India: Laws For Recovery Of Damages

 Often the misgivings of an executed contract show up at the time of disputes; especially when promises are made under a contract; non-performance thereof, have farther reaching effects than what the parties give credit at the time of negotiating a contract. This is evident more so in contracts with multiple parties and higher stakes. However, if the parties are mindful of the provisions under the law, the pre-contract discussions can play a vital role in a suit for recovery of damages due to non-performance of a contract.

Under the Indian Contract Act, the word 'damages' is understood as compensation under a contract paid by the defaulting party to the non-defaulting party, which are awarded to the non-defaulting party to compensate for actionable wrongs of the former.

Over the years, courts have categorised damages in several ways, for instance, general, special, nominal, exemplary, aggravated damages etc.

However, under a contract the compensation awarded are liquidated or unliquidated damages awarded as per the terms governing the contract. Under a contract, the parties may agree to payment of a certain sum on breach of the terms of the contract. When the agreement between the parties stipulates the sums payable for non-performance, damages are known as liquidated damages. Unliquidated damages are awarded by the courts or arbitral tribunals on assessment of the loss or injury caused to the party suffering from breach of contract.

Under the Indian Contract Act 1872, unliquidated damages and liquidated damages are governed by Sections 73 and 74 respectively. Damages that a nondefaulting party may suffer on account of a defaulting party can be broadly categorised as direct, or indirect/ consequential damages. It is pertinent to know that any of such types of damages may be contemplated by the parties, be in knowledge of the parties or foreseeable at the time of making the contract.

The underlying principle under Section 73 of the Indian Contract Act is to assess the acts and/or omissions by a party under the contract to arrive at a compensation that is payable to the non-defaulting party due to nonperformance by the other party in order to place such non-defaulting party in the financial position it would have occupied had the promise made under the contract been fulfilled. Thus, the compensation is, more often than not, commensurate with the expectation that results from fulfillment of the promise made under the contract.

However, the Indian Contract Act 1872, qualifies the general principle as aforesaid by providing that for an award of damages, the loss or damage must have arisen in the usual course of things from such breach; or parties should have known that such a loss or damage could subsequently arise at the time of entering into the contract.

In the landmark case of Hadley v. Baxendale it was held that a party injured by a breach of contract can recover only those damages that either should reasonably be considered as arising naturally, i.e., according to the usual course of things from the breach, or might 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, thereby, covering both aspects of direct and consequential damages.

Section 73 of the Act provides that compensation is not to be granted for any remote or indirect loss or damage sustained by reason of breach of contract. However, it does not take away from the provision that the nondefaulting party is entitled to receive from the defaulting party, compensation for any loss or damage caused thereby which the parties knew when they made the contract.

If a party can establish that under any special circumstances (which are outside the ordinary course of things) resulting in such losses the other party to the contract was aware of the losses suffered due to the actions or inactions of such party, the latter shall be liable for such losses, even if such losses do not occur in the normal course of events. And if such losses were not contemplated under the special circumstances under the terms of the contract or that a reasonable man could not have foreseen such risk arising out of a breach, then the mere knowledge of the special circumstances would not make such party liable for such alleged loss or injury. Therefore, at the time of drafting a contract it is essential for the parties to be aware of such special circumstances and the risks reasonably arising out of breach under such special circumstances in order to protect their interests from losses that are indirect or consequential.

The principles of remoteness and foreseeability have been enunciated in various other cases including Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd. wherein it was held that "in cases of breach of contract, the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach. What was at that time reasonably so foreseeable, depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach. For this purpose, it was held that the knowledge 'possessed' is of two kinds: one imputed, the other actual. Everyone, as a reasonable person, is taken to know the 'ordinary course of things' and consequently, what loss is liable to result from a breach of contract in that ordinary course"... "But to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added, in a particular case, knowledge which he actually possesses, of special circumstances outside the 'ordinary course of things,' of such a kind that a breach in those special circumstances would be liable to cause more loss.'

Even though the concept of consequential damage arises within the four corners of the aforesaid principle and that on breach of a contract (in addition to the compensation payable due to the loss or damage caused as may have been agreed between the parties), the defaulting party may also be liable to compensate for the losses and damage consequent to such loss or damage. However, the same would only be awarded when the circumstances or the nature of loss or damage were in the knowledge of the party, reasonably foreseeable at the time of entering into the contract.

As regards the quantum of liquidated damages, it has been held by the Supreme Court of India that if the court is unable to assess the compensation, the sum named by the parties, if it be regarded as a genuine pre-estimate, may be taken into consideration as the measure of reasonable compensation (albeit not if the sum named is in the nature of a penalty). However, since the contracts do not provide quantification of indirect, consequential damages - for quantification of the same, the said principle laid down by the Supreme Court could be said to apply to such damages too. Further, it is a settled position in law that where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. In addition, the principles of causation and the attempt made by parties to mitigate such losses also play a vital role to determine liability for damages.

From the aforesaid, it can be concluded that the general principle with respect to claiming the consequential damages by a non-defaulting party is that, the nondefaulting party is only entitled to recover /claim such part of the damage or loss resulting from breach by the defaulting party as was reasonably foreseeable (as liable to result from breach at the time of execution of the contract). The damage or loss reasonably foreseeable would inter alia depend on the knowledge possessed and shared between the parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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