CONTENTS

1. INTRODUCTION-BREACH OF CONTRACT AND REMEDIES....................................................................3

2. CONCEPT OF DAMAGES.......................................................................................................................5
3. REMOTENESS OF DAMAGE..................................................................................................................7
4. TYPES OF DAMAGES............................................................................................................................8
5. COMPENSATORY DAMAGES..............................................................................................................10
a) General damages (ordinary damages)....................................................................................................10
b) Special damages....................................................................................................................................10
c) Measuring of compensatory damages....................................................................................................11
d) Duty to mitigate damages suffered........................................................................................................13
6. EXEMPLARY OR PUNITIVE DAMAGES................................................................................................14
7. NOMINAL DAMAGES.........................................................................................................................15
8. LIQUIDATED DAMAGES AND PENALTY..............................................................................................16
A. Exception to the rule in the context of ‘penalty’...........................................................................18
B. ‘Earnest Money’ and ‘Security Deposit’.........................................................................................20
9. UNLIQUIDATED DAMAGES................................................................................................................21
10. ADEQUACY OF DAMAGES..................................................................................................................23
11. CONCLUSION.....................................................................................................................................25

2
CONCEPT OF DAMAGES: TYPES AND ADEQUACY

1. INTRODUCTION-BREACH OF CONTRACT AND REMEDIES

Breach of contract is a legal cause of action 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. If the party does not fulfill his contractual
promise, or has given information to the other party that he will not perform his duty as
mentioned in the contract or if by his action and conduct he seems to be unable to perform the
contract, he is said to breach the contract. A breach of contract is where a party to a contract fails
to perform, precisely and exactly, his obligations under the contract. This can take various forms
for example, the failure to supply goods or perform a service as agreed. A contract being a
correlative set of rights and obligations for the parties would be of no value, if there were no
remedies to enforce the rights arising there under. The Latin maxim Ubi jus, ibi remedium
denotes where there is a right, there is a remedy. Where the promisor neither performs his
contract nor does he tender performance, or where the performance is defective, there is a breach
of contract.1

The breach of contract may be

(i) Actual or,

(ii) Anticipatory.

The actual breach may take place either at the time the performance is due, or when actually
performing the contract. The anticipatory breach, i.e., a breach before the time for the
performance has arrived. This may also take place in two ways, by the promisor doing an act
which makes the performance of his promise impossible or by the promisor in some other way

1
L.L. Fuller and Willian R. Perdue Jr., ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale Law Journal 52

3
showing his intention not to perform it. 2 Breach of contract may occur, before the time for
performance is due. This may happen where one of the parties definitely renounces the contract
and shows his intention not to perform it or does some act which makes performance impossible.
3
The other party, on such a breach being committed, has a right of action for damages. 4He may
either sue for breach of contract immediately after repudiation or wait till the actual date when
performance is due and then sue for breach. If the promisee adopts the latter course, i.e., waits till
the date when performance is due he keeps the contract alive for the benefit of the promisor as
well as for his own. He remains liable under it an enables the promisor not only to complete the
contract in spite. of previous repudiation., but also to avail himself of any excuse for non-
performance which may have come into existence before the time .fixed for performance.

In Hochester v.s De La Tour 5, A hired B in April to act as a courier. commencing employment

from 1st June, but wrote to B in May repudiating the agreement, B sued A for breach of contract
immediately after repudiation. ‘A’ contended that there could not be breach of contract before
June 1. It was held; B was immediately entitled to sue and need not wait till the 1st June, for his
right of action to accrue. In Avery v. Bowden 6, A hired B's ship to carry a cargo from Russia.
Later on B repudiated the contract. A delayed taking action hoping B would change his mind
before the performance date. War broke out between .Russia and Britain before the performance
date, frustrating the contract. It was held that A lost his right to sue B for damages by his delay.
In Frost v. Knight7, the law on the subject of "anticipatory breach" was summed. up as follows:

"The promisee if he pleases may treat the notice of intention as inoperative and await the time
when the contract is to be executed and then hold the other party responsible for all the
consequences of non- performance: but in that case he keeps the contract alive for the benefit of
the other party as well as his own; he remains subject to all his own obligations and liabilities
under it, and enables the other party not only to complete the contract, if so advised,

2
Ebrahim Shoarian, “THE EFFECTS OF INTENTIONAL BREACH OF CONTRACT WITH EMPHASIS ON INTERNATIONAL
INSTRUMENTS”. International Journal of Research In Social Sciences, (2013) IJRSS & K.A.J. ISSN 2307-227X.
at.p.119.
3
Indian Contract Act 1872, s 73 (illustration (f))
4
R.K.Bangia, “The Indian Contract Act”, revised by Dr. Narender Kumar, ed. 14th, (2011) at. p. 237.
5
(1853) 2 E&B 687.
6
(1856) 116 E.R. 1122
7
(1872) L.R. 7 Ex. 111

4
notwithstanding his previous repudiation of it, but also to take advantage of any supervening
circumstances which would justify him in declining to complete it."

