Contract Damages Under Indian Contract Act, 1872 With A Focus On Lost Profit Damages

Contract Damages
HASIT SETH
16 October 2020
(c) 2020, Hasit Seth. HLaw Chambers

Disclaimer
The materials in this presentation are not legal advice and

is not intended to solicit legal work. This material is
intended for an academic discussion among
professionals. If you are seeking legal advice, please
contact a lawyer licensed in your jurisdiction.

World of Legal Remedies
♔Remedies
♕Civil Wrongs
♞Contractual Remedies
♞Equitable Remedies
♞Constitutional Remedies
♞Statutory Remedies
♕Criminal Wrongs
♞Imprisonment
♞Fines
♞Other punishments

Contract Remedies
♔Damages
♔Equitable Remedies
♕Specific Relief
♕Injunction
♔Restitution
♕Quantum Merut

Contract Damages

Damages
♔“Damages are an award in money for a civil wrong.”

♕McGregor on Damages, 20th Edn.
♔Compensatory damages for losses are the most common form of
damages.
♔They can be: pecuniary or non-pecuniary.
♔General & Special damages
♕Contract, tort, proof & pleading contexts.
♔Nominal Damages

Expectation Interest - Restatement 2nd of Contract
♔Injured party has a a right to damages based on his expectation

interest as measured by
♔(a) the loss in the value to him of the other party's performance
caused by its failure or deficiency, plus
♔(b) any other loss, including incidental or consequential loss,
caused by the breach, less
♔(c) any cost or other loss that he has avoided by not having to
perform.

Reliance Interest - Restatement 2nd of Contract
♔As an alternative to the measure of damages stated in § 347, the

injured party has a right to damages based on his reliance interest,
including expenditures made in preparation for performance or in
performance, less any loss that the party in breach can prove with
reasonable certainty the injured party would have suffered had
the contract been performed.

Normal Damages

S.73 - Compensation for loss or damage caused by breach of contract.
♔73. … compensation for any loss or damage caused to him thereby,

♕which naturally arose in the usual 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.
♔Compensation for failure to discharge obligation resembling those
created by contract.
♔ For Contract damages
♕means which existed of remedying the inconvenience caused by the non-
performance of the contract must be taken into account.

Rule in Hadley v. Baxendale (1854) 9 Exch 341
[T]he 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, ie, 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. (emphasis supplied)

Army Welfare v. Sumangal, (2004) 9 SCC 619 (3 JJ)
♔ Contractor had no responsibility to approve building plans.

♔Architect and Employer agreed that Contractor will approve building
plans.
♔Delay as municipality asked Employer to stop work without proper
building plans.
♔Contractor was held not to be liable for such delay.

UOI v. Sugauli Sugar, (1976) 3 SCC 32 (3 JJ)
♔“3. The plaintiffs …goods were booked on September 5, 1955 to

several destinations under railway risk. The goods did not reach the
destinations. The respondents alleged that non-delivery was on
account of gross negligence and misconduct on the part of the
railways.”
♔“4. The defence was that the wagons containing the goods in suit
along with other wagons were taken on Barge No. 6 from Samariaghat
to Mokamahghat on September 7, 1955. There was an accident. The
barge with all the wagons sank in the river Ganges. The railways
contended that the employees were not guilty of any negligence or
misconduct.”

UOI v. Sugauli Sugar, (1976) 3 SCC 32 (3 JJ)
♔“22. The market rate is a presumptive test because it is the general

intention of the law that, in giving damages, for breach of contract, the
party complaining should, so far as it can be done by money, be placed
in the same position as he would have been in if the contract had been
performed...The market value is taken because it is presumed to be the
true value of the goods to the purchaser. “
♔“One of the principles for award of damages is that as far as possible
he who has proved a breach of a bargain to supply what he has
contracted to get is to be placed as far as money can do it, in as good a
situation as if the contract had been performed. The fundamental basis
thus is compensation for the pecuniary loss which naturally flows
from the breach.”
MSEB v. Datar Switchgear, (2018) 3 SCC 133
♔Contract for electrical low-tension management system installation.

♔Disputes. Arbitration.
♔ Award ordered MSEB to pay ₹185,97,86,399 as damages:
♕ ₹ 109 crores towards the installed object.
♕₹ 71 crores towards the objects manufactured and ready for installation
♕₹ 6.52 crores towards raw material purchased for the manufacture of balance
equipment.
♔Main breach contended was that MSEB did not provide a list of
installation locations – an issue of ‘fundamental breach’.
♔Rejected mitigation claim because equipment was custom made.

