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Damages for breach of contract under Indian Contract Act and English Contract Law

February 21, 2023

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This article has been written by Sahiba Chopra, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

This article has been published by Rachit Garg.

Table of Contents

Introduction

The term “damages” was explained by the Supreme Court in the case of Common Cause vs. Union of India (1999) as a form of compensation due to a breach, loss or injury caused to the plaintiff. The Apex Court gave this simple explanation after taking into consideration definitions of damages by McGregor and Lord Hailsham. The court in this case bifurcated damages as pecuniary and non-pecuniary. While the former can be determined arithmetically, the later lacks the element of calculation. Damages are awarded not only in cases of contractual breaches, but also in cases relating to consumer law, intellectual property rights, tort, Sale of Goods Act, 1930 and arbitral proceedings. Thus, the spectrum of damages as a remedy is quite wide. This study focuses on damages as a remedy of breach of contract in Indian and English contract law. Since the Indian Contract Act, 1872 is based on the principles of English common law, the concept of damages under Indian and UK legislation is not much different and many a times stark similarities can be clearly cited while there are certain peculiarities wherein the two laws stand diametrically apart.

Damages under the Indian Contract Act, 1872

Sections 73 and 74 of Indian Contract Act, 1872 entail two types of damages namely, unliquidated damages and liquidated damages. Section 73 states that in the event of a contract being brought to an end, the aggrieved party is entitled to claim from the party who committed the wrong, compensation for loss or damage being caused to it. This section comes with two prerequisite conditions.

Firstly, the damage or injury must have arisen in the ordinary course of things.
Secondly, the damage has to be of such a nature that the parties to a contract must have anticipated it.

Contrary to this, there is Section 74, wherein parties pre-meditate upon the amount to be paid to the aggrieved party by the defaulter in the event of any contractual breach. This section refers to such an amount as a penalty or compensation. Proof of actual loss is not necessary under Section 74. An explanation attached to this section even provides for making stipulation as to increased interest payable by defaulting party to aggrieved party as penalty from the date of breach of contract. Therefore, while Section 73 makes provision for unliquidated damages (not stipulated in a contract), Section 74 deals with liquidated damages (stipulated in a contract).

Section 73 and Hadley vs. Baxendale(1845) : an analysis

Section 73 of Indian Contract Law is based upon the English common law of damages as laid down in Hadley vs. Baxendale (1845). In this case, the court bifurcated damages as ‘general damages’ and ‘special damages’. It was clearly held that in the event of breach of contract, the breaching party shall compensate the non-breaching/ aggrieved party with the damages which arose in the ordinary or usual course of things and not for such damage or injury which could not be contemplated by either of the parties. The major points of distinction between these two types of damages can be represented by way of following table:

Points of distinction	General damages	Special damages
1. Meaning and Interpretation	These damages arise naturally in the usual course of things from the act of breach itself. These are such damages which can be contemplated by the parties to a contract at the time of entering into a contract.	These are based on special circumstances which are too remote to be anticipated or contemplated by the parties at the time of entering into a contract.
2.Test of Reasonableness	Foresight of a reasonable man is used to determine these damages. If damage falls within the ambit of foresight of a reasonable man, the damages are categorised as general.	If a damage is such that a reasonably prudent man cannot under any circumstances anticipate it, it comes under the category of special damages.
3.Whether recoverable or not	These damages are made recoverable under Section 73 of the Indian Contract Act,1872 as they are clearly pre-meditated upon by the parties before the execution of a contract.	There is a bar on recovering such damages under Indian Contract Act, 1872, unless and until the plaintiff conveys special circumstances to the defendant which could cause such damage.
4. Presumption	Once the plaintiff proves that he/she has sustained damages, those damages are presumed to be general damages by the court.	In this case, the plaintiff has to prove that it gave notice of such anticipated damage to the defendant. Also, the plaintiff has to prove that he took reasonable steps to mitigate loss.

Exemplification

Company Y placed an order with Company X to deliver office chairs and tables to its office meant for being used by its employees and clients for sitting and doing work comfortably. Company X instead of delivering chairs and tables, delivered shoe racks and couches to Company Y. Company Y insisted on replacing furniture, but Company X failed to do so causing Company Y to rent requisite furniture till new furniture arrived. Since, delivery of right furniture was the essence of contract, it amounted to material breach of contract. In such a case if Company Y sues Company X, the court may order following general damages:

Refund to be made by Company X to Company Y of any pre-payment made while placement of order, along with,
Reimbursement of any expense Company Y incurred on sending furniture back to Company X.

