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Sunday, August 29, 2010

Law of Contracts - Compensation for Breach of Contract


INTRODUCTION
An action for damages for the injury caused by the non-performance of most contracts is the preliminary, if not the only, remedy of the injured party. In fixing the amount of damages, the general purpose of the law is to give compensation, that is, to put the plaintiff in as good a position as he would have been, had the defendant performed the contract. Compensation involves the assessment
1.)    of gains prevented by breach, and
2.)    of losses ensuing, which would not have occurred had the contract been performed,
Less any saving to the plaintiff due to non performance of the contract.
Ordinarily compensation is not the value of contract, but of the performance of contract. Damages should be adjusted in such a way as to equal the value of the performance; that is, the value of the defendants performance less the saving made by the plaintiff for the labour or expense of wholly or partly performing his own part. This saving made by the plaintiff has to be deducted from the value of the performance which the defendant should have made.
Mental suffering caused by the breach, though sometimes a real injury, is not generally allowed as a basis for compensation. Pecuniary loss is the usual measure. The measure, is of the value to the injured party of the performance of the contract, not the value of performance to the general public, subject to qualification which limits the defendant’s liability to consequences which he could have reasonably foreseen when the contract was made.

Ordinarily, a plaintiff can recover compensation for only such consequences as would follow such a breach in the usual course of things. He cannot recover damages when they are remote, speculative, hypothetical, and not within the realm of reasonable certainty. The nature of the contract upon which damages are claimed must be such as to support an inference of definite profits grounded upon a reasonably sure basis of facts. There can be no recovery
a)      when the elements, upon which the claims rests, are numerous and shifting contingencies, whose relation to wrong to the wrong complained of is problematical; or
b)      when such profits are not probable.

Manifest ambiguity in ascertaining what would have been the course of events in the face of complicated factors, under circumstances which have never come to pass, and inherent difficulties in calculating the amount of prospective gains prevent the recovery of damages. Pure changes lying between the alleged wrong and anticipated profits, dependent upon unsettled conditions, render impracticable the assertion of cause and effect. But, where the plaintiff has given valuable consideration for the promise of a performance which would have given him a chance to make a profit, he should receive compensation for non performance, unless the difficulty of determining its value is extreme. This is true, specially, when there is no chance of loss.

Compensation is awarded for only those injuries which the defendant had reason to foresee as a probable result of his breach, partial or total when the contract was made. Both profits prevented and losses sustained are within the rule.

One of the ways in which a contract may be discharged is breach of contract. Breach is the antithesis       of performance; nevertheless it may result in discharge. However, discharge by breach brings in its wake other consequences. It gives rise to remedial rights resting on the fundamental juridical principle that were a right is broken there must be remedy, ‘Ubi jus ibi remedium, discharge by breach of contract gives rise to remedies for the innocent party.
The most common form the Remedy may take is a right to claim compensation. There may also be circumstances of breach which entitle the innocent party to treat himself as discharged from any performance due from him. However, not every breach operates as a discharge. When the party at default has repudiated as its obligations or made himself unable to perform or failed to perform this is usually the effect.
There is a qualification to the principle of breach by default of a party. The default does not strictly itself ‘discharge’ the contract. It enables the innocent party, if he chooses, to absolve himself as discharged from performance or further performance from his side. He may be said have ‘accepted’ the repudiation. On the other hand he may choose to consider the contract as not discharged and continue to insist on performance, and carry on his part.
When repudiation is accepted by innocent party, he is absolved from all other contractual obligation. So also the primary obligations of the party in default are discharged. However, there arises on his part the secondary obligation to compensate in damages for the breach. The replacement of primary obligation by secondary obligation is by operation of law and cannot be obviated.

Section 73 of the Indian Contract Act states that
“When a contract has been broken, the party who suffers by such breach is entitled to receive, 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 made the contract, to be likely to result from breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge is entitled to receive the same compensation from the party in default, as if such person has contracted to charge it and had broken his contract.”

The first paragraph deals with compensation for loss or damage caused by breach of contract. It states that where a contract is broken, the party suffering from the breach of contract is entitled to receive compensation from the party who has broken the contract. Compensation can be recovered for loss or damage:
i)                    that arose in usual course of things from such breach; or
ii)                  Which the parties knew at the time they made the contract is likely to result from such breach.
The second para provides that no compensation is payable for any remote or indirect loss or damage. The third para applies the same principles where breach occurs of obligations resembling contracts. The fourth para provides that while assessing damage, the means which existed to the person claiming damages of remedying the inconvenience caused by non performance, must be considered. The illustrations to the section represent the general rules that can be followed while interpreting the section.