When a party to a contract has broken the contract, the other party may treat the contract as
rescinded and he is absolved from all his obligations under the contract. Under Section 65 of the
Indian Contract Act (ICA), when a party treats the contract as rescinded, he makes himself liable
to restore any benefits he has received under the contract to the party from whom such benefits
were received. Under Section 75 of the ICA, if a person rightfully rescinds a contract he is
entitled to a compensation for any damage which he has sustained through the non-fulfillment of
the contract by the other party.8 Section 64 deals with consequences of rescission of voidable
contracts, i.e. where there is flaw in the consent of one party to the contract. Under this Section
when a person at whose option a contract is voidable rescinds, the other party thereto need not
perform any promise therein contained in which he is the promisor. The party rescinding a
voidable contract shall, if he has received any benefit thereunder, from another party to such
contracts, restore such benefit as far as maybe,to the person to whom it was received. The law on
this issue is dealt with in two statutes, viz, the specific relief act, 1963 and the Indian Contract
Act, 1872. The remedies for the breach of contract are:

1. Damages or Compensation
2. Specific Performance
3. Injunction
4. Rescission
5. Quantum meruit or punitive damages.

2. CONCEPT OF DAMAGES

The word ‘damages’ means monetary compensation for the loss suffered. When a breach of
contract takes place, the remedy of damages is the logical consequence of breach. The aggrieved
party may seek compensation from the party who breaches the contract. When the aggrieved
party claims damages as a consequence of breach, the court takes into account the provisions of
law in this regard and the circumstances attached to the contract. The amount of damages would

8
Borough‟s “Remedies under Law of Contract”, Ch.2, at.p.16.

5
depend upon the type of loss caused to the aggrieved party by the breach. The court would first
identify the losses caused and then assess their monetary value.

Under Section 73 of the Indian Contract Act, when a contract has been broken, a 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
course 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. The foundation of the claim for
damages rests in the celebrated case of Hadley v. Baxendale9. The facts of the case were:

There was a breakdown of a shaft in A's mill. He delivered the shaft to B, a common carrier to be
taken to a manufacturer to copy and make a new one. A did not make known to B that delay
would result in loss of profits. By some neglect on the part of B, the delivery of the shaft was
delayed in transit beyond a reasonable time. As a result the mill was idle for a longer period than
it would otherwise have been, had there been no such delay. It was held, B was not liable for the
loss of profits during the period of delay as the circumstances communicated to A did not show
that the delay in the delivery of the shaft would entail loss of profits to the mill. In the course of
the judgment it was observed:

"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, Le., 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. Now, if the special circumstances under which the contract was actually made
were communicated by the plaintiffs to the defendants and thus known to both the parties the
damages resulting from the breach of such a contract which they would reasonably contemplate,
would be the amount of injury which would ordinarily follow from a breach of contract under
these special circumstances so known and communicated. But, on other hand, if these special
circumstances were wholly unknown to the party breaking the contract, he at the most could
only be supposed to have had in his contemplation, the amount of injury which would arise
9
[1854] EWHC J70

6
generally and in the great multitude of cases not affected by any special circumstances from
such breach of contract. For, had the special circumstances been known, the parties might have
specially provided for the breach 6f contract by special terms as to damages in that case and of
this advantage it would be very unjust to deprive them."

Section 73 of the Indian Contract Act, 1872 lays down the basic guidelines for identifying the
losses:

“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, form the party who has
broken the contract, compensation for any loss of damage caused to him thereby, which
naturally arose in the usual course 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.”

3. 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 defence and mental agony
and torture of prosecution. 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.

7
The term ‘Damages’ has been defined by McGregor ‘as 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.‘ This
definition was adopted by Lord

In a suit for damages under the law of tort, the Court awards pecuniary compensation after it is
proved that the defendant committed a wrongful act.