Lost Profits
Consequential Damages

Attorney General v. Global Water [2020] UKPC 18
♔Govt. of BVI entered in two contracts with GWA for a water

treatment plant, viz.:
♕1st contract was a design & build (DBA) contract
♕2nd contract was a manage/operate/maintain agreement ( MOMA) for 12 years
♔Govt. failed to provide site, which was Govt.’s responsibility in DBA
♔In arbitration, the award held that:
♕Govt. has breached the DBA’s term of providing site.
♕But rejected GWA’s claim that Govt. also breached an implied term of
MOMA that Govt. will provide site under DBA. Claim for loss of profit from
MOMA’s operation was too remote.

♕The arbitrators also found that, ““Breach of the DBA prevented the fulfilment
of a condition precedent to the performance of a distinct and separate
contract; it prevented the MOMA from commencing.”
♔Govt. appealed to court. Single judge upheld GWA’s contentions.
♔The Court of Appeal, reversed, rejecting damages claimed as too
remote by arguing:
♕Govt. could have got water plan built by someone else if GWA terminated
DBA for breach. And then Govt. could have given MOMA to GWA.

♔Privy Council held that damages were NOT remote, because:

♕1st - “…the contracts were entered into between the same parties on the same
day and they both related to the same Plant on the same site, giving rise to
special knowledge under the second limb of the rule in Hadley v Baxendale.”
♕2nd – Govt. knew and intended that performance by both the parties would
lead to commencement of MOMA.

♔Privy Council held that damages were NOT remote, because:

♕3rd – “Design Build Documents which were incorporated into the DBA were
the same documents as were incorporated into the MOMA, identifying
Purestream as the manufacturer of the Plant and GWA as its exclusive
representative…”
♕4th - “…there is no express term in the DBA which limits the Government’s
liability in damages to GWA’s loss of earnings under the DBA and no finding
by the arbitrators that such a term was to be implied into the DBA. “

"...[1] .... [3] what

...[2] party in a ... [5] the
purpose of was ... [4] test to be applied
breach of contract is criterion for
damages for reasonably is an objective one.
entitled to recover deciding
breach of contemplated One asks what the
only such part of the what the
contract is to depends upon defendant must be
loss actually resulting defendant
put the party the knowledge taken to have had in his
as was, at the time the must be
whose rights which the or her contemplation
contract was made, taken to
have been parties rather than only what
reasonably have had in
breached in possessed at he or she actually
contemplated as his or her
the same that time or, in contemplated. In other
liable to result from contemplati
position, so any event, words, one assumes
the breach. To be on as the
far as money which the that the defendant at
recoverable, the type result of a
can do so, as party, who the time the contract
of loss must have breach of
if his or her later commits was made had thought
been reasonably their
rights had the breach, about the consequences
contemplated as a contract is a
been then of its breach.
serious possibility ... factual one."
observed. possessed.

A.T. Brij Paul v. Gujarat, (1984) 4 SCC 59, 65 (3 JJ)
♔ A concrete was to be built.

♔Contractor quoted below estimate at ₹16,59,900.
♔Road was partly built.
♔The state rescinded the contract due to delay in execution.
♔State settled final bill which contractor accepted under protest.
♔Contractor filed a suit to demand 11 lakhs:
♕Rs 7 lakhs by way of damages, goodwill, prestige and loss of expected profit,
♕Rs 3 lakhs by way of damages on account of loss sustained while executing
the work
♕Rs 1 lakh as damages for the extra .

A.T. Brij Paul v. Gujarat, (1984) 4 SCC 59, 65 (3 JJ)
♔“11. Now if it is well-established that the respondent was guilty of

breach of contract inasmuch as the rescission of contract by the
respondent is held to be unjustified, and the plaintiff contractor had
executed a part of the works contract, the contractor would be entitled
to damages by way of loss of profit.”
♔ “Adopting the measure accepted by the High Court in the facts and
circumstances of the case between the same parties and for the same
type of work at 15 per cent of the value of the remaining parts of the
work contract, the damages for loss of profit can be measured.”
♔2 lakh awarded as “loss of profit” after other damages upheld by HC.

Liquidated Damages

S.74 - Compensation for breach of contract where penalty stipulated for.
♔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.

S.74 - Explanations
♔stipulation for increased interest from the date of default may be a

stipulation by way of penalty.
♔When any person enters into any bail-bond, recognizance or other
instrument of the same nature, … shall be liable, upon breach of the
condition of any such instrument, to pay the whole sum mentioned
therein.
♔A person who enters into a contract with Government does not
necessarily thereby undertake any public duty, or promise to do an act
in which the public are interested.

Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405 (5 JJ)
♔Sale of leasehold rights not completed.