Sec 73 postulates a valid and binding contract between the parties and deals with one of the remedies for breach of the contract in the nature of the claim for compensation for loss or damages. Therefore if an agreement is void, the forfeiture clause of such void agreement cannot be clause of such void agreement cannot be enforced and earnest money cannot be forfeited on the ground of breach of contract.[1]

ACTION FOR DAMAGES

A cause of action for breach of contract can only arise as and when the plaintiff has actually suffered damages. When plaintiff has already recovered damages in respect of the same cause of action in a suit, in which he could have recovered damages in respect of same cause of action in a suit, in which he could have recovered damages for loss subsequently arising, a fresh suit of recovery of the latter is not maintainable. In a case of continuing breach, however, damages recovered in a former action are no bar to a fresh action.

BREACH OF CONTRACT

The section applies only when a contract has been broken; and breach of contract must be proved before setting about the question of damages. No damages can be awarded by the court without coming to any conclusion about breach, merely on the ground that the defendant has been profited by the contract.

BREACH AMOUNTING TO DISCHARGE
Upon a non-guilty party electing to treat the contract as not binding, the contract is not rescinded from the beginning but both parties discharged from further performance and the rights and liabilities already accrued continue unaffected.

FORMS OF BREACH OF CONTRACT
Discharge of contract may arise in the following ways:
(i)                 A party renouncing his obligations under the contract.
(ii)               A party by his own act making it impossible that he should fulfil his obligations under the contract.
(iii)             A party may fail to perform what he has promised.

ACTUAL OR ANTICIPATORY BREACH
A breach of contract may take place before the time fixed for the performance of the contract if the promisor has repudiated the contract, or where the promisor has disabled himself from performing the contract.

PARTY COMMITTING BREACH LIABLE TO COMPENSATE
The party committing a breach and is guilty of it has to compensate for the damage. The defendant owes no liability for any damages if he is not guilty of committing the breach.
The party committing a breach cannot ask for damages i.e. if the breach has been committed by the plaintiff himself than he cannot ask for damages.
THE PARTY SUFFERING FROM THE BREACH CAN CLAIM THE DAMAGES

It is essential that the aggrieved party who was ready to perform his part of contract must only claim the damages. Sec 73 is in favour of party willing to perform contract and not for the party committing breach.


REMEDIES OF BREACH

As seen above, where there is a breach of contract, the primary obligations of the party in breach are replaced by the secondary obligation to compensate the other party in damages for loss in respect of the breach. This is irrespective of whether the injured party is entitled to absolve himself from performance of his part or not as a result of the breach. When he is able to do so, his claim for damages is in addition to it.
Other types of remedies can be remedies of specific performance and injunction in some case. Since the researcher has to concentrate his research on compensation as a remedy so other two remedies are not covered in this project.

DAMAGES AS A REMEDY FOR BREACH OF CONTRACT
Damages for breach of contract committed by the defendant are compensation to the plaintiff for the damage, loss or injury he has suffered through that breach. An action for damages is always available as a matter of right when a contract has been broken, as against the relief of specific performance, which lies in the discretion of court.
Even where the plaintiff has been able to prove his loss; ‘it must be remembered that the rules as to damages can in nature of things only be approximately just.’

For the breach of contract the damages is the most appropriate remedy and some times the only remedy, available to a person who suffers because of the breach of contract by the other party.
It is the fundamental principle of damages for breach of contract that these are awarded to place the injured party in the same position in which he would have been, had he not sustained the injury of which he complains. Hence the damages must be commensurate with the injury sustained.
With breach of contract the contractual obligations come to an end and new obligations arise for payment of damages.

The function of damages for breach of contract is compensatory and not punitive. Compensation is said to refer to the pecuniary recompense which a person is entitled to receive in respect of damage or loss which he has suffered. Pecuniary damages refer to financial damage caused in past or will be caused in future.
The function of compensation is to restore the position of the person as earlier within the power of money. Ordinarily there is only one measure of damages in contract, which the loss truly suffered by the promisee.
The amount of damages cannot exceed the loss actually suffered by the claimant, or which he is likely to suffer. Damages should confer a windfall on the plaintiff. The principle that the measure of damages awarded in contract must be reasonable and proportionate to the benefit gained from its receipt is derived to discourage economic waste.

