Damages for Breach of Contract - Sept 2012

7/28/2019 Damages for Breach of Contract - Sept 2012

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LawQuest 2012. All Rights are Reserved. 1

Damages for Breach ofContracts

by Poorvi Chothani, Esq.LawQuest

www.lawquestinternational.com

September 12, 2012IIM - Ahmedabad
http://www.lawquestinternational.com/http://www.lawquestinternational.com/


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Introduction

An agreement enforceable by law is a

contract.

A contract, which imposes a legal

relationship between the contracting parties,

can be brought to an end only by the

Discharge of the Contract.


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Discharge of Contract may take place in

various ways as follows by:1. Performance

2. Attempted Performance or Tender

3. Impossibility of Performance

4. Agreement

5. Lapse of Time

6. Operation of Law7. Breach of Contract


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Definition of Breach of Contract

Breach of Contract under the Indian Contract Act,

1872 :

A breach of contract gives rise to a legal cause ofaction in which a binding agreement or bargained-

for exchange is not honoured by one or more of the

parties to the contract by non-performance or

interference with the other party's performance

without any lawful excuse


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Nature of Breach

Actual Breach: Actual breach occurs where one party

refuses to perform his side of the bargain on the due

date or performs incompletely.

Anticipatory Breach: Where one party announces, in

advance of the due date for performance, that he

intends not to perform his side of the bargain.

Innocent party may sue for damages as soon as breach

is announced.


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Forms of Breach of Contract

A party renouncing his obligations under the

contract

A party by his own act making it impossible that

he should fulfill his obligations under the contract

A party may fail to perform what he haspromised


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Innocent Partys Options in Face of a Breach

a) Renunciation (where a party refuses to perform his

obligations under the Contract)

b) Breach of condition (where the party in default hascommitted a breach of condition)

c) Fundamental Breach (where the party in breach has

committed a serious (or fundamental) breach of aninnominate term or totally fails to perform the contract)


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General Principles

When there is such a breach of contract by one

party then the other party is entitled to discharge

himself and does so, he is released from further

performance.

He is not obliged to accept any further

performance from the party in breach.


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Remedy

Equitable or Common Law Remedy

a. Specific Performance

b. Injunction

Legal Remedy

a. Damages


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Remedy

Damages should be -

Capable of being fairly and reasonably be

considered arising naturally in the usual course ofthings; or

As per the knowledge of both the parties at the time

of entering into the contract as the naturalconsequence of such breach.


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Specific Performance

Is an exceptional but specific remedy, which isgranted:

In rare cases where the court considers it just andequitable

If movable property is an extra ordinary article that isnot easily available in the market or is of specialvalue of interest to the plaintiff

Where a movable property is held as agent or trustee

of plaintiff. Where transaction involves land or other immovableproperty


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Specific Performance Not Granted Where

Compensation is an adequate relief Contract involves minute and numerous details

Contract is dependant on personal qualifications ofthe parties

Contract involves performance of a continuousnature that constant supervision by the court wouldbe required

Specific performance would be possible against

one party but not the other Damages are not as speedy or efficacious as

specific performance


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Prithvi Raj Singh Vs. Dalip Kulkarni

(Rajasthan High Court, 1999)

An agreement for taking over of a company provided thatthe defendant shall discharge the liabilities of the plaintifftowards various financial institutions. In pursuance of the

agreement, the plaintiff handed over the assets of thecompany and their possession to the defendants. Thedefendant failed to pay the institutions.

Order of specific performance was awarded on theground that damages are not as speedy and efficaciousa remedy as specific performance.


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Surjit Kaur Vs. Naurata Singh

(Supreme Court,2000) Specific performance cannot be granted to a party who

has not been ready and willing at all stages to performthe contract

In cases where a contract is not capable of beingperformed in whole then the readiness and willingness,at all stages, is the readiness and willingness to acceptpart performance

If a contract is not capable of being performed in wholeand a party clearly indicates that he is not willing toaccept part performance, then there is no readiness andwillingness, at all stages, to accept part performance.


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Shanker Singh Vs. Narinder Singh

(Supreme Court, 2011)

The party seeking part performance must unambiguouslyrelinquish all claims to performance of remaining part of thecontract.

