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Damages for Breach of Contract (Section 73)

Meaning and Purpose of Damages

When a contract is breached, the party who suffers loss due to the breach (the aggrieved party) is generally entitled to receive monetary compensation from the party who breached the contract (the breaching party). This monetary compensation is called Damages.

Section 73 of the Indian Contract Act, 1872, lays down the fundamental principles governing the award of damages for breach of contract.

Meaning and Purpose

Damages are a legal remedy aimed at compensating the aggrieved party for the loss or injury they have suffered as a result of the breach. The primary purpose of awarding damages in contract law is compensatory, not punitive. The goal is to put the aggrieved party, as far as money can do it, in the same position they would have been in if the contract had been performed. It is about making good the loss caused by the breach, not punishing the breaching party.

Compensation for loss or damage

Section 73 (first paragraph):

"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."

This paragraph establishes the principle that compensation is to be awarded for the loss or damage that is a consequence of the breach. It sets the standard for determining what kind of loss is compensable, introducing the concept of 'remoteness of damages'.

Section 73 (second paragraph):

"Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach."

This paragraph clarifies that remote or indirect losses are not compensable. Only losses that are directly or naturally a consequence of the breach, or were contemplated by the parties, are recoverable.

The amount of damages is usually assessed at the date of the breach. The aggrieved party also has a duty to mitigate their loss, meaning they must take reasonable steps to minimize the loss resulting from the breach. If they fail to do so, they cannot claim compensation for losses that could have been avoided.

Example 1. Mr. Kapil contracts to sell 100 quintals of potatoes to Mr. Lalit for Rs. 20,000/-, delivery next week. Mr. Kapil fails to deliver the potatoes. On the date of delivery, the market price of potatoes has risen to Rs. 250 per quintal. What compensation can Mr. Lalit claim?

Answer:

Mr. Lalit can claim compensation for the loss naturally arising from the breach. The loss in this case is the extra cost Mr. Lalit has to incur to buy the potatoes from the market due to Mr. Kapil's non-delivery. The contract price was Rs. $200$ per quintal (Rs. $20,000 / 100$). The market price is Rs. $250$ per quintal. The difference is Rs. $50$ per quintal. For 100 quintals, the loss is Rs. $50 \times 100 = Rs. 5,000$. Mr. Lalit is entitled to Rs. 5,000/- as ordinary damages under Section 73, as this loss naturally arose from the breach in the usual course of things.


Rule of Remoteness of Damages (Hadley v. Baxendale)

Section 73, particularly its first two paragraphs, embodies the famous rule regarding the remoteness of damages established in the English case of Hadley v. Baxendale. This rule determines which losses are recoverable and which are too 'remote' to be compensated.

The Rule in Hadley v. Baxendale (Applied in Section 73)

The case of Hadley v. Baxendale (1854) 9 Ex 341 involved a mill owner (Hadley) whose mill shaft broke. He contracted with a carrier (Baxendale) to transport the broken shaft to a manufacturer for repair. The carrier was informed that the article to be carried was the broken shaft of a mill and that the mill was stopped. Due to the carrier's delay, the mill remained stopped for a longer period than necessary, and Hadley claimed damages for the loss of profits caused by the delay.

The Court laid down a rule stating that damages for breach of contract should be such as may fairly and reasonably be considered either:

1. Arising naturally, i.e., according to the usual course of things, from such breach itself; OR

2. 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.

Applying this rule, the Court in Hadley v. Baxendale denied the claim for loss of profits because, while it arose from the delay, it could not be considered to arise naturally (as mills often have spare shafts), and the carrier was not informed that the mill would be stopped due to the delay, so this specific loss could not be supposed to be in their contemplation at the time of contract.

Section 73 of the Indian Contract Act adopts this two-limb rule, slightly rephrased:

Direct and natural consequences (Loss arising naturally in the usual course of things)

This is the first limb of the rule. Compensation is given for losses that flow directly and naturally from the breach in the ordinary course of events. These are the losses that a reasonable person would expect to result from the breach without any special knowledge of the circumstances.

