The words compensation and damages are frequently used in contracts, in cases of accidents, libel, personal injury cases and in other cases which are civil in nature in the court of law. Though, there is a significant difference between the two but they are often used together and interchangeably in civil litigation leading to confusion between the both. It is significant to note that in both these cases money is paid to another party for making good for the loss.

When an agreement becomes enforceable by law it attains the status of a valid contract as per the Contract Act, 1872. A contract is a legal promise to perform obligations for a consideration and when a party breaks such promise, the other party may suffer losses for non-performance of the promised obligations. For such losses, compensation or damages or both can be claimed by availing the legal remedies available.


Compensation for loss or damage caused by breach of contract - When a contract has been broken, the party who suffers such a 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 the reason of 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 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.

Therefore, the means which existed of remedying the inconvenience caused by non-performance of the contract must be taken into consideration while estimating the loss or damage arising from the breach of contract. This section makes it clear that damages arising out of obligations resembling those drafted on the contract and that arising out of breach of contract are treated separately. Section 73(3) covers claim for the damages arising from obligations resembling those created by the contract while section 73(1) covers the damages which are recoverable due to breach of contract.

The expression compensation may include a claim for damage but compensation is more comprehensive. Damages are awarded for suffering injury while compensation stands on a higher footing. Compensation aims to place the injured party back in a position as if the injury has not taken place by way of pecuniary relief for the caused injury. Therefore, the commutation of compensation cannot be mathematically precise but will definitely be broader than that of the assessment of damages. When there is a breach of contract, if sum to be paid in case of such breach 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 then the party complaining of such breach will be entitled, whether or not actual damage or loss is proved to have been caused thereby and to receive from the party who breached the contract a reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

In these cases, the stipulation for penalty may be a stipulation for increased interest from the date of default. The exception to this scenario is when a person enters into a bail bond, recognizable or other instruments 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 performance of any public duty or any act involving public interest, he shall be liable, upon breach of any condition of any such instrument, to pay the whole sum which shall be mentioned therein.

Hence, when a person enters into a contract with government does not necessarily thereby undertake any public duty or promise to do an act involving public interest. The term "Compensation" as stated in the oxford dictionary signifies that which is given in recompense, an equivalent rendered. "Damages" on the other hand constitute the sum of money, claimed or adjudged to be paid in compensation for loss or injury sustained, the value estimated in money, of something lost or withheld.

Damages when simply stated are a legal remedy which is usually in the form of money, paid by the court in a civil litigation to compensate an injured party for their loss, suffering or an injury. In order to be awarded with the damages, the injured party must show that the breach of duty or some other form of negligence has occurred and caused some type of mental or physical injury. Some types of damages do more than just compensate for loss or injury which is the primary distinction between compensation and damages.

It does not make much difference as far as assessment of damages is concerned, whether default is treated as breach of contract between two contracting parties or neglect of duty by agents in failing to carry out the instructions of their principal, Although the Indian Contract Act makes separate provisions for the consequences in each case, the rule laid down as to the measure of damage is the same, namely the party in breach must make the compensation in respect of direct consequences flowing from the breach and not in respect of the loss or damage remotely or indirectly caused. This is also an admitted rule followed as per English common law which is based on board principle of restitutio in integrum which means, the party who has suffered the loss should be placed in a similar position, as far as compensation in money can do it, as if the party in breach had performed his contract or fulfilled his duty. This principle can be observed in British Columbia Saw Mill Co. v. Nettleship1, "Where a man was going to be married to an heiress, his horse having cast a shoe on the journey, employed a blacksmith who did the work so unskillfully that the horse was lamed and the rider not having arrived in time the lady married another; and the blacksmith was held liable for the loss of the marriage." And the learned judge warned "We should inevitably fall into a similar absurdity unless we applied the rules of common sense to restrict the extent of liability for breach of contract of this sort."

The common sense point of view was thus put by Lord Wright in Liesbosh, Dredger v. Edison s. S.S. owners2. "The law cannot take account of everything that follows a wrongful act; it regards some subsequent matters as outside the scope of its selection `it were infinite for the law to judge the causes, 'or consequence of consequences. Thus, the loss could be recovered from the wrongdoer. In the varied web or affairs, the law must abstract some consequence as relevant, not perhaps on ground of pure logic but simply for practical reasons." These considerations have led the Court to evolve the qualifying rules of remoteness subject to which alone the broad principles of restitutio and integrum now finds its application.