Damages and specific performance are both remediesavailable upon breach of obligations by a party to the contract.

Unless the contrary is proved, the Court shall presume thatbreach of contract to transfer immovable property cannot beadequately relieved by compensation in money.

There must be certainty with respect to the property to besold.


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Jabalpur Cable Network Pvt. Ltd Vs. ESPN

Software India Pvt. Ltd.(Madhya Pradesh High Court, 1999)

Contract to send messages and satellite signals by a

cable operator has been held as specifically enforceableas they are not goods, ordinary article of commerce, nor

easily available/obtainable in the market nor there are any

standards of ascertaining loss caused to the aggrieved

party to the contract.


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Injunction

An injunction is an order of the courtrequiring a person to perform a negative

obligation.

For granting injunctions a court applies the sameprinciples as are applicable in granting specific

performance of a contract.

Two broad categories of injunction:a)Prohibitory injunction

b)Mandatory injunction


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Damage or Loss

1. Pecuniary (loss of profits, damage to goods, loss of

future earnings)

2. Non-pecuniary (pain, suffering, loss of reputation)


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Damages and Compensation

Damages are the pecuniary recompense given byprocess of law to a person for the actionable wrong doneto him by another person.

Compensation for damage or loss due to an actionablewrong like compensation for loss arising out of breachof contract or termination of employment and so on.

In the Indian Contract Act, 1872, the word damages forbreach of contract is used in the sense of compensation.


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Damages

Types of Damages:

Nominal Damages

Substantial Damages

Aggravated and Exemplary Damages

Liquidated and Un-liquidated Damages

Consequential Damages

Damages for pain and suffering

Punitive Damages


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Dhulipudi Namayya Vs. Union of India

(Andhra Pradesh High Court, 1958)

Function of damages for breach of contract is compensatory notpunitive.

Ruxley Electronics Vs. Forsyth (House of Lords, 1995)

The amount of damages cannot exceed the loss actually suffered by theclaimant or which he is likely to suffer.

Ghansiram Vs. Municipal Board (Bhopal High

Court,1956)

The amount of damages cannot exceed the loss actually suffered by theclaimant, or which he is likely to suffer.


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Quantification of Damages

The only measure of damages in a contract is theloss truly suffered by the promisee

The amount of damages cannot exceed the lossactually suffered by the claimant of which he has or

is likely to suffer Damages are compensation for natural andprobable consequence of the breach i.e. whichcould reasonably be foreseen

The function of damages is compensatory notretributive. They are based on loss of plaintiff noton gain of defendant


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Jwala Prasad Vs. Jwala Bank Ltd.

(Allahabad High Court, 1957)

Managing Director is deemed to be dismissed on winding

up of a company. Claim for damages evaluated at the dateof the winding up after deducting what he is able to earn by

doing any other business he likes. He was awarded half of

the evaluated amount.


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State of Uttar Pradesh Vs. Debi Prasad

(Allahabad High Court, 1966)

A was dismissed by one department of the

Government and was then employed by another

department. The dismissal was declared illegal by acourt of law. A claimed salary in respect of his

employment in the first department. A was awarded

salary after deducting the salary for the period for which

he served in that other department.


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One-Time, Single Assessment of Damages

When claim arises from one and the same cause ofaction.

A second proceeding cannot be brought in respect ofthe same cause of action even though the plaintiff

suffers an unexpected or very great loss in the future.

However, separate suits may be maintained forseparate breaches of different promises in the samecontract

A claim for un-liquidated damages does not give rise toa debt until the liability is adjudicated upon and thedamages assessed.


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Legal Remedies

Section 73 of the Contract Act, 1872: When acontract has been broken, the party who suffers by suchbreach is entitled to receive, from the party who hasbroken the contract a compensation for any loss or

damage caused to him thereby, which naturally arose inthe usual course of things from such breach, or whichthe parties knew, when they made the contract to belikely to result from the breach of it.

Such compensation is not to be given for any remoteand indirect loss or damage sustained by reason of thebreach.