The damages are awarded on the basis of loss suffered by plaintiff and not on the profit gained by the defendant. If the defendant makes profit out of a contract without incurring any losses to plaintiff then there lies no action for compensation as no loss is suffered by plaintiff and defendant had fulfilled his obligations and performed his part of the contract.

EXCLUSION OF RIGHT TO CLAIM DAMAGES BY EXPRESS CONTRACT
In certain cases, parties may exclude or restrict liability for damages. Parties may, by making express provisions, exclude the right to claim damages for its breach. Such provision is valid, provided it is expressed in plain and unambiguous language. Under the English law, attempts to exclude or limit liability for breach of contract are restricted by statute. In any case such a term does not avail of the party himself guilty of breach.


BASIS FOR DETERMINING DAMAGES
On a breach of contract, the party who suffers by such breach may be entitled to claim compensation for the same, but it is not necessary that he may be compensated for all the consequences resulting from the breach of the contract.

THE GENERAL PRINCIPLE

The rules regarding remoteness of damage in contract are found in the judgement of the court of the exchequer in Hadley v. Baxendale,[2] as interpreted in later cases. Section 73 of the Indian Contract Act, 1872 which contains the rule regarding award of damages, is based upon the rule of English Law which was laid down in this case.
In 1854 the Court of Exchequer Chamber decided the now-famous case of Hadley v. Baxendale,[3] The basic facts in Brief are
The plaintiffs owned a flour mill that went down because of a break in the crankshaft that worked the mill. As a result, the plaintiffs wanted to transport the broken shaft to the original manufacturer, Joyce & Co. of Greenwich, to serve as a pattern for the manufacture of a new shaft. They therefore sent an employee to the local office of the defendants, who were large-scale public carriers trading under the name Pickford & Co. The employee told Pickford's clerk that the mill was stopped and that the shaft must be sent immediately. The clerk answered that if the shaft was sent up by twelve o'clock any day, it would be delivered at Greenwich on the following day.

The shaft was placed in Pickford's hands the next day before twelve o'clock, and Hadley paid £ 2 4d. for its shipment. Pickford's clerk was told that a special entry, if required, should be made to hasten delivery. In the event, delivery was delayed for five days "by some neglect":  Pickford routed the shipment through London and instead of immediately forwarding the shaft from London to Greenwich by rail, kept the shaft in London for several days and then sent it to Greenwich by canal together with an unrelated shipment of iron goods that Pickford was transporting to Joyce. Completion of the new shaft by Joyce was correspondingly delayed, and the mill was down five extra days. The plaintiffs claimed that they thereby were unable to supply many of their customers with flour, sharps, and bran during that period, and were obliged to buy flour to supply some of their other customers, and lost the means and opportunity of selling flour, sharps, and bran, and were deprived of gains and profits which otherwise would have accrued to them, and were unable to employ their workmen, to whom they were compelled to pay wages during that period. . . .

On the basis of these claims, the plaintiffs asked for damages of £ 300. Pickford argued that the damages claimed were "too remote."  The plaintiffs responded that these damages were "not too remote, for they are . . . the natural and necessary consequence of the defendants' default." The trial court "left the case generally to the jury," which awarded the plaintiffs damages of £ 25 above and beyond £ 25 that Pickford had already paid into court. The Exchequer Chamber reversed, but not on the theory of remoteness. Instead, it said that a party injured by a breach of contract can recover only those damages that either should "reasonably be considered . . . [as] arising naturally, i.e., according to the usual course of things" from the breach, or might "reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."

The rule laid down the case of Hadley v. Baxendale,[4] by Alderson B was as follows:

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 either such as may fairly and reasonably be considered arsing naturally, i.e. according to usual course of things, from such breach of contract itself, or such as many 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 parties, the damages resulting from the breach of such a contract which they would reasonably contemplate, would be 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 generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the circumstances been known, the parties might have provided for the breach of contract by special terms as to the damages in that case; thus it would very unjust to deprive them.

The court concluded that the plaintiffs had failed to satisfy either test. The two branches of the court's holding have come to be known as the first and second rules of Hadley v. Baxendale[5].

Most contracts can be characterized as sales of commodities (using that term broadly to include goods, land, and services) for a money price. The two rules of Hadley v. Baxendale[6]  are normally applied only to cases involving a breach by the seller of a commodity, because usually a buyer's major obligation is to pay money, and the nonpayment of a money price rarely implicates those two rules. For convenience, in the balance of this Article I shall therefore refer to the party in breach of a contract as the seller and to the party injured by a breach as the buyer.