Example: In a contract for sale of goods, if the seller fails to deliver, the natural loss is the difference between the contract price and the market price on the date of breach (if market price is higher). This loss occurs naturally because the buyer has to pay more to get the goods from elsewhere.

Damages which the parties knew, when making the contract, to be likely to result (Contemplation of parties)

This is the second limb. Compensation is also given for losses that do not arise naturally in the usual course of things but were such that both parties, at the time they entered into the contract, foresaw or knew they were likely to result from a breach. This requires that the special circumstances causing the unusual loss must have been communicated by the aggrieved party to the other party at the time the contract was made.

Example: A contracts to deliver a specific machine to B by a certain date. B informs A at the time of contract that he needs the machine by that date to fulfil a highly profitable contract with C, and that failure to deliver will cause B to lose that profit. If A delays the delivery and B loses the contract with C, B can claim the loss of profit from A, as this was a loss contemplated by both parties due to the communication of special circumstances.

If the special circumstances causing the unusual loss are not communicated, the defaulting party will only be liable for the natural loss, not the unusual loss flowing from those special circumstances.

Remote and Indirect Loss (Section 73, second paragraph):

Section 73 explicitly excludes compensation for 'remote and indirect loss or damage'. These are losses that are too far removed from the breach, or are not directly caused by it, or were not contemplated by the parties. The chain of causation is broken or too tenuous.

Example 1. Mr. Manoj contracts to deliver a standard machinery part to Mr. Naveen's factory by 10th April. Mr. Naveen needs this part urgently to keep his factory running, and failure to receive it on time will cause him to lose Rs. 50,000/- in profits per day. Mr. Naveen does NOT inform Mr. Manoj about this urgent need or the potential loss of profits when making the contract. Mr. Manoj delivers the part 5 days late. Can Mr. Naveen claim Rs. 2.5 Lakhs (5 days * Rs. 50,000) for loss of profits?

Answer:

Mr. Naveen likely cannot claim the Rs. 2.5 Lakhs for loss of profits. The loss of profit from the factory stopping is a special loss arising from Mr. Naveen's specific circumstances (the need for the part to keep the factory running). This loss does not arise naturally in the usual course of things from a standard delay in delivery of a machinery part. Since Mr. Naveen did not inform Mr. Manoj about these special circumstances and the potential loss of profits at the time of the contract, this loss was not within the contemplation of both parties as likely to result from the breach. It is considered a remote loss under Section 73. Mr. Naveen can only claim ordinary damages, such as compensation for the inconvenience or perhaps the cost of arranging alternative transport if that was a natural consequence, but not the loss of profits.


Types of Damages

Damages awarded by courts can take different forms depending on the nature of the loss suffered and the purpose of the award.

Ordinary Damages

These are damages awarded to compensate for the loss that arises naturally in the usual course of things from the breach. This corresponds to the first limb of the rule in Hadley v. Baxendale (Section 73, first para). They are the normal, direct consequences of the breach.

Example: Difference between contract price and market price for failure to sell/buy goods.

Special Damages

These are damages awarded to compensate for losses that do not arise naturally from the breach but arise due to special circumstances known to both parties at the time of the contract. This corresponds to the second limb of the rule in Hadley v. Baxendale (Section 73, first para - "which the parties knew... to be likely to result"). For special damages to be recoverable, the special circumstances causing the loss must have been communicated to the other party when the contract was made.

Example: Loss of profit on a sub-contract which was known to the breaching party.

Nominal Damages

These are small amounts of damages awarded by the court when there has been a breach of contract, but the aggrieved party has not actually suffered any substantial monetary loss. The award is made to acknowledge that the party's contractual right has been violated.

Example: A contracts to buy goods from B for Rs. 10,000/-. B fails to deliver. On the date of delivery, the market price is also Rs. 10,000/-. A suffers no monetary loss. A can still sue B for breach, and the court may award nominal damages (e.g., Re. 1 or Rs. 100) to recognize that B did breach the contract.

