Damages under Indian Contract Act

Contracts are central to business, trade, and daily transactions in India. But what happens when one party fails to fulfil its promises? The law cannot always force someone to perform their promise, but it can make the party pay for the loss caused. This remedy is called “damages.” Under the Indian Contract Act, 1872, the rules regarding damages are well-defined and ensure fair compensation for the aggrieved party. This article explores the concept, types, principles, and procedures relating to damages under the Indian Contract Act.

What are Damages?

Damages refer to the monetary compensation awarded to the aggrieved party when a contract is breached. The main aim is to put the non-defaulting party in the position they would have been if the contract had been performed. Indian law does not generally aim to punish the defaulting party but seeks to compensate for the actual loss suffered.

Statutory Framework

The Indian Contract Act, 1872 lays down the framework for damages through three important sections:

• Section 73: Covers unliquidated damages and compensation for loss or damage caused by breach of contract.
• Section 74: Deals with liquidated damages and penalty clauses in contracts.
• Section 75: Entitles the aggrieved party to compensation when the contract is rescinded lawfully.

When are Damages Awarded?

Damages are awarded when:

• A valid contract exists between the parties.
• There is a breach of contract, either actual or anticipatory.
• The breach results in a loss or damage to the non-defaulting party.

The compensation is usually for actual losses suffered, not for imaginary or speculative loss.

Types of Damages

Indian contract law recognises several types of damages, each serving a specific purpose.

General and Special Damages

• General Damages: These are damages that arise naturally in the ordinary course of events from the breach. For example, if a supplier fails to deliver goods, the buyer may recover the difference between contract price and market price.
• Special Damages: These arise due to special circumstances beyond the usual course of events. They can only be claimed if such circumstances were made known to both parties at the time of contract formation. For instance, if a late delivery causes a unique business loss, it must have been communicated in advance.

Liquidated and Unliquidated Damages

• Liquidated Damages: These are amounts pre-decided by the parties in the contract, payable in case of a breach. Indian courts will award these only if they represent a genuine pre-estimate of loss and not as a penalty.
• Unliquidated Damages: Here, the amount is not fixed in the contract. The court decides the compensation based on the actual loss proved.

Nominal Damages

Sometimes, there is a breach of contract, but no substantial loss is suffered. The court may then award a small, symbolic amount, known as nominal damages, to acknowledge the breach of a legal right.

Substantial Damages

These are awarded when there is significant or total failure of performance. The compensation reflects the actual loss suffered due to the breach.

Aggravated and Exemplary Damages

• Aggravated Damages: Additional compensation may be awarded if the breach causes mental distress, inconvenience, or injury to the claimant.
• Exemplary (or Punitive) Damages: These are rare in contract cases. They are awarded not to compensate but to punish the wrongdoer in cases of gross misconduct or wrongful actions like breach of promise to marry.

Consequential and Incidental Damages

• Consequential Damages: These are secondary losses resulting from the breach, such as loss of profits due to delayed delivery.
• Incidental Damages: These are costs incurred to deal with the breach, like storage or transportation charges.

Pecuniary and Non-Pecuniary Damages

• Pecuniary Damages: Directly quantifiable in monetary terms.
• Non-Pecuniary Damages: Cannot be precisely measured in money, like loss of reputation or mental agony.

Damages for Loss of Profit or Opportunity

Damages may also be awarded for loss of profits or business opportunities if they are a direct consequence of the breach or were within the contemplation of the parties at the time of contract formation.

Remoteness of Damages

Not every loss caused by a breach is compensable. The law limits compensation to those losses which:

• Arise naturally from the breach (direct losses), or
• Were in the reasonable contemplation of both parties when the contract was made (special losses).

Losses that are too remote or unexpected are not compensable. This principle was first laid down in the famous English case Hadley v. Baxendale, which is followed in India.

Principle of Mitigation

The aggrieved party is expected to take reasonable steps to minimise the loss resulting from a breach. They cannot simply let the losses increase and then claim damages. If the non-defaulting party fails to mitigate the loss, the damages awarded by the court may be reduced accordingly.

How to Claim Damages?

• The aggrieved party should issue a formal notice to the defaulting party, claiming damages.
• If the claim is disputed or ignored, the matter can be taken to a competent court or arbitral tribunal.
• The burden of proof lies on the claimant to show the breach, the loss suffered, and the amount claimed.

Limitation Period

There is a three-year limitation period to file a suit for damages, starting from the date the aggrieved party becomes aware of the breach. If this period is missed, the right to claim damages may be lost.

Computation of Damages

• Liquidated Damages: The court checks whether the stipulated amount in the contract is a genuine pre-estimate of loss. If it is found excessive or penal, the court may award only reasonable compensation up to the agreed amount.
• Unliquidated Damages: The court assesses the actual loss based on evidence, such as market price difference, profits lost, or expenses incurred.
• Mitigation: The steps taken by the aggrieved party to reduce the loss are also considered.

Contractual Limitations on Damages

Parties can limit or exclude damages by inserting express clauses in their contract, subject to the law and public policy. Such clauses are generally valid unless they are unconscionable or violate statutory provisions.

Interest on Damages

The court has the discretion to award interest on the damages amount from the date of filing the suit to the actual realisation of the damages. This helps compensate the aggrieved party for the delay in receiving their due.

Conclusion

The provisions regarding damages under the Indian Contract Act, 1872 are fair and balanced. They aim to provide adequate compensation to the aggrieved party without being punitive towards the defaulting party. Indian courts focus on actual loss, reasonable foreseeability, and proper conduct of the aggrieved party while awarding damages. Both parties to a contract should be aware of these rules and draft their contracts carefully, keeping in mind the need for clear terms and adequate documentation in case of a dispute.