In the given scenario, if Company X was beforehand conveyed by Company Y that it needed new furniture on a particular day since its old furniture was going to be discarded, the damages for breach of contract apart from above listed general damages, would also include payment for company Y’s expenditure incurred on renting furniture, until the right furniture arrived, as special damages. It is so because Company X had prior knowledge that Company Y would not have sitting arrangements for his employees and clients in case timely delivery of furniture is not made. Here, since notice of such special circumstance (old furniture to be discarded the previous day) is duly given to Company X, so special damages can be claimed. Also, to mitigate loss, Company Y rented temporary furniture. So, both conditions as mentioned in the above table under the heading ‘Special damages’ alongside presumption’ are satisfied, thereby enabling Company Y to claim special damages.

Purpose of damages under Indian and UK laws

Both in Indian contract law and English contract law, damages are of compensatory nature. Their purpose is not to punish the defendant for the breach, but to put the party whose rights have been violated in such a place as if the contract has been duly performed. Thus, the prime purpose of awarding damages in both India and UK is to make good the losses and damage suffered by the plaintiff rather than to punitively charge the defendant. But there are certain legit exceptions to this general rule. Such exceptions can be discussed as below:

Damages for mental pain and suffering

As a general rule, damages for mental pain and suffering are not awarded, but as held in Jarvis vs. Swan Tours Ltd (1972) damages for mental distress can be recovered in certain special cases. These special cases are those wherein a contract is entered into by a party for enjoyment, recreation and entertainment purposes, but instead of getting amusement, the party undergoes mental agony, distress, anguish and disappointment. In such cases where the purpose of contract is not fulfilled by the other party resulting in causing distress to the other party, damages for mental pain and suffering can be awarded.

Indian courts too now award damages for mental pain and suffering. One such case came to light in 2022 wherein Gurugram District Consumer Forum imposed a fine of about Rupees 4 lakh on gated housing society’s management and its security agency due to incident of dog bite of a resident. Not only petitioner’s legal expenses were ordered to be borne by defendants but payment of 9 percent interest since the date of admission of case to the court was awarded. Since, petitioner paid maintenance as per rent agreement, the purpose of rent agreement was defeated causing trauma and mental agony to petitioner, hence court awarded damages for mental pain and suffering apart from physical damage.

Nominal damages

These damages are awarded by the court where the plaintiff has suffered no loss but it is necessary to convey that the plaintiff’s right has been duly recognised. These damages consist of a meagre amount imposed on the wrong- doer and are awarded both by Indian and UK courts in those cases wherein there is infringement of a legal right but no financial loss is suffered by the plaintiff.

Exemplary damages

These damages are purported to punish the defendant and not merely compensate the plaintiff. These are punitive in nature. Courts in both the UK and India apply strict parameters before granting punitive or exemplary damages in contractual breach cases. Landmark case on punitive damages is Rookes vs. Barnard (1964) wherein three cases were laid down wherein punitive damages can be awarded. These are –

Oppressive, arbitrary, or unconstitutional action by any servant of the government.
Wrongful conduct by the defendant which has been calculated by him for himself, which may well exceed the compensation payable to the claimant; and
Any case where statute provides for exemplary damages.

These principles of exemplary damages, though, have been affirmed by the Supreme Court of India, but are largely granted in cases of violation of constitutional rights by public authorities and Indian courts ordinarily refrain from granting such damages. In this context, Delhi High Court had observed that punitive damages should follow general damages and these damages can be granted only if the court is satisfied that the exemplary element is not adequately met with the general damages computed for the plaintiff. So, punitive damages alone can never be awarded and are always awarded over and above the general damages.

Measure of damages and granting damages with interest

With regard to computation of damages, the rule was laid down in Jamal vs. Moola Dawood Sons & Co. (1915) wherein it was held that difference between the contract price and market price existing on the date of breach of contract, shall amount to proper measure of damages. Granting interest alongside damages is dependent upon many factors like terms of agreement, customs relating to payments and relevant statutory provisions. The amount of interest shall be determined in accordance with Section 34 of the Civil Procedure Code, 1908 under which courts have discretionary power to grant interest with damages. There is a bar of 6% on interest rate to be levied.

Indian law and English law : an antithesis on damages for contractual breaches

With regard to damages, there exists two differences between Indian contract Law and English contract law. First one relates to ‘limitation of liability’ and the second one is differential treatment of expressions ‘liquidated damages and penalty’. These can be discussed as follows.

Limitation of damages

Under the English contract law, the scope of damages is quite wide, including within its ambit not only general damages but also consequential losses incurred by the plaintiff. Recognition of such a loss was given in the British Sugar Case. English contract law talks about various aspects of damages like expectation interest, reliance interest and restitution interest. These interests can be explained as follows.

