India: Consequential Damages Under The Indian Contract Act, 1872

Last Updated: 10 January 2014

Article by Hitesh Sablok1

The Indian Contract Act, 1872 ("Act") governs the law of contracts in India and is predominantly based on English common law. The Act defines the term "contract" as an agreement enforceable by law2. In other words, it is a legally enforceable and binding agreement, which is voluntarily entered into between two or more competent parties, for consideration and with mutual obligations. In today's dynamic business environment, majority of the commercial transactions are successfully and effectively undertaken through contracts. The list of such transactions include manufacturing arrangements, supply arrangement, sub-contracting, infra projects, EPCs, advisory, etc. Moreover, due to the aggressive growth in the field of technology, the parties entering into such commercial transactions, are more cautious than ever, thus making the parties deliberate even on the minutest of details / specifications so as they can best secure their interest. Therefore, contents of a contract have become highly detailed and elaborate. Particularly, as a measure of safeguarding, securing and protecting their respective interests in an event of breach of the terms of the contract, parties generally negotiate and agree upon the various remedies that the injured party can invoke to mitigate and compensate for the losses it may suffer on account of such breach. In other words, any breach of the terms and conditions of the contract by either party ("Defaulting Party"), entitles the other party ("Non-Defaulting Party") to claim for damages and / or other remedies from the Defaulting Party. The term "damages" is not defined under the Act. However, it can be said to mean an award of money to be paid by the Defaulting Party to the Non-Defaulting Party as compensation for loss or injury caused on account of the Defaulting Party's breach of the terms and conditions of the contract. Damages can be broadly divided into two categories, (i) direct damages; and (ii) indirect / consequential damages. This article aims to highlight and discuss the legitimacy of claiming indirect / consequential damages arising out of the breach of the terms of the contract.

Section 73 of the Act 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, 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 of damage sustained by reason of the breach"It further states that "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." The explanation to Section 73 states that "In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by non-performance of the contract must be taken into account."

It appears from Section 73 of the Act that the general principle for assessment of damages is compensatory, i.e. the innocent party is to be placed, so far as money can do, in the same position as if the contract had been performed. However, the question which arises for deliberation is that whether the Defaulting Party can be held liable for the indirect damages / consequential damages suffered by the Non-Defaulting Party?

Consequential damage or loss usually refers to pecuniary loss consequent on physical damage, such as loss of profit sustained due to fire damage in a factory3. It arises due to the existence of certain special circumstances. The basic rule for determining scope and extent of consequential damages, which Defaulting Party would be liable to pay to Non-Defaulting Party, was first elaborated in the judgment of Alderson B., in the English Court of Exchequer, in the case of Hadley v. Baxendale4. In the said case, the plaintiff, were millers and used to run the City Steam-Mills in Gloucester. A crankshaft of a steam engine at the mill had broken and the plaintiff arranged to have a new one made by W. Joyce & Co. in Greenwich, and for the said purpose W. Joyce & Co. required that the broken crankshaft be sent to them in order to ensure that the new crankshaft would fit together properly with the other parts of the steam engine. The plaintiffs contracted with the defendants, who were common carriers, to deliver the crankshaft to engineers for repair by a certain date at a cost of £2 sterling and 4 shillings. The defendants failed to deliver on the date in question, causing the plaintiff to lose business. The plaintiff sued for the profits lost due to the defendant's late delivery, and the jury awarded the plaintiff damages of £25. The defendants appealed, contending that they did not know that the plaintiff would suffer any particular damage by reason of the late delivery. The issue raised by the defendants in the appeal was whether the defendant in breach of contract could also be held liable for the damages that the defendant was not aware and which were suffered by the plaintiff from a breach of the contract.

The Court observed that "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made where communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract."