♔“8… Under the common law a genuine pre-estimate of damages by
mutual agreement is regarded as a stipulation naming liquidated
damages and binding between the parties: a stipulation in a contract in
terrorem is a penalty and the Court refuses to enforce it, awarding to
the aggrieved party only reasonable compensation.”
♔“The Indian Legislature has sought to cut across the web of rules and
presumptions under the English common law, by enacting a uniform
principle applicable to all stipulations naming amounts to be paid in
case of breach, and stipulations by way of penalty. “

♔“10 …The measure of damages in the case of breach of a stipulation

by way of penalty is by Section 74 reasonable compensation not
exceeding the penalty stipulated for. “
♔“…In assessing damages the Court has, subject to the limit of the
penalty stipulated, jurisdiction to award such compensation as it
deems reasonable having regard to all the circumstances of the case.
Jurisdiction of the Court to award compensation in case of breach of
contract is unqualified except as to the maximum stipulated; but
compensation has to be reasonable, and that imposes upon the Court
duty to award compensation according to settled principles.”

♔“10 … The section undoubtedly says that the aggrieved party is

entitled to receive compensation from the party who has broken the
contract, whether or not actual damage or loss is proved to have been
caused by the breach. Thereby it merely dispenses with proof of
“actual loss or damage”; it does not justify the award of compensation
when in consequence of the breach no legal injury at all has resulted,
because compensation for breach of contract can be awarded to make
good loss or damage which naturally arose in the usual course of
things, or which the parties knew when they made the contract, to be
likely to result from the breach.”

Maula Bux v. UOI (1969), 2 SCC 554, (3 JJ)
♔Facts:
♔2 Contracts with Govt. to supply potatoes & non-veg food.
♔Maula paid ₹10,000 and ₹8,000 as performance security.
♔Govt. rescinded the contracts and forfeited the deposits for persistent
supply defaults.
♔Maula filed a suit for Rs 20,000 for performance security.

♔Supreme Court:
♔“Where the Court is unable to assess the compensation, the sum
named by the parties if it be regarded as a genuine pre-estimate may
be taken into consideration as the measure of reasonable
compensation… ”
♔“… but not if the sum named is in the nature of a penalty.
♔“…Where loss in terms of money can be determined, the party
claiming compensation must prove the loss suffered by him.”
♔Key here: Govt. led no evidence of actual loss. So trial court and later
SC decreed the suit for not proving losses suffered by Govt.

♔SC also said,

♔“5. Forfeiture of earnest money under a contract for sale of property
— Movable or immovable — If the amount is reasonable, does not fall
within Section 74. That has been decided in several cases: …easily
explained, for forfeiture of reasonable amount paid as earnest money
does not amount to imposing a penalty. “
♔“But if forfeiture is of the nature of penalty. Section 74 applies.”
♔ ”Where under the terms of the contract the party in breach has
undertaken to pay a sum of money or to forfeit a sum of money which
he has already paid to the party complaining of a breach of contract,
the undertaking is of the nature of a penalty.”

BSNL v Reliance, (2011) 1 SCC 394 (3 JJ)
♔ Matter was remanded back to TDSAT but observations matter.

♔Issue: International calls masked a domestic calls to avoid IUC.
♔The court held that clauses provided a reasonable pre-estimate of
damages because:
♕(1) international calls can be identified even when made on a local port.
Hence, a international call from a masked number alone cannot be
considered.
♕(2) Limited time period for recognizing higher IUC rates.

Kailash Nath v. DDA, (2015) 4 SCC 136 (2 JJ)
♔Auction of a plot for 3.12 crores to the highest bidder.

♔Highest bidder deposited earnest money, 78 Lakhs, for auction.
♔DDA twice gave extension for balance money.
♔Allotment was cancelled.
♔Kailash filed a suit. Plot was reauctioned at 11.78 crores.
♔Matter reached SC.

♔SC held that DDA’s forfeiture was invalid, because:

♔Earnest money could not be forfeited under auction terms as DDA
itself increased time to make balance payment.
♔[There were time is of essence issues that are not considered here]
♔Liquidated Damages (LD) are are payable if it is a genuine pre-
estimate of damages by both the parties and so found by court.
♔In other cases, only reasonable compensation up to LD. But if amount
stated is a penalty than only a reasonable amount up to the penalty can
be ordered.
♔In both above cases, amount stated in contract is the upper limit that
court can grant.
♔“43.1. Where a sum is named in a contract as a liquidated amount

payable by way of damages, the party complaining of a breach can
receive as reasonable compensation such liquidated amount only if it
is a genuine pre-estimate of damages fixed by both parties and found
to be such by the court. In other cases, where a sum is named in a
contract as a liquidated amount payable by way of damages, only
reasonable compensation can be awarded not exceeding the amount so
stated. Similarly, in cases where the amount fixed is in the nature of
penalty, only reasonable compensation can be awarded not exceeding
the penalty so stated. In both cases, the liquidated amount or penalty is
the upper limit beyond which the court cannot grant reasonable
compensation.”