On the basis of the two rules of Hadley v. Baxendale[7], contract law has conventionally distinguished between general or direct damages on the one hand and special or consequential damages on the other. General or direct damages are the damages that flow from a given type of breach without regard to the buyer's particular circumstances. General damages are never barred by the principle of Hadley v. Baxendale[8]  because by their very definition such damages should "reasonably be considered . . . [as] arising naturally, i.e., according to the usual course of things from the breach." For example, if a seller breaches a contract for the sale of goods, it follows naturally that the buyer suffers damages equal to the difference between the contract price and the market or cover price. This difference can normally be recovered as general damages.

Special or consequential damages are the damages above and beyond general damages that flow from a breach as a result of the buyer's particular circumstances. Typically, consequential damages consist of lost profits (although other kinds of consequential damages may occur). In particular, consequential damages typically consist of the difference between the profits the buyer actually made in transactions with third persons and the profits he would have made if the seller had performed. For example, suppose a seller breaches a contract for the sale of a factor of production, such as a die press, that the buyer plans to use rather than resell. The buyer's consequential damages are the difference between the profits he earned on his actual postbreach output and the profits he would have earned if the die press had been furnished as promised.

The second rule of Hadley v. Baxendale[9]  has traditionally been conceptualized to mean that consequential damages can be recovered only if, at the time the contract was made, the seller had reason to foresee that the consequential damages were the probable result of the breach. Under this conceptualization of the second rule, the first rule is simply a special case of the second: if a given type of damage arises "naturally, i.e., according to the usual course of things" from the breach of a given contract (the first rule), then a seller will always have reason to foresee that the given type of damages are the probable result of the breach (the second rule). Therefore, in the balance of this Article I will refer to this conceptualization of the second rule as the principle of Hadley v. Baxendale[10].

Two important characteristics of the principle of Hadley v. Baxendale[11]  should be briefly stated at the outset. First, the principle is a default rule. Essentially, the principle serves as a device to limit sellers' liability. If the principle were dropped from the law, sellers could still limit liability by contractual provisions that preclude consequential damages, set a dollar or formula limit on liability, offer varying liability limits in exchange for higher or lower prices, or substitute for dollar liability some other obligation, such as replacement or repair. Second, although the principle is often characterized as a "foreseeability doctrine," the principle as traditionally formulated and applied cuts off most foreseeable damages.

This second characteristic of the principle of Hadley v. Baxendale[12]  can best be understood by distinguishing among three levels of foreseeability.

The first level is foreseeability in the ordinary sense of that term, that is, in the sense that an event -- here, damage of a certain type -- could have been foreseen. In that sense of the term, almost any damage that actually occurs was likely to have been foreseeable.

A second level of foreseeability requires not only that a certain type of damage could have been foreseen, but that the prospect that this damage would occur was more than marginal, or not insignificant. I will use the term reasonably foreseeable to refer to damages that are foreseeable at this second level.

A third and most demanding level of foreseeability requires not only that the damage could have been foreseen, and that the prospect it would occur was more than marginal, or not insignificant, but that viewed ex ante it was probable or highly probable that the damage would result.

The principle of Hadley v. Baxendale[13], as traditionally formulated and applied, ratchets up the requirement of foreseeability to the third, exceptionally demanding level, and thereby cuts off both damages that could have been foreseen and damages that are reasonably foreseeable. Accordingly, it is inaccurate, or at least oversimplified, to treat the Hadley principle simply as a foreseeability doctrine. On the one hand, the principle cuts off most foreseeable damages. On the other, a foreseeability limitation would apply in contract law even if the principle of Hadley v. Baxendale[14]  were dropped.
 
As Hadley v. Baxendale[15] is the basis of formation of sec.73 so is the case of Murlidhar Chiranjilal v. Harishchandra Dwarkadas[16] as far as an attempt to interpret the section.
The facts of the case Murlidhar Chiranjilal v. Harishchandra Dwarkadas[17] can be stated in brief as:
A suit was filed by firm Messrs. Harishchandra Dwarkadas (hereinafter called the respondent) against the appellant-firm Messrs. Murlidhar Chiranjilal and one Babulal. The case of the respondent was that a contract had been entered into between the appellant and the respondent through Babulal for sale of certain canvas at Re. 1 per yard. The delivery was to be made through railway receipt for Calcutta f.o.r. Kanpur. The cost of transport from Kanpur to Calcutta and the labour charges in that connection were to be borne by the respondent. It was also agreed that the railway receipt would be delivered on August 5, 1957. The appellant however failed to deliver the railway receipt and informed the respondent on August 8, 1947, that as booking from Kanpur to Calcutta was closed the contract had become impossible of performance; consequently the appellant cancelled the contract and returned the advance that had been received. The respondent did not accept that the contract had become impossible of performance and informed the appellant that it had committed a breach of the contract and was thus liable in damages. After further exchange of notices between the parties, the present suit was filed in November, 1947.

