Contracts have become increasingly pivotal due to the expansion of business and commercial transactions driven by our economy’s robust growth. Correspondingly, the number of contract disputes has risen in parallel with this expansion. Consequently, it has become essential to evaluate the remedies available to the parties in such circumstances, as the disagreement often stems from the parties’ failure to fulfill their obligations under the contract’s terms. One such remedy is the award of damages in cases of contract breach. Calculating the appropriate damages, however, requires the consideration of several key factors.[i] This article will examine the multifarious variables that must be taken into account when assessing damages, in accordance with the requirements of statutes and the various types of damages granted to the involved parties.
WHAT ARE DAMAGES?
The Indian Contract Act, 1872 does not provide a formal definition of damages. Nonetheless, damages represent a form of financial compensation awarded to the harmed party by the party that has breached the terms and conditions of the agreement. The underlying rationale for granting damages is to recompense the injured party for the losses they have incurred. Therefore, the party that violated the agreement pays damages to the party who was harmed.[ii] In the case of Common Cause v. Union of India[iii], the Hon’ble defined damages as “Damages are the pecuniary compensation, obtainable by success in an action, for a wrong which is either a tort or a breach of contract, the compensation being in the form of a lump sum which is awarded unconditionally”.
Furthermore, the Hon’ble Supreme Court also outlined three damages requirements in Organo Chemical Industries v. Union of India.[iv] These requirements are as follows:
- Harm Resulting from Wrongdoing: When an individual acts improperly or fails to fulfill their obligations, it inevitably leads to harm being inflicted upon another party.
- Remuneration through Remedies: In such circumstances, the aggrieved individual deserves to be compensated for the damage they have endured as a result of the wrongful actions or omissions.
- Calculating Damages: The damages awarded should be sufficient to not only cover the actual losses incurred by the aggrieved party, but also serve as a deterrent to discourage future misconduct by the breaching party.
By ensuring that the damages are calculated to adequately compensate the injured party and deter future breaches, the legal system can effectively uphold the sanctity of contractual agreements and provide a fair and equitable remedy for those who have been wronged.[v]
CONSEQUENCES OF BREACH OF CONTRACT
The Indian Contract Act of 1872 delineates the regulations pertaining to breach of contract within Sections 73 to 75. These sections outline the repercussions of breaching a contract and the criteria for granting damages.
- Section 73: [vi] This section addresses the pursuit of damages in cases of contract breach resulting in harm. It stipulates that if a party fails to fulfill their contractual obligations, the aggrieved party is entitled to seek compensation. However, compensation is limited to the evident harm at the time of contract formation, excluding any concealed or consequential damages.
- Section 74:[vii] Section 74 pertains to the enforcement of penalties specified in the contract for breaches. Even in cases where the exact losses incurred are not quantifiable, the affected party can claim compensation up to the predetermined penalty amount stated in the contract.
- Section 75:[viii] Section 75 deals with claiming damages when one party terminates a contract due to the other party’s non-compliance. If a party terminates the agreement because the other party fails to fulfill their obligations, they are eligible to seek recompense for any losses suffered.
To delve deeper into this concept, let’s explore practical scenarios that exemplify the application of contractual provisions:
- Nita’s Bathroom Renovation:
Nita engages a contractor to renovate her bathroom for Rs. 25,000. However, the contractor fails to complete the work within the agreed-upon timeframe, rendering the bathroom unusable. In this scenario, Nita has the right to seek compensation for the inconvenience and damages resulting from the contractor’s breach of contract.
- Mohan’s Bike Rental:
Mohan rents a bike with a penalty clause of Rs. 500 per hour for late returns. Upon returning the bike six hours past the due time, Mohan incurs a penalty of Rs. 3000 as specified in the rental agreement. Despite the shop’s inability to precisely quantify the losses due to the delay, they are entitled to enforce the Rs. 3000 penalty in accordance with the contract.
