Law On Damages For Breach Of Contract

In the times of COVID-19, as the world has come to a standstill, innumerable contracts would be in a state of stasis, having remained unexecuted or only partially executed, performance not having taken place or having become impossible, payments not made or not entirely made, many contractual promises unfulfilled. We do not know the future post COVID-19 but experts have warned of an economic catastrophe. Many contracts may continue to remain unperformed. We can assume that there may be a spurt in cases where parties seek damages for non-performance of contracts. India would be no exception. Contractual damages primarily find their source in law in Sections 73 and 74 of the Contract Act, 1872, of which Section 73 pertains to damages in general and Section 74 deals with what is generally known as "liquidated damages". This piece focuses on the general principles of the law on damages for breach of contract under Section 73. It does not cover principles pertaining to liquidated damages covered by Section 74 or any aspects of the third paragraph of Section 73, that is, compensation for failure to discharge obligations resembling those created by a contract or of any quantum meruit claimss. The main body of Section 73 is reproduced hereinbelow: 73. Compensation of loss or damage caused by breach of contract When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual 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. Explanation: In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by non-performance of the contract must be taken into account. Illustrations: …. The principles of law on contractual damages under Section 73 of the Contract Act have been evolved by the Supreme Court in its numerous decisions on the issue and I have attempted to concisely enumerate and explain them hereinbelow: (1) Section 73 begins with the words "When a contract has been broken", signifying that: (a) The existence of a concluded contract is a sine qua non in a claim for compensation under Section 73. In the absence of a concluded contract, a claim under Section 73 would not be maintainable.[1] Moreover, the contract must be valid and not void under any of the provisions of the Contract Act[2], nor should it have become impossible of performance (unless such impossibility arises from an act of the defaulter or was anticipated and guarded against in the contract). However, it may be borne in mind that, in the case of void agreements, Section 65 of the Contract Act stipulates restitution of any advantage gained thereunder. (b) It is only upon a breach of contract that there can be any question of awarding damages under this provision. The plaintiff is required to prove that there is a breach of contract by the defendant. Further, if the plaintiff has contributed to the breach, he cannot claim damages.[3] Certain eventualities, such as those contemplated in Sections 53, 54, 63, 67 of the Contract Act, could also bar a party from claiming damages. (2) A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach. That question can only be decided by only an adjudicatory forum, that is, a court or an Arbitral Tribunal.[4] (3) Compensation is payable for breach of contract only where damage or loss is caused by such breach. If damage or loss is not suffered, the law does not provide for a windfall.[5] In other words, damage or loss caused is a sine qua non for award of compensation. Where there has been no legal injury in consequence of the breach, there cannot be an award of compensation, because compensation for breach of contract can be awarded to make good loss or damage 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". (4) A casual connection between the breach and the loss is a prerequisite for an ...

Law On Damages For Breach Of Contract

Amrita Thakore

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