TABLE OF CONTENTS

CERTIFICATE
ACKNOWLEDGEMENT
TABLE OF CASES
ABSTRACT.
RESEARCH METHODOLOGY
INTRODUCTION
DAMAGES FORBREACH.............................................................................................
SECTION 73 0F CONTRACT ACT
MEASURE OF DAMAGES.
BIBLIOGRAPHY..

TABLE OF CASES

Hadley v Baxendale
Sunrise Associates v Govt NCT of Delhi, (2006) 5 SSC 603
Sudesh Prabhakar Volvoikar v Gopal Babu Savolkar, (1996) 5 Bom CR 1
Ram Kumar v Lakshmi Narayan, AIR 1947 Cal 157
Plasgraf v Long Island R. R. Co
Horne v Midland Railway Co
British Columbia Saw Mill Co v Nettleship
Ghaziabad Development Authority v Union of India, (2000) 6 SCC 113
Sarvaraya Textiles Ltd v Pavan T. Punjabi, (2004) 1 Bom CR 551
Chief Secy, State of Gujrat v Kothari Associates, (2003) 1 Guj CD 372 (Guj)
State of Rajasthan v Nathulal, AIR 2006 Raj 19
Draupadi Devi v Union of India, (2004) 11 SSC 425
Cotton Corp. of India Ltd v Nand Kishore Parasramka, AIR 2001 Cal 137
Dhamudhar Prasad Verma v State of A.P., (2003) 2 BC 351 (Gau)
Maharashtra State Electricity Board v Sterlite Industries (India) Ltd, (2002) 1

ICC 178 (SC)

Pannalal Jankidas v Mohanla, AIR 1951 SC 145, 149
Food Corporation of India v Laxmi Cattle Food Industries, (2006) 2 SCC 699
Bombay Motor Sports v Union of India, (2000) 1 BLJR 23 (Pat)

INTRODUCTION
Oxford dictionary defines damages as financial compensation for loss or injury. In
law, damages are money claimed by, or ordered to be paid to, a person as
compensation for loss or injury Black's Law Dictionary. In context of the Indian

Contract Act, 1872 damages are referred in context to breach of contract i.e. a
party's failure to perform some contracted-for or agreed-upon act, or his failure to
comply with a duty imposed by law which is owed to another or to society. Breach of
contract is a legal concept in which a binding agreement or bargained-for exchange
is not honored by one or more of the parties to the contract by non-performance or
interference with the other party's performance On a breach of contract by a
defendant, a court generally awards the sum that would restore the injured party to
the economic position they expected from performance of the promise or promises
(known as an "expectation measure" or "benefit-of-the-bargain" measure of
damages). When it is either not possible or not desirable to award damages
measured in that way, a court may award money damages designed to restore the
injured party to the economic position they occupied at the time the contract was
entered (known as the "reliance measure"), or designed to prevent the breaching
party from being unjustly enriched ("restitution"). Parties may contract for liquidated
damages to be paid upon a breach of the contract by one of the parties. Under
common law, a liquidated damages clause will not be enforced if the purpose of the
term is solely to punish a breach (in this case it is termed penal damages). The
clause will be enforceable if it involves a genuine attempt to quantify a loss in
advance and is a good faith estimate of economic loss. Courts have ruled as
excessive and invalidated damages which the parties contracted as liquidated, but
which the court nonetheless found to be penal. Damages are likely to be limited to
those reasonably foreseeable by the defendant. If a defendant could not reasonably
have foreseen that someone might be hurt by their actions, there may be no liability.
This is known as remoteness. This rule does not usually apply to intentional torts
(e.g. deceit), and also has stunted applicability to the quantum in negligence where
the maxim Intended consequences are never too remote applies 'never' is
inaccurate here but resorts to unforeseeable direct and natural consequences of an
act.

DAMAGES FOR BREACH

A contract is not a property. It is only a promise supported by some consideration

upon which either the remedy of specific performance or that of damage is
available.1 The party who is injured by the breach of a contract may bring an action
for the damages. Damages means compensation in terms of money for the loss
suffered by the injured party. Burden lies on the injured party to prove his loss. 2
Every action for damages raises two problems. The first is the problem for
remoteness of damage and the second that of measure of damages.