Some Key Decisions
♔Alternate rates of interest if mortgage interest not paid in time are not
penalties but part of written contract.
♕Banke Behari v. Sunder Lal, 1893 SCC OnLine All 28, (Allahabad, 6 JJ)
♔Earnest money
♕Shree Hanuman v. Tata Aircraft (1969) 3 SCC 522, (3 JJ)

S.75 - Party rightfully rescinding contract, entitled to compensation
♔ A person who rightfully rescinds a contract is entitled to

compensation
♕for any damage which he has sustained
♕through the non-fulfilment of the contract.

Restitution

Quasi Contract
♔For ‘Quasi Contract’, also known as ‘Constructive Contract’

♔Depends on independent, non-contractual doctrine – ‘unjust
enrichment’ which is now the basis of restitution remedies
♔Neither tort nor contracts
♔Contract Act uses the words:
♕ “Certain Relations Resembling Those Created by Contracts”
♕ to broaden the English law’s concept of “Quasi Contracts” and

♔Unjust Enrichment
♕Has D been enriched?
♕Is enrichment at benefit of P?
♕Was enrichment unjust?
♕Any defenses / policy reasons?
♔ Lipkin Gorman v. Karpnale [1991] 2 AC 548
♔S.68 – Claim for necessaries supplied to person incapable of
contracting, or on his account

S.69
♔Reimbursement of person paying money due by another in payment

of which he is interested
♕A person who is interested in the payment of money
♕ which another is bound to pay
♕, and who therefore pays it,
♕is entitled to be reimbursed by the other.
♔Person paying must be interested in the payment and not himself
liable to pay

S.70
♔Obligation of Person enjoying benefit of non-gratuitous act

♕ Where a person lawfully does anything for another person, or delivers
anything to him,
♕not intending to do so gratuitously, and
♕such other person enjoys the benefit thereof,
♕the latter is bound to make compensation to the former in respect of,
♕ or to restore, the thing so done or delivered

S.71
♔Responsibility of finder of goods

♕A person who finds goods
♕Belonging to another,
♕And takes them into his custody,
♕is subject to same responsibility as a bailee

S.72
♔Liability of person to whom money is paid, or thing delivered, by

mistake or under coercion.
♕A person to whom money has been paid, or anything delivered,
♕by mistake
♕or under coercion,
♕must repay or return it.

Thank you
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© 2020, Hasit Seth. All rights reserved.

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Contract Damages

(c) 2020, Hasit Seth. HLaw Chambers

The materials in this presentation are not legal advice and

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔“Damages are an award in money for a civil wrong.”

(c) 2020, Hasit Seth. HLaw Chambers

♔Injured party has a a right to damages based on his expectation

(c) 2020, Hasit Seth. HLaw Chambers

♔As an alternative to the measure of damages stated in § 347, the

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔73. … compensation for any loss or damage caused to him thereby,

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔ Contractor had no responsibility to approve building plans.

(c) 2020, Hasit Seth. HLaw Chambers

♔“3. The plaintiffs …goods were booked on September 5, 1955 to

(c) 2020, Hasit Seth. HLaw Chambers

♔“22. The market rate is a presumptive test because it is the general

♔Contract for electrical low-tension management system installation.

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔Govt. of BVI entered in two contracts with GWA for a water

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔Privy Council held that damages were NOT remote, because:

(c) 2020, Hasit Seth. HLaw Chambers

♔Privy Council held that damages were NOT remote, because:

(c) 2020, Hasit Seth. HLaw Chambers

"...[1] .... [3] what

(c) 2020, Hasit Seth. HLaw Chambers

♔ A concrete was to be built.

(c) 2020, Hasit Seth. HLaw Chambers

♔“11. Now if it is well-established that the respondent was guilty of

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔When a contract has been broken,

(c) 2020, Hasit Seth. HLaw Chambers

♔stipulation for increased interest from the date of default may be a

(c) 2020, Hasit Seth. HLaw Chambers

♔Sale of leasehold rights not completed.

(c) 2020, Hasit Seth. HLaw Chambers

♔“10 …The measure of damages in the case of breach of a stipulation

(c) 2020, Hasit Seth. HLaw Chambers

♔“10 … The section undoubtedly says that the aggrieved party is

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔SC also said,

(c) 2020, Hasit Seth. HLaw Chambers

♔ Matter was remanded back to TDSAT but observations matter.

(c) 2020, Hasit Seth. HLaw Chambers

♔Auction of a plot for 3.12 crores to the highest bidder.

(c) 2020, Hasit Seth. HLaw Chambers

♔SC held that DDA’s forfeiture was invalid, because:

♔“43.1. Where a sum is named in a contract as a liquidated amount

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔ A person who rightfully rescinds a contract is entitled to

(c) 2020, Hasit Seth. HLaw Chambers

(c) 2020, Hasit Seth. HLaw Chambers

♔For ‘Quasi Contract’, also known as ‘Constructive Contract’

(c) 2020, Hasit Seth. HLaw Chambers