Types of Damages under Section 73 of Indian Contract Act

The Indian Contract Act, 1872 is the principal legislation governing contracts in India. Section 73 of the Act is a vital provision as it deals with the grant of damages when a contract is breached.

The objective is simple—when one party suffers due to the non-performance of a contract by the other party, the law seeks to put the injured party in the position they would have been if the contract had been performed properly. This compensation, called damages, is an essential tool for ensuring fairness and justice in commercial and civil dealings.

But, not every loss or inconvenience leads to damages. Only certain kinds of losses, which are direct and foreseeable, are legally recoverable. Section 73, along with relevant case laws and illustrations, explains which damages can be claimed and how.

In this article, let us explore the various types of damages recognised under Indian law, with practical examples for easier understanding.

What are Damages?

Damages in contract law refer to the monetary compensation awarded to a party for loss or injury suffered because of another party’s breach of contract. The main principle is to compensate and not to punish. Indian courts are generally careful to award only reasonable compensation and not to grant windfall gains or penalties to the aggrieved party.

Types of Damages under Section 73

Compensatory Damages

Compensatory damages are the primary and most common form of damages. They are intended to cover the actual loss or injury suffered by the aggrieved party. The aim is to restore the party to the position they would have been in if the contract had been performed.

A. General Damages

General damages are losses that arise naturally, in the usual course of things, from the breach. These damages are presumed to have been in the contemplation of the parties.

Example: If A agrees to sell 100 bags of rice to B at ₹2,000 per bag, and fails to deliver, and the market price rises to ₹2,300 per bag, B can claim ₹30,000 as general damages (100 x ₹300).

B. Special Damages

Special damages are those which result from special circumstances that were communicated to and known by both parties at the time of contract formation. The party claiming special damages must specifically prove the loss and that the loss was in the contemplation of both sides.

Example: If A knows that B needs the rice for fulfilling a lucrative government order, and fails to deliver, resulting in B’s loss of the government contract, B can claim special damages if it was made clear to A during contract negotiation.

Nominal Damages

Nominal damages are symbolic. They are awarded when a breach of contract is proven, but the aggrieved party fails to prove any real, substantial loss. These are usually small sums and are awarded to affirm the violation of a legal right.

Example: If a passenger’s flight is wrongly cancelled but the passenger does not suffer any significant financial loss or inconvenience, the court may award nominal damages.

Relevant Case Law: Indian Airlines v. Madhuri Chowdhury (2002) – The court granted nominal damages as no significant loss was established by the passenger.

Liquidated Damages

Liquidated damages are those where the parties to a contract agree beforehand on a fixed sum payable in case of breach. This sum is written into the contract and acts as a deterrent against non-performance. However, under Indian law, as per Section 74, courts will only enforce such an amount if it is reasonable and not penal in nature.

Example: A contractor agrees to pay ₹50,000 as compensation for every week’s delay in completion of a building. If the delay is for two weeks, the court will check if ₹1,00,000 is a genuine pre-estimate of loss. If it is excessive, the court may reduce the amount.

Relevant Case Law: Fateh Chand v. Balkishan Dass (1964) – The Supreme Court ruled that only reasonable compensation can be granted, even if a higher amount was specified in the contract.

Punitive or Exemplary Damages

Punitive damages, also called exemplary damages, are rare in contract law. Their main purpose is to punish the defaulting party for wilful misconduct or gross negligence, not merely to compensate the aggrieved party. Generally, Indian contract law does not favour punitive damages, except in a few rare cases where the breach involves fraud, malicious intent or gross oppression.

Example: If an employer fraudulently withholds the salary of an employee or acts in an outrageously oppressive manner, the court may consider punitive damages in very rare circumstances.

Consequential Damages

Consequential damages, also known as indirect damages, refer to losses that do not flow directly from the breach but are a result of it. These can include loss of profits, business opportunities, or additional expenses that were reasonably foreseeable.

Example: If a manufacturer delays supplying a machine to a factory and the delay causes the factory to shut down and lose profits, the factory owner can claim consequential damages for lost profits, provided the manufacturer was aware of the importance of timely delivery.

Incidental Damages

Incidental damages are the reasonable costs and expenses incurred by the aggrieved party to avoid or minimise further loss after the breach occurs. These can include costs for arranging alternative supplies, additional transport, storage, or legal fees.

Example: If a supplier fails to deliver goods, and the buyer spends money to quickly buy substitute goods from the market at a higher price, these extra costs are incidental damages.

Reliance Damages

Reliance damages are awarded to cover the expenses and costs incurred by a party in reliance on the contract. These are awarded when the aggrieved party, acting in good faith, incurs expenses in anticipation of the contract being performed, but is left at a loss due to the breach.

Example: A company spends money on setting up a shop after getting a franchise agreement. If the franchisor then fails to supply products as promised, the company can claim the money spent on setting up as reliance damages.

Restitution Damages

Restitution damages are meant to prevent unjust enrichment. If one party has conferred a benefit on the breaching party (like an advance payment or valuable goods), and the contract fails, the law requires the benefit to be returned.

Example: If a builder receives an advance to construct a house but never starts the work, the advance amount must be returned as restitution damages.

Principles Governing Assessment of Damages

• Direct and Foreseeable Losses Only: Damages are awarded only for losses which are a direct result of the breach and which were foreseeable or contemplated by both parties at the time of contract.
• Mitigation of Loss: The aggrieved party has a duty to take reasonable steps to reduce the loss or damage caused by the breach. If they fail to do so, they may not recover the full amount claimed.
• Market Price Rule: In commercial contracts, damages are often measured by the difference between the contract price and the market price at the time of breach.
• No Double Recovery: The injured party cannot recover more than the actual loss suffered. The purpose is to compensate, not to punish or grant windfall profits.

Conclusion

Damages are a cornerstone of contract law in India. Section 73 ensures that the aggrieved party is compensated for losses arising out of a breach of contract, but the compensation must be fair, reasonable, and not punitive in nature. The law recognises several types of damages—compensatory, nominal, liquidated, punitive, consequential, incidental, reliance, and restitution—each with its own rules and purpose.