DR.

RAM MANOHAR LOHIA

NATIONAL LAW UNIVERSITY,
LUCKNOW

FINAL DRAFT
MEASURES OF DAMAGES: MODE AND METHOD IN TERMS
OF INDIAN CONTRACT ACT

SUBMITTED TO SUBMITTED BY

Dr.VISALAKSHI VEGESNA SHAILESH KUMAR &SHALINI

ASSOCIAT PROFESSER (LAW) B.A.LL.B (H) 2nd semester

ROLL NO-123 &124

 TABLE OF CONTENTS

➢ Declaration…………………………………………………...
➢ Acknowledgemen……………………………………………...
➢ Objective of research…………………………………………...
➢ Research Questions…….​ ....................................................
➢ Research methodology........................................................
➢ Introduction..​ ............................................................................
➢ Measures of damages.......................................................
➢ Damages are compensatory, not penal………………………..
➢ Damages when goods have fixed market price………………….
➢ Liquidated damages and penalty………………………………..
➢ Compensation for breach of contract where penalty is stipulated …..
➢ Nominal damages …………………………………………………
➢ Entitlement of earnest for breach of contract…………………….
➢ Quantum meruit……………………………………………
INTRODUCTION

The aim of this topic is to examine​ the entitlement of the claimant to recover damages in
respect of a breach of contract committed by the defendant. Every breach of contract gives
rise to a claim for damages. In the case where the claimant has not suffered any loss as a
result of the breach, he is still entitled to recover damages but damages will not be nominal.
The word ‘damages’ as used in this topic, is not tied to compensatory damages. As Dr
EDELMAN suggest in his book ‘Gain –Based Damages Contract, Tort, Equity and
Intellectual Property (Hart, 2002), the word ‘”damages” can only mean money award which
respond to wrongs’. On this view the word ‘damages’ is not tied to any particular measure of
recovery.
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Section 73 of the Contract Act is lays down the provision relating to damages. It provides
that the party, who breaches a contract, is liable to compensate the injured party for any loss
or damage caused, due to the breach of contract. For compensation to be payable, Two things
should be taken into consideration (i) The loss or damage should have arisen as a natural
consequence of the breach, or (ii)It should have been something the parties could have
reasonably expected to arise from a breach of the contract. In the former case, an objective
test would be applied where as in the latter case a subjective test would be applied. Under this
section, the burden of proof lies on the injured party. This section, however, provides that
compensation shall not be awarded for any remote or indirect loss sustained by the parties.
Section 73 also provides that the same principles will apply for breach of a quasi-contractual
obligation, i.e. in the event that an obligation resembling that created by contract has not been
discharged, the injured party is entitled to receive compensation as if a contractual obligation
has been breached. Damages under Section 73 of the Act 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.

Section 74 of the Indian Contract Act reads as follows:- “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 of 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.” InFateh Chand v
Balkishan Das , the Supreme Court stated:
Section 74 declares the law as to liability upon breach of contract where compensation is by
agreement of parties predetermined or where there is a stipulation by way of penalty. But the
application of the enactment is not restricted to cases where the aggrieved party claims relief
as a plaintiff. The section does not confer a special benefit upon any party. It merely declares
the law that notwithstanding any term in the contract for determining the damages or
providing for forfeiture of any property by way of penalty, the Court will award to the party
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aggrieved only reasonable compensation not exceeding the amount named or penalty
stipulated. The Court also held that the jurisdiction of the court to award compensation under
section 73 in case of breach of contract is unqualified except as to the maximum stipulated,
and compensation has to be reasonable. This section has to be read in conjunction with
section 74, section 74 emphasizes that in case of breach of contract, the party complaining of
the breach is entitled to receive reasonable compensation whether or not the actual loss is
proved.

