Damages for Breach of Contract

Sections 73 and 73
 Remedies for Breach of Contract
• Damages – a common law remedy

• Other remedies: Specific performance of

contract – an injunction to prevent breach.

• S. 73 to S. 74 deals with damages for breach of

contract.
 Damages
• Damages is the amount adjudged to be paid
by one to another as compensation for loss
sustained by the latter in consequences of
breach
• Object of awarding damages is not to punish
but to compensate, and to put a party in the
same position in which it would have been if
the contract would have been performed.
 Kinds of Damages
• General damages – arising naturally out of a breach
for compensating the party for the loss sustained
• Special damages – in addition to general damages
arising out of breach, for loss resulting from special
circumstances known to both parties at the time of
entering into contract.
• Nominal damages – award of compensation where
injured party has not really suffered any loss due to
breach
 Measure of Damages
While arriving at the amount of damages the
problem is referred to in two terms:
• Remoteness of damages, and
• Measure of damages.

• Remoteness of damages-Hadley v. Baxendale

(1854).
 Hadley v. Baxendale
Damages are recoverable in two cases –
• When they ‘arise naturally’, i.e. according to
the usual course of things,
• When they are ‘such as may be reasonably be
supposed to have been in contemplation of
both the parties, at the time of contract, as
the probable result of breach.
 Rules Regarding Damages
• General damages –
• In contemplation of parties – reasonably be
considered to be within the contemplation of the
parties at the time of entering into the contract.
• Horne v. Midland Railway Co. (1873) – delivery
of shoes to French army

• Knowledge leads to contemplation

• Imputed or actual knowledge
• Victoria Laundry Ltd. v. Newman Industries Ltd.
(1949). Boilers for business
 Rules Regarding Damages
• Degree of probability required to satisfy the
test of remoteness in the contract.
• Heron II Case, Koufos v. C. Czarnikow Ltd.
(1969) – sale of sugar
• It was held that “reasonably foreseeable”
means that the loss is a “serious possibility” or
a “real danger”, or is “not unlikely”.
• Parsons (H) (Livestock) Ltd. V. Uttley Ingham
& co. Ltd. (1978) – hopper for storing pig nuts
 Section 73
• Two principles –
Compensation is recoverable for any loss or
damage-
(i) Arising naturally in the usual course of things
from breach, or
(ii) Which the parties knew at the time of
contract as likely to result from the breach
• Madras Railway co. v. Govinda Rau (1898) –
delivery of sewing machine and cloths-festival
• Proof of loss is necessary
 Section 73
• Difference in market price and contract price
[sale and supply transactions]
• Murlidhar Chiranjlal v. Harischandra Dwarkadas
(1962) – supply of canvas to Calcutta through
Kanpur –
• Two principles on which damages are calculated
in case of breach of contract of sale of goods–
– As far as money can do it, the aggrieved party is to
be put in as good a situation if the contract had
been performed and
– Duty to take reasonable steps to mitigate the
consequences of breach [Duty to mitigate loss]
 Measure of Damages
• Damages are compensatory and not penal
• Effect of fraud or misrepresentation in
measuring damages
• Naughton v. O’Collaghan (1990) – horse fit for
race
The price at which a thing is purchased and its difference with
the real value, when misrepresentation about it is discovered,
is the yardstick for compensation
• East v. Maurer (1991) – adjacent hairdressing
salons- ‘actual damage directly following the
fraudulent inducement’
 Rules Regarding Damages
• Duty to mitigate loss – if the plaintiff does not
take reasonable care to prevent the loss likely
to arise from breach, he will not be entitled to
damages.

• A.K.A.S. v. Moola Dawood Sons & Co. (1916) –

sale of shares at lower price
 Rules Regarding Damages
• Vindictive, Exemplary damages –
• English law –
i. Banker refusing to pay a customer’s cheque
ii. Action for breach of promise to marry
iii. Vendor of real estate failing to make title
• Nominal damages (no loss situation).
• Difficulty in assessment – does not disentitle a
person from getting the damages- speculative
damages
 Liquidated Damages and Penalty
• Agreed amount – the amount to be awarded
in case of breach if mentioned in the contract
itself, the injured party is entitled to get the
same in case of breach as per Section 74 of
the Act.
 Liquidated Damages & Penalty
• In event of breach, • Payment of money
promise to pay a stipulated in contract,
determined sum of to act as a threat to
money. secure the
• Plaintiff is entitled to performance.
recover no more no • Recover only for actual
less. loss, and if greater than
penalty, entire
compensation ignoring
penalty.
Liquidated Damages & Penalty
• If it is extravagant and
unconscionable, than
the greatest loss which
can be caused, it is a
penalty.
 Liquidated Damages & Penalty
Various tests:
• Sum stipulated extravagant and unconscionable
in comparison with the greatest loss
• Penalty – if breach consists only in not paying a
sum of money and sum stipulated is greater
than actually would have paid
• Presumption – if single lump sum is payable by
compensation on occurrence of certain event
 Liquidated Damages & Penalty
• S. 74, however does not make any such
distinction between liquidated damages or
penalty.
• There are certain principles under S. 74 to
award compensation.
 Liquidated Damages & Penalty
• Reasonable compensation not exceeding the sum so
mentioned in the contract, whether it be liquidated
damages or penalty.
• The named sum constitutes the maximum limit of
liability
• Stipulations regarding interest – it may be either
from the date of bond or from date of default. In the
former it is not penalty, in later it may be a penalty.
• Proof of loss
 Liquidated Damages & Penalty
 Forfeiture of “Earnest Money” or “Deposit”
• Fateh Chand v Balkishan Das (1963)
Application of s.74 to forfeiture clauses- the expression “the contract
contains any other stipulation by way of penalty”
• Maula Bux v Union of India (1969)
The words ‘whether or not actual damage or loss is proved to have been caused
thereby’ apply only in those cases where it is not possible to prove monetary value of
the loss, and, therefore, value fixed by parties may be taken as a reasonable measure
of compensation.
In the present case, loss could be determined.

Supreme Court refused to allow the deposit to be forfeited or reasonable

compensation to be recovered as the court found that breach of contract caused no
loss to the Government and, the Government made no attempt to establish that it
had suffered any loss or damage on account of the breach
 Liquidated Damages & Penalty
 Forfeiture of “Earnest Money” or “Deposit”

• ONGC Ltd v Saw Pipes Ltd (2003)

Burden of proving that no losses were actually caused to the other party was on the
party committing breach. The Court said that it was not necessary for the party to
lead evidence to show the amount of loss suffered by it unless the breaching party
came to the court and proved that no loss was in-fact caused.
 Liquidated Damages & Penalty
• Exceptions – when a person enters into a bail
bond or any other instrument of same nature,
or under provisions of any other law, he shall
be liable to pay whole of the amount
undertaken by him in case of default. It is
always by way of a penalty.
 Rules Regarding Damages
• Compensation to the party rescinding the
contract – S. 75, in a suit for specific
performance, alternatively rescission is
claimed, party rescinding is entitled to
compensation.

• Refer the illustration to s.75