In the case of Mahadeo Prasad v. Siemen Ltd3, the question arose as to what was the effect of naming a sum in the contract with regard to the provision of section 74 of the Indian Contract Act. It appears that the point gave the learned judge considerable trouble in arriving at the decision especially in view of observations of the Privy Council in the aforesaid case reported in AIR 1929 PC 179 Bhai Panna Singh v. Bhai Arjun Singh4. Ameer Ali J. explained the judgment delivered by the Judicial Committee by observing that the judicial committee did not mean that the sum named in the contract was not be given effect at all. What the judicial committee meant was that the plaintiff "must prove his damages". Ameer Ali, J. observed: "But is not the figure named some proof? It is not to be conclusive proof, but is it is not some proof? It is not the estimate made by the parties with full consideration of some evidence? I think it is. "According to the learned judge "..... in English Law the sum named, if a penalty, ceases to have any effect at all either as a lower or upper limit. In Indian law it remains an upper limit or maximum." The learned judge also observed "To my mind, the following is the intention of the legislature: (1) the plaintiff must prove his damage in a general sense; (2) The contract made by the parties estimating their damages is in itself evidence; (3) if there is no other evidence of damage, I can conceive of other cases where this evidence alone will be considered sufficient, nor do I think that the Judicial Committee intended by anything said in MANU/WB/0274/1993 to exclude such a possibility; (4) The sum named however is not conclusive evidence, that is to say, if there is no other evidence or circumstance showing that it was excessive, the court will not consider itself bound by it; (5) If, on the other hand, the other evidence and circumstances indicate that the damage equals may equal or is likely to exceed the amount named, the court will abide by it, and lastly, (6) In case of (4), that is to say where the other evidence shows that it is unreasonable, the plaintiff will have to prove his damage irrespective of the figure."


The Supreme Court has considered the scope and applicability of section 74 of the Indian Contract Act in Fate Chand v. Balkishan5 and has distinguished the Indian Law from the English Law between stipulations for liquidated damages and penalty and observed that the distinction made in English Law between stipulations for liquidated damages and penalty have been eliminated by the provisions of section 74 of the Indian Contract Act. It is observed that the measures of damages in case of breach of a stipulation by way of penalty is, by section 74, reasonable compensation not exceeding the penalty stipulated for. The Supreme Court observed , '' assessing damages, the court has, subject to the limit of the penalty stipulated, jurisdiction of the court to award compensation in case of breach of contract is qualified except as to maximum stipulation; but compensation has to be reasonable and that imposes upon the court duty to award compensation according to settled principles. This section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proven to have been caused by the breach. Thereby, it merely dispenses with proof of actual loss or damage; it does not justify the award of compensation for breach of contract can be awarded to make good the loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely result from the beach.'' In Union of India v. Raman Iron Foundry6, the Supreme Court observed while construing section 74 ''...even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely outside limit.''


Hence, considering the above aspects, compensation and damages even though being used simultaneously and interchangeably, hold dissimilarities. Damages are usually monetary awards and commonly observed in cases of accidents to compensate for the losses suffered by them whether physical, financial or emotional. Damages are not always compensatory in nature. Also, it is sometimes considered that damages are awarded to deter someone from the same crime again. In contempt of court cases, damages are charged and these kinds of damages are not compensatory in nature. While, compensation is a legal right of all those who have been wronged or suffered losses because of guilt or lapse of another person whether it is an injury suffered from an accident or some kind of damage to the skin or other part of body by any treatment undergone at the salon. Individuals who suffer injuries received in road injuries receive compensation from not just their insurance companies but also from the party that has been found guilty of rash driving. Compensation shall be fixed on well-known principles that are applicable to the law of contract, which are to be found inter alia in section 73 of the Contract Act. Therefore, before ascertaining the quantum of both these claims a practice of considering the differentiation between both these claims on the basis of facts in hand is essential to reach a justified conclusion.


1. L.R.3 C.P.499,588

2. [1993] A.C. 449

3. AIR 1934 Cal 285

4. MANU/PR/0072/1929

5. MANU/SC/0258/1963

6. MANU/SC/0005/1974

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