Remoteness of Damage
Every Breach of contract upsets many a settled expectations of the injured party. He
may feel the consequences for a long time and in variety of ways. A person contracts
to supply to a shopkeeper pure mustard oil, but he sends impure stuff, which is a
breach. The oil is seized by an inspector and destroyed. The shopkeeper is arrested,
prosecuted and convicted. He suffers the loss of oil, the loss of profits to be gained
on selling it, the loss of social prestige and of business reputation, not to speak of the
time and money and energy wasted on defense and mental agony and torture of
prosecution.3 Thus theoretically the consequences of a breach may be endless, but
there must be an end to liability. The defendant cannot be held liable for all that
follows from his breach. There must be a limit to liability and beyond that limit the
damage is said to be too remote and, therefore, irrecoverable. 4 The problem is to
where to draw the line.
The rule in Hadley v Baxendale

1 Sunrise Associates v Govt NCT of Delhi, (2006) 5 SSC 603.

2 Sudesh Prabhakar Volvoikar v Gopal Babu Savolkar, (1996) 5 Bom CR 1.
3 See Ram Kumar v Lakshmi Narayan, AIR 1947 Cal 157.
4 See judgment of ANDREWS, J in Plasgraf v Long Island R. R. Co, Court of Appeals of
New York, (1928) 284 NY 339.

A very noble attempt was made as early as (1854) in the well-known case of Hadley
v Baxendale5 to solve the problem by laying down certain rules.
ALDERSON B laid down the following rule:
Now we think about the proper rule in such a case as the present is this:
Where two parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of contract
should be such as may fairly and reasonably be considered either arising naturally,
i.e., according to the usual course of things, from such breach of contract itself, or
such as may reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as the probable result of the breach of it.
The decision in the above case has always been taken as laying down two rules.
(i)

General Damages:
General damages are those which arise naturally in the usual course of
things from the breach itself. Another mode of putting this is that the
defendant is liable for all that which naturally happens in the usual course
of things after the breach.

(ii)

Special Damages:
Special damages are those which arise on account of the unusual
circumstance affecting the plaintiff. They are not recoverable unless the
special circumstances were brought to the knowledge of the defendant so
that the possibility of the special loss was in contemplation of the parties.

No recovery of Special Damages when Special Circumstances not known Lack of

knowledge of special circumstances once again prevented recovery of special
damages in Horne v Midland Railway Co.6
For the same reason loss of profits was not allowed to be recovered in British
Columbia Saw Mill Co v Nettle ship.7

5 (1854) 9 Ex 340.
6 (1873) LR 8 CP 131.

Special Circumstances already within Knowledge of Contract Breaker But in the

subsequent case of Simpson v London & North Western Railway Co 8 the above
suggestion was qualified to this extent that if the special circumstances are already
within knowledge of the party breaking the contract, the formality of communicating
them to him may not be necessary. In another case 9 a fragmentiser was purchased
by the plaintiff under hire-purchase agreement. Its rotor broke down before normal
life. The plaintiff had no means to replace it at cash price. He had to arrange it again
a hire-purchase price and claimed the same as damages. The defendant contended
the plaintiff had to pay hire- purchase price because of his lack of means. This
contention was rejected. The fact that in the present circumstances of economy the
business has to depend upon hire-purchase system, was held to be within the
contemplation of the parties.
Relationship between Two Rules Re- examined
The relationship between the rules was re-examined in Victoria Laundry (Windsor)
Ltd v Newman Industries Ltd10 LORD ASQUITH worked out a number of propositions
from a consideration of the leading authorities.
The judgment emphasised that both the rules are based upon the principles of
forseeability.11 This gives a new look for Hadley v Baxendale. Now it has been
clearly so stated by DIPLOCK LJ in C. Czarnikow Ltd v Koufos.12