In such cases, the Court usually has to decide three questions:

1. Was the damage allegedly caused by the defendant’s wrongful act?

2. Was it remote?

3. What is the monetary compensation for the damage?

These elements imply that there has to be always a plaintiff who had suffered loss on account of
wrongful act of the defendant. If the damage caused to the plaintiff is directly referable to the
wrongful act of the defendant, the plaintiff becomes entitled to damages. How the damages
would be calculated, what factors would be taken into consideration and what arithmetical
process would be adopted would depend upon the facts and circumstances of each case.

4. TYPES OF DAMAGES

In Hadley Vs Baxendale (1854)10 it was held that an injured party may recover those damages
reasonably considered to arise naturally from a breach of contract, or those damages within the
reasonable contemplation of the parties at the time of contracting. The court held that the usual
rule was that the claimant is entitled to the amount he or she would have received if the
breaching party had performed; i.e. the plaintiff is placed in the same position she would have
been in had the breaching party performed. Under this rule, Hadley would have been entitled to

10
Ibid 9.

8
recover lost profits from the five extra days the mill was inoperable, if such loss of profit was in
contemplation of parties at the time of contracting.11 Keeping in view the provisions of section
73 of ICA and the court judgements, the aggrieved party would be entitled to one of the
following types of damages, depending upon the circumstances of this case:

1. General/Ordinary Damages: Damages arising naturally and directly out of the breach
in usual course of things.
2. Special Damages: Compensation for the special losses caused to the aggrieved party by
the special circumstances attached to the contract.
3. Exemplary Damages: Damages for the mental or emotional suffering also caused by the
breach.
4. Nominal Damages: Nominal damages refers to a damage award issued by a court when
a legal wrong has occurred, but where there was no actual financial loss as a result of that
legal wrong

In Ghaziabad Development Authority V Union of India 12, the Hon’ble court held that in case of
breach of contract, mental anguish is not a head of damages in ordinary commercial contract. In
order to claim damages, party has to plead specifically the manner in which he suffered the loss.
[State V Pratibha Prakash Bhawan13. The Plaintiff to the suit must prove damage and the amount
of the damage. . In Sitaram Bindraban vs. Chiranjanlal14 Brijlal it was held that the parties to a
contract can create, for themselves, special rights and obligations such as providing for
themselves the measure of damages for their breach. The Parties can also provide in a contract
that in the event of breach, no compensation will be payable except for refund of amounts paid
and such a term was held to be enforceable in Syed Israr Masood vs. State of Madhya Pradesh.15
With regard to measure of damages for breach of warranty, in Mangilal Karwa vs. Shantibai16 it
was held that the amount, which put the plaintiff in the position in which he would have been if
the contract had been fulfilled.

11
K.Bangia, “The Indian Contract Act”, revised by Dr. Narender Kumar, ed. 14th, (2011) at. p.198.
12
AIR 2000 SC 2003
13
AIR 1995 Ori 62
14
AIR 1962 SC 366
15
1982 SCR (1) 894
16
AIR 1956 Nag 221 (DB)

9
 5. COMPENSATORY DAMAGES

There are two categories of compensatory damages. The first category, general damages,
includes all those damages that arise naturally from breach of contract. The second category
called special damages arising due to the special circumstances foreseeable by the parties at the
time of making contract.

a) General damages (ordinary damages)

These are damages that arise naturally from the breach of contract. They are restricted to the
‘direct and proximate’ consequences and not to the remote or indirect losses or consequences of
the breach of a contract.

In the case of Hadley v. Baxendale17, the crankshift of a mill broke and it was necessary for it to
be sent to the manufacturers as a pattern for the new one. The mill owners engaged carriers for
this purpose, but the carriers delayed delivery, and the mill owners were unable to use the mill
for longer than if there had been no delay. Consequently, the loss of profits suffered by the
millers was greater than if no delay had occurred. The millers sued the carriers for such loss of
profits. The courts held that since the only information given by the millers was that the article to
be carried was the broken shaft of a mill, and it was not made known to them that the delay
would result in loss of profits, they were not liable for the loss of profits.

b) Special damages
These are the consequential damages caused by the breach of contract due to the existence of
special circumstances. Such damages are awarded by the courts only when at the time of making
a contract, these special circumstances were foreseeable by the party committing the breach.