The contention of Babulal was that the contract had become incapable of performance and was therefore rightly rescinded. Further Babulal contended that he was not in any case liable to pay any damages. The appellant on the other hand denied all knowledge of the contract and did not admit that it was liable to pay any damages. Certain other pleas were raised by the appellant with which we are however not concerned in the present appeal.

Three main questions arose for determination on the pleadings of the parties before the trial court:
  1. Whether Babulal had acted as agent of the appellant in the matter of this contract.
  2. Whether the contract had become impossible of performance because the booking of goods from Kanpur to Calcutta was stopped?
  3. Whether the respondent was entitled to damages at the rate claimed by it?

The trial court held that Babulal had acted as the agent of the appellant in the matter of the contract and the appellant was therefore bound by it. If further held that the contract had become impossible of performance. Lastly it held that it was the respondent's duty when the appellant had failed to perform the contract to buy the goods in Kanpur and the respondent had failed to prove the rate prevalent in Kanpur on the date of the breach (namely, August 5, 1947) and therefore was not entitled to any damages. On this view the suit was dismissed.

The two main questions that arose there in the High Court were about:
  1. The impossibility of the performance of the contract
  2. The liability of the appellant for damages.

The High Court held that the contract had not become impossible of performance as it had not been proved that the booking between Kanpur and Calcutta was closed at the relevant time. It further held that the respondent was entitled to damages on the basis of the rate prevalent in Calcutta on the date of breach and after making certain deductions decreed the suit for Rs. 16,946. Thereupon there was an application by the appellant for a certificate to appeal to this Court, which was rejected. This was followed by an application to this Court for special leave which was granted; and that is how the matter has come up before us.

The same two questions which were in dispute before the High Court were raised in the Supreme Court

The Supreme Court held that:
The two principles on which damages are calculated are well-settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the qualified by a second, which 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 of the damage which is due to his neglect to take such steps. This is not a case where it can be said that the parties when they made the contract knew that the likely result of breach would be that the buyer would not be able to make profit in Calcutta. This is a simple case of purchase of goods for re-sale anywhere and therefore them measure of damages has to be calculated as they would naturally arise in the usual course of things from such breach. That means that the respondent had to prove the market rate at Kanpur on the date of breach for similar goods and that would fix the amount of damages, in case that rate had gone above the contract rate on the date of breach. This is not a case of the special type to which the words “which the parties knew, when they made the contract, to be likely to result from the breach of it” appearing in section 73 of the Contract Act apply. This is an ordinary case of contract between traders which is covered by the words “which naturally arose in the usual course of things from such breach” appearing in section 73. As the respondent had failed to prove the rate for similar canvas in Kanpur on the date of breach it is not entitled to any damages in the circumstances. The appeal is therefore allowed, the decree of the High Court set aside and of the Trial Court restored with costs to the appellant throughout.
And as the respondent had failed to prove the rate for similar canvas in Kanpur on the date of breach it is not entitled to any damages in the circumstances.


The two main principles laid down by this decision were:
  1. The aggrieved party should be put as far as in good position as money can do.
  2. The sufferer should try to as far as possible mitigate the losses. 


LOSS ARISING IN THE NATURAL COURSE OF THINGS

The rule laid down in Hadley v. Baxendale,[18] was further elaborated in the case of Victoria Laundry case[19] by court of appeal as single rule.
The facts in brief are:
The plaintiff was dyer and with a intention to expand his business ordered the defendant for a large boiler. Defendant agreed to sell the boiler to the plaintiff, but it was damaged through Defendant’s negligence while being loaded. There was a consequent delay of twenty weeks in delivery. Defendant knew that plaintiff was a dyer, and that the boiler is required for his business. Plaintiff wanted it for especially lucrative dyeing contracts with the government but based his claim merely on loss of profit due to normal dyeing contracts.