Expectation Interest	Reliance Interest	Restitution Interest
It is meant to place the plaintiff in a situation which he would have otherwise occupied had the defendant fulfilled his obligations towards the plaintiff. Such an interest is also referred to as performance interest and aims to meet the expectation of promisee.	Reliance interest can be understood on the basis of the concept of status quo, aiming at restoring the plaintiff’s initial position before he entered into a contract. Since he relied on the breaching party and changed his position, the court restored his initial position.	It aims to prevent the party breaching the contract to earn any kind of benefit or gain at the disadvantage and expense of the non-breaching party. Restitution interest is also meant to force the breaching party to return any amounts received by the non- breaching party.

In order to better understand these interests, an example can be used- ‘A’ is the owner of a reputable bakery. He enters into a contract with one Mr ‘B’ for delivery of high-quality chocolates. A and B agree that ‘A’ shall pay Rs. 30,000 upfront. Once the contract is entered into, ‘A’ buys extremely rare coffee beans of Rs. 40,000 to later mix with chocolate in order to prepare confectionery items. B takes ₹30,000 but the next day fails to deliver chocolates ‘A’ expected to make a total income of Rs 2,00,000 if chocolates were delivered by ‘B’ timely.

Here, expectation interest is ₹2,00,000 (income expected by ‘A’ to be earned if ‘B’ had performed his promise).

Reliance interest is ₹40,000 (amount for which coffee beans were purchased relying on the delivery of chocolate to be made).

Restitution interest is ₹ 30,000 (advance payment by ‘A’ to ‘B’).

While such a wide range of interests are recognised as damages under English contract law, Indian contract law adopts a comparatively much narrower approach. Section 73 of Indian Contract Act covers damages ensuing from the usual course of things and the already anticipated damages by the parties to a contract. Indirect or consequential losses are clearly recognised under English law but Indian courts apart from certain exceptions do not recognise remote damages.

Distinction between liquidated damages and penalty

English contract law draws a distinction between liquidated damages and penalty while Indian contract law under Section 74 makes no concrete separation between the two. If the sum agreed between parties is a genuine pre estimate of prospective damages then we term it as liquidated damages, while if the sum is excessively disproportionate to the likely prospective loss, then it is termed as penalty. While aim of liquidated damages to provide compensation to the aggrieved party, aim of penalty is to impose punishment on party breaching the contract. A simple example clarifying the difference between liquidated damages and penalty is electricity bills. When we err in bill payment of electricity use, the bill amount is liquidated damages we need to pay while over and above the actual bill amount is penalty to deter consumers from being late bill payers.

English law

In England, special care is taken to draft liquidated damages provision since many times if such a provision stipulates an exorbitant amount of damages, such damages would be struck down on the ground of being a penalty clause. In other words, under English contract law, the amount mentioned in a contract can either be treated as liquidated damages or penalty. If the amount is a reasonable and genuine estimate of prospective loss, it is recoverable and upheld by courts. However, if the amount mentioned in the contract is added for the purpose of dissuading another party from committing breach of contract and the amount is highly disproportionate to the loss estimated, such a clause is struck down by courts. Thus, English courts forbid parties to add penalty clauses in contracts in the disguise of liquidated damages.

Indian law

Indian courts make no distinction with regard to liquidated damages and penalty. Section 74 of the Indian Contract Act, 1872 uses both expressions namely liquidated damages and penalty in such a way so as to signify no explicit distinction between the two. Where contracts are silent on the amount of damages, courts determine damages after considering facts and circumstances of each case. Courts cannot award compensation in excess of what is mentioned in the contract, but they can award a lesser amount as damages.

If in a case the defendant proves that no loss was caused to the plaintiff, then no damages, even if they are liquidated, can be claimed. Though there may be breach of contractual obligations, it may not result in awarding of liquidated damages/penalty to the plaintiff if there was no actual loss caused due to such breach. The same was held in the case of Indian Oil Corporation vs. Messrs Lloyds Steel Industries Ltd (2007) where the court made it clear that liquidated damages cannot be claimed solely on the ground that they find mention in the contract. There has to be an occurrence of actual loss.

Conclusion

Though there are other remedies available to parties aggrieved by breach of contract like rescission of contract, sue for specific performance, injunction and quantum meruit, damages especially liquidated ones are considered far better option than the enlisted remedies due to the easy nature of their computation, thereby leading to prevention of litigation or at least fast outcome of litigation. For fixation of liability in order to claim damages, there has to be establishment of causation, that is, to establish a causal connection between the loss incurred/ injury sustained and the breach committed. Such an establishment of causation will not solely make a defendant liable if the loss or injury is too remote to the breach of contract. In cases where there is contributory negligence on the part of plaintiff himself, the court may disentitle him from claiming damages. Thus, the maxim of “He hath committed inequity shall not have equity” may be applied by courts.

References

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Damages for breach of contract under Indian Contract Act and English Contract Law

Introduction

Damages under the Indian Contract Act, 1872