India: Unraveling Damages Under The Indian Contract Law Regime: Key Principles & Judgments

The Indian Contract Act, 1872 ("Act") is a cornerstone of the nation's legal framework, governing the formation, performance and enforcement of contracts. Under this comprehensive body of law, the notion of damages holds immense significance, serving as a crucial remedy for parties aggrieved by breaches of contractual obligations.

As we embark on this journey through the labyrinth of damages in the Act, it becomes evident that this area of law is dynamic and ever-evolving, driven by both legislative intent and judicial acumen. Through the lens of key principles and judgments, we will decipher the nuances of contractual remedies and their transformative impact on the commercial landscape in India.

Legal Framework: Damages under the Act

In the case of Common Cause vs. Union of India¹, the term damages has been defined which refers to a form of compensation due to a breach, loss or injury. This mechanism enables the injured party to obtain compensation for the losses that have been incurred as a result of defaulting party's failure to fulfil its contractual obligations.

The primary objective of awarding damages is to help the party who has suffered the loss retain the position it had before the loss was incurred under a valid contract². Sections 73 and 74 of the Act encompass provisions concerning the violation of contractual obligations.

Section 73 addresses the implications of a breach of contractual obligations leading to losses incurred by the aggrieved party. In such instances, the damages awarded to the aggrieved party are considered unliquidated, as they are determined based on an assessment of the actual loss and injury suffered. However, it is important to note that this type of compensation does not extend to cover indirect or remote losses resulting from the said breach. On the other hand, Section 74 pertains to liquidated damages, wherein the contract itself stipulates a predetermined amount of damages to be paid in the event of a breach of contractual terms.

Therefore, in order to pursue a claim for damages under the Act, it is essential that a breach of contract occurs³, which thereby excludes cases where the contract is validly terminated without any violations of its terms and conditions.

Breach of contract: Let us now examine the circumstances under which a breach of contract occurs.

A breach of contract occurs when there is a contravention of the contractual terms or when the promises made within the contract are not fulfilled. In such instances, it is possible that the terms are not adhered to in the manner originally intended when the contract was formed.

It is settled in law that where a party to a contract commits an anticipatory breach of the contract, the

other party to the contract may treat the breach as putting an end to the contract and sue for damages⁴. An anticipatory breach occurs when one party explicitly asserts that they will not fulfill their contractual obligations in the future. As a result, the other party has the option to either allow the contract to continue or terminate it. If an anticipatory breach of contract is established and the contract is subsequently terminated, the plaintiff is entitled to claim damages based on the intention to fulfill the contract before its termination.

Assessment of Damages

Over the years, Indian courts have adopted a comprehensive approach when assessing damages, considering several factors, such as:

• The Remoteness of Damages: Courts apply the principle of the remoteness of damages to determine the extent to which the breaching party is liable for the losses suffered by the aggrieved party. In the case of Hadley vs. Baxendale⁵, the court established the principle for determining the extent of damages in a breach of contract. According to this principle, the injured party can recover damages that either naturally arise from the breach or were foreseeable at the time of contract formation. These damages are referred to as 'special damages. In this case, the plaintiff, who was the owner of a mill that had to stop its operations due to a broken crankshaft, hired the defendant, a carrier, to transport the damaged crankshaft to the manufacturer for repair within a certain time frame. However, the defendant failed to deliver it on time, resulting in a delay in restarting the mill's operations. The plaintiff filed a lawsuit against the defendant, seeking to recover the earnings they would have made if the mill had been restarted sooner. The court acknowledged that the defendant's failure to deliver a crankshaft for repairs led to the stoppage of the plaintiffs' mill, resulting in a loss of profits. However, the court also noted that under ordinary circumstances, such consequences would not have been likely to occur when millers send broken shafts to third parties using a carrier. As these special circumstances were not communicated by the plaintiffs to the defendants, the extent of damages was limited.

• Causation: The courts examine the causal link between the breach of contract and the losses incurred by the aggrieved party. They assess whether the breach was the direct cause of the damages claimed and whether any intervening factors contributed to the losses. In Maula Bux vs. Union of India⁶, the plaintiff had entered into two contracts with the Government of India on different dates to supply potatoes and poultry, eggs and fish. However, due to the government's continuous failure to provide the agreed-upon supplies, the contracts were revoked and the plaintiff's security deposits were forfeited. The plaintiff filed a lawsuit to recover the deposited funds. Initially, the Trial Court ruled in favor of the plaintiff, stating that while the government had the right to cancel the contracts, the deposits could not be forfeited without proof of actual damage. Subsequently, the High Court modified the ruling, reducing the damages awarded. The court applied the principle of causation and held that Section 74 of the Act allows for appropriate compensation in cases of breach, irrespective of whether actual damage or loss is proven. However, the court emphasized that if the forfeited amount constituted a penalty, the compensation should not exceed the contractually specified amount.