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Liquidated Damages

Section 74 of the Indian Contract Act:

When a contract has been broken, if a sum is named in

the contract as the amount to be paid in case of such

breach, or if the contract contains any other stipulation by

way of penalty, the party complaining of the breach is

entitled, whether or not actual damage or loss is proved to

have been caused thereby, to receive from the party who

has broken the contract reasonable compensation notexceeding the amount so named or, as the case may be,

the penalty stipulated for.


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Liquidated Damages and Penalty

Interchangeable use of the terms liquidated damages and penaltycreates ambiguities

Penalty deterrent value, often considered as a means of terrifying a

party to fulfill his or her obligation.

Exorbitant

Unconscionable

Breach consists in paying of money and the sum stipulated is

greater than the sum which ought to have been paid.

Liquidated damages genuine, covenanted pre-estimate of damages.

Nature of damages depends on facts of the case.


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Liquidated Damages

Nature of damages depends on:

Character of transaction and its special nature, if any

The relative situation of the parties

The statutory rights and obligations accruing from the transaction

Intention of the parties as evidenced in the contract

The particular stipulation which is contended to be penal in

nature


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If the contract does not provide on theconsequences of breach, the loss of profit isawarded as damages. The theme can be divided into further parts. In a sale contract, there is areference to the sale price. This makes quantificationof the loss relatively easy. The courts haveformulated specific principles in relation to this.

In other business contracts the assessment wouldbe on the general principles.

Business Contracts


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Damages for Mental Pain and Suffering

Ordinarily, in commercial contracts damages are not

allowed for mental suffering.

Damages, in principle cannot be recovered in a contractfor injury to reputation.

Damages for mental distress in contract are limited to a

certain class of cases where the contract itself is to

provide peace of mind and not in commercial contracts.


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Mitigation

The rule that the party in breach of contract be placed as

far as money can do it, in as good a situation as if the

contract had been performed, is qualified by one more

principle:

- It imposes on a plaintiff the duty of taking all reasonable

steps to mitigate the loss consequent on the breach and

debars him from claiming any part which is due to his

neglect to take such steps.


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Rules of Mitigation

The plaintiff cannot recover the losses consequent uponthe default of the defendant if the plaintiff could have

avoided the loss by taking reasonable steps.

If the plaintiff avoids or mitigates the loss, he cannot

recover for such avoided loss even if he takes steps which

are more than what was reasonable required of him.

Where the plaintiff suffers loss or incurs expense despite

taking reasonable steps to avoid or mitigate the lossresulting from the defendants default, he may recover the

further loss due to expense.

Contd


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Rules of Mitigation

The explanation of Section 73 does not create an

independent actionable duty to mitigate but a factor to be

taken into account in assessing the damages naturally

flowing from the breach.

Mitigation also finds applications in the contract of

employment.


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Remoteness of Damage

Compensation must be in respect of the direct

consequences flowing from the breach and not in

respect of loss or damage indirectly or remotely caused.

The party who has suffered the loss should be placed in

the same position, as far as compensation in money can

do, as if the party in breach has performed his contract

or fulfilled the duty.


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Hadley Vs. Baxendale

(Court of Exchequer Chamber,1854)

The Crankshaft Case delay in transportation by canal instead of rail

Criteria for awardparties intent, purposes and awareness.

Absent explicit communication inference based on parties actions.

Importance of communicating special circumstances.

Where two parties have made a contract which one of them has

broken, the damages which the other party ought to receive in respectof such breach of contract should as such as may fairly and reasonablybe considered either arising naturally i.e. according to the usual courseof things, from such breach of contract, itself.


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Position in India

The principles ofHadley Vs. Baxandale

First: If the parties have in express terms impliedly

provided for the consequences, these should befollowed.

Second: Take the contract and its breach to be as it

usually happens in general practice.


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A contracts to pay a sum of money to B on a day specified. Adoes not pay the money on that day. B, in consequence of notreceiving the money on that day, is unable to pay his debts,and is totally ruined. A is not liable to make good to B anythingexcept the principal sum he contracted to pay, together with

interest up to the day of payment.