17
[1984] 9 Exch. 34

10
In the case of Victoria Laundry Limited v. Newman Industries Limited 18, V the launders and
dyers required a bolier for the purpose of expanding their business. V entered into an agreement
with N where N was to supply the Bolier on June 5th. Due to the fault of N, the Bolier was not
delivered till November 8th. Consequently, V could not service his new customers and had a loss
of lucrative profits worth 278 Pounds. V claimed this loss from N. N contended that he did not
know about V’s lucrative business contacts. The court held that V could recover the loss of
ordinary laundry profits but not the loss resulting from some lucrative contacts with specific
customers because N was not aware of these contacts and such a loss was not in contemplation
of both the parties when the contract was made.

If the special circumstances were already in the knowledge of the party responsible for the
breach of contract, the formality of communicating them to him may not be necessary.

In the case of Simpson v. London &North Western Railway Company19, Simpson a manufacturer
used to exhibit his samples of his equipment at agricultural exhibitions. He delivered his samples
to Railway Company to be exhibited at New Castle. On the occasion he wrote “must reach at
New Castle on Monday certain”. On the account of negligence on the part of Railway Company,
the samples reached only after the exhibition was over. S, claimed damages from railway
Company for his loss of profits from the exhibition. The court held that the railway company was
liable to pay these damages as it had the knowledge of special circumstances, and must have
contemplated that a delay in delivery might result in such loss.

c) Measuring of compensatory damages

Section 73, of the Indian Contract Act, 1872, provides that, “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 course of things from such breach, or which the parties knew when they made the

18
[1949] 2 KB 528
19
][1876] 1 Q.B.D. 274

11
contract, to be likely to result from the breach of it. Such compensation is not given for any
remote and indirect loss or damage sustained by the reason of the breach.”

This section warrants the need to assess such damages, general or special, according to the facts
of the case.

In the case of a contract for sale or purchase general rule as regards to measuring of the damage
is that –

i. The damage would be assessed on the difference between the contract price and the market
price on the date of the breach.

In the case of Jamal v. Moola Dawood Sons & Co. 20, M agreed to purchase certain shares from J
on a particular date and subsequently declined to purchase them on that date. The difference
between contract price and market price on that date was Rs. 1, 09, 218. J later on sold those
shares and the actual loss amounted Rs. 79,862. J sued M claiming Rs. 1, 09, 218 as damages.
The courts held that he was entitled to Rs, 1, 09, 218, because the damages are measured
according to the circumstances existing on the date of breach.

ii. Under a contract of sale of goods, damages can be claimed for breach of condition, or
warranty and such damages include all damages flowing from the breach.

In the case of Jackson v. Walson & Sons 21, J’s wife died from poisoning caused by the tinned
fish supplied by W. in an action for damages for breach, the court held that J was entitled to

20
[1916] 43.I.A. 6.
21
[1909] 2 KB 193

12
damages incurred by – employing extra servants by reason of the loss of wife’s services during
illness, medical expenses, pecuniary loss occasioned by the death of his wife.

iii. If the seller is selling services rather than something tangible and the buyer breaches the
contract, the calculation of general damages is somewhat different.

d) Duty to mitigate damages suffered

The way in which liability for contract damages is limited by the courts imposing a duty on the
party who has been harmed by a breach of contract to mitigate the damages resulting from the
breach. In other words, the party who has been harmed may not sit idly and watch the damages
accumulate. Moreover the party is supposed to act prudently to minimize such damages.

In the case of Neki v. Pribhu 22, A took a shop from B on rent and paid one month’s rent in
advance. B could not give possession of shop to A. there were other shops available in the
vicinity but A chose not to do business for eight months. After eight months, A sued B for breach
of contract claiming damages including advance rent and loss of profits for eight months. The
court held that he was entitled to a refund of his advance and nothing more, as he failed in his
duty to minimize the loss by not taking another shop in the neighborhood.

In another case, Derbshire v. Warran 23, D was the owner of ‘X’ brand of car which was damaged
in an accident by negligence of W. D was informed that the pre-accident value of the car was 85
pounds and the estimated cost of repair was 192 pounds, and as such an uneconomic proposition.
D, however, decided to have the car repaired and claimed the damages from W amounting to 137
pounds (192 pounds – 80 pounds claimed from insurance 25 pounds the cost of hiring another
vehicle until his car was repaired). W argued that D could have purchased a similar vehicle in the
open market for 85 pounds; he should have not taken this uneconomic step. The court accepted
this view and awarded the replacement value of the vehicle, i.e., 30 pounds (85 pounds
22
100 I.C. 662
23
 [1963] 1WLR 1067

13
replacement price 25 pounds cost of hiring another vehicle – 80 pounds claimed from the
insurance).