That there are

not two rules formulated in Hadley v Baxendale but only two different instances of
7 (1868) LR 3 CP 499: 18 LT 604.
8 (1876) 1 QBD 274.
9 B.P. Exploration & Co v Heent, (1982) 2 QBD 925. Where the lessor knew the purpose for
which the lessee required the premises, he was held liable for the loss of that purpose during
the delayed period. Jaques v Millar, (1877) 6 Ch D 153.
10 (1949) 2 KB 528 CA: (1949) 1 All ER 997.
11 Also so observed by DEVLIN J in Biggin & Co v Permanite Ltd, (1951) 1 KB 422.
12 (1966) 2 WLR 1397, 1497; on appeal. Heron II, the Koufos v C. Czarnikow Ltd, (1969) 1
AC 350: (1967) 3 All ER 997

the application of a single rule. To the same effect is the decision of the House of
Lords in Monarch Steamship Co Ltd v Karlshmans Oljefabriker (A/B).13
House of Lords Restore Original Vitality of Two Rules
The interpretation put upon the Hadley v Baxendale principles by the Court of
Appeal in the Victoria Laundry case had virtually replaced the expression
contemplation of the parties with reasonable mans foresight and this being the
principle in law of torts also, hardly any distinction remained between tort and
contract principles relating to remoteness of damages. But the House of Lords in
their decision in the Heron II, Koufos v C. Czarnikow Ltd14 have restored the
distinction by again laying emphasis upon the contemplation of the parties.
Lord HODSON also presented the same view of Hadley v Baxendale.
Physical Injury Resulting from Breach The wisdom of the distinction between tort and
contract principles, at any rate in reference to physical injury caused by breach, has
again been questioned by Lord DENNING in Parsons v Uttley Ingham & Co.15

In

the opinion of the Court of Appeals it was held that the principle of Hadley v
Baxendale should be confined to economic loss and for physical injuries the principle
of forseeability which operates in torts should apply.16

Section 73 of the Contract Act

13 (1949) AC 196.
14 (1967) 3 All ER 686: (1969) 1 AC 350: (1967) 3 WLR 1491
15 (1978) 1 All ER 525.
16 Distinction between tort and contract is breaking down at many points. See Fridman,
(1977) LQR 482.

The same principles are applicable in India. The Privy Council, for example,
observed in Jamal, A.K.A.S. v Moola Dawood Sons & Co17 that Section 73 is
declaratory of the common law as to damages. Similarly, PATANJALI SASTI J
(afterwards CJ) of the Supreme Court observed in Pannalal Jankidas v Mohanla18
that the party in breach must make compensation in respect of the direct
consequences flowing from the breach and not in respect of the loss or damage
indirectly or remotely caused.19 The section provides:
73. Compensation for loss or damage caused by breach of contract.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 coarse 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.
Explanation. In estimating the loss or damage arising from a breach of contract,
the means which existed of remedying the inconvenience caused by the nonperformance of the contract must be taken into account.

17 (1916) 43 IA 6: ILR 1916 43 Cal 493: (1916) 1 AC 175: 43 IA 6

18 AIR 1951 SC 144, 153: 1950 SC R 979: 53 Bom LR 472: (1951) 21 Comp Cas 1
19 Pannalal Jankidas v Mohanla, AIR 1951 SC 145, 149

Section 73 incorporates Two Rules of Hadley v Baxendale

The section declares that compensation is not to be given for any remote or indirect
loss or damage sustained by reason of the breach. 20The section also provides that
the same principles will apply where there has been a breach of a quasi-contractual
obligation.
The section thus clearly lays down two rules. Compensation is recoverable for any
loss or damage
(i)
(ii)

arising naturally in the usual course of things from the breach, or

which the parties knew at the time of the contract as likely to result from
breach.

The first rule is objective as it makes the liability to depend upon a reasonable
mans foresight of the loss that will naturally result from the breach of the contract.
The second rule is subjective as, according to it, the extent of liability depends
upon the knowledge of the parties at the time of the contract about the probable
result of the breach.21

The burden of proof lies on the plaintiff to show that damage

has been sustained and what shall be the measure of converting the loss into
money. A claim for damages becomes liable to be rejected where this burden is not
discharged.22

Liability in ordinary cases

The extent of liability in ordinary cases is what may be foreseen by the hypothetical
reasonable man, as arising naturally in the usual course of things. One illustration is
the decision of the Madras High Court in Madras Railway Co v Govinda Rau.23

20 State of Rajasthan v Nathulal, AIR 2006 Raj 19

21 See Murray Pickering, The Remoteness of Damages in Contract, (1968) 31 Mod LR 203.
22 Draupadi Devi v Union of India, (2004) 11 SSC 425.