A contracts to sell and deliver 500 bales of cotton to B on afixed day. A knows nothing of Bs mode of conducting hisbusiness. A breaks his promise, and B, having no cotton, is

obliged to close his mill. A is not responsible to B for the losscaused to B by closing of the mill.

Remoteness of Damage Illustrations to S. 73


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A contracts to sell and deliver to B, on the first ofJanuary, certain cloth which B intends to manufactureinto caps of a particular kind, for which there is nodemand, except at that season. The cloth is notdelivered till after the appointed time, and too late to beused that year in making caps. B is entitled to receivefrom A, by way of compensation, the differencebetween the contract price of the cloth and its marketprice at the time of delivery, but not the profit which heexpected to obtain by making caps, nor the expenses

which he has been put to in making of preparation forthe manufacture.



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A, a ship owner, contracts with B to convey him form Calcuttato Sydney in As ship, sailing on the first of January, and Bpays to A, by way of deposit, one-half of his passage-money.The ship does not sail on the first of January, and B, after

being, in consequence, detailed in Calcutta for some time, andthereby put to some expense, proceeds to Sydney in anothervessel, and, in consequence, arriving too late in Sydney, losesa sum of money. A is liable to repay to B his deposit, withinterest, and the expense to which he is put by his detention inCalcutta, and the excess, if any, of the passage-money whichB lost by arriving in Sydney too late


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LawQuest 2012. All Rights are Reserved.42

A, the owner of a boat, contracts with B to take a cargo of juteto Mirzapur, for sale at that place, starting on a specified day.The boat, owing to some avoidable cause, does not start atthe time appointed, whereby the arrival of the cargo atMirzapur is delayed beyond the time when it would havearrived if the boat had sailed according to the contract. Afterthat date, and before the arrival of the cargo, the price of jutefalls. The measure of the compensation payable to B by A isthe difference between the price which B could have obtainedfor the cargo at Mirzapur at the time when it would havearrived if forwarded in due course, and its market price at thetime when it actually arrived

Remoteness of Damage: Parties are bound bythe consequences they have contemplated


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A delivers to B, a common carrier, a machine, to be

conveyed, without delay, toAs mill, informing B that his mill is

stopped for want of machine. B unreasonably delays the

delivery of the machine, and A, in consequence, loses a

profitable contract with the Government. A is entitled to

receive from B, by way of compensation, the average amount

of profit which would have been made by the working of the

mill during the time that delivery of it was delayed, but not the

loss sustained through the loss of the Government contract.



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A contracts with B to make and deliver to B, by a fixed day,for a specified price, a certain piece of machinery. A doesnot deliver the piece of machinery, at the time specified, and,in consequence of this, B is obliged to procure another at a

higher price than that which he was to have paid to A, and isprevented from performing a contract which B had madewith a third person at the time of his contract with A (butwhich had not been communicated to A), and is compelledto make compensation, the difference between the contract

price of the machinery and the sum paid by B for another,but not the sum paid by B to the third person by way ofcompensation



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A, a builder, contracts to erect and finish a house by the firstof January, in order that B may give possession of it at thattime to C, with whom B has contracted to let it. A is informedof the contract between B and C. A builds by B, who, in

consequence, loses the rent which he was to have receivedfrom C, and is obliged to make compensations to C for thebreach of his contract. A must make compensation to B forthe constructing or re-building the house, for the rent loss, andfor the compensation made to C

Explanation: The parties have shared the consequences ofbreach in the loss of tenancy.



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In Pannalal J ankidas Vs. Mohanlal (Supreme Court,1950) the Supreme Court has recognized that Section

73 codifies the judgment in Hadely Vs. Baxendale.

The cases on remoteness of damage have abated asall commercial contracts have a clause stating:Neither party shall be liable to the other party for

indirect or consequential losses.



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Measure of Damages - The Principle

A basis for damages has already been adopted in

the principle restitutio in integrum, namely that

when an injured person has suffered damage, hemust, so far as money can do it, be restored to the

position before he suffered it.


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Measure of Damages

In business contracts, parties come together to earn aprofit so loss of profit is the most common claim.

In a sale contract - difference between the contract

price and the price of the goods on the date ofperformance adequately measures the loss.

Difficult to measure loss of profit in other contractssuch as work contracts.

