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Revisiting the principle of damages under the contract regime in India

October 13, 2021
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This article is written by Kshitij Kothari, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).

Introduction

A contract is an agreement between two or more parties, wherein they abide by all the terms and conditions agreed upon;  between them, orally or in writing. The terms and conditions are followed by the parties in the manner they are agreed and if any of the parties fail to comply with the conditions decided upon, then the defaulter party may be entitled to pay the compensations in the manner as may be described in the contract or decided by the parties prior to the contract. However, in the event the default is severe according to the nature of the contract, then the defaulting party may be ordered to pay the money as this mechanism allows the injured party to recover compensation for the loss suffered by them due to the breach of contract, from the party who causes the breach. These monetary payments are known as “Damages”. In the case of Common Cause v. Union of India, the Supreme Court has defined the word “Damages” as a form of compensation due to a breach, loss, or injury, payable to the party/ies who has suffered by such defaults. This article seeks to revisit the established principles of damages under the Contract law of India. 

The calculation for the damages

To calculate the value for damages for the breach of contract, there are two conditions that need to be taken into account:

  1. The remoteness of damage,
  2. The measure of damages.

The remoteness of damage

The parties must determine whether the loss suffered by the party is the proximate action of the breach of contract by the party breaching the contract. The breaching party shall be liable only for the proximate action done by them. In order to explain this principle better, I would like to mention a notable case law. 

Hadley v. Baxendale

Facts

Hadley, the Plaintiff, along with other millers and employees worked as proprietors for the City Steam-Mills situated at Gloucester based on partnership. During the processing of flours, sharps, and bran, a crankshaft of the steam engine had broken and Hadley contracted with Baxendale and Ors., (the Respondents) to get the repaired crankshaft by a particular date. But Baxendale failed to deliver the item to Hadley because of which Hadley lost the profit for the time being and the jury awarded him £25. The Respondent contended claiming that he did not know that Plaintiff would suffer a loss due to late delivery on his part. 

Judgment

When the case went to the bench of Baron Sir Edward Hall Alderson, he concluded that Baxendale could only be held accountable for ordinarily foreseeable damages, or if Hadley had disclosed his unusual circumstances in advance. The court refused to allow Hadley to recover lost earnings. The fact that a party is sending something to be fixed does not mean that if it is not delivered on time, the party will lose money.

Justice Alderson stated that “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.” The principle put forth by him is considered to be the basis of the law to ascertain whether the damage is the proximate or the remote consequences of the breach of contract.

The measure of damages

When it is found that particular damage is the proximate result of the breach of contract the next principle comes into play. The “measure of damages”  refers to the amount of compensation required to compensate for the damage caused.

Types of damages

Ordinary damages

When there is a breach of a contract, the suffering party probably is in a disadvantaged position and is likely to incur some type of damage. Ordinary damages are damages which fairly and reasonably be considered as arising naturally and directly in the usual course of things from the breach of contract itself. 

Damages, that are the direct or the proximate consequences of the breach of contract, can be described as ordinary damages. For instance: Arun agrees to sell and deliver 20 boxes of apples to Bola for Rs 10,000 on a particular date, say it 04th October 1987. On the due date, i.e., 4th October 1987 the price of apples increased and Arun refused to fulfil his promise. Bola purchases 20 bags of potatoes for Rs. 11,000. Bola can receive Rs 1000 from Arun as ordinary damages which are directly arising from the breach of the contract.

Special damages

If the loss on the breach of a contract does not arise naturally i.e., according to the usual course of things but it arises due to some special circumstances, the persons making the breach of contract can be made liable of the same provided that those special circumstances were brought to his knowledge at the time of the making of the contract.  If he did not know about the special circumstances in the particular case, he cannot be made liable for the same.

