Discuss the principles on which the court would award damages for breach of contract.

Question: Discuss the principles on which the court would award damages for breach of contract. [HJS 2003]

Find the answer to the mains question only on Legal Bites. [Discuss the principles on which the court would award damages for breach of contract.]

Answer

Timely fulfillment of the contractual agreement is an important part of any commercial transactions and if any party breaches the terms of the contract then the party not only loses the trust of the other party but it also has to pay a certain amount of money as a penalty for the breach of contract which is pre-decided during the drafting of the contract.

The Indian Contract Act, from Section 73-75 deals with the consequences for breach of contract. In sense, the liability and the course of action which will follow in case there is a breach of contract by either party is discussed in these sections.

Section 73 of the act

Section 73 of the Act states that “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.

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

This section states that when any party suffers because of the breach of obligation by other parties, then that party shall have the right to claim compensation for any damages that may cause to him because of the breach of contract. The caveat in this regard is the remoteness of the damage.

As held in Ram Kumar Agarwal v. Lakshmi Narayan Agarwal [AIR 1947 Cal 157], the affected party can claim damage for any loss which he may incur for the breach provided it may have arisen in the usual course of things, but he won’t be able to claim any losses which are the result of some indirect connections with the breach of contract.

It may happen that because of the breach of contract, the affected party had to suffer losses for a long period of time and the losses he suffered may have an indirect connection with the breach even then also he shall have the right to claim compensation for all the direct loss incurred for a particular period of time, not for an indefinite period.

The principle is that the defendant cannot be made liable for all that follows from his breach. There must be a limit to the liability of the defendant and beyond that liability even if the plaintiff suffers any harm then also he won’t be able to claim any compensation.

Hadley v. Baxendale (1854) 9 Exch 341 lays down two principles

1. The claim should arise naturally- i.e. the claim should arise as per the usual course of action
2. The claim should be reasonable, in the sense that both the parties reasonably supposed that certain acts if occurred then, it would probably result in the breach of the contract.
3. Section74 of the act

Section 74 states that “When a contract has been broken, if a sum is named in the contract as the amount 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 or 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.”

The section basically talks about the liquidated damage that the affected party is entitled to. This section states that if there is any clause in the contract which states that in case of breach by either party the defendant shall be liable to pay the certain specified amount then the plaintiff can claim the amount if there is a breach in contract.

It means that the plaintiff can claim the amount mentioned in the contract (also called liquidated amount) from the defendant in case there is a breach of contract. It can be further deduced that amount stipulated in the contract can be claimed even if the actual loss or the damage was proved by him or not.

The caveat as per this rule is that the amount stipulated in the contract is the maximum amount that the plaintiff can claim. Cases may arise that court can award compensation less than the stipulated amount if it appears reasonable as per the circumstance of the case, but the no case the amount awarded by the court should be more than the stipulated amount

III. Section 75 of the act

The above-mentioned states that “A person who rightfully rescinds a contract is entitled to consideration for any damage which he has sustained through the no fulfillment of the contract.”

This section states that in case if one of the parties cancels the contract, in that case, the party canceling the contract has to pay certain compensation to the other party even if there is no completion of the contract.

The other party has the right to claim compensation for any damage that he had to incur because of the cancellation of the contract. It has to keep in mind that the question of claiming damage in case of rescinding contract comes only if the contract has been rescinded under Sections 39, 53 54 & 55 of the Contract Act.

Thus, breach of contract in the Indian Contract Act has provided for both the liquidated damage and unliquidated damage in the Act. The former is applicable when any amount is specified in the contract from the beginning and the later when no amount is specified and the court awards a certain amount after analyzing the facts and circumstances of the case.

---

Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X