Exemplary Damages (or Punitive Damages)

These are damages awarded not to compensate the aggrieved party for their loss, but to punish the breaching party for their conduct (e.g., oppressive, arbitrary, or unconstitutional actions) and to deter others from similar behaviour. In pure contract law, the primary aim of damages is compensatory, and exemplary damages are generally not awarded for breach of contract in India, except in limited circumstances, such as:

These exceptions blur the lines between contract and tort or involve elements affecting reputation/personal liberty.

Liquidated Damages vs. Penalty (Section 74)

Parties may sometimes include a clause in their contract specifying an amount to be paid in the event of a breach. This agreed amount can be either liquidated damages or a penalty.

Section 74 deals with this:

"When a contract has been broken, if a sum 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, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."

Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

Liquidated Damages: An amount genuinely pre-estimated by the parties at the time of making the contract as the probable loss that would result from a breach. If the amount is a genuine pre-estimate, the court will award this amount, provided it represents reasonable compensation.

Penalty: An amount stipulated in the contract that is extravagant, exorbitant, and disproportionate to the probable loss. It is intended to terrorize or punish the breaching party rather than compensate for loss. The court will not award the full penalty amount if it is unreasonable.

Indian Position (Section 74): Unlike English law, Section 74 in India does not strictly distinguish between liquidated damages and penalty clauses. It provides that the aggrieved party is entitled to receive only 'reasonable compensation' up to the amount specified in the contract (whether termed as liquidated damages or penalty). The stipulated amount is the maximum limit of compensation. The aggrieved party does not necessarily have to prove the exact amount of loss if a genuine pre-estimate (liquidated damages) was made, but the court will ensure the compensation is reasonable and does not exceed the stipulated sum. If the stipulated amount is a penalty, the court will award a reasonable amount irrespective of the penalty amount, capped at the penalty amount itself (if reasonable compensation exceeds the penalty). If the actual loss is negligible or zero, only nominal damages might be awarded even if a large amount is stipulated, unless it was a genuine pre-estimate of difficulty-to-quantify loss.

Example 1. A contract for construction of a building specifies that if the builder delays completion beyond the agreed date, he must pay the owner Rs. 5,000/- for every day of delay, as liquidated damages. The builder is delayed by 10 days. What can the owner claim?

Answer:

The contract specifies Rs. 5,000/- per day as liquidated damages for delay. The total stipulated amount for 10 days delay is $10 \times Rs. 5,000 = Rs. 50,000/-$. According to Section 74, the owner is entitled to receive reasonable compensation not exceeding this amount. The court will assess what is reasonable compensation for the 10-day delay (considering factors like loss of rent, additional expenses, etc.). If the court finds that Rs. 5,000/- per day was a genuine pre-estimate of the likely loss and the total loss is Rs. 50,000/- or more, it can award Rs. 50,000/-. If the actual loss is less than Rs. 50,000/-, or the Rs. 5,000/- per day is found to be an unreasonable penalty, the court will award a lesser, reasonable amount, capped at Rs. 50,000/-.

Assessment of Damages

Mitigation of Damages

When a breach of contract occurs, the aggrieved party is entitled to claim damages for the loss suffered. However, the law imposes a duty on the aggrieved party to take reasonable steps to minimize the loss resulting from the breach. This is known as the Duty to Mitigate Damages.

Principle of Mitigation

Although not explicitly stated as a 'duty' in a single section of the Indian Contract Act, 1872, the principle of mitigation is well-established in Indian contract law, largely through judicial interpretation, and is considered an implicit requirement under Section 73. Section 73 states that compensation is to be given for loss "caused to him thereby," implying a causal link between the breach and the loss, and excluding losses that the aggrieved party could have reasonably avoided.

The principle requires the aggrieved party to act reasonably, as if the breach had not occurred, in order to minimize the loss they suffer. They cannot sit idly by and allow the losses to accumulate and then claim the entire accumulated loss from the breaching party.

