Very often, in contractual disputes between parties, lawyers are asked to comment on the quantum of damages that the party which that has suffered a loss can claim against the other.
The answer lies in the Indian Contract Act, 1872, read with a host of judicial pronouncements on this subject.
Unlike certain other jurisdictions such as the US, in India, award of damages is compensatory in nature and not punitive. The intention of the law in awarding damages for breach of contract is that the party complaining against a breach should be placed in the same position monetarily as it would have been if the contract had been performed. Damages are, therefore, compensation for a natural and probable consequence of the breach, that is, a breach that can be reasonably foreseen.
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In terms of the Contract Act, a party that suffers a breach is entitled to compensation for any loss or damage, which arose naturally in the usual course of things from such breach (general damages) or which the parties knew when they made the contract to be likely to result from the breach of the contract (special damages).
No compensation can be awarded for any remote and indirect loss. The Supreme Court has laid down that once breach is established, damages must be proved, and in those cases where it is not possible to prove the precise quantum of damages, the claimant will be entitled to reasonable damages.
These provisions, therefore, have the effect of excluding consequential loss, which does not arise in the usual course of things. An interesting and commonly cited example of consequential loss is the case of British Columbia Saw Mill Co. v. Nettleship—a man was on his way to be married to an heiress and on the way, the man’s horse lost a shoe. A blacksmith was employed to fix a new shoe but did the work so unskilfully that the horse became lame. The rider did not reach his wedding on time and the lady married another man. The blacksmith was sued and sought to be made liable for the loss of the marriage.
The court, while rejecting the claim for damages (for the loss of the marriage), held that rules of common sense had to be applied to restrict the extent of liability for the breach of a contract of this sort.
Contractual damages are not the only kind of damages that can be claimed in India. Damages for a breach of contract are different from damages for tortuous acts (where a civil wrong is committed by one person against the other outside a contract).
The law of torts has not developed in India to the extent it has developed in countries such as the US or UK. The principle for awarding damages in tort is that such damages are awarded with the intention of putting the person who has suffered damages in the same position had the tortuous act not been committed. This could include the payment of punitive damages.
However, the basic principle of damages under contract is to give a person the gains that were expected from the performance of the contract.
The Contract Act also permits the parties to agree in their contract that, for a certain event of default, a pre-determined amount will be paid as damages. This is also commonly known as “liquidated damages”.
Liquidated damages in a contract are a genuine pre-estimate of the reasonable compensation to which the non-defaulting party would be entitled in case of a breach. Liquidated damages have always been interpreted as the “ceiling” or the maximum that can be claimed.
The Supreme Court has further explained that if parties to a contract specify an amount as liquidated damages, then, if breach is established, such amount will be deemed to be the damages payable, unless it is proved otherwise.
Most commercial contracts today have a pre-determined formula for liquidated damages. In such cases, the party claiming the damages would be entitled to that amount without proving the actual loss or damage suffered by it and this would automatically serve to limit the liability for the breach.
The Contract Act also specifies that liquidated damages will represent the maximum amount claimable even if a sum as penalty is provided as payable on breach.
Historically, courts in India have been conservative while awarding damages for breach of contract. And even where liquidated damages have been agreed to between two contracting parties, the courts are normally called upon at the instance of a party to determine whether such amounts are reasonable and whether or not the entire amount should be awarded.
Therefore, in contractual disputes for damages between two parties where they agreed to pay damages upon a breach at the time of execution of a contract, but courts would usually honour the intention of the parties—the test of reasonableness of damages will ultimately need to be met in all circumstances.
Send your comments to firstname.lastname@example.org This column is contributed by Bharat Vansh Bahadur of AZB & Partners, Advocates & Solicitors.