Author Name:   varsha g subramanian

this article discusses damages as a remedy to the breach of contract. it includes everything right from what are damages?, types of damages to the measure of damages...

Suit For Damages

The term ‘damages’ may be defined as the monetary compensation payable by the defaulting party to the aggrieved party for the loss suffered by him. The aggrieved party, may therefore bring an action for damages against the party who is guilty of the breach of the contract. And the party, guilty of the breach, id liable to pay damages to the aggrieved party. The primary aim of damages is to compensate the aggrieved party, and to place him in the same position which he would have occupied had the breach of contract not occurred. It may, therefore, be noted that the damages are given by way of compensation for the loss suffered by the aggrieved party, and not for the purpose of punishing the default party.

§ Kinds Of Damages
Law recognizes various kinds of damages or losses. Once the court has determined which loss may be recovered, it is then faced with the problem of quantifying the loss, i.e. determining just how just how much the aggrieved party should receive. The kinds of damages are as follows:

1) Compensatory Damages –
There are two categories of compensatory damages. The first category, general damages, includes all those damages that arise naturally from breach of contract. The second category called special damages arise due to the special circumstances foreseeable by the parties at the time of making contract.

a) General damages (ordinary damages) – there are damages that arise naturally from the breach of contract. They are restricted to the ‘direct and proximate’ consequences and not to the remote or indirect losses or consequences of the breach of a contract.

In the case of Hadley v. Baxendale[1], the crankshift of a mill broke and it was necessary for it to be sent to the manufacturers as a pattern for the new one. The mill owners engaged carriers for this purpose, but the carriers delayed delivery, and the mill owners were unable to use the mill for longer than if there had been no delay. Consequently, the loss of profits suffered by the millers was greater than if no delay had occurred. The millers sued the carriers for such loss of profits. The courts held that since the only information given by the millers was that the article to be carried was the broken shaft of a mill, and it was not made known to them that the delay would result in loss of profits, they were not liable for the loss of profits.

b) Special damages – these are the consequential damages caused by the breach of contract due to the existence of special circumstances. Such damages are awarded by the courts only when at the time of making a contract, these special circumstances were forseeable by the party committing the breach.

In the case of Victoria Laundry Limited v. Newman Industries Limited [2], V the launders and dyers required a bolier for the purpose of expanding their business. V entered into an agreement with N where N was to supply the Bolier on June 5th. Due to the fault of N, the Bolier was not delivered till November 8th. Consequently, V could not service his new customers and had a loss of lucrative profits worth 278 Pounds. V claimed this loss from N. N contended that he did not know about V’s lucrative business contacts. The court held that V could recover the loss of ordinary laundry profits but not the loss resulting from some lucrative contacts with specific customers because N was not aware of these contacts and such a loss was not in contemplation of both the parties when the contract was made.

If the special circumstances was already in the knowledge of the party responsible for the breach of contract, the formality of communicating them to him may not be necessary.

In the case of Simpson v. London & North Western Railway Company[3], S a manufacturer used to exhibit his samples of his equipment at agricultural exhibitions. He delivered his samples to railway company to be exhibited at New Castle. On the occasion he wrote “must reach at New Castle on Monday certain”. On the account of negligence on the part of railway company, the samples reached only after the exhibition was over. S, claimed damages from railway company for his loss of profits from the exhibition. The court held that the railway company was liable to pay these damages as it had the knowledge of special circumstances, and must have contemplated that a delay in delivery might result in such loss.

c) Measuring of compensatory damages-
Section 73, of the Indian Contract Act, 1872, provides that, “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compenssation 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 liekly to result from the breach of it. Such compensation is not given for any remote and indirect loss or damage sustained by the reason of the breach.”

This section warrants the need to assess such damages, general or special, according to the facts of the case.

In the case of a contract for sale or purchase general rule as regards to measuring of the damage is that –
 i. The damage would be assessed on the difference between the contract price and the market price on the date of the breach.

In the case of Jamal v. Moola Dawood Sons & Co.[4], M agreed to purchase certain shares from J on a particular date and subsequently declined to purchase them on that date. The difference between contract price and market price on that date was Rs. 1, 09, 218. J later on sold those shares and the actual loss amounted Rs. 79, 862. J sued M claiming Rs. 1, 09, 218 as damages. The courts held that he was entitled to Rs, 1, 09, 218, because the damages are meausred according to the circumstances existing on the date of breach.

 ii. Under a contract of sale of goods, damages can be claimed for breach of condition, or warranty and such damages include all damages flowing from the breach.