Example: A contracts to deliver goods to B on 1st June. A fails to deliver. The market price on 1st June is Rs. 100 per unit. By 10th June, the market price has risen to Rs. 120. If B could have purchased substitute goods on 1st June at Rs. 100, but waited until 10th June to buy at Rs. 120, B can only claim damages based on the price difference on 1st June (Rs. 100 - contract price). B cannot claim the additional loss caused by waiting till 10th June, as he failed to mitigate his loss by buying substitute goods earlier.

The aggrieved party is only required to take 'reasonable' steps to mitigate. What is reasonable depends on the circumstances of each case. They are not required to take steps that are unreasonable, expensive, or risky.

Consequences of Failure to Mitigate

If the aggrieved party fails to take reasonable steps to mitigate their loss, they cannot recover compensation from the breaching party for the portion of the loss that could have been avoided by taking those steps. The compensation awarded will be reduced by the amount that could have been mitigated.

Conversely, if the aggrieved party takes reasonable steps to mitigate the loss and incurs expenses in doing so, those expenses may also be recoverable as damages, even if the steps taken did not fully succeed in mitigating the loss.

The duty to mitigate arises as soon as the aggrieved party becomes aware of the breach or ought to have become aware of it.

Example 1. Mr. Suresh contracts to hire a venue from Mr. Tarun for an event on 1st November for Rs. 50,000/-. On 20th October, Mr. Tarun cancels the contract. Mr. Suresh could easily book an equally suitable alternative venue for Rs. 55,000/- for the same date. However, he makes no effort to find an alternative venue and cancels his event, claiming Rs. 50,000/- from Mr. Tarun as damages (the amount paid for the cancelled venue). Is he entitled to the full amount?

Answer:

Mr. Suresh is not entitled to the full Rs. 50,000/-. He had a duty to mitigate his loss by taking reasonable steps to find an alternative venue. Finding a similar venue for Rs. 55,000/- would likely be considered a reasonable step. By failing to do so, he did not mitigate the loss that could have been avoided. His claim for damages will be limited to the reasonable cost of obtaining a substitute performance, which is the difference in price between the original venue and the alternative venue: Rs. $55,000 - Rs. 50,000 = Rs. 5,000$. He may be able to claim Rs. 5,000/- as damages, but not the full Rs. 50,000/- as he failed to mitigate the loss of being without a venue by booking the alternative.


Burden of Proof

In a suit for damages for breach of contract, certain aspects related to proving the breach and the loss fall on the parties.

On the Party Alleging Breach and Claiming Damages

The primary burden of proof lies on the party who alleges the breach and claims damages. They must prove:

Burden of Proof Regarding Mitigation

The burden of proving that the aggrieved party failed to take reasonable steps to mitigate their loss generally lies on the breaching party. The breaching party must demonstrate that:

It is not for the aggrieved party to initially prove that they *did* mitigate. They prove their loss resulting from the breach. It is then up to the breaching party, if they wish to argue for a reduction in damages based on mitigation, to show that the aggrieved party failed in their duty to mitigate.

Example 1. Mr. Vinod sues Mr. Yogesh for breach of contract, claiming Rs. 1 Lakh in damages for loss of profit. What must Mr. Vinod prove to the court?

Answer:

Mr. Vinod, as the plaintiff claiming damages, must prove the following:

  • That there was a valid contract with Mr. Yogesh.
  • That Mr. Yogesh breached that contract.
  • That he suffered a loss of profit of Rs. 1 Lakh as a consequence of Mr. Yogesh's breach. He needs to provide evidence to quantify this loss.
  • That this loss of profit was a direct and natural consequence of the breach OR was a loss that both parties knew, at the time of the contract, was likely to result from the breach (e.g., Mr. Vinod informed Mr. Yogesh about the specific opportunity for profit).

Mr. Yogesh, if he wants to argue that the damages should be reduced, would then have the burden to prove that Mr. Vinod failed to take reasonable steps to mitigate his loss of profit.