The court said that:
1.      In cases of breach of contract the aggrieved party is only entitled to recover such part of loss actually resulting as was at time of the contract reasonably foreseeable as liable to result from breach…
2.      What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or at all events, by the party who later commits the breach…
3.      For this purpose, knowledge ‘possessed’ is of two kinds: one imputed, the other actual. Everyone, as a reasonable person is taken to know the ‘ordinary course of things and consequently what loss is liable to result from a breach of contract in that ordinary course’. But to this knowledge a contract breaker is assumed to posses whether he actually possesses it or not, there may have to be added in a particular case  knowledge which he actually possesses, of special circumstances outside the ‘ordinary course of things’ of such a kind that a breach in those special circumstances would be liable to cause more loss.
This rule limits the plaintiff’s damages to those losses which may be regarded within the observation of the parties of their possibility of occurring and the compensation is awarded considering the general or special facts which were known to both the parties in regard to damages as result to breach of contract.
In the case of breach of contract of marriage, there is disappointment and loss to the feelings and therefore, in such a case, it has been held that exemplary damages can be claimed.[20]
Sometimes the loss suffered by the plaintiff may not be in terms of loss of profits, but the same may be by way of wasted expenditure on certain project. Such expenses sometimes may have been incurred prior to the making of the contract. In such cases the plaintiff’s claim is not limited to expenses incurred only after the contract has been concluded. He can claim also the expenditure incurred before the contract, provided that it was such as would reasonably in the contemplation of the parties as likely to be wasted if the contract was broken.


LOSS ARISING FROM SPECIAL CIRCUMSTANCES

When the loss caused is such that the same did not arise naturally in the usual course of things but because of some special circumstances, the same can be claimed only if the special circumstances were in the knowledge of both the parties, when they made the contract.

If in the case of Hadley v. Baxendale,[21] if the defendants knew that the plaintiff was in a urgent need of the crank shaft for starting there mill they would have been liable for the loss of profits due to delay in delivery of crank shaft.

It is essential that the special circumstances must be in knowledge of defendant as well. Thus the special circumstances must be communicated to the defendant either by plaintiff or by his agent to signify the importance of the fulfilment of the contract so that the defendant while agreeing to the contract must know the circumstances created by the breach of contract and he will be liable for the damage caused to the plaintiff by the special and remote circumstances. Thus the liability of the defendant increases with the additional knowledge while agreeing to the contract.

DAMAGES FOR LOSS OF ENJOYMENT, INCONVENIENCE OR DISAPPOINTMENT, INJURED FEELINGS, EXASPERATION, MENTAL DISTRESS

Whether damages are awarded for loss of enjoyment, inconvenience or disappointment, injured feelings, exasperation, mental distress or similar intellectual feelings depends mainly on two factors:

(i)                 the nature of contract which is broken; and
(ii)               whether the aggrieved party has suffered any accompanying physical discomfort or inconvenience of such feeling.

In the case of Ghaziabad Development Authority v. Union of India[22] the Supreme Court held that damages for mental agony are not payable in case of ordinary commercial contract and the purpose of awarding damages is to put complainant monetarily in the same position as he would have been in if contract had been performed. Therefore rule as to remoteness of damage comes into play.

In general damages for loss of reputation or of goodwill cannot be claimed except where there is a loss of publicity of loss of opportunity to enhance reputation.

In another case the Supreme Court has said that compensation for loss of enjoyment of money can be awarded.[23]

In the case of Ghaziabad Development Authority v. Union of India[24]the facts in brief can be stated as under:
Ghaziabad Development Authority constituted under Section 4 of the Uttar Pradesh Urban Planning and Development Act, 1973 is the appellant. The Authority has from time to time promoted and advertised several schemes for allotment of developed plots for construction of apartments and/or flats for occupation by the allottees. Ghaziabad Development Authority had announced a scheme for allotment of developed plots which was known as "Indirapuram Scheme". The Authority informed the claimants that a plot of 35 sq metres was reserved for them, the estimated cost of which plot was Rs. 4,20,000 payable in specified instalments. An allotment of plot was also informed. Then at one point of time the claimants were informed that due to some unavoidable reasons and the development work not having been completed there has been delay in handing over possession. Having waited for an unreasonable length of time the claimants approached the MRTP Commission.