In the case of Jackson v. Walson & Sons[5], J’s wife died from poisoning caused by the tinned fish supplied by W. in an action for damages for breach, the court held that J was entitled to damages incurred by – employing extra servants by reason of the loss of wife’s services during illness, medical expenses, pecuniary loss occasioned by the death of his wife.

 iii. If the seller is selling services rather than something tangible and the buyer breaches the contract, the calculation of general damages is somewhat different.

d) Duty to mitigate damages suffered-
The way in which liability for contract damages is limited by the courts imposing a duty on the party who has been harmed by a breach of contract to mitigate the damages resulting from the breach. In other words, the party who has been harmed may not sit idly and watch the damages accumulate. Moreover the party is supposed to act prudently to minimize such damages.

In the case of Neki v. Pribhu[6], A took a shop from B on rent and paid one month’s rent in advance. B could not give possession of shop to A. there were other shops available in the vicinity but A chose not to do business for eight months. After eight months, A sued B for breach of contract claiming damages including advance rent and loss of profits for eight months. The court held that he was entitled to a refund of his advance and nothing more, as he failed in his duty to minimize the loss by not taking another shop in the neighbourhood.

In another case, Derbshire v. Warran [1963], D was the owner of ‘X’ brand of car which was damaged in an accident by negligence of W. D was informed that the pre-accident value of the car was 85 pounds and the estimated cost of repair was 192 pounds, and as such an uneconomic proposition. D, however, decided to have the car repaired and claimed the damages from W amounting to 137 pounds (192 pounds – 80 pounds claimed from insurance 25 pounds the cost of hiring another vehicle until his car was repaired). W argued that D could have purchased a similar vehicle in the open market for 85 pounds; he should have not taken this uneconomic step. The court accepted this view and awarded the replacement value of the vehicle, i.e., 30 pounds (85 pounds replacement price 25 pounds cost of hiring another vehicle – 80 pounds claimed from the insurance).

2) Vindictive Damages
At time breach of contract by one party not only results in monetary loss to the injured party but also subjects him to disappointment and mental agony. In such cases monetary compensation alone cannot provide an appropriate remedy to the sufferings of the injured party. Thus there is a need for vindictive damages.

Vindictive damages do not form part of the law of contract. The concept is borrowed from English law. There are two kinds of contracts where Indian courts consider awarding vindictive damages:
i. Breach of contract to marry. In this case the amount of damages will depend upon the extent of injury to the party’s feeling. One may be ruined, other may not mind so much.
ii. Where a banker refuses to honour the cheque of a customer while having his money in his hands, and the customer thereby suffers loss of reputation.

3) Nominal Damages –
Sometimes, a person brings a legal action for breach of contract and proves that a breach actually occurred but fails to prove that any actual damage has been suffered. This may happen, for example, because of the rules for measuring damages and requirement that damages should be foreseeable and proved with certainity. In such a situation, injured party is awarded nominal damages.

Such damages are awarded simply to recognise the right of the injured party to claim damages, and are of very small amount.

For ex:
a) A contracted to purchase ‘LML Scooter’ from B, a dealer, for Rs. 25, 000. But A failed to purchase the Scooter. However, the demand for the Scooter far exceeded the supply and B could sell the Scooter to Z for Rs. 25, 000, i.e., without any loss of profit. Here if B makes a claim upon A for breach of contract, he will be entitled to nominal damages only.

4) Liquidated Damages And Penalty-
The contracting party may stipulate in the contract a sum of money to be paid in case the contract is broken by either party. It may be termed as ‘liquidated damages’ or ‘penalty’ depending upon the purpose to fix the sum.

The purpose of fixing a sum as ‘liquidated damages’ is to compensate the injured party for the loss to be incurred by the breach of the other. Thus it is a fair pre-estimation of the loss to be caused by non-performance of the contract.

The purpose of providing a ‘penalty’ in a contract is to discourage a party from breaching it and to provide a special punishment if the contract is breached anyway. Thus it is a sum which has no relation to the probable loss, and generally is disproportionate to the damages likely to accrue as a result of the breach.

The above differentiation is required to understand the position of English Law in this respect. English Law awards ‘liquidated damages’ as compensation, irrespective of the fact whether the sum so specified is more or less than the actual damages. But does not allow the sum specified as ‘penalty’ on the ground that only the government, not private individuals can determine appropriate remedies for breach of contract.