6. EXEMPLARY OR PUNITIVE DAMAGES

Exemplary or punitive damages are awarded to punish the defendant and are not, as a rule,
granted in case of breach of contract. In two cases, however, the court may award such damages,
viz.

 Breach of promise to marry

 Wrongful dishonor of a customer’s cheque by the banker.

It should be noted here that exemplary damages are not awarded in an action for breach of
contract generally with the exemption of the breach of promise of marriage as the object of
defaulting party is never an entrance into the consideration of quantum of damages.24 Because,
damages for breach of contract are considered to be in the nature of compensation, not in the
nature of punishment.25

In a breach of promise to marry, the amount of the damages will depend upon the extent of
injury to the party's feeling.

The most important question, especially with regard to India, is whether the law should permit
Indian courts to award punitive damages in contract cases. It is easy to take refuge under the
presumption that there are rarely any fixed set of factors to guide the judges. In other countries,
like England and U.S.A., there are standard of conduct that warrants punitive damages26 like:

1.) Standard of intentional conduct;

2.) Standard of reckless conduct;

3.) Standard of negligent conduct etc.

24
Berry v. Decosta, (1956) I.A.&N. 408, (As per C.B.Pollock).
25
Addis v. Gramophone Co. Ltd., (1909) AC 488 (As per Lord Atkinson).
26
James. B. Sales and Kenneth B. Cole Jr. “A Relic That Has Outlived its Origin” (1984), at.p. 1130- 38.

14
In the case of Time Inc. v Lokesh Srivastava the Delhi High Court 27granted punitive damages of
Rs. 500,000 (US$ 11,000) in a trade mark dispute (2005). Similarly, the National Commission
for Consumer Protection pronounced punitive/ exemplary damages against Reliance India
Mobile (now Reliance Communication) of Rs. 1.50 lakh for making false statement under
affidavit before the court.

7. NOMINAL DAMAGES

Nominal damages consist of a small token award, e.g., a rupee of even 25 paise, where there has
been an infringement of contractual rights, but no actual loss has been suffered. These damages
are awarded to establish the right to decree for breach of contract. For instance, A contracted to
purchase ‘LML Scooter’ from B, a dealer, for Rs. 25, 000. But A failed to purchase the Scooter.
However, the demand for the Scooter far exceeded the supply and B could sell the Scooter to Z
for Rs. 25, 000, i.e., without any loss of profit. Here if B makes a claim upon A for breach of
contract, he will be entitled to nominal damages only. In the event that loss is suffered, the court
has the discretion to award the aggrieved party nominal damages in recognition of his right.

Yet nominal damages are no substitute because the claimant suffered no pecuniary loss. In
Beswick v Beswick28, Mr Beswick made a contract with his nephew whereby the nephew
promised to make payments to Mr Beswick’s widow during his lifetime in return for Mr
Beswick’s promise to transfer his business to the nephew. When Mr Beswick If at the time of
entering into the contract the party has notice of special circumstances which makes special loss
the likely result of the breach in the ordinary course of things, then upon his-breaking the
contract and the special loss following this breach, he will be required to make good the special
loss died, the nephew refused to pay and Mrs Beswick brought an action for breach of contract in
her capacity as Mr Beswick’s personal representative. The nephew argued that, since Mr
Beswick had died, his estate had suffered no loss as a result of the breach of contract, and thus
27
2006 131 CompCas 198 Delhi
28
[1968] AC 58, [1967] All ER 1197

15
nominal damages were adequate. The House of Lords rejected this argument, claiming that it
‘wholly misunderstood’ the adequacy test. ‘Equity will grant specific performance when
damages are inadequate to meet the justice of the case’, Lord Upjohn asserted. Far from being a
reason to deny specific performance, the fact that only nominal damages could be recovered was
the main reason why specific performance should be ordered according to the House of Lords.

8. LIQUIDATED DAMAGES AND PENALTY

The contracting party may stipulate in the contract a sum of money to be paid in case the contract
is broken by either party. It may be termed as ‘liquidated damages’ or ‘penalty’ depending upon
the purpose to fix the sum29.

The purpose of fixing a sum as ‘liquidated damages’ is to compensate the injured party for the
loss to be incurred by the breach of the other. Thus it is a fair pre-estimation of the loss to be
caused by non-performance of the contract.

The purpose of providing a ‘penalty’ in a contract is to discourage a party from breaching it and
to provide a special punishment if the contract is breached anyway. Thus it is a sum which has
no relation to the probable loss, and generally is disproportionate to the damages likely to accrue
as a result of the breach.