The courts take a percentage of the contract value as ameasure of loss.


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Measure of damages has to be calculated as wouldplace the party suffering breach as far as money cando it in as good a condition in which he would had beenhad the contract been performed

The injured party has the corresponding duty to take allreasonable steps to mitigate the loss consequent onthe breach

The injured party is debarred from claiming any part ofdamages which is due to his neglect in taking suchsteps

Murlidhar Chiranjilal Vs. Harishchandra

Dwarkadas (Supreme Court, 1962)


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Illustrations:

A contracts to sell and deliver 50 mounds of saltpeter to

B, at a certain price to be paid on delivery. A breaks hispromise. B is entitled to receive from A, by way of

compensation, the sum, if any, by which the contract

price falls short of the price for which B might have

obtained 50 mounds of saltpeter of like quality at the time

when the saltpeter ought to have been delivered

Measure of Damage


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A hires Bs ship to go to Bombay, and there takes on board, on the first

of January, a cargo, which A is to provide, and to bring it to Calcutta,

the freight to be paid when earned. Bs ship does not go to Bombay, but

A has opportunities as those on which he had chartered the ship. A

avails himself of those opportunities, but is put to trouble and expensein doing so. A is entitled to receive compensation from B in respect of

such trouble and expense.

Explanation: A can only receive the expenses incurred for arranging

the alternate carriage.

Performance Interest: Damages that should beawarded to the innocent party


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A contracts to let his ship to B for a year, from the first of January, for

a certain price. Freights rise, and, on the first of January, the hire

obtainable for the ship is higher than the contract price. A breaks his

promise. He must pay to B, by way of compensation, a sum equal to

the difference between the contract price and the price for which Bcould hire a similar ship for a year on and from the first of January.

Explanation: A must pay to B, by way of compensation, a sumequal to the difference between the contract price and the price for

which B could hire a similar ship, for a year on and from the first ofJanuary. The illustration does not mention the expenses for finding

the alternate carriage.



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A, a builder, contracts to erect and finish a house by the first of January in order

that B may give possession of it at that time to C, to whom B has contracted to let

it. A is informed of the contract between B and C. A builds the house so badly

that, before the first of January, it falls down and has to be re-built by B, who, in

consequence, loses the rent which he was to have received from C, and is obliged

to make compensation to C for the breach of his contract.

Explanation: If the contract, had been performed, B would not have incurred thecost of rebuilding the house. Thus, A should reimburse him the cost of rebuilding

the house. It was expressly understood by the parties that A had contracted to rent

the house to C. The consequences of breach reached to the contract between Band C. Thus A should pay to B the rent B lost and the compensation he had to pay

to C.



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A, a ship-owner, contracts with B to convey him from Calcutta toSydney inAs ship, sailing on the first of January, and B pays to A, byway of deposit, one-half of his passage-money. The ship does not sailon the first of January, and B, after being in consequence detained inCalcutta for some time and thereby put to some expenses, proceeds to

Sydney in another vessel, and, in consequence, arriving too late inSydney, loses a sum of money

Explanation: In the case of a breach of carriage, the passenger wouldhave to buy another ticket and suffer miscellaneous expenses in thewhile. However, as a result of the delay in reaching Sydney, he wouldincur losses is remote to the contract which is for carriage.



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A delivers to B, a common carrier, a machine, to beconveyed, without delay, toAs mill informing B that his millis stopped for want of the machine. B unreasonably delays

the delivery of the machine

Explanation: The parties know that the mill will be idle ifthe contract is breached. As a result of this, the loss to theparty will be of profit.

Business Contract Knowledge of Special

Circumstances


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A contracts to sell and deliver 500 bales of cotton to B ona fixed day. A knows nothing ofBs mode of conductinghis business. A breaks his promise, and B, having nocotton, is obliged to close his mill. A is not responsible to

B for the loss caused to B by the closing of the mill.

Explanation: Itis not shared between the parties that Bhas a mill and it would be closed if the delivery weredelayed.

Business Contract Usual Course of Business


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LawQuest 2012. All Rights are Reserved.

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A contracts to sell and deliver 50 mounds of saltpeter to B,at a certain price to be paid on delivery. A breaks hispromise.

