What are the Rules for Determining Damages for Breach of Contract?

The rules for determining damages in case of breach of contract as based on the decision given in Hadley vs. Baxendale, are contained in Sec. 73 of the Indian Contract Act, 1872. The rules state that when a contract has been breached, the injured party is entitled to:-

1. Such damages which naturally arose in the usual course of things from such breach. (This relates to Ordinary Damages arising in the usual course of things);

2. Such damages which the parties knew, when they made the contract, to be likely to result from the breach. (This relates to Special Damages.)

But such compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach; and such compensation for damages arising from breach of quasi-contract shall be the same as in any other contract.

Estimation of Damages:

In estimating the loss or damages arisen from a breach of contract the means which existed for remedying the inconvenience caused by the non-performance of the contract, must be taken into account.

The object of a awarding damages for the breach of contract is to put the injured party into the position in which he would have been, had there been performance of that contract. Sec. 73 to 75 of the Act deal with the rules regarding the loss or damage arisen from a breach of contract. The rules state that:-

1. Damages are paid as compensation and restitution and not as punishment. Infact through damages efforts are made to put the party back into the same position as if the contract had been performed. [Hadley Vs. Baxendale]

2. Compensation is paid for proximate losses as May naturally, fairly and reasonable arise in the usual course of events.

3. No compensation can be paid for any remote or indirect losses as provided under Sec. 73.

4. Compensation can be paid for any loss or damage, which the party knew when he entered into the contract.

5. Subsequent circumstances causing increase or decrease in the quantum of damages are not taken into consideration.

6. Claim for damages must be fair and reasonable.

In general, the law allows the following four types of damages:-

(i) Ordinary Damages:

Compensation can be paid for actual loss. No one can be allowed to make profits from loss. Usually, the difference between the contract price and the market price on the date of breach is determined as compensation. Such compensation is known as ‘ordinary damages’.

Section 73 does not give any course of action unless and until damage is actually suffered. [Union of India vs. T.D.L. Patel, A.I.R. (1917), Delhi 120]

(ii) Special Damages:

Damages other than those arising from the breach of contract may be recovered, if such damages may reasonably be supposed to have been in the contemplation of both the parties as the probable result of the breach of contract. Such damages are known as special damages.

Such damages cannot be claimed as a matter of right. They can be claimed only if special circumstances which would result in a special loss in case of breach of contract, are brought to the notice of the other party. [Simpson Vs. London N. W. Rail Co.]

Further, the fact that damages are difficult to be assessed, does not prevent the injured party from recovering them. [Chaplin vs. Hicks (1911), 2 K.B. 786]

(iii) Vindictive or Exemplary Damages:

Damages are awarded by way of compensation for loss suffered and not by way of punishment. Hence, such damages have no place in the Law of Contract because they are punitive by nature. However, there are two cases in which the court may award exemplary damages. These cases are:-

(a) Breach of a promise to marry; and

(b) Wrong dishonor of a cheque by a banker.

(iv) Nominal Damages:

Where the injured party has not, in fact, suffered any loss by reason of the breach of contract, the damages recovered by him are nominal, i.e., very small. Such damages only acknowledge that the plaintiff has proved his case and won. [Brace Vs. Calder]

Some other types of damages:

Over and above these four types of damages for which the aggrieved party may claim for breach of contract, there are some other types of damages which an aggrieved party may also claim for the breach of a contract. These damages along with the rules in relation thereto are as under:-

(1) Damages for loss of reputation:

Generally, such damages are not recoverable. An exception to this rule arises in case of a banker, who wrongfully refuses to honor a customer’s cheques. If the customer is a businessman, he can recover damages in respect of any loss to his business reputation by such breach.

The rule in such a case is–the smaller the amount of the cheque dishonored, the larger the amount of damages awarded. In case the customer is not a businessman, he can recover only nominal damages.

(2) Damages for inconvenience and discomfort:

(Damages can also be recovered for physical inconvenience and discomfort. The general rule is that the measure of damages is not affected by the motive and the manner of the breach of contract.

If, however, the inconvenience or discomfort caused by breach, is substantial, the damages can be recovered on the ground of fairness.

(3) Mitigation of damages:

It is the duty of the aggrieved party to take all reasonable steps to mitigate the loss caused by the breach.

[Union of India vs. B. Prahlad & Co.]

He cannot claim compensation for loss from the party in default, which he would have reasonably avoided.

[M. Iachia Setty & Sons Ltd. vs. Coffee Board, Bangalore, A.I.R. (1986), S.C. 162]

The aggrieved party cannot claim compensation for loss which is really due not to the breach but due to his own neglect after the breach. (Explanation to Section 73)

(4) Difficulty in assessment:

Though the damages which are incapable of assessment cannot be recovered, the fact that they are difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them.

The court must do its best to estimate the loss and a contingency may be taken into account. [Chaplin vs. Hicks]

(5) Cost of decree:

The aggrieved party is entitled, in addition to the damages, to get the cost of getting the decree for damages. However, the cost of suit for damages is at the discretion of the court.

(6) Damages agreed upon in advance:

Sometimes the contract states the sum to be paid in case of its breach or if the contract contains any other stipulation by way of a penalty, e.g., for non-performance of the contract, the aggrieved party is entitled to receive from the party, who has breached the contract reasonable compensation not exceeding the amount so stated. (Section 74).

(7) Damages from carriers:

Damages can be claimed from the carriers even without notice for deterioration caused to goods by delay in transit. J Wilson vs. Lancashire & Yorkshire Rly. Co.]

(8) Damages by way of penalty:

Damages by way of penalty are not allowed except in the case of bail bond or in public interest or for the performance of public duty by order of the Court or Government.

(9) Damages for breach of service contracts:

Damages for breach of service contracts by the employers are determined with reference to the usual terms of images for the employment contracted for and at the time that would be lost before similar employment is obtained.

The measure of damages for earlier termination of service is the salary for the remainder of the term of service.

(10) Interest on payments of money:

Damages for the breach of contracts for payment of money on a particular date, interest on the principal sum from the date on which the sum was agreed to be paid till the actual date of payment is regarded to be a sufficient compensation to the aggrieved party.