49
[12] Damages under the Indian
Contract Act 1872, available at:
https://vidhinama.com/damages-under-the-indian-contract-act-1872/#DAMAGES (Last Modified December 19, 2022)
[13] Damages under the Indian
Contract Act 1872, available at:
https://vidhinama.com/damages-under-the-indian-contract-act-1872/#DAMAGES (Last Modified December 19, 2022)
[14] Understanding ‘Damages’
and ‘Compensation’ under Contract Law, available at: https://lawlex.org/lex-pedia/understanding-damages-and-compensation-under-contract-law/20619 (Last Modified May 24, 2020)
[15] 1963
AIR 1405, 1964 SCR (1) 515
[16] Appeal (civil) 7419 2001 of 518
[17] Avtar Singh, Avtar Singh’s Law of Contract &
Specific Relief 466 (Eastern Book Company, Lucknow, 13th edn., 2022)
[18] Damages under the Indian
Contract Act 1872, available at:
https://vidhinama.com/damages-under-the-indian-contract-act-1872/#DAMAGES (Last Modified December 19, 2022)
[19] 1996
SCC (4) 704, JT 1996 (6) 254
[20] 1997 (i) AD (Delhi) 190
[21] Revision Petition No. 4607 of 2013
[22] Avtar Singh, Avtar Singh’s Law of Contract &
Specific Relief 466 (Eastern Book Company, Lucknow, 13th edn., 2022)
[23] Damages under the Indian
Contract Act 1872, available at:
https://vidhinama.com/damages-under-the-indian-contract-act-1872/#DAMAGES (Last Modified December 19, 2022)
[24] (1971)
SLT (Sh Ct) 49