• Mitigation: It places an obligation on the aggrieved party to take reasonable measures to minimize the damages resulting from a breach of contract. This can involve actions such as seeking alternative arrangements, finding replacement goods or services, or exploring opportunities to mitigate financial losses. In M/S. Murlidhar Chiranjilal vs. M/S. Harishchandra Dwarkadas⁷, the parties entered into a contract for the sale of canvas. The contract specified the delivery of commodities in Kanpur for subsequent resale in Calcutta. However, the appellant breached the contract by failing to deliver the products as agreed. The respondent claimed damages, arguing that they suffered losses due to an increase in the market price of identical canvas on the date of the breach. The appellant contended that the respondent failed to mitigate their damages by not taking reasonable steps to minimize losses, such as purchasing comparable goods in Kanpur. The court ruled that the principle of mitigation of damages would be applied in this case. The respondent had a duty to buy similar goods in Kanpur and provide evidence of the prevailing market rate on the breach date. If the rate exceeded the contract rate, the difference would determine the damages. However, the respondent failed to fulfill this duty and did not provide evidence of the market rate in Kanpur. Consequently, the court ruled that the respondent was not entitled to any monetary damages.

Calculation of Damages

The distinction between the quantum of damages and the measure of damages is essential. The former pertains to the actual monetary amount awarded as compensation, whereas the latter involves the legal considerations and principles guiding the assessment.

When it comes to evaluating and quantifying damages, especially in cases of unliquidated damages, the determination of the actual loss or damage assumes great significance.

In instances of a contract breach, the primary objective of awarding damages is to restore the aggrieved party to the position they would have occupied had the breach not occurred. The damages awarded should, therefore, be limited to the extent of the actual loss suffered or reasonably foreseeable to be suffered by the aggrieved party. The amount should not exceed the measure of loss warranted by the circumstances.

The calculation of damages arising from a breach of contract lacks a strict procedure, as observed by the Supreme Court in the case of M.N. Gangappa vs. Atmakur Nagabhushanam Shetty & Co. and Anr.⁸ The court stated that damages should be determined based on the specific facts and circumstances of each case.

Regarding the calculation of damages after a contract breach, the Supreme Court has established two important principles:

• The aggrieved party claiming damages should be compensated to the extent that money can restore them to the position they would have been in if the contract had been fully performed.
• The plaintiff is obligated to take all reasonable measures to minimize the losses resulting from the breach. Failure to mitigate the damages could prevent the plaintiff from claiming compensation for the losses that could have been avoided with reasonable efforts.

In India, there are no laws specifically mentioning the formula to calculate damages, so widely accepted methods are used without any legal issues. Courts usually don't interfere with the methods or formulae used by arbitrators or valuers to calculate damages.

Conclusion

The primary purpose of damages in contract law is to restore the aggrieved parties to the position they were in before the contract was breached. This contributes to the rectification of the imbalance generated by the breach and guarantees that the non-breaching party is not unfairly disadvantaged. Additionally, damages also serve as a deterrent to contract violations. The potential liability for paying damages acts as a disincentive for parties to violate their contractual obligations, as they bear the risk of financial consequences. This encourages parties to honor their contractual commitments and discourages breach of contract. As a result, both in principle and in practice, damages have shown to be an effective means of enforcing contractual obligations.

Corrida Legal is the preferred corporate law firm in Gurgaon (Delhi NCR) and Mumbai.

Footnotes

1. Common Cause vs. Union of India (1999) 6 SCC 667.

2. Section 10, The Indian Contract Act, 1872.

3. P. Radhakrishna Murthy v. NBCC Ltd (2013) 3 SCC 747.

4. Jawaharlal Wadhwa & Another vs. Haripada Chakroberty (1989) 1 SCC 76.

5. Hadley vs. Baxendale (1854) 9 Ex 341.

6. Maula Bux vs. Union of India, (1969) 2 SCC 554.

7. M/S. Murlidhar Chiranjilal v. M/S. Harishchandra Dwarkadas AIR 1962 SCC 366.

8. M.N. Gangappa v. Atmakur Nagabhushanam Shetty & Co. and Anr, AIR 1972 SC 696.

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.