Supreme Court held that:
When a Development Authority announces a scheme for allotment of plots, the brochure issue by it for public information is an invitation to offer. Several members of the public may make applications for availing benefit of the scheme. Such applications are offers. Some of the offers having been accepted subject to rules of priority or preference laid down by the authority result in a contract between the applicant and the authority. The legal relationship governing the performance and consequences flowing from breach would be worked out under the provisions of the Contract Act and the Specific Relief Act except to the extent governed by the law applicable to the authority floating the scheme. In case of breach of contract damages may be claimed by one party from the other who has broken its contractual obligation in some way or the other. The damages may be liquidated or unliquidated. Liquidated damages are such damages as have been agreed upon and fixed by the parties in the anticipation of the breach. Unliquidated damages are such damages as are required to be assessed. Broadly the principle underlying assessment of damages is to put the aggrieved party monetarily in the same position as far as possible in which it would have been if the contract would have been performed. Here the rule as to remoteness of damages comes into play. Such loss may be compensated as the parties could have contemplated at the time of entering into the contract. The party held liable to compensation shall be obliged to compensate for such losses as directly flow from its breach.
The ordinary heads of damages allowable in contracts for sale of land are settled. A vendor who breaks the contract by failing to convey the land to the purchaser is liable to pay damages for the purchaser's loss of bargain by paying the market value of the property at the fixed time for completion less the contract price. The purchaser may claim the loss of profit he intended to make from a particular use of the land if the vendor had actual or imputed knowledge thereof. For delay in performance the normal nature of damages is the value of the use of the land for the period of delay, viz. usually its rental value and that Compensation for mental agony could not have been awarded as has been done by the MRTP Commission.
The court held that Interest on equitable grounds can be awarded in appropriate cases and Rate of interest awarded in equity should neither be too high nor too low. So Awarding interest at the rate of 12 per cent per annum would be just and proper and meet the ends of justice in the cases under consideration. Hence Authority does not therefore have any justification for resisting refund of the claimants' amount with interest. It gave Direction for payment of interest at the rate of 18 per cent shall stand modified to pay interest at the rate of 12 per cent per annum.

DAMAGES IN CONTRACTS RELATING TO MARRIAGE

Under Indian laws, breach of promise to marry is actionable, and there is no bar of public policy operating against the same.
In the case of Prema Korgaokar v. Mushtak Ahmed[25] the high court awarded exemplary damages as the plaintiff had a lot damage mentally as well her whole life was ruined due to breach of promise to marry by the defendant.
The facts of the case can be stated briefly as:
The plaintiff Miss Prema Korgaokar belonged a poor Brahmin Family. She worked as a typist in the defendants office in Mumbai who himself worked in Indian oil corporation.
The defendant was transferred to Rajkot office of Indian Oil. He told the plaintiff to accompany him and promised that he would find a job for her. The plaintiff convinced by the promise accompanied the defendant. She stayed with defendant for 3 days in hotel Ashok. The plaintiff, who was already married, told the plaintiff that his wife was unable to give birth to a child and he wanted a child. He promised the plaintiff to give a status of wife and all rights to her. He also changed the name of the plaintiff. The plaintiff had no option and she surrendered herself to the defendant.
Afterwards they both started living in Rajkot as husband and wife. When the plaintiff requested the defendant to marry her he started avoiding her. Consequently on repeated asking by the plaintiff the defendant started harassing her and even beated her.

The plaintiff filed a suit in the high court contending that her life was ruined and now she cannot get back to her family and she had lost her all chances to find a good life partner.

The question that arose before high court was
Whether compensation can be awarded in case of only non pecuniary losses and in cases of breach of contract relating to marriage under sec. 73?

The high court decided that in case of breach of contract relating to marriage exemplary damages apart from normal damages would be awarded as the plaintiff has suffered a lot and his feeling are badly hurt. So the defendant should pay Rs. 1 Lac and a interest @12% p.a.


MEASURE OF DAMAGES

The measure of compensation depends upon the circumstances of each individual case. The complained loss, or claimed damage, must be fairly attributed to breach as a natural result or consequence of the same. The loss must be a real loss, or actual loss and not merely a probable or a possible one. Where there is any loss to the plaintiff in consequence of the failure of the promisor to fulfil his promise, he is entitled to compensation. The burden is of proof is on promise to show how much loss he has suffered. If the deed of agreement between the parties mentions the damages to be paid for the breach of contract, than the deed governs the matter and courts have to abide by it.[26] The court has to assess damages, as best it can, on the materials available. There is a distinction between cases
1)      Where there is absence of  evidence which makes it impossible to fix damages; and
2)      Where there is difficulty in assessing damages because of nature of the damages proved[27];