The above differentiation is required to understand the position of English Law in this respect.
English Law awards ‘liquidated damages’ as compensation, irrespective of the fact whether the
sum so specified is more or less than the actual damages. But does not allow the sum specified as

29
Available on http://www.legalservicesindia.com/article/article/suit-for-damages-411-1.html, last seen on
10:21pm, 20/11/2017.

16
‘penalty’ on the ground that only the government, not private individuals can determine
appropriate remedies for breach of contract.

Indian Contract Law differs from English law in this matter. It does not recognize any difference
between ‘liquidated damages’ and ‘penalty’. Nor does it allow any sum fixed by the parties as
damages. It says that the injured party is entitled to a reasonable compensation in case of breach
subject to the maximum of the amount fixed as ‘liquidated damages’ or ‘penalty’ by the parties
to the contract.

Section 74 of the Indian Contract Act, 1872, provides that, “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
other party who has broken the contract reasonable compensation not exceeding the amount so
named or, as the case may be the penalty stipulated for.”

Thus in India, the sum named in the contract is not awarded as damages. It is left to the court to
ascertain the actual loss or reasonable compensation and award the same, which will, however,
not exceed the sum named in the contract.

For example:

a) “A” agreed to sell B his house for Rs. 1, 05, 000, provided that on breach of contract, the
defaulting party will pay Rs. 10, 000 as damages to the other. B broke the contract and A resold
the house for Rs. 1, 04, 000. A sued B and claimed Rs. 10, 000. It was held that A cannot recover
Rs. 10, 000 as liquidated damages or penalty, he could only get the actual loss suffered by him,
i.e., Rs. 1000 30
30
Panna Singh v. Arjan Singh [1929] 23 CWN 949.

17
 A. Exception to the rule in the context of ‘penalty’

Section 74 provides that when any person enters into a bail bond, recognizance or other
instrument of the same nature, or under the provisions of any law, or under the orders of the
Central Government,31 gives any bond for the performance of any public duty or act in which the
public are interested, he shall be liable, upon breach of condition of any instrument, to pay the
whole sum mentioned therein.

Measuring interest damages –

By and for the large number of cases decided under section 74 relate to stipulations providing for
interest. These stipulations are discussed below.

1) Stipulations for enhanced rate of interest –

Such a stipulation occurring in a contract may have twofold character :

i) Stipulation for increased interest from the rate of bond. This is always considered as ‘penalty’.

ii) Stipulation for increased interest from the date of default. It may or may not be in the nature
of penalty. It is a question of fact to be considered in each case. Generally if the rate of interest
payable on default is unreasonable, the court considers it as a penalty.

31
Available on http://www.manupatra.co.in/newsline/articles/Upload/30C28D5D-262B-4A4A-AE17-
C4D86F92BCE0.pdf, last seen on 10:33pm, 20/11/2017

18
Explanation to Section 74 provides that – a stipulation for the increased interest from the date of
default may be stipulation by way of penalty.

2) Stipulations for compound interest – following rules are deduced from various past judicial
decisions in this regard :

i) A stipulation for payment of compound interest in place of simple interest at the same rate is
not considered as penalty.

ii) A stipulation for payment of compound interest in place of simple interest at a higher rate is
considered as penalty.

3) Stipulations for payment of interest at a lower rate, if interest is paid regularly on due dates –

A stipulation to accept interest at reduced rate if it is paid punctually does not make the original
rate of interest a penalty.32

Other related provisions –

Two important aspects in the context of compensation by way of damages are:

1) Cost of bringing a suit in the court of law, and

2) Treatment of ‘earnest money’, or ‘security deposit’ in contracts.

Cost of suit – when a party brings upon a suit in the court of law, he incurs expenditure thereby.
If his point is proved in the suit, he is entitled to recover the cost of suit in addition to the
damages from the defaulter party. However, it is under the discretion of the court to award or not
to award such costs.33
32
Supra cit. 31
33
Ibid cit.32

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 B. ‘Earnest Money’ and ‘Security Deposit’
Sometimes a party to the contract is required to deposit some money with the other party. This is
generally done with a view to ensure performance of the contract. The money so deposited may
be either ‘earnest money’ or ‘security deposit’.

The ‘earnest money’ is part of the purchase price paid in advance. When the transaction goes
through it is adjusted against the bill. When transaction fails through by reason of default or
failure of the buyer, the other party can rescind the contract and retain the earnest money. Thus,
the earnest money is liable to be forfeited.