Fazal Ilahi v East Indian Railway Co24 is another illustration of the same kind.
In a claim for general damages the plaintiff has to assert that he has suffered such
loss but for the purpose of claiming special damages he has specifically to plead and
prove that he has sustained such special loss. 25

Building Contracts
Since works and building contracts are undertaken only with a view to earn profits,
the party committing the breach would be liable for the contractors loss in terms of
expected profits. The Supreme Court came to this conclusion in A.T. Brij Pal Singh v
State of Gujrat.26
Some earlier cases on the subject were also decided either on the basis of cost of
cure or difference in value depending on whether in the circumstances of the case,
cure would be reasonable or whether recovery on the basis of difference in value
would be reasonable. The latter would be more reasonable where the building,
though defective, is nevertheless substantially useful. The cost of rectification even if
recovered, may not be so used.27

Delay suffered by builder

The builder was required to complete the work within 18 months but by reason of
delays caused by the Department, it took 27 months to be complete. The builder
23 (1898) 21 Mad 172Damages cannot be recovered by a person who does not do his duty
under the contract.
24 (1921) ILR 43 All 623.
25 Chief Secy, State of Gujrat v Kothari Associates, (2003) 1 Guj CD 372 (Guj).
26 (1948) 4 SSC 59: AIR 1984 SC 1703.
27 See East Ham B.C. v Bernard Sunley & Sons Ltd, (1965) 3 All ER 619 HL.

suffered itemized damages which he proved by leading oral evidence. The amount
claimed being reasonable was decreed.28

Scheme for allotment of plots

Damages for mental pain and anguish cannot be awarded in a case in which there
is a breach on the part of the development authority in delaying the completion of the
scheme. It is not a head of damages in ordinary commercial contracts. The court,
however, allowed interest at the rate of 12% on the refundable amount though there
was no provision in the contract to that effect. It was justifiable on equitable grounds.
The brochure of the scheme clearly excluded the liability of the authority to pay
interest in cases of refund of consideration. It was held that this clause would apply
only to cases in which the claimant himself was brought about the circumstances of
refund.29

MEASURE OF DAMAGES
Once it is determined whether general or special damages have to be recovered
they have to be evaluated in terms of money. This is the problem of measure of
damages and is governed by some fundamental principles.

Claim for damages is not debt

A claim for damages arising out of breach of contract, whether for general or
liquidated damages, remains only a claim till its adjudication by the court and
become a debt only after courts award it. Till then and on the basis of the claim
alone, the claimant is not entitled to present a winding up petition of the defendant
company on the ground of its inability to pay debts. 30
28 Chief Secy, State of Gujrat v Kothari Associates, (2003) 1 Guj CD 372 (Guj).
29 Ghaziabad Development Authority v Union of India, (2000) 6 SCC 113.
30 Greenhills Exports(P) Ltd v Coffee Board,(2001) 4 Kar LJ 158 (DB).

Damages are compensatory, not penal

In the words of ASQUITH J: It is well settled that the governing purpose of damages is to
put the party whose rights have been violated in the same position, so far as money can do so,
as if his rights have been observed.31
Robinson v Harman32 is an apt illustration of the above principle.

Inconvenience caused by breach

But the inconvenience caused by the breach may be taken into account. Thus, for
example ,in Hobbs v London & South-Western Rly Co, where a train pulled its
passengers to a wrong direction and consequently the plaintiff and his wife, finding
no other conveyance, nor a place to stay, had to walk home at midnight, the jury
allowed 8 as damages for inconvenience suffered by the plaintiffs in being obliged
to walk and 20 in respect of the wifes illness caused by catching cold. On appeal,
the court of Queens Bench held that the 8 was properly awarded but not 20. This
was critcised in the subsequent case of Mc Mohan v Fields.

Nominal damages (No loss situation)

Where the plaintiff suffers no loss the court may still award him nominal damages in
recognition of his right. But this is in the discretion of the court. The court may
altogether refuse to award any damages or may award even substantial damages.
The court is competent to award reasonable compensation in case of breach, even
if no actual damage is proved or shown to have been suffered in consequences of
breach of contract.33
31 In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 2 KB 528 CA.
32 (1848) 18 LJ Ex 202.
33 T.A. Choudhary v State of A.P., (2004) 3 ALD 357 (DB).