- Rahul’s Catering Mishap:
Rahul contracts a catering company for his daughter’s birthday party, agreeing on a menu and delivery time. However, the catering company fails to deliver the food on the event day, leading Rahul to arrange alternative catering at additional costs. Faced with disappointment and financial burden, Rahul decides to terminate the contract. Consequently, Rahul has the right to claim compensation from the catering company for the damages incurred due to their breach of contract.
These scenarios illustrate how breach of contract situations can unfold in real-life contexts, highlighting the importance of contractual provisions in safeguarding parties’ rights and providing remedies for breaches.
TYPES OF DAMAGES
The purpose for seeking damages dictates the type of damages pursued, leading to various categories of damages:
- General and Special Damages:
- General damages encompass compensation for losses naturally arising from the defendant’s misconduct, requiring no specific proof of the losses incurred. In contrast, special damages are tailored to compensate for anticipated losses under the contract, necessitating evidence of the actual loss suffered.[ix]
- Nominal and Substantial Damages:
- Nominal damages are awarded when there is a breach of contract without tangible financial harm, serving as a symbolic remedy. Conversely, substantial damages address losses that are challenging to quantify but are granted to reflect the severity of the breach and its repercussions.[x]
- Exemplary and Aggravated Damages:
- Aggravated damages compensate for additional harm caused by the defendant’s actions, beyond direct losses from the breach. Exemplary damages, also known as punitive damages, aim to penalize the defendant for egregious behaviour and deter future misconduct.
- Liquidated and Unliquidated Damages:
- Liquidated damages are predetermined amounts specified in the contract for breaches, while unliquidated damages are determined by the court based on the circumstances and projected losses, rather than being pre-established by the parties.[xi]
- Pecuniary and Non-Pecuniary Damages:
- Pecuniary damages are quantifiable by the court to assess the party’s financial harm or loss based on actual damages incurred. In contrast, non-pecuniary damages are challenging to quantify precisely due to their subjective nature, reflecting losses that are not easily measurable in monetary terms.
By understanding the nuances of these various categories of damages, parties involved in contractual disputes can navigate the complexities of seeking appropriate compensation for breaches and losses incurred.
CONCLUSION
The factors mentioned above present a dilemma for the courts in assessing damages. As a result, it’s crucial to consider these factors when determining damages and signing contracts. Because of this, it is recommended that, if feasible, the damages be included explicitly in the contract itself. Ultimately, this helps both parties avoid the cost of legal fees and avoid wasting time and resources on unnecessary litigation. As a result, extensive research must be done before creating a contract and be entered into diligently.
[i] Julie Amadeo, Justin Ben-Asher, James Carolan, Chris Paparella, Steptoe, New York Breach of Contract Damages, Bloomberg Law, (2020) https://www.steptoe.com/a/web/209139/3ZEZ74/new_york_breach_of_contract_damageseco73244.pdf.
[ii] Types of Damages in Contract Law (Section 73 of Indian Contract Act), LAW CORNER (Jun. 31, 2021), https://lawcorner.in/types-of-damages-in-contract-law-section-73-of-indian-contract-act/.
[iii] Common Cause v. Union of India, AIR 1999 DELHI 257.
[iv] Organo Chemical Industries v. Union of India, 1979 AIR 1803.
[v] Susan Buckner, Breach of Contract and Lawsuit, FindLaw, (2023).
[vi] Indian Contract Act, 1872, § 73, No. 09, Acts of Parliament, 1872 (India).
[vii] Indian Contract Act, 1872, § 74, No. 09, Acts of Parliament, 1872 (India).
[viii] Indian Contract Act, 1872, § 75, No. 09, Acts of Parliament, 1872 (India).
[ix] Julie Amadeo, et. al, supra note 1.
[x] Pence Law Firm, P.C., Four Types Of Damages Available In A Breach Of Contract, https://pencelawok.com/blog/four-types-of-damages-available-in-a-breach-of-contract/.
[xi] Gierach Law Firm, LLC, 5 Types of Damages that may be awarded for a Breach of Contract, https://www.gierachlawfirm.com/5-types-of-damages-that-may-be-awarded-for-a-breach-of-contract/.
Author: Gayatri Singh, UPES, Dehradun
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