I OVERVIEW

In India, the award of damages for non-performance or breach of contract is governed by the Contract Act, 1872 (Indian Contract Act). There are various other statutes that also provide for payment of damages or compensation in appropriate situations. Damages are also frequently granted in tort cases.

The concept of damages in Indian law has been defined by the Supreme Court of India (Supreme Court) as 'the pecuniary compensation, obtainable by success in an action, for a wrong which is either a tort or a breach of contract, the compensation being in the form of a lump sum which is awarded unconditionally'.2 The Indian law of damages largely aims to place the claimant in the same situation as if the breach had not occurred.

While the general law on damages is meant to be compensatory in nature, Indian jurisprudence on grant of exemplary and punitive damages is evolving and gaining popularity, especially in cases involving repeat offenders in intellectual property matters, as well as environmental law.

Indian law provides for broadly two categories of damages: liquidated and unliquidated damages. Some of the other recognised categories include:

  1. general and special damages;
  2. consequential damages;
  3. pecuniary and non-pecuniary damages;
  4. aggravated damages;
  5. exemplary damages;
  6. nominal damages; and
  7. damages for loss of profit or opportunity.

This chapter primarily focuses on the provisions of the Indian Contract Act on the award of damages, the guiding principles of which are often followed by courts in awarding damages as well as under other statutes, with punitive damages being seldom awarded.

II QUANTIFICATION OF FINANCIAL LOSS

i Introduction

In Indian contract law, the function of damages for breach of contract is compensatory and not punitive.3 The object is to put the person, whose right has been breached, in the same position, so far as money can do, as if there was no breach.4

Quantification of damages plays a crucial role in compensating parties for losses suffered due to a breach of contract. Sections 735 and 746 of the Indian Contract Act provide the framework for assessing and awarding damages in such cases. Section 73 deals with the compensation for loss or damage caused by a breach of contract, stating that the injured party is entitled to receive compensation for any loss or damage that naturally arises from the breach in the ordinary course of events (i.e., unliquidated damages). Section 73 borrows from the principles laid down in Hadley v. Baxendale7 and also allows for the recovery of both pecuniary and non-pecuniary losses that are a direct consequence of the breach. Conversely, Section 74 provides for the payment of liquidated damages; that is, when a contract specifies a predetermined amount to be paid in the case of a breach. However, the court has the power to reduce or waive such liquidated damages if they are found to be excessive or unconscionable. These provisions in Indian contract law ensure that parties are adequately compensated for the harm caused by a breach of contract, while striking a balance between compensation and unjust enrichment.

ii Evidence

Damages are only awarded in the case of a breach of contract, which has to be adjudicated upon by the courts.8 In cases where a party is seeking damages as compensation for the loss or damage, the party has to prove that the breach naturally arose in the course of things and that both parties knew at the time of entering into the contract that the loss would be a likely result of the breach. The existence of loss or injury is indispensable and must be established both in the case of liquidated and unliquidated damages.9 However, in the case of unliquidated damages, the court must ensure that such a pre-estimate of damages is not in the nature of a penalty.10

The claimant also faces the burden of proving two other essential elements to successfully claim damages: reasonable foreseeability and mitigation. First, the claimant must demonstrate that the loss suffered was reasonably foreseeable at the time of entering into the contract. This means that the consequences of the breach should have been within the contemplation of the parties or such consequences could have been anticipated by a reasonable person in a similar situation.11 The courts typically apply the test of remoteness to ascertain whether the loss was in the contemplation of the parties when entering into the contract. Regarding remoteness, it has been held to be sufficient that the event of the breach of contract would have appeared as not unlikely to occur by the parties.12 Second, the claimant is also required to demonstrate that it took reasonable steps to mitigate or minimise the loss resulting from the breach.13 This implies that the claimant ought to have made reasonable efforts to reduce the extent of its losses by taking appropriate actions.14 By establishing both reasonable foreseeability and mitigation, the claimant strengthens their case for an award of damages under Indian contract law.

When awarding damages, the courts also assess whether there is a causality that can be established between the breach of contract and the claimant's loss. It must be proved that the breach did not merely provide an occasion for the loss or the opportunity for the claimant to injure himself or herself but was the dominant cause for the loss.15 There may be cases where there are multiple reasons for the loss caused to the claimant and in such cases, the claimant will have to prove that the dominant or effective cause for the loss was the breach of contract to recover damages. Furthermore, in cases where there is an unforeseeable and extraneous event after the breach of contract, such as an act of nature or an act of a third party, then the claimant will only be able to recover damages for the loss that accrued before the extraneous event.16

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Footnotes

1. Padmaja Kaul and Palecanda M Chinnappa are partners, Yugank Goel and Sahana Devanathan are principal associates and Vansh Bhutani is an associate at IndusLaw.

2. Common Cause, a registered Society v. Union of India, 1999 (6) SCC 667.

3. R Yashod Vardhan and Chitra Narayan (eds), Pollock and Mulla: The Indian Contract Act and Specific Reliefs Act (15th ed, LexisNexis 2017) citing Dhullipadi Namayya v. Union of India, AIR 1958 AP 533.

4. Murlidhar Chiranjilal v. Harishchandra Dwarkadas, (1962) 1 SCR 653.

5. Section 73, Indian Contract Act, 1872:
Compensation for loss or damage caused by breach of contract. 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, 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. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract. When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. Explanation - In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

6. Section 74, Indian Contract Act, 1872:
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. Explanation - A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Exception - When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the Central Government or of any State 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 the condition of any such instrument, to pay the whole sum mentioned therein. Explanation - 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.

7. Hadley & Anor v. Baxendale & Ors, [1854] EWHC J70.

8. P Radhakrishna Murthy v. NBCC Limited 2013 3 SCC 747.

9. Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136.

10. Maula Bux v. Union of India, (1969) SCC 2 586.

11. R Yashod Vardhan and Chitra Narayan (eds), Pollock and Mulla: The Indian Contract Act and Specific Reliefs Act (15th ed, LexisNexis 2017) citing Karsandas H. Thacker v. The Saran Engineering Co Ltd, AIR 1965 SC 1981.

12. R Yashod Vardhan and Chitra Narayan (eds), Pollock and Mulla: The Indian Contract Act and Specific Reliefs Act (15th ed, LexisNexis 2017).

13. Murlidhar Chiranjilal v. Harishchandra Dwarkadas, AIR 1962 SC 366.

14. R Yashod Vardhan and Chitra Narayan (eds), Pollock and Mulla: The Indian Contract Act and Specific Reliefs Act (15th ed, LexisNexis 2017) citing Chitty on Contracts, 28th ed, pp. 1316–17, paragraphs 28–05.

15. R Yashod Vardhan and Chitra Narayan (eds), Pollock and Mulla: The Indian Contract Act and Specific Reliefs Act (15th ed, LexisNexis 2017).

16. R Yashod Vardhan and Chitra Narayan (eds), Pollock and Mulla: The Indian Contract Act and Specific Reliefs Act (15th ed, LexisNexis 2017).

Originally published by Lexology.

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