In the event that loss is suffered, the court has the discretion to award the aggrieved party
nominal damages in recognition of his right. Further damages may also be awarded for loss
of the party's positive or exceptional interests in the case of contracts to be performed in the
future. Improper recession of a contract may also result in compensation for loss of profit
being awarded under Section 73 as was held by the Supreme Court in the case of Dwarka Das
v State of Madhya Pradesh.
In Sitaram Bindraban vs. Chiranjanlal Brijlalit was held that the parties to a contract can
create, for themselves, special rights and obligations such as providing for themselves the
measure of damages for breach. The Parties can also provide in a contract that in the event of
breach, no compensation will be payable except for refund of amounts paid and such a term
was held to be enforceable in Syed Israr Masood vs. State of Madhya Pradesh.With regard to
measure of damages for breach of warranty, in Mangilal Karwa vs. Shantibai it was held that
the amount, which put the plaintiff in the position in which he would have been if the contract
had been fulfilled.
In Esso Petroleum Co. Ltd. vs. Mardon it was held that where during the pre-negotiation
stage of a contract, the party who has special knowledge and expertise concerning the subject
matter of negotiation, makes a forecast based on knowledge and expertise with an intention to
induce the other party to enter into a contract, it is open to the court to treat the forecast being
not only an expression of opinion but a continuing warranty. In such a case, if the estimate
turns out to be made negligently and wholly unsound, the party making the forecast can be
made liable for breach of warranty. In Murlidhar Chiranjilal vs. Harishchandra Dwarkadas
the Supreme Court held that there are two principles on which damages are calculated in case
of breach of contract of sale of goods. Firstly, he who proved a breach of a bargain to supply
what he has contracted to get is to be placed so far as money can do it in as good situation as
if the contract has been performed. Secondly, a duty is imposed on the plaintiff to take all
reasonable steps to mitigate the loss consequent to breach, and he is debarred him from
claiming any part of the damage which is due to neglect to take such steps.
In Union of India vs. Raman Iron Foundry it was held that damages are the compensation
which an injured party may be entitled to get on adjudication by court of law but he does not
get them by reason of any existing obligation on the part of the party, in breach of contract,
who has no pecuniary liability till the court has determined the question of breach and the
amount of compensation therefore. The court will not determine pre-existing liability.
Further, since the breach of contract does not result in any existing obligation by the party
committing breach, the right to recover damages is not an actionable claim and cannot be
assigned.
MEASURE OF DAMAGES
After it has been established that a certain consequence of the breach of contract is proximate
and not remote and the plaintiff deserves to be compensated for the same, the next question
which arises is: what is the measure of damages, for the same, or in other words, the problem
is of the assessment of compensation for the breach of contract.
Damages are compensatory in nature. The object of awarding damages to the aggrieved party
is to put him in the same position in which he would have been if the contract had been
performed. Damages are, therefore, assessed on that basis. If a party takes security deposit
from the other for the due performance of the contract, he is not entitled to forfeit the deposit
2
on ground of default, when no harm is caused to him on account of such default.
In State of Kerala v. k. Bhaskaran, there was a breach of work contract by the Government
and the contractor brought an action to recover the loss of 10% profit in that contract. It was
held that generally 10% profit is taken as an element in the estimation of the contract and the
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contractor was entitled to claim compensation on that basis.
In a contract of sale of goods, the measure of damages is the difference between the contract
price and the market price on the date of the breach of contract. For instance, A agrees to
supply B a watch on 1​st​ January for Rs. 1,000. If fails to supply the watch and the market
price of the watch on that date is Rs.1, 200 B will be entitled to recover from A Rs 200 as
damages. The reason is that the loss suffered by the buyer is Rs 200 because due to the rise in
the market price of the watch, he will have to pay that much extra if he purchases the watch
from the market. Similarly, if the buyer (B) refuses to take the watch on the due date, the
seller will also be entitled to recover the difference between the contract price and the market
price on 1​st​ January. For instance, the market price of the watch on that date is Rs 800, A’s
loss is Rs 200in respect of the transaction, because from another costumer A can get only Rs.
800 whereas B had promised to pay Rs.1000 for the same. A can recover Rs.200 from B.

DAMAGES ARE COMPENSATORY, NOT PENAL

In the words of ASQUTH J : “It is well settled that the governing purpose of damages is to
put the party whose right have been violated in the same position, so far as money can do so,
as if his rights has been observed”.
“The primary or principle of the law of damages for a breach of contract is to place the
plaintiff in the same position he would be in if the contract have been fulfilled, or to place the
plaintiff in the position he would have occupied had the breach of the contract not occurred.
When this is accomplished, the primary aim or the principle of law of damages has been
fulfilled”. In a case involving the construction of the swimming pool where the depth of the
pool happened to be less than that was specified, the pool being otherwise useful the court
allowed the difference in value of the pool as provided and its value as it should have been
provided. ​ ​The court did not allow the cost of​ ​setting right the pool because that would have