Explanation: B is entitled to receive from A, by way ofcompensation, the sum, if any, by which the contract pricefalls short of the price for which B might have obtained 50mounds of saltpeter of like quality at the time when thesaltpeter ought to have been delivered.

Sale Contract


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A contracts to sell and deliver 50 mounds of saltpeter to Bon the first of January, at a certain price. B afterwardsbefore the first of January, contracts to sell the saltpeter toC at a price higher than the market price of the first of

January.

Explanation: In estimating the compensation payable byA to B, the market price of the first of January, and not theprofit which would have arisen to B from the sale of C, is

to be taken into account.

Sale Contract


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A contracts to buy Bs ship for 60,000 rupees, but breakshis promise.

Explanation: A must pay to B, by way of compensation,the excess, if any, of the contract price over the pricewhich B can obtain for the ship at the time of the breach

of promise.

Sale Contract


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A contracts to supply B with a certain quantity of ironat a fixed price, being a higher price than that forwhich A could procure and deliver the iron. Bwrongfully refuses to receive the iron.

Explanation: B must pay to A, by way ofcompensation, the difference between the contractprice of the iron and the sum for which A could haveobtained and delivered it.

Sale Contract


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Sale of Goods Award of Lost Commission

Where the buyer wrongfully neglects or refuses to accept and pay for thegoods - action against damages for non-acceptance.

The measure of damages - estimated loss directly and naturally resulting inthe ordinary course of events, from the buyers breach of contract.

Where there is an available market for the goods the measure of damages isthe difference between the contract price and the market or current price atthe time or times when the goods ought to have been accepted, or, if no,time was fixed for acceptance, then at the time of the refusal to accept.

If on investigation of facts, one finds that it is unjust to apply that rule, in thelight of the general principles mentioned above it is not to be applied.

W L Thompson Limited Vs. R Robinson(Gunmakers) Limited (1955)


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The Car Dealer Case:

Consequences of excess demand over supply on loss of profitwhen no loss of profit -

Nominal damages

Union of India Vs. M/s Commercial Metal Corporation(Delhi High Court, 1981)

The decisive element is the date of breach and the market price

prevailing on that date.

The law does not penalise the buyers inaction

Charter Vs. Sullivan (1957)


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Generally, there is no award for inconvenience, pain andsuffering.

The exception is limited to contracts whose purpose is toprovide peace of mind or freedom from distress.

J arvis Vs. Swans Tours Limited (1972) - The Swiss holidaycase

Watts Vs. Morrow (1991) The house appraisal case

The damages will be awarded if the fruit of the contract is notprovided or if the contrary result is procured instead.

Non-Pecuniary Losses


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Liquidated Damages

A fixed amount decided by the contracting parties to bepaid in the case of a breach.

Maximum award subject to the stipulated amount.

Award subject to actual damages excess amount

considered to be penal in nature.

Except if the stipulated amount is a genuine pre-estimate

of the losses.


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LiquidatedDamages Compensation and Penalty: Actual damages are more than the

total amount stipulated, the party pays only the total stipulatedamount.

Fateh Chand Vs. Balkrishna Dass (Supreme Court, 1963): TheSale of Property Case - In assessing damages the court has,

subject to the limit of the penalty stipulated, jurisdiction to awardsuch compensation as it deems reasonable having regard to all thecircumstances of the case.

Duty not to enforce the penalty clause but only to awardreasonable compensation is statutorily imposed upon Courts by

Section 74.

As the party had not suffered any loss, no damages were awarded


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Liquidated Damages

Maula Bux Vs. Union of India (Supreme Court, 1969)

Reasonable amount of earnest deposit. Forfeiture ofearnest money under a contract for sale of property movable or immovable if the amount is reasonable,

does not fall within Section 74.

If forfeiture is of the nature of penalty, Section 74 applies.

Not required to prove actual loss or damages before he

can claim a decree and the court is competent to awardreasonable compensation in case of breach even if noactual damage is proved.


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Liquidated DamagesMaula Bux

To summarize the court interpreted Section 74 as follows:

The court should assess the actual damages even in thecase of contracts where damages are stipulated. Actualdamages not exceeding the stipulated amount should be

awarded.