In the case of Shree Hanuman Cotton Mills v. Tata Aircraft Ltd. 34, A contracted with B to
purchase from him aeroscrap for Rs. 1,00,000 and paid Rs. 25,000 as earnest money, being 25%
of the purchase price. One of the conditions of the contract was that if A failed to pay the
balance, contract would be cancelled and earnest money would be forfeited. A defaulted in
paying the balance and in consequence, B forfeited the deposit. A filed a suit for recovery of the
deposit. The court held that the deposit was intended as earnest money, and the seller was
entitled to forfeit it.

The ‘security deposit’ is deposited only as a security for performance of the contract. It is not a
part of the purchase price. Thus when a contract is completed it is not adjusted against the
purchase price. Law considers it as ‘penalty’. Thus it is not liable to be forfeited35.

9. UNLIQUIDATED DAMAGES

34
AIR 1970 SC 1986
35
See A. Singh, Law of Contracts, 212,215( 11th edition 2015)

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Sums of money not established in advance by the contracting parties as a compensation for a
breach of contract, but determined by a court after such breach occurs is known as a unliquidated
damages.36 Such damages are unascertained. In general such damages cannot be set-off. No
37
interest will be allowed on unliquidated damages. Unliquidated damages are calculated by the
court and are designed to compensate the innocent party for any losses incurred as a result of a
breach of contract. However, where loss cannot be proved, the innocent party will only be
entitled to claim nominal damages. In the case of Surrey CC v. Bredero Homes, 38 damages were
not awarded to the Council arising from the failure of the defendant to comply with planning
permission, because the Council had not suffered any loss. This can be in contrast with the case
of Chaplin v. Hicks39 where the Court of Appeal awarded damages to the claimant for the loss of
a chance to win a competition.

The term “unliquidated damages”, are opposed to liquidated damages, and is applied to those
damages which cannot be determined at the time of making the contract or pre-arranged by the
parties, and these are left to the discretion of the Court to be determined by the rules governing
the measure of damages. It is immaterial even if a particular amount is specified in the pleading
as the sum at which the plaintiff estimates the damages. Damages are said to be liquidated when
they have been agreed and fixed by the parties. It is the sum, which the parties have agreed by
contract as payable on default of one of them. Section 74 applies to these damages. In all other
cases, the court quantifies or assesses the damages or loss; such damages are unliquidated. It is
possible that the parties fix an amount as liquidated damages for a specific type of breach only;
then the party sufferings from other type breach may sue for the unliquidated damages arising
from such breach.40Where, under the terms of the contract , it was stipulated that if the goods
were not supplied before the date fixed, the purchaser had a right to claim damages at the rate
agreed and if they were not delivered within seven days of the date fixed, then the purchaser was
entitled to cancel the contract and encash the bank guarantee, but the goods were delivered
within the extended time, it was held that the purchaser was entitled to claim damages only at the

36
http://www.businessdictionary.com/definition/unliquidated-damages.html.
37
John Bouvier „Law Dictionary‟; Adapted to the Constitution and Laws of the United States, Published in 1856.
38
(1993) 1 WLR 1361.
39
(1911) 2 KB 786
40
Aktieselskabet Reidar v. Arcos (1927) 1 KB 352: (1926) All ER Rep 140

21
rate agreed, and the clause relating to confiscation of bank guarantee could not be invoked since
the contract was not cancelled.41

Unliquidated damages are not punitive in nature. These damages are not awarded to punish the
defendant. As these damages are not also restitutionary in nature so these are also not awarded to
recover any gain made by the defendant as a result of a breach.

M/S. Kusal Construction Company v. Municipal Corporation of Delhi 42 is an important authority

on this point, needed to be discussed here. It was held by the court in this case that so far as the
law in India is concerned, there is no qualitative difference in the nature of the claim whether it is
for liquidated damages or for unliquidated damages. Section 74 of the Indian Contract Act
eliminates the somewhat elaborate refinements made under the English common law in
distinguishing between stipulations providing for payment of liquidated damages and stipulations
in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual
agreement is regarded as a stipulation naming liquidated damages and binding between the
parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it,
awarding to aggrieved party only reasonable compensation. The Indian Legislature has sought to
cut across the web of rules and presumptions under English common law, by enacting a uniform
principle applicable to all stipulations naming amounts to be paid in case of breach, and
stipulations by way of penalty, and according to this principle, even if there is a stipulation by
way of liquidated damages, a party complaining of breach of contract can recover only
reasonable compensation for the injury sustained by him, the stipulated amount being merely the
outside limit. It therefore makes no difference in the present case that the claim of the appellant
is for liquidated damages. It stands on the same footing as a claim for unliquidated damages.