2
Haji Abdul sattar v. M P State, etc. marketing federation Ltd.,A.I.R. 1989 M.P.7.
3
State of kerala v. K. Bhaskaran, A.I.R. 1985 KERALA 49.
given the recipient windfall profits which are impermissible because the award of damages is
to compensate the claimant and not to punish the payer.
ACTUAL RESELL BY THE SELLER NOT NECESSARY
IN jamal VS moola dawood sons and co. The privy council has held that the proper measure
of damages is the difference between the contract price and market price on the date of the
breach of the contract irrespective of the fact that the seeler does not again sell the goods on
that day, but sells the same on a subsequent date and the actual loss o him is different from
the difference in the prices on the date of the breach of the contract. In this case, the appellant
sold 23,500 shares to the respondent. The date of delivery was 30​th​ dec, 1911. The shares
were tendered on that day but the respondent refused to take them. On that date, the market
price of those shares was lower than the contract price by rupees 1,09,218. The appellant sold
those shares in the market subsequently between the contract price and actual resell price was
only rs 79,862. The appellant claimed rs 1,09,218, viz. The difference between the contract
price and market price on the date of breach of contract, where as the respondents contended
that appellants should get only rs 79,862 which was the difference in the price on a
subsequent date when the shares were sold by the appellants. The appellant’s contention was
4
upheld and rs 1,09,218 were awarded to them as a damage.
Their lordship observed :
If the purchaser is entitled to the benefit of subsequent sells, it must also be true that he must
bear the burden of subsequent losses. The latter preposition is in their lordship’s opinion
impossible , and the former is equally unsound. If the seller holds to the share after the
breach, the specualition as to the way the marker will subsequently go is the speculation of
the seller, not of the buyer, the seller cannot recover the buyer the loss below the market price
at the date of the breach if the market falls, nor is he liable to the purchaser for the profit if
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the market rises.

DAMAGES WHEN GOODS HAVE FIXED MARKET PRICE

​Sometimes, the market price for certain goods may be fixed one and not subject to any
fluctuation, that is, there may be no difference between contract price and the market price.
The question which arise in such a case is, can the seller recover damages from the buyer on
the basis of being deprived of the profit which he would have been made, had the buyer taken
the goods?
The seller was entitled to recover the loss of profit even though the contract and the market
price was the same. The rule of compensation being in the basis of difference between the
contract price and the market price was only a prima facie rule. For ex seller had been able to
sell one car less due to the breach of contract by the buyers and therefore, they could recover
the loss of profit on that account.

4
Jamal v. Moola dawood sons &co. A.I.R. 1987 Ker.56.
5
Id.,502
LOSS OF PROFIT ON A SUB-CONTRACT
When the seller does not supply the goods to the buyer and the buyer is not able to earn
certain amount of profit which he could have been made by supplying the goods further
under sub-contract, the buyer is not entitled to recover the loss of expected profit but his right
is only to recover the difference between the market price and the contract price. But if the
fact of sub-contract has been brought to the knowledge of the other party, then the loss
arising out of the non performance of the sub-contract consequent on the breach of contract
by the promise, can be claimed.

LIQUIDATED DAMAGES AND PENALTY

Often the term ‘liquidated damages' is mistaken or rather confused with the term ‘penalty'.
Thus, understanding the terms, we can clearly distinguish between the two. A penalty can be
said to be a sum so stipulated in terrorem (with the object of coercing the party into
performing the contract), and thus an amount qualifies to be a penalty if the sum named is
extravagant and unconscionable. It is also a penalty if the breach consists in paying of money
and the sum stipulated is greater than the sum which ought to have been paid. However,
liquidated damages are a genuine, covenanted pre-estimate of damages as seen above. They
are both to be so judged on the facts of each case. The question whether a particular
stipulation in a contract is in the nature of the penalty has to be determined by the court
against the background of various relevant factors, such as the character of transaction and its
special nature, if any, the relative situation of the parties, the rights and obligations accruing
from such a transaction under the law and the intention of the parties incorporating in the
contract, the particular stipulation which is contended to be penal in nature. If on such a
comprehensive consideration, the court finds that the real purpose for which the stipulation
was incorporated in the contract was that by reason of its burdensome or oppressive
character, it may operate in terrorem over the provisory so as to drive him to fulfil the
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contract, and then the provision will be held to be of Penalty.
Sometimes, the parties to a contract, at the time of making the contract agree to the amount of
compensation payable in the event of the breach of contract. The amount of compensation
payable, which has been agreed beforehand, may be either liquidated damages of penalty. If
the compensation to be paid on the breach of the contract is the genuine pre-estimate of the
prospective damages, it is known as liquidated damages. If the compensation agreed to be
paid in the event of breach of contract is excessive and highly disproportionate to the likely
loss, the amount is fixed terrorem, with a view to discouraging breach of contract, it is known
as a penalty. Whether a stipulation was penalty or liquidated damages dependant on the
construction of contract as penalty or liquidated damages though relevant was not decisive.
The distinction between penalty and liquidated damage was thus explained by lopes, j in the
case of law vs. Redditch local branch:
The distinction between penalty and liquidated damages depend on the intention of the
parties to be gathered from the whole of the contract if the intention is to secure performance
of the contract by the imposition of a fine or penalty, then the sum specified is penalty; but if,