In Union of India v. Hari Mohan Ghosh, the plaintiff and respondent booked three packages of artificial silk ready-made garments to be delivered through the Railways but the consignment was not delivered at the destination. The plaintiff claimed not only the value of the goods lost but also for the loss of profit. It was held that the plaintiff was entitled to the loss of profit unless he had made known to the railways when the goods were booked that such loss was likely to result from the breach of it.

Exemplary damages

In the case of exemplary damages, there are two instances for awarding this kind of damages:

With regards to the first pointer, in a breach of promise to marry, damages resulting from injury to feelings and disappointment, and for that exemplary damages may be claimed.

In the case of Laxminarayan v. Sumitra, after the engagement between the couple, the parties had sexual intercourse as a result of which the girl became pregnant. When the husband became aware of the situation, he refused to marry her. It was held by the Hon’ble Madhya Pradesh High Court that she (the pregnant girl) was entitled to damages of chances of marriage becoming dim and the associated social stigma with her condition. It was further held that mere acquittal of the boy and others in criminal cases, would not disallow an action for damages under the law of torts.

With regards to the second pointer, a wrongful dishonour of cheques from a businessman will include exemplary damages as compensation even if he has not suffered any financial loss. However, unless the damages are proven as special damages, a non-trader is not always awarded special damages.

For instance, Arun is a farmer. He issues a cheque for procuring seeds for his next crop. He has sufficient funds in his account, but the bank incorrectly rejects the cheque. Arun files a suit claiming compensation for damages to his reputation. The Court awards a nominal amount as damages since Arun is not a trader.

Nominal damages

In the absence of any credible proof proving the extent of the plaintiff’s damages, the maxim of nominal damages must be applied. In the case of M/s. Vikas Electricity Services v. Karnataka Electricity Board, the Karnataka High Court stated that the plaintiff could not be denied damages merely because he failed to produce adequate evidence to determine the extent of the damage he suffered. According to the Court, “the law requires not damage, but an injuria to frame a judgment, and thus an injuria, even without damage or loss, would qualify the plaintiff to entitle a judgment.” In the instant case, the defendant called upon the plaintiff to execute some work but the plaintiff was not allowed to execute the work by the Executive Engineer. In response to the plaintiff’s claim for Rs. 50,500/- in damages, the Hon’ble High Court awarded Rs. 25,000/- because the plaintiff failed to produce sufficient evidence to establish his actual loss.

Quantum Meruit

Normally, if a person, having agreed to do some work or render some services, has done only a part of what he was required to do, he cannot claim anything for what he has done. When a person agrees to complete some work for a lump sum, failure to complete the work does not entitle him to any remuneration, even if only a portion of the work is completed. However, the law recognizes an important exception to this reliance in the form of a “Quantum Meruit” action. For example, if Arun and Bola enter into a contract and Arun, who has already performed a portion of the contract, is then prevented by Bola from fulfilling the remainder of his obligations under the contract, then in those circumstances, Arun can recover reasonable remuneration from Bola for what he has already done.

Conclusion

An individual is entitled to receive compensation in terms of monetary incentives only if he has suffered an actual loss due to the breach of contract by the other party. Liquidated damages are useful in situations where determining the number of damages is difficult since it is pre-determined by including a condition in the contract itself. Similarly, certain amounts may be earmarked as compensation for specific breaches, and damages shall be awarded in the event of a commensurate breach. Damages that do not fall under this category are referred to as “remote” or “indirect,” and cannot be claimed. The person who suffers consequences as a result of the breach shall take all reasonable steps to mitigate the claims. Damages have proven to be effective in enforcing contractual obligations, conceptually and practically. Another notable change is the judiciary’s stance, which is gradually becoming more permissive while awarding damages is the arbitral awards where courts are gradually adopting the approach of granting damages ranging in crores. 

References

  1. National Highways Authority of India v. Hindustan Construction Company, (2016) 155 DRJ 646 (DB)
  2. Riya Chopra et al., Law of Damages in India, Nishith Desai Associates, (2019)

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