In some cases, it may not be possible to assessdamages. In such cases, if the stipulated sum isgenuine pre-estimate, it should be awarded or taken intoconsideration for working out a reasonablecompensation.


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ONGC Vs. SAW Pipes Limited(Supreme Court, 2003)

In case of failure to deliver goods within the period fixed for suchdelivery the aggrieved party is entitled to recover from thecontractor liquidated damages as agreed when there is specificstipulation in the agreement that the time and date of delivery of

the goods was the essence of the contract

It is understood that the agreed liquidated damages weregenuine pre-estimate of damages when agreement is executedby experts

Condition to extend the time limit for supply of goods oncondition of paying stipulated liquidated damages as agreed atthe time of entering into contract is held to be valid


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Oil and Natural Gas Corporation Limited Vs.SAW Pipes Limited (Supreme Court, 2003)

Liquidated damages for delay in supply of goods wereheld to be recoverable by paying authorities from thebills for payment of cost of material supplied by thecontractor

Stipulation for recovering liquidated damages is heldnot to be a penalty or that the said sum was in any wayunreasonable.

In certain contracts, it is impossible to assess or provedamages. Sections 73 and 74 cover such matters inthe absence of any specific contractual terms.


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Award of Damages Case-By-Case

Determination

Terms of the contract.

If the terms are clear and unambiguous liquidateddamages to be granted unless claim is unreasonable orpenal in nature.

Section 74 is to be read along with Section 73 - therefore,in every case of breach of contract, the person aggrievedby the breach is not required to prove actual loss ordamage suffered by him before he can claim a decree.

Award reasonable compensation granted even if no actualdamage is proved.


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Earnest Money and Deposit

Earnestmeant something given for the purpose of

binding a contract, something to be used to put

pressure on the defaulter if he failed to carry out his

part.

Deposit.is a guarantee that the contract shall be

performed.


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Earnest Money and Damages

Earnest money did not preclude the party from claiming damages for

breach.

1. It must be given at the time of execution of the contract

2. It represents a guarantee that the contract will be fulfilled or, inother words, earnest is given to bind the contract

3. It is part of the purchase price when the transaction is carried out

4. It is forfeited when the transaction falls through by reason of thedefault or failure of the purchaser.

5. Unless there is anything to the contrary in the terms of thecontract, on default committed by the buyer, the seller is entitledto forfeit the earnest.


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Recent Judgments

Gatta Rattaiah Vs. Food Corporation of India (Andhra PradeshHigh Court, 2011)

Under the common law a genuine pre-estimate of damages bymutual agreement in regarded as a liquidated damages andbinding between the parties.

A stipulation in a contract seeks to terrorize it is a penalty andthe Court refuses to enforce it awarding to the aggrieved partyonly reasonable compensation.

When evidence shows that the extent of the damages or losssuffered by the party is less no one can be allowed to enrich bytaking undue advantage of the forfeiture clause.


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Recent Judgments

MSK Projects Vs. State of Rajasthan (Supreme Court, 2011)

A reasonable expectation of profit is implicit in a workscontract and its loss has to be compensated by way ofdamages if the other party to the contract is guilty of breach ofcontract cannot be gainsaid.

BSNL Vs. Reliance Communication Ltd. (Supreme Court, 2010)

Liquidated damages serve the useful purpose of avoiding

litigation and promoting commercial certainty and, therefore,the court should not be astute to categorize as penalties theclauses described as liquidate damages.


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Recent Judgments

ONGC Vs. Oil Country Tubular Limited (Bombay HighCourt, 2011)

Quantum of damages must be determined with reference to the

provisions as it stood, at the time of commission of the breach

where the parties agreed to pay damages in case of breach ofcontract.

Confirming Saw Pipes has recognized the importance ofleading evidence to prove damages or reasonable

compensation. Quantum of damages cannot be awarded only

on the basis of presumption and assumption.


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Recent Judgments

Herbicides (India) Ltd. Vs. Shashank Pesticides P. Ltd.(Delhi High court, 2011)

Innocent party is entitled to receive compensation

from the guilty party. Innocent party entitled to direct damages but not

remote damages.

