A contract is a legal promise to perform certain obligations. When a party breaks a promise, then the other parties to the contract might suffer losses due to non-performance of the obligation. The Indian Contract Act, 1872, has laid down some specific rules for filing a suit for damages in such cases. In this article, we will look at the various types of damages and the different scenarios under which a party can file a suit for compensation.
Compensation for Losses or Damages caused by a Breach of Contract
This section of the Indian Contract Act, 1872, lays down certain rules to determine the amount of compensation upon the breach of a contract. The ground rule is, on the breach of a contract, it is the entitlement of the suffering party to receive compensation from the party who breaks the contract for losses sustained due to the breach. Here are some rules:
- The suffering party can claim compensation for any loss arising naturally in the usual course of events.
- Even if the party knew that on the breach of the contract, they might suffer certain losses, he can claim compensation.
- Special damages, if any, can be claimed only if the suffering party has given notice about it earlier. Also, the party suffering a loss is expected to take reasonable steps to minimize it.
- The suffering party cannot claim compensation for indirect or remote losses/damages.
Also, while estimating the loss incurred, all the means which existed to remedy the inconvenience caused by the non-performance of the contract should be considered.
Example: Peter agrees to sell and deliver 50 kilograms of rice to John for Rs 5,000. The amount is to be paid on delivery. However, Peter fails to perform the promise. John buys 50 kilograms of rice from a neighbourhood trader for Rs 6,000. John can claim compensation from Peter. The compensation amount is the additional amount that John had to pay to procure the same quantity of rice of similar quality from the market. In this case, it is Rs 1,000.
Types of Damages
Sections 73-75 of the Indian Contract Act, 1872, define remedy by way of damages as the entitlement of the suffering party to recover compensation for losses suffered due to non-performance of the contract. The damages can be of the following types:
1] Ordinary damages
On the breach of a contract, the suffering party may incur some damages arising naturally, in the usual course of events. Even if the suffering party knew about the likely damages if the contract was breached, he can claim compensation for such losses.
Peter agrees to sell and deliver 10 bags of potatoes to John for Rs 5,000 after two months. On the date of delivery, the price of potatoes increases and Peter refuses to perform his promise. John purchases 10 bags of potatoes for Rs 5,500. He can receive Rs 500 from Peter as ordinary damages arising directly from the breach.
2] Special Damages
A party to a contract might receive a notice of special circumstances affecting the contract. In such cases, if he breaches the contract, then he is liable for the ordinary damages plus the special damages.
Peter hired the services of John, a goods transporter, to deliver a machine to his factory urgently. He also informed John that his business has stopped for want of the machine. However, John delayed the delivery of the machine by an unreasonable amount of time. Peter missed out on a huge order since he didn’t have the machine with him.
In this case, Peter can claim compensation from John. The compensation amount will include the amount of profit he could have made by running his factory during the period of delay. However, he cannot claim the profits that he would have made if he got the contract since John was not made aware of the same.
3] Vindictive or Exemplary Damages
There are two scenarios for awarding vindictive or exemplary damages:
- Breach of a promise to marry because it causes injury to his/her feelings
- Wrongful dishonour of cheque by a banker because it causes loss of reputation and credibility.
In case of a wrongful dishonour of cheque from a businessman, the compensation will include exemplary damages even if he has not suffered any financial loss. However, a non-trader is not awarded heavy compensation unless the damages are alleged and proved as special damages.
Example: Peter is a farmer. He issues a cheque for procuring seeds for his next crop. He has sufficient funds in his account but the bank erroneously dishonours the cheque. Peter files a suit claiming compensation for damages to his reputation. The Court awards a nominal amount as damages since Peter is not a trader.
4] Nominal Damages
If a party to a contract files a suit for losses but proves that while there has been a breach of contract, he has not suffered any real losses, then compensation for nominal damages is awarded. This is done to establish the right to a decree for a breach of contract. Also, the amount can be as low as Re 1.
5] Damages for Deterioration caused by Delay
In cases where goods are being transported by a carrier and he delays the delivery of goods causing them to deteriorate, the affected party can file a suit for damages for deterioration by the delay. Deterioration can mean physical damage to the goods and/or loss of a special opportunity for sale.
6] Pre-fixed damages
During the formation of a contract, the parties might stipulate payment of a certain amount as compensation upon the breach of the contract. This amount can be a reasonable estimate of the likely loss in case of a breach or a penalty.
Under Section 74 of the Indian Contract Act, 1872, it is specified that if an amount is mentioned in a contract as the sum to be paid in case of a breach, then the suffering party is entitled to reasonable compensation, not exceeding the amount specified.
Solved Question on Suit for Damages
Q: If the contract specifies the penalty amount as Rs 100,000 and the actual loss due to the breach is Rs 70,000. What will be the damages?
Ans: If the contract specifies the penalty amount as Rs 100,000 and the actual loss due to the breach is Rs 70,000, then the compensation awarded to the suffering party is Rs 70,000. On the other hand, if the suffering party sustains a loss of Rs 150,000, the compensation awarded will be Rs 100,000 and NOT the actual loss sustained.