The Court further pointed out that "But how do these circumstances show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third person? Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. Or, again, suppose that, at the time of the delivery to the carrier, the machinery of the mill had been in other respects defective, then, also, the same results would follow. Here it is true that the shaft was actually sent back to serve as a model for the new one, and that the want of a new one was the only cause of the stoppage of the mill, and that the loss of profits really arose from not sending down the new shaft in proper time, and that this arose from the delay in delivering the broken one to serve as a model. But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants" Therefore, applying the aforesaid rule and considering the fact that the special circumstance was not communicated by the plaintiff to the defendants, it was held that the plaintiffs could not recover the loss of profits from the defendants.

A similar question arose in the case of Victoria Laundry (Windsor Ltd.) v. Newman Industries Ltd.5 In the said case, the defendants were to deliver a boiler for the plaintiff and the delivery was delayed by five months. As a result of not having enough laundry capacity, the plaintiff lost a high value cleaning contract from the Ministry of Supply. The plaintiff sued the defendants for the loss of profits on account of (i) the large number of customers which could have been served if the said boiler was delivered on time; and (ii) the amount the plaintiff could have earned if it had received the contract from the Ministry of Supply. In the instant case the defendants were aware that the plaintiff required the boiler for immediate use and therefore, it was held that the defendant as a reasonable man could have foreseen some loss of profit though not the loss of profit resulting from the special circumstance with respect to the Ministry of Supply's contract.

Therefore, the defendant was held liable to compensate for the ordinary loss of profits and not for the extraordinary loss of profits which were on account of the special circumstances.

Analyzing the principles laid down in the aforesaid cases, it is evident that there are two categories of damages which the can be claimed by the Non-Defaulting Party i.e. (1) which can be fairly and reasonably considered arising naturally, i.e., in the usual course of things, from such breach of contract itself; and (ii) which may reasonably be supposed to have been in the contemplation of both the parties, at the time they made the contract, as the probable result of the breach of it. The first category refers to the direct damages and the second category refers towards consequential damages. Consequential damages can only be claimed by the Non-Defaulting Party in case the special circumstances resulting into the consequential damage were already brought into the Defaulting Party's knowledge at the time of executing the contract.

It is also relevant to highlight herein that Section 73 of the Act very clearly provides that compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach on the contract. However, it also states that the Non-Defaulting Party is entitled to receive from the Defaulting Party the compensation for any loss or damage caused thereby, which the parties knew, when they made the contract, to be likely to result from the breach of it.

It is also evident from the above discussion that the principles laid down in aforesaid case of Hadley v. Baxendale have been adopted by the draftsmen within the language of Section 73 of the Act and the same has also been applied in various Indian cases.

It may be concluded that the general principle with respect to claiming the consequential damages by Non-Defaulting Party is that the Non-Defaulting Party is only entitled to recover / claim such part of the damages or losses resulting from the breach by the Defaulting Party, as was at the time of execution of the contract reasonably foreseeable as liable to result from the breach. Further, the damage or loss "reasonably foreseeable" would inter-alia depend on the knowledge possessed / shared between the parties. It is expected out of a reasonable person to understand and foresee the damage which may be suffered by the Non-Defaulting Party and resulting from the breach by the Defaulting Party in the "ordinary course". However, in case of existence of "special circumstances", which are outside the purview of the "ordinary course" what is of utmost importance, so as to be able to claim the consequential damages, is that the Defaulting Party should be aware of the said "special circumstances" which would result into consequential losses for the Non-Defaulting Party, at the time of executing the contract.


1.Author is working as a Senior Associate with Vaish Associates Advocates, New Delhi. The author's views expressed in the article are personal and author is solely responsible for any errors that may remain in this article.

2.Section 2(h) of the Act.

3.Pollock & Mulla, Indian Contract & Specific Relief Acts, 11th edition, pg. 802.

4.Pollock & Mulla, Indian Contract & Specific Relief Acts, 13th edition, pg. 1523.

5. (1854) 9 Exch. 341.

© 2014, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Singh & Associates
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Singh & Associates
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions