Author: Deepika M..
When two parties come together and agree on something, it is called agreement. When an agreement is enforceable by law, it is called contract. A contract is an agreement between parties (2 or more) which is enforceable by law. A contract is basically a promise from one person to do or to refrain from doing something in return for some consideration from the other party.
A contract must have an offer from one party and its acceptance from other in order for it to become a contract. There are other essentials which has to be fulfilled to make a contract valid like, mutual consent, intention to create legal relationship, legal capacity of the person entering into contract, valid consideration, etc. If all the essentials are fulfilled, then an agreement becomes a legally valid contract. This contract defines and governs the rights, liabilities and obligations between parties.
The Indian Contracts Act 1872 regulates contracts all over India. It gives rules and regulations related to contracts, obligations of the parties, etc. It is one of the important central laws that oversees anything that is related to contract and it regulates the law related to contracts in India. In this article author has discussed about damages under Indian Contract Act 1872.
BREACH OF CONTRACT
When parties enter into a contract, they make a promise to do somethings or refrain from doing something in return for consideration. This promise made by the parties which is the subject matter of the contract is legally binding on both the parties and they are obligated to fulfill their part of the promises.
In case, either party fails to do something they promised to do or does something that is refrained by the contract, then breach arises. Breach of contract is a failure of fulfilling the obligation as mentioned in the contract by either party (i.e.) when either party fails to perform their promise, it is called as breach of contract.
When one party breaches the contract because of which the other faces damage or loss, then the party violating the contract has to compensate the injured party (i.e.) the party suffering loss has right to claim remedies from the other party. Remedy is a right accrued to the injured party when other party breaches the contract. Also, there are many types of remedies provided to the aggrieved party under The Indian Contract Act 1872. Damages is one such remedy and the most commonly referred one too.
‘Damages’ means money compensation to the extent of loss or damage suffered by the aggrieved party. Section 73 of Indian Contracts Act 1872 talks about the compensation that has to be provided to any loss or damage caused when a contract has been breached. Damages are always compensatory in nature. It is to help the party which has been aggrieved to be put in the situation where he would’ve been if the contract had been performed without any breach.
Illustrations: A promises to buy a second-hand car from B for 2 lakhs. A fails the promise and only gives 1 lakh. B here is entitled to claim compensation from A to the extent of loss suffered by him.
ESSENTIALS FOR CLAIMING DAMAGES
Following are the essential elements to claim damages:
- There has to be a valid agreement between the parties.
- Either party has to breach the contract by not fulfilling the obligation listed out in the contract.
- This breach of contract by one party should result in some damage or any kind of loss on the part of other party.
In the case of Organo Chemical Industries v. Union of India1, honorable Supreme Court pointed out three essentials of damages,
- There should be a damage caused by one party to another by doing or not doing something;
- Compensation has to be awarded through legal remedies;
- Quantum of loss has to be determined on the basis of such damage caused.
CONDITIONS TO CLAIM DAMAGES
The aggrieved party is entitled and can claim for damages in case of breach, but there are two kinds of problems or conditions under which the party causing the breach is not liable to pay damages. They are,
Remoteness of Damages
When two parties enter into contract and one party breaches the contract because of which the other party is entitled to receive compensation, the loss or damage must be arising out of such breach in the terms of the contract. Only in such cases, where the loss is because of breach of the contract, the one who breach the contract is liable to pay compensation. The loss should not be remotely related to the breach, if it does, then the party who breach the contract is not liable to pay compensation to the injured party. This is called remoteness of damages.
This rule was laid down in the case of Hadley vs. Baxendale2 and it consists two parts. The breach of contract maybe recovered,
- If the damage caused or loss incurred is fairly and reasonably arising in the natural course of breach of contract or
- Or reasonably may supposed to have been in the contemplation of parties, while entering into the contract, in case of breach of it.
In the case of Koufos v. C. Czarnikow Ltd.3, it was held that, in both the above conditions the loss must have been a probable result in breach of the contract.
Measure of Damages
Once it is concluded that the loss is proximate consequence of breach of the contract and that it is not too remote, then how much compensation should be paid or the assessment of compensation has to be decided. So, measure of damages is nothing but deciding the quantum of damages (i.e.) how much damages has to be paid to the party which has been injured. Sometimes it is difficult to assess and determine the damages, but that does not relieve the party who breached the contract from the liability. In cases of contract of sale, if a breach happens, then the measure of damages is the difference between contract amount and the market price on the date of breach of contract. Also, if the breach was on the part of seller, then the buyer can claim damages on the date of breach but not necessarily re-purchase the same on that date. Similarly, if the breach was on the part of buyer, then he can claim damages on the date of such breach but need not re-sell the goods on that date.
In the case of State of Kerala v. K. Bhaskaran,4, the Government made breach on Works Contract because of which the contractor faced 10% loss on his profit. He brought action against the government and it was held that he was entitled claim compensation and the 10% profit which the contractor lost here is the element for the estimation of contract.