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on the other hand, the intention is to assess the damages for the breach of the contract, it is
liquidated damages.

COMPENSATION FOR BREACH OF CONTRACT WHERE PENALTY

IS STIPULATED FOR
Section 74 of the Act deals with the situation where the parties to a contract agree that the
contract itself will stipulate the penalty for the breach of the contract i.e. liquidated damages.
The main principle behind this section is to promote certainty in commercial contracts.
Section 74 provides that damages, not exceeding the amount stipulated in the contract, must
be given to the injured party on breach of the contract. It further provides that such damages
must be given to the injured party irrespective of any actual loss or damage proved by them.
The explanation to Section 74 distinguishes between a genuine pre-estimate of the damages
and a penalty. A penalty would be a sum of money, which is stipulated in order to dissuade a
person from breaching a contract. When a contractual obligation is one of debt, the rule
against a penalty would not apply to the sum payable. However, if a higher rate of interest is
payable from the date of default, this would be construed as a penalty.
This distinction between estimated damages and a penalty is significant when enforcing one's
rights in court. In the former, the courts do not have the discretion to question the amount
agreed upon as damages by the parties. However, in the case of a penalty that is stipulated,
even though the courts may not reject the claim in its entirety, they have the discretion to
reduce an unconscionable amount to what they may perceive as reasonable. However, it is
pertinent to note that no claim of liquidated damages is maintainable unless the promisee is
proved to have sustained loss due to the default of the promisor. One cannot compensate a
person who has not suffered any loss or damage. Therefore, in the absence or proof of
damage for any breach of obligations, no sum of money named in a contract can be claimed.
There may be cases where the actual loss or damage is incapable of proof. Section 74
exempts a party from such responsibility and enables him to claim compensation in spite of
his failure to prove the actual extent of the loss or damage, but the party must establish that
he has suffered some loss or damage. The proof of this basic requirement of “loss/damage” is
not dispensed with by Section 74. It merely dispenses with the proof of the “actual
loss/damage”. The courts, in such cases where it is difficult to ascertain the precise amount of
damages, have the discretion to award reasonable compensation to the aggrieved party.
The Supreme Court has, in Maula Bux v. Union of India held that:-
● A claimant may have to lead evidence to prove the actual loss or damage resulting
from the breach, if the adjudicating authority were of the view that in the given facts
and circumstances, compensation can be calculated in accordance with the settled
rules.
● However, if the adjudicating authority were of the view that in the facts and
circumstances in question, it will be impossible for the Court to assess the
compensation, then the Courtsmay take into consideration the sum named by the
parties “if it be regarded as a genuine pre-estimate … but notif the sum named is in
the nature of a penalty”.

This latter principle (stated above) has been recently reiterated by the Supreme Court in
ONGC Ltd. v. Saw Pipes the Supreme Court held that “In some contracts, it would be
impossible for the Court to assess the compensation arising from breach and if compensation
contemplated is not by way of penalty or unreasonable, Court can award the same if it is
genuine pre-estimate by the parties as the measure of reasonable compensation.” The
Supreme Court held that if the parties have pre-estimated such loss after clear understanding,
it would be totally unjustifiable to arrive at the conclusion that the defaulting party is not
liable to pay compensation. The Court in this case also held:
● Terms of the contract are required to be taken into consideration before arriving at the
conclusion whether the party claiming the compensation is entitled to the same;
● If the terms are clear and unambiguous stipulating liquidated damages in case of the
breach of the contract, unless it is held that such estimate of damages/compensation is
unreasonable or is by way of penalty, the party who has committed the breach is
required to pay such compensation and that is what is provided in section 73 of the
Contract Act.
● Section 74 to be read along with section 73 and, therefore, in every case of breach of
contract, the person aggrieved by the breach is not required to prove actual loss or
damage suffered by him before he can claim a decree. The court is competent to
award reasonable compensation in case of breach even if no actual damage is proved
to have been suffered in consequence of the breach of the contract.
● In some contracts, it would be impossible for the court to assess the compensation
arising from breach and if the compensation contemplated is not by way of penalty or
unreasonable, the court can award the same if it is a genuine pre-estimate by the
parties as the measure of reasonable compensation.