No need to prove the actual loss/damage suffered

when contract has a liquidated damages clause. Reasonable damages cannot exceed the amount of

liquidate damages stipulated in the contract


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Recent Judgments

Herbicides (India) Ltd. Vs. Shashank Pesticides P. Ltd.(Delhi High court, 2011)

If the amount stipulated on account of breach of contract is shownto be by way of penalty, the innocent party suffering on account ofthe breach is entitled only to a reasonable compensation and notthe amount stipulated in the contract.

If it is not possible to assess damages the amount stipulated inthe contract as liquidated damages should normally be acceptedas a fair and reasonable pre-estimate of damages.

The law imposes a duty upon the Plaintiffs to take all reasonablesteps to mitigate loss


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Recent Judgments

Phulchand Exports Ltd. Vs. OOO Patriot(Supreme Court, 2011)

A contract for sale stipulated for delivery of the goods

sold within 180 days; the shipment should be done by avessel that is on way to Novorossiysk as the first port ofdischarge

SC held the reimbursement as neither to be punitive norvindictive notwithstanding the availability of the right tothe buyer against the insurer or carrier.


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Recent Judgments

GAIL Vs. Surya Roshni (Delhi High Court, 2012)

Pipe line installed by Surya Roshni Ltd. failed

GAIL chose to de-rate the said pipe line to make itworkable

Surya Roshni paid for de-rating. Hence GAIL notentitled to additional compensation

Parties may provide for reimbursement on accountof replacement of defective goods and provide forconsequential damages


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Recent Judgments

M/s J . K. Cement Works Vs. Delhi J al Board(Delhi High Court, 2012)

Genuine pre-estimate of damages on account of lossand did not require any further proof of such loss.

Vishal Engineers & Builders Vs. Indian Oil CorporationLtd.

Airports Authority of India Vs. R. K. Singhal 2011 (126)DRJ 250

Sudhir Gensets Ltd. Vs. Indian Oil Corporation Ltd.


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Recent Judgments

J yoti Sarup Mittal Vs. Abhiyan Cooperative(Delhi High Court, 2012)

Delay in a construction project Amount mentioned in claim

Penal in nature and penal provisions are not

enforced in law

Liquidated damages require proof of such loss


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Recent Judgments

Airports Authority of India (AAI) Vs. Shri ShaktiResorts & Hotels Limited (SSRHL) (Delhi High Court,2012)

SSRHL applied for NOC from AAI for mortgaging hisleasehold right

Arbitrator held AAI to be liable to issue NOC and askedAAI to pay damages.

Held AAI is not liable for damages

R t J d t


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Recent Judgments

National Highways Authority of India Vs. Tantia-TBL

(Delhi High Court, 2012)

There was delay in completion of work by Tantia.

Tantia was found to have issued early warning' notices

and also necessary notification to NHAI while seekingextension of time and was held not to have committedany breach of contract.

Delay is attributed to NHAI.

Compensation allowed to Tantia for loss suffered due todelay in completion of contract and for idling and underutilization of machinery and equipment.


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Recent Judgments

Cybernetics Network Pvt. Ltd. Vs. BisquareTechnologies Pvt. Ltd. (Delhi High Court, 2012)

Bisquare entered into a fraudulent contract with CNPL

for technology transfer. CNPL sued Bisquare.

CNPL was held to be entitled under section 73 to get

back the technical assistance fee paid to Bisquare,

restoring it to the position it was in, prior to MOU andTSSA


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The Situation Abroad

In the US stipulations for liquidated damages are intendedto estimate damages. Differs from state to state butsubject to two principles: Uncertainty whether harm caused is difficult to calculate

Reasonableness in proportion to actual or anticipated harm

Most common law countries do not allow penal damages

India does not differentiate between liquidated damagesand penalties contractual damages may be granted

even if intent was to penalize subject to certain criteria. Civil law countries - Penalties allowed but recently have

been reduced by courts based on circumstances.


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Thank You

Damages for Breach of Contract - Sept 2012

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Transcript of Damages for Breach of Contract - Sept 2012