Now, it is well settled principle of law that until or unless the liability is adjudicated and
damages are assessed by a decree or order of a court or other adjudicatory authority, a claim for
unliquidated damages does not give rise to a debt. When there is a breach of contract, the party
who commits the breach incur no pecuniary obligation, or the party complaining of the breach is
not entitled to a debt due from the other party. The only right with the party aggrieved by the
breach of the contract has is the right to sue, which is not treated as an actionable claim.43
41
Shiv Ispat Udyog Pvt. Ltd. v. Industries Valley, AIR 1984 Del 405.
42
(2011) HC Del., at.p.10.
43
Union of India v. Raman Iron Foundry, AIR 1974, SC 1265, at.p.1273.

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 10. ADEQUACY OF DAMAGES

The concept of the inadequacy of damages has been used as a reason to justify a number of
alternative remedies for breach of contract. Specific performance or an injunction will not be
ordered if damages would be adequate to protect the expectation interest of the injured party.44

A. BASES OF REQUIREMENT

During the development of the jurisdiction of courts of equity, it came to be recognized that
equitable relief would not be granted if the award of damages at law was adequate to protect the
interests of the injured party. There is, however, a tendency to liberalize the granting of equitable
relief by enlarging the classes of cases in which damages are not regarded as an adequate
remedy. This tendency has been encouraged by the adoption of the Uniform Commercial Code,
which "seeks to further a more liberal attitude than some courts have shown in connection with
45
the specific performance of contracts of sale.” In accordance with this tendency, if the
adequacy of the damage remedy is uncertain, the combined effect of such other factors as
uncertainty of terms, insecurity as to the agreed exchange, and difficulty of enforcement should
be considered. Adequacy is to some extent relative, and the modern approach is to compare
remedies to determine which is more effective in serving the ends of justice. Such a comparison
will often lead to the granting of equitable relief. Doubts should be resolved in favour of the
granting of specific performance or injunction. Because the availability of equitable relief was
historically viewed as a matter of jurisdiction, the parties cannot vary by agreement the
requirement of inadequacy of damages, although a court may take appropriate notice of facts
recited in their contract.

B. FACTORS AFFECTING ADEQUACY OF DAMAGES

In determining whether the remedy in damages would be adequate, the following circumstances
are significant:

(a) The difficulty of proving damages with reasonable certainty,

44
J Dawson, ‘Specific Performance in France and Germany’ (1959) 57 Michigan Law Review 495, 532.
45
Comment 1 to Uniform Commercial Code §2-716.

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(b) The difficulty of procuring a suitable substitute performance by means of money awarded as
damages, and

(c) The likelihood that an award of damages could not be collected.

Difficulty in proving damages: The damage remedy may be inadequate to protect the injured
party's expectation interest because the loss caused by the breach is too difficult to estimate with
reasonable certainty....Some types of interests are by their very nature incapable of being valued
in money. Typical examples include heirlooms, family treasures and works of art that induce a
strong sentimental attachment. Examples may also be found in contracts of a more commercial
character.

The breach of a contract to transfer shares of stock may cause a loss in control over the
corporation ....The breach of a covenant not to compete may cause the loss of customers of an
unascertainable number or importance. The breach of a requirements contract may cut off a vital
supply of raw materials. In such situations, equitable relief is often appropriate.

Difficulty of obtaining substitute: If the injured party can readily procure by the use of money a
suitable substitute for the promised performance, the damage remedy is ordinarily adequate.

Entering into a substitute transaction is generally a more efficient way to prevent injury than is a
suit for specific performance or an injunction and there is a sound economic basis for limiting the
injured party to damages in such a case. Furthermore, the substitute transaction affords a basis
for proving damages with reasonable certainty, eliminating the factor stated in Paragraph (a)....

Contracts for the sale of land: Contracts for the sale of land have traditionally been accorded a
special place in the law of specific performance. A specific tract of land has long been regarded

24
as unique and impossible of duplication by the use of any amount of money. Furthermore, the
value of land is to some extent speculative. Damages have therefore been regarded as inadequate
to enforce a duty to transfer an interest in land, even if it is less than a fee simple.....

11. CONCLUSION

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 course 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. —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 course 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. 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." In estimating the loss or damage arising from a breach
of contract, the means which existed of remedying the inconvenience caused by the non-
performance of the contract must be taken into account.

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