Indian Contract Law differs from English law in this matter. It does not recognise any difference between ‘liquidated damages’ and ‘penalty’. Nor does it allow any sum fixed by the parties as damages. It says that the injured party is entitled to a reasonable compensation in case of breach subject to the maximum of the amount fixed as ‘liquidated damages’ or ‘penalty’ by the parties to the contract.

Section 74 of the indian Contract Act, 1872, provides that, “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 other party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be the penalty stipulated for.”

Thus in India, the sum named in the contract is not aawarded as damages. It is left to the court to ascertain the actual loss or reasonable compensation and award the same, which will, however, not exceed the sum named in the contract.

For ex:
a) A agreed to sell B his house for Rs. 1, 05, 000, provided that on breach of contract, the defaulting party will pay Rs. 10, 000 as damages to the other. B broke the contract and A resold the house for Rs. 1, 04, 000. A sued B and claimed Rs. 10, 000. It was held that A cannot recover Rs. 10, 000 as liquidated damages or penalty, he could only get the actual loss suffered by him, i.e., Rs. 1000 [7]
Exception to the rule in the context of ‘penalty’ –

Section 74 provides that when any person enters into a bailbond, recognizance or other instrument of the same nature, or under the provisions of any law, or under the orders of the Central Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of condition of any instrument, to pay the whole sum mentioned therein.

Measuring interest damages –
By and far the large number of cases decided under section 74 relate to stipulations providing for interest. These stipulations are discussed below.

1) Stipulations for enhanced rate of interest –

Such a stipulation occuring in a contract may have twofold character :

i) Stipulation for increased interest from the rate of bond. This is always considered as ‘penalty’.

ii) Stipulation for increased interest from the date of default. It may or may not be in the nature of penalty. It is a question of fact to be considered in each case. Generally if the rate of interest payable on default si unreasonable, the court considers it as a penalty.

Explanation to Section 74 provides that – a stipulation for the increased interest from the date of default may be stipulation by way of penalty.

2) Stipulations for compound interest – following rules are deduced from various past judicial decisions in this regard :
i) A stipulation for payment of compound interest in place of simple interest at the same rate is not considered as penalty.
ii) A stipulation for payment of compound interest in place of simple interest at a higher rate is considered as penalty.

3) Stipulations for payment of interest at a lower rate, if interest is paid regularly on due dates –
A stipulation to accept interest at reduced rate if it is paid punctually does not make the original rate of interest a penalty.

Other related provisions –
Two important aspects in the context of compensation by way of damages are:
1) Cost of bringing a suit in the court of law, and
2) Treatment of ‘earnest money’, or ‘secuirty deposit’ in contracts.

Cost of suit – when a party brings upon a suit in the court of law, he incurs expenditure thereby. If his point is proved in the suit, he is entited to recover the cost of suit in addition to the damages from the defaulter party. However, it is under the descretion of the court to award or not to award such costs.

‘Earnest Money’ and ‘Security Deposit’ – sometimes a party to the contract is required to deposit some money with the other party. This is generally done with a view to ensure performance of the contract. The money so deposited may be either ‘earnest money’ or ‘security deposit’.

The ‘earnest money’ is part of the purchase price paid in advance. When the transaction goes through it is adjusted against the bill. When transaction fails through by reason of default or failure of the buyer, the other party can rescind the contract and retain the earnest money. Thus, the earnest money is liable to be forfeited.

In the case of Shree Hanuman Cotton Mills v. Tata Aircraft Ltd.[8], A contracted with B to purchase from him aeroscrap for Rs. 1, 00, 000 and paid rs. 25, 000 as earnest money, being 25% of the purchase price. One of the conditions of the contract was that if A failed to pay the balance, contract would be cancelled and earnest money would be forfeited. A defaulted in paying the balance and in consequence, B forfeited the deposit. A filed a suit for recovery of the deposit. The court held that the deposit was intended as earnest money, and the seller was entitled to forfeit it.

The ‘security deposit’ is deposited only as a security for performance of the contract. It is not a part of the purchase price. Thus when a contract is completed it is not adjusted against the purchase price. Law considers it as ‘penalty’. Thus it is not liable to be forfeited.
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[1] [1984] 9 Exch. 34
[2] [1949] 2 KB 528.
[3][1876] 1 Q.B.D. 274
[4] [1916] 43. I.A. 6.
[5] [1909] 2 KB 193.
[6] 100 I.C. 662.
[7] Panna Singh v. Arjan Singh [1929] 23 CWN 949.
[8] AIR 1970 SC 1986.

The  author can be reached at: varsha.nuals@legalserviceindia.com

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