Section 74 of the Act does not apply to negotiable instruments. It also does not apply in cases
of persons entering into bail bonds and other similar instruments for the performance of
public duties. Breach of any condition in such an instrument would require the person
concerned to pay the entire sum mentioned therein. However, the explanation to the
exception provides that a party who contracts with the Government does not necessarily
undertake any public duties.
It is important to note that by providing for compensation in express terms the right to claim
damages under the general law is necessarily excluded.

NOMINAL DAMAGES
7
Where the plaintiff suffers no loss the court may still award him nominal damages in
recognition of his rights. But this is in the discretion of the court. The court may altogether
refuse to award any damages or may award even substantial damages. “the court to
competent to award reasonable compensation in case of breach, even if no actual damage is
proved or shown to have been suffered in consequence of breach of contract”. It has been
pointed by the Delhi high court , following some earlier high court decisions, that section 73
does not give any cause of action unless and until damage is actually suffered.
The Karnataka high court in M\S. Vikas electricity service VS Karnataka electricity board,
said that nearly because the plaintiff failed to produce evidence sufficient to ascertain the
extent of damage he suffered, he could not be denied damages. But an injuria or wrong upon
which to base a judgement for the plaintiff and therefore an injuria, although without loss or
damage would entitle the plaintiff to a judgement.”

ENTITLEMENT OF EARNEST FOR BREACH OF CONTRACT

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Section 74 of the Indian contract act, 1872 emphasizes that in case of breach of contract, the
party complaining of the breach is entitled to receive reasonable compensation whether or not
actual loss is proved to have been caused by such breach. Therefore, the emphasis is on
reasonable compensation. If the compensation named in the contract is by way of penalty,
consideration would be different and the is party only entitled to reasonable compensation for
the loss suffered. But if the compensation named in the contract for such breach is genuine
pre-estimate of the loss which the parties knew when they made the contract to be likely to
result from the breach of it, there is no question is proving such loss or such party is not
required to lead evidence to prove actual loss suffered by him. Burden is on the other party to
lead evidence for proving that no loss is likely to occur by such breach.
In Aditya mass communication Pvt. Ltd. Vs. A.P.S.R.T.C.,Hyderabad , it has been held that
if an offer is withdrawn before opening of a tender, the earnest money deposited by the
tenderer has to be refunding the earnest money, interest on the same has also to be paid.

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QUANTUM MERUIT
Quantum meruit is a ​Latin​ phrase meaning "what one has earned". In the context
of ​contract​ ​law​, it means something along the lines of "reasonable value of services".
Quantum meruit is the measure of damages where an express contract is mutually modified
by the implied agreement of the parties, or not completed. While there is often confusion
between the concept of quantum meruit and that of "unjust enrichment" of one party at the
expense of another, the two concepts are distinct.
The concept of quantum meruit applies in (but is not limited to) the following situations:
I.​ When a person hires another to do work for him, and the contract is either not completed or
is otherwise rendered unperformable, the person performing may sue for the value of the
improvements made or the services rendered to the defendant. The law implies a promise
from the employer to the workman that he will pay him for his services, as much as he may
deserve or merit.
The measure of value set forth in a contract may be submitted to the court as evidence of the
value of the improvements or services, but the court is NOT required to use the contract's
terms when calculating a quantum meruit award. (This is because the values set forth in the
contract are rebuttable, meaning the one who ultimately may have to pay the award can
contest the value of services set in the contract.)
II.​ When there is an express contract for a stipulated amount and mode of compensation for
services, the plaintiff cannot abandon the contract and resort to an action for a quantum
meruit on an implied assumpsit. However, if there is a total failure of consideration, the
plaintiff has a right to elect to repudiate the contract and may then seek compensation on a
quantum meruit basis.