LIQUIDATED AND UNLIQUIDATED DAMAGES
Liquidated damages are damages that are already agreed by the parties while entering into the contract. Liquidated damages are damages where the compensation which should be paid when any breach arises to the aggrieved party are pre-determined and parties fix them while entering into an agreement. But the fixed amount should be reasonably pre-estimated by taking the prospective damages into consideration. It has to be genuine and bona-fide. Section 74 talks about Liquidated damages (i.e.) when one party enter into a contract which has specific amount as compensation in case a breach arises out of it, then it should be paid when either party breaches the contract, whether or not any damage is caused, and the compensation shall not exceed the liquidated damages fixed by the contract.
Unliquidated damages are damages which are not pre-determined by the parties while entering into the contract. The compensation to be paid in case of breach is not fixed and it has to be decided or estimated after the breach takes place by assessing it. These are usual damages and Section 73 talks about Unliquidated damages, which are made available by courts in case of breach after assessing the damage or loss caused because of the breach.
In the case of ONGC v. Saw Pipes Ltd.5, the Supreme Court held that, in case of damages, the sections 73 and 74 has to be read together and where there is a liquidated damages, it has to be granted. And in cases where the exact damage or loss suffered could not be assessed, reasonable decision of providing reasonable compensation has to be made.
KINDS OF DAMAGES
General damages are also called as ordinary damages. When a breach of contract is caused in natural course of event, then it comes under general damages. The aggrieved party can file suit of damage at the place where breach has occurred and claim monetary compensation.
Illustration: A enters into contract with B promising that he will sell his Apple of 5kg for Rs.500 next week to B. A fails to do so and B buys 5kg Apples from another person C for Rs.700. Here, B can claim his loss of Rs.200 from A as he spent extra amount on C’s apple and incurred loss because A failed to perform his promise.
Special damages are damages that arise out of certain special circumstances. They don’t arise on the breach of terms and conditions of the contract, but on the happening of a special circumstance which leads to loss or damage. Here, the party which breaches the terms of contract that leads to loss under special circumstance is obligated to pay compensation.
Illustration: A agreed to deliver a particular machine to B for certain price. B here informed A that his business is stopped for want of that particular machine. Yet, A here fails to deliver it on time because of which B suffers huge loss. Here the contract is on the delivery of machine and the damage caused here is not on the breach of contract. But A is liable to compensate B for his loss under this special circumstance which was caused because of non-delivery of machine on time by A.
In the case of Reliance General Insurance v. Anish Sebastian6, it was held that, special damages are above general damages. They are not a result of act of party, but a consequence of some wrongful act. They mostly focus on the price outside that of contract.
Nominal damages are damages that the person who breaches the contract is liable to pay, even if the injured party cannot prove any damage caused. For instance, when a person’s legal right has been violated, then he is entitled to claim damages even though there is no loss or damage caused.
These damages are aggravated damages. Vindictive damages are awarded when a party breaches the contract and the other party is affected mentally. It is to compensate the mental stress or injury caused to aggrieved party where the injury is caused or increased in the manner the other party acted wrongfully. When the defendant here is not in any intention to compensate the injured party, then it is awarded as punishment to him.
In Disen v. Sampson7, it was decided that, compensation can be awarded for mental injury where the contract in itself is for providing enjoyment, pleasure, like taking photograph in a wedding ceremony.
When any person commits offence and is proven guilty, then all the authorities that has been affected by such offence has to be compensated as substantial damages since the offence is against the society. If in case, it is hard to decide or estimate the damage caused to society, then the court can direct the defendant to pay compensation to the authorities who have been affected by the offence.
The Indian Contract Act 1872 deals with everything related to contracts from when the parties enter into one and when there arises a problem related to it. The act provides statutory provisions to protect the interest of any party or parties who have been aggrieved by the action of other by way of breach of the mentioned terms in the contract. The main purpose of the act is to govern the parties and to make them stick to the promise they made by means of contract and to estimate and provide compensations when an injury is caused.
In order to conclude, remedies provided under The Indian Contracts Act 1872 protect the interest of the parties who enter into contract and fulfill their promise believing the other party will do the same and end up aggrieved when they don’t. There are various types of remedies that can be claimed by the aggrieved or injured party. Damages is the most common remedy that are made available to most people in case of breach of contract. This is because they are simpler than the other modes of remedies. In case of damages, it ends when an injured party or parties claims the damages for their legal injury and moves on. Whereas, other remedies are a bit prolonging compared to this one.
Even in certain cases where the damages cannot be exactly estimated with regard to the loss caused by the breach, the court provides a reasonable level of compensation to the aggrieved party by assessing the damage caused. So, the aggrieved party can claim compensation in one way or another and that is the sole purpose of these provisions and remedies, that is to protect the injured party from their lose and damage.
- Organo Chemical Industries v. Union of India, 1979 AIR 1803.
- Hadley vs. Baxendale, (1854) 9 Ex. 341, at 354.
- Koufos v. C. Czarnikow Ltd., (1867) 3 W.L.R. 1491.
- State of Kerala v. K. Bhaskaran, AIR 1985 Kerala 49.
- ONGC v. Saw Pipes Ltd., (2003) 5 SCC 705.
- Reliance General Insurance v. Anish Sebastian, MANU/CF/0466/2015.
- Disen v. Sampson, (1971) SLT (Sh Ct) 49.