Refund on partial cancellation of contract

The agreement for sale of damaged food grains. The purchaser deposited a certain
amount with the Food Corporation. An application was made for cancellation of a
certain part of the agreement which was not capable of being performed. This was
conceded and some refund was made. The purchaser was not allowed to sue the
corporation for breach of contract in the matter of refund. There was no proof of any
such breach.34

Agreement to provide scientific process

The agreement was for setting up a project for converting menthons to menthol. The
agreement showed that the requisite technical knowhow was to be provided by the
Indian Institute of Petroleum (IIP). A huge expenditure was incurred in setting up the
plant. But IIP failed in its experiments of converting the material even up to five
years. It was something which had to be done under the contract in five months. The
arbitrator awarded compensation of Rs 90 lacs for the loss suffered in setting up the
plant. The court said there was nothing against public policy in the award. 35

Injunctions for restraining breach of contract

A supply system to the army which had been going on since 1960was not allowed to
be scrapped all of a sudden by blacklisting the supplier. A person dealing with the
government in matters of sale and purchase develops legitimate interest and
expectations. The order of blacklisting amounted to denial of equality of opportunity.
Before issuing such an order some explanation should be called for. The court would
not interfere in the matter if it is decided again by giving opportunity to the supplier. 36
34 Food Corporation of India v Laxmi Cattle Food Industries, (2006) 2 SCC 699.
35 CSIR v Goodman Drug House(P) Ltd, AIR 2007 Utt1 58
36 Bombay Motor Sports v Union of India, (2000) 1 BLJR 23 (Pat).

Writ remedy against termination of dealership

A dealership agreement was terminated by reason of breaches on part of the dealer.
He applied for a writ against the order expecting that contractual obligations should
be decided on the basis of affidavit evidence. The court found that the termination
had become necessary in public interest. There was no violation of Article 14 and,
therefore no scope of interference.37

Waver and writ remedy

Waiver of credit guarantee commission charges, rebate and concessional rates of
interest were held to be a part of the term of loan. They were contractual matters
between the parties. Any dispute as to such matters could be resolved through a civil
suit and not under writ jurisdiction.38

Nonperformance of its contract by Government and writ remedy

On the completion of a Government contract, the Government becomes liable for
payment of the amount accrued to the contractor. He gets a legal right to invoke the
jurisdiction of the writ court praying for mandamus for direction to the Government to
make payment for the admitted outstandings.39

Nonperformance of Government contract by contractor and writ

A foreign company contracting with the Government failed to complete the road
building projects within the stipulated periods. Sufficient time and opportunities were
afforded to the company to amend defaults. But it could not do so. Termination of the
37 O.J.S. Corp. Transstory v Govt of Karnataka, AIR 2005 Kant HCR 1492.
38 Devi Prasad Steels (P) Ltd v A.P. State Financial Corp. (1999) 1 BC 497 (AP).
39 Dhamudhar Prasad Verma v State of A.P., (2003) 2 BC 351 (Gau).

contract by the Government in according with the contract stipulations was held to be
justified in public interest. There was no violation of Article 14 and no occasion of
issuing a writ.40

Recovery of damages as arrears of land revenue

The Supreme Court has upheld the validity of a clause in a Government contract
which authorized the State to recover damages as arrears of land revenue. 41 Where
there was no such clause recovery of dues under a contract by way of arrears of
land revenue was not allowed.42

Exclusion of Section 73: Arbitration Clause

Whether in the context of terms and conditions of a contract it is permissible to
provide that Section 73 would not apply and the special terms of the contract should
be applied for making out recoverable loss, the court said that it depends upon the
appreciation of the facts of case and if the arbitrator had followed the special
provision, no fault in his award could be found for that reason alone. 43

40 O.J.S. Corp. Transstory v Govt of Karnataka, AIR 2005 Kant 351.

41 State of Karnataka v Shree Rameshwara Rice Mills, (1987) 2 SCC 160
42 Mohd Umar v Nagar Palika,Khatima, AIR 1988 All 227.
43 Maharashtra State Electricity Board v Sterlite Industries (India) Ltd, (2002) 1 ICC 178
(SC).

BIBLIOGRAPHY

CONTRACT & SPECIFIC RELIEF-by Avtar Singh

INDIAN CONTRACT ACT- by R.K. Bangia
indlaw.com
google.co.in
wikipedia.org
indiankanoon.org