April 13, 2021

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Approach to damages under contract law

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This article is written by Suhasini Kamble who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

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A “Contract” is an agreement between at least two or more parties. It ties all the party’s together, once they agree to the terms therein. In a contract, such terms are mentioned which are agreed and followed by both the parties, if any of the parties fail to comply with the terms, then the other party may be entitled to compensation. 

“Breach of contract” refers to the obligations of a contract which are not followed by either of the party’s as agreed and defined to be agreed. The remedy is mostly determined by the severity of the breach of the contract, as well as the damage caused to the party. However, if the loss has been extensive and severe in nature, the breaching party may be ordered to pay money. These monetary payments are often referred to as “Damages”.

“Damages” are the injury or harm caused to either party in a contract. As per law, the estimated money should be equivalent to detriment or injury sustained by either party. It occurs due to non-performance or non-compliance of the terms in the contract by either of the parties and the results to restitution or compensation accordingly. 

The harm caused to a person is physical injury, disabilities, loss of enjoyment, loss of comfort, inconvenience or disappointment, injured feelings, vexation, mental distress, loss of reputation, etc. The damage caused to the property, viz. damage or destruction of property; and Economic damage is the injury to the financial condition of the party which would include loss of profits, expenses incurred, costs, damages paid to third parties, etc.

There are two situations where damages are caused i.e. consequential and incidental. When used in the exemption clause in a contract, first refers to those which occur unknowingly but cause severe damages physically, such as loss of profit sustained due to fire blown in a factory, and second refers to the loss suffered by the plaintiff after he became aware of the breach and made out to avoid the loss, i.e. the cost of buying or hitting a replacement or returning defective goods.

  1. Compensatory damages – Here monetary compensation is awarded by the court in a civil action to the person who caused a loss due to the wrongful conduct of the other party.  
  2. General damages – Here are those damages which occur naturally in the course of the event, out of the control of the parties. While pleading, it is presumed to be a natural and probable consequence with the result of bringing a lawsuit. When it comes to proving the loss, usually but not exclusively non-pecuniary in monetary terms are not capable to enumerate the loss.
  3. Special damages – Such damages do not occur due to breach of the defendant but can only be recovered if they were in the reasonable consideration of the parties at the time they made the contract. Here it refers to the losses that must be specifically pleaded and proven. In this type of damages, the loss can be calculated financially. 
  4. Nominal damages – If the defendant is found liable for breach of contract, the plaintiff is entitled to nominal damages, even if no actual damage is proven. Nominal damages are awarded if there is an infringement of a legal right and if it does not give rise to any real damages, it gives the right to a verdict because of the infringement. The view that the nominal damage does not indicate that the trifling amount is erroneous, nominal damage means only a small amount of money.
  5. Punitive damages – In Black’s Law Dictionary, ‘punitive/exemplary damages’ is defined as ‘Damages awarded in addition to actual damages when the defendant acted with recklessness, malice, or deceit; specific., damages evaluated by way of punishing the wrongdoer or by creating an example to others. 

Here, the injury suffered must be recognized by law as justifying to redress and the party must have actually sustained the damage. These are granted for a particular type of wrongful act. These are not awarded to reward the loss but to punish the defendant for the action done by him.

In other specific situations, two other forms of damages may be awarded: Treble and liquidated.

  1. Treble damages – In some situations, the treble damages are awarded by the statutory provisions in which the judge has the authority to multiply the number of monetary damages by three and to order that the plaintiff receives the tripled amount.
  2. Liquidated damages – These types of damages are awarded when there is no clear idea of the damage or loss caused to the aggrieved party and it is difficult to prove the actual harm or loss caused by the breach. The compensation agreed upon is to be mentioned in the contract. It represents a reasonably estimated amount caused by the injury. In determining whether a particular contract provision constitutes liquidated damages or an unenforceable penalty the court will look to the intention of the parties, even if the terms are specifically mentioned and defined in the contract.   

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The measurement of damages is done by the concerned legal principles governing the recovery system; the principle of the remoteness of damage confines the recoverability of damages. Now, what does this mean? The term remoteness of damages means the legal tests used to find out the type of loss caused by the breach of the contract and then to be compensated by awarding damages.

There are three principle remedies – monetary awards (called “damages”), specific performance, and restitution. They all have their own limits as per law. For example, the specific performance is not always applicable. It becomes impossible to complete a contract as a party can’t be ordered to do the impossible things. 

The Indian courts have been unwilling to award standard damages in the view that, if the offender has to be punished, then the remedy to punish must be the penal law. Nevertheless, in most cases, Indian courts rely upon the international precedents and opinions of English law to award the damages.

The ground rule of the Indian Contract Act, 1872, has to be understood here. Section 73 of the Act, deals with the reparation for damages arising from a breach of contract or failure to discharge its obligations created by contract to the person who broke the contract, and Section 74 of the Act, governs with the compensation part, where the penalty is specified in the Act.

Explanation of Section 73 – In assessing the loss or damage caused by the breach of a contract, consideration must be given to the means that existed to remedy the inconvenience caused by the non-performance of the contract.

Illustration – Mr. X contracts to repair Mr. Y’s room and nearby premises in a specified way and receives the money in advance for the same. Mr. X repairs the house, but not according to the contract. So here Mr. Y is entitled to recover the cost of making the repairs as per the contract from Mr. X.

Subsequently, Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a “sine qua non” for the applicability of the Section. 

Koninlijke Philips NV v. Amazestore (2019) (260 DLT 135)

In this case, Hon’ble Delhi High Court, holding the defendant liable for the violation of statutory and common law rights on multiple counts found that the facts stated in the plaint are proved and the product of the defendants bore close similarity to those of the plaintiff. So, a permanent injunction to prevent infringement was therefore granted and compensatory damages awarded. 

Fortune Infrastructure and Anr. v. Trevor D’Lima & Ors. (2018) 5 SCC 442

On appeal, the Hon’ble Supreme Court of India ruled in favor of the respondents. In doing so, it was held that while the general principle consistently applied is that damages are compensatory and the innocent party is to be placed as far as money can, in the same position as if the contract has been performed, this rule is more qualified within the real estate sector.  

While awarding damages there is a need for developing the standards for courts in India to analyze the circumstances and grant the damages. The law of damages in India lies on the misconception as no updated statutory laws and mostly rely upon the English law, which may not match the situation in India. However, with the span of time, Indian courts have pronounced many such landmark judgments that can be adopted as developments in common law on the subject and with conceptual clarity, which can only be launched. 

So in either case, the courts since the erstwhile Privy Council have adopted a balanced approach to ensure that the damages awarded should not be excessive and must be compensatory in nature. It lays down certain rules to determine the amount of compensation upon the breach of a contract. The purpose of the contract law is to provide remedies to the aggrieved party to fulfill the loss or damage caused by the party.

  • blog.ipleaders.in
  • legalmatch.com
  • law.jrank.org
  • indiacorplaw.in
  • mondaq.com
  • thelawreviews.co.uk

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