The word "damage" simply means a sum of money given as compensation for loss or harm of any kind.1 In other words, "damages" is compensation for causing loss or injury through negligence or a deliberate act, or an estimate of Court or award of a sum as a fine for breach of a contract or of a statutory duty. It is the amount of money which the law awards or imposes as pecuniary compensation, recompense, or satisfaction for an injury done or a wrong sustained as a consequence of a breach of a contractual obligation. According to Black Law Dictionary, a damage is "Money compensation awarded as a remedy for a breach of contract or tortuous acts."2
Liquidated Damages and Unliquidated Damages
"Liquidated Damages" mean a sum which the parties have assessed by the contract as damages to be paid notwithstanding whatever may be the actual damage. The parties to a contract, as part of the agreement between them, fix an amount which is to be paid by way of damages in the event of breach. A sum stipulated in this way is classified as liquidated damages where it is in the nature of a genuine pre-estimate of the damage which would probably arise from breach of the contract.3
The term "Unliquidated Damages", means a sum of money not established in advance by the contracting parties as a compensation for a breach of contract, but determined by a court after such breach occurs. Such damages are unascertained in advance.4
Mitigation of Damage
The principle of Mitigation of Damage can be traced from Halsbury's Laws of England (4th Edn.) Vol. 12, para 1193 page 477, which runs thus5-
"1193. Plaintiff's duty to mitigate loss. The plaintiff must take all reasonable steps to mitigate the loss which he has sustained consequent upon the defendant's wrong, and, if he fails to do so, he cannot claim damages for any such loss which he ought reasonably to have avoided."
Again, in para 1194 at page 478 the following statement occurs under the heading 'Standard of conduct required of the plaintiff:
"The plaintiff is only required to act reasonably, and whether he has done so is a question of fact in the circumstances of each particular case, and not a question of law. He must act not only in his own interests but also in the interests of the defendant and keep down the damages, so far as it is reasonable and proper, by acting reasonably in the matter. In cases of breach of contract the plaintiff is under no obligation to do anything other than in the ordinary course of business, and where he has been placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the defendant whose breach of contract has occasioned the difficulty. The plaintiff is under no obligation to destroy his own property, or to injure himself or his commercial reputation, to reduce the damages payable by the defendant. Furthermore, the plaintiff need not take steps which would injure innocent persons."
The general principles deducible from the above stated Principle are6:
- As far as possible a party who has proved a breach of the contract, is to be placed, as far as money can do it, in as good a situation as if the contract had been performed.
- A statutory duty is cast on the plaintiff who has proved the breach of the contract of taking all reasonable steps to mitigate the loss consequent on the breach of the contract.
- If the plaintiff, who proves the breach of the contract but fails to prove that he took all reasonable steps to mitigate the loss consequent to the breach of the contract, he will be debarred from claiming damages to the extent he could have mitigated the same by taking such steps.
In M/s. Murlidhar Chiranjilal vs. M/s. Harishchandra Dwarkadas & Anr7, the Supreme Court examined the scope of Section 73 of the Indian Contract Act and observed, "The two principles on which damages in such cases are calculated are well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed; but this principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part of the damage which is due to his neglect to take such steps".
In the case of Pannalal Jugatmal vs. State of Madhya Pradesh8, the Court observed, "Mitigation of Damage is incorporated in the explanation to Section 73 of the Contract Act. The explanation casts a burden upon the person complaining of breach of the contract to show that he did not possess means of remedying the inconvenience caused by the non-performance of the contract. The law, for wise reasons, imposes upon a party subjected to injury from breach of a contract, the active duty of making reasonable exertions to render the injury as light as possible".
In M. Lachia Setty & Sons Ltd. vs. Coffee Board, Bangalore9, the Supreme Court held that the principle of mitigation of loss does not give any right to the party who is in breach of the contract but it is a concept that has to be borne in mind by the Court while awarding damages.
Application of Mitigation of Damage in Arbitration Law
In the case of Pepsico India Holding Pvt. Ltd. vs. Nishiland Park Limited, the Court observed, "The law of mitigation under Section 34 of the Arbitration Act, cannot be overlooked by the Court, when such award is challenged on the merit itself. The loss of profit claims always have a foundation of net loss and not only the estimated gross profit, without supporting accounts and material. The doctrine of mitigation was overlooked though the claim itself was denied by the Petitioner. In my view, it amounts to wrong estimation of the damages, as undue importance is given to the unsupported expert's opinion. The actual loss and the proof of the same, is totally missing. It is not the case of possible view or interpretation of the contract. Any assessment of damages on undisclosed or unknown formula or principle, 'falls within the ambit of error of law' and is contrary to the contract and the law, therefore, unsustainable.
The alleged non- supply of labels itself cannot be the reason to grant the damages or compensation without proof of actual loss or supporting material to loss of profit, especially when no steps whatsoever taken and produced on record to show the steps to mitigate the losses were taken".
Mitigation of damage doesn't give any right to the party in breach of contract, but it is applied by Courts while awarding damages. Also, reasonable steps to mitigate the loss should be taken by plaintiff otherwise he cannot claim the amount of loss which he could mitigate.
1. A.S.Sharma v. Union of India, 1995ACJ 493 at 498(Guj.)
2. Black‟s Law dictionary, ed.6th at.p. 389
3. United Telecom Ltd. vs. Respondent: Commissioner of C. Ex, MANU/CB/0264/2006
4. Ram Lal Jain vs Central Bank Of India Ltd, AIR 1961 P H 340
5. M. Lachia Setty & Sons Ltd. vs. Coffee Board, Bangalore (1980) 4 SCC 636
6. M. Nanjappa vs M.P. Muthuswamy, AIR 1975 Kant 146
7.AIR 1962 SC 366
8. AIR1963 MP 242
9. (1980) 4 SCC 636
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