In former case, the case of plaintiff may fail, but in the latter case, the court should make an effort to put the injured party in same position as he would have been , if he had not sustained the wrong.
Once it is established that the plaintiff is entitled to claim damages, the next question arises is of the measure of damages, i.e., assessment of the amount of compensation which has to be paid for the breach of contract. Ordinarily, the damages are compensatory in nature and therefore, the loss caused to a party on account of breach of contract can be claimed.
The question of assessing the amount of damages does not involve any question of legal recoverability, but merely the determination of losses in monetary terms or non-pecuniary (i.e. loss of goodwill, reputation, mental pain and suffering) and pecuniary damages (cost of replacement of good, loss of profits and any other losses).
In a contract of sale of goods, compensation has to be assessed on the basis of the loss which arises on the date of breach of contract.
Since damages are to bring the plaintiff in condition of post performance contract a question arises whether damage for cost of replacement of goods is to be awarded or the difference in the market values of correct performance and defective performance of contract. When a contract to deliver goods at certain price is broken the damage in general is the difference between the contract price and market price when the contract is broken.
Sec 73 describes the method of assessing the compensation due to a plaintiff suing upon a breach of a contract. It does not however, affect the right of the seller to bring an action against the buyer for recovery of the price of goods on the buyer refusing to take delivery of the goods.
Even though the measuring of damages under sec 73 of the act is the jurisdiction of the court, yet when the amount of damages to be awarded for a breach of contract is limited by the specific agreement between the parties.


MITIGATION OF DAMAGES

There is a fundamental principle of the law of damages, i.e., the plaintiff entitled to claim damages on the breach of contract must take reasonable steps to mitigate the loss arising from such breach.
According to explanation of sec. 73, “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.”
It means that whether the plaintiff has taken steps to mitigate the loss or not is a factor which has to be taken into account in assessing damages. If the plaintiff has not availed of the duty to mitigate the loss the damages claimed by him cannot be said to have arisen ‘naturally’ in the usual course of things.
Whether the plaintiff has discharged his duty of taking reasonable steps to mitigate the loss is a question of facts which depends upon circumstances & facts of a particular case.

The concept of the principle is that the person who has broken the contract should not suffer the burden of additional damages which could be prevented if the plaintiff had acted upon in time to mitigate the damage. This principle ensures that plaintiff should not get anything more than the loss suffered after acting reasonably in order to mitigate damages. The rule also allows for the defendant for efficient breach as he may break his contractual obligation if he gets higher profit from a new contract and profit even after paying the damages.

The doctrine of mitigation is governed by three rules:
  1. The plaintiff cannot recover the loss consequent upon the default of the defendant if the plaintiff could have avoided the loss by taking reasonable steps.
  2. If the plaintiff avoids or mitigates the loss, he cannot recover even if he takes steps which are more than what was reasonably required of him.
  3. Where the plaintiff suffers loss or incurs expense by taking reasonable steps to avoid or mitigate the loss resulting from the defendant’s default, he may recover further loss or expense from the defendant.[28]

However the plaintiff can recover expenses or further loss incurred by him in taking reasonable steps to mitigate his loss resulting from the defendant’s breach, even when the mitigation steps were unsuccessful or had led to greater loss.
The plaintiff may claim damages to place him in position of breach. This does not disallows him from getting remedial damages from breach of contract.


BREACH MUST BE OF SUCH NATURE AS WILL ENTITLE PLAINTIFF TO RECOVER DAMAGES
It may be added, that the breach of the contract must be of a nature such as will entitle the plaintiff to recover damages. Where therefore, the breach is of nature which
a)      Does not give right to recover damages, or
b)      Does not occasion any loss or damage,
No cause of action accrues to the plaintiff to recover compensation under this section.

LIMITATION OF RECOVERY
Two matters may be borne in mind namely,
1)      No compensation may be allowed, where there is no definite or reasonable proof of loss suffered,
2)      The right to recover compensation may be excluded by an agreement of the parties. In such a case, there can be no recovery, even though there has been loss or damage, since the right is excluded by agreement.

CLAIMS FOR PROSPECTIVE LOSS

Prospective damages are awarded for any future losses, other than the damage faced at the time of breach.
Pecuniary damages are assessed separately but in general damages a single sum is awarded for all the damage suffered.


DAMAGES ASSESSED ONCE AND FOR ALL

The damages that result from a single cause must be assessed and awarded once and for all, and the suit brought up by plaintiff must be for all his losses, past, present and future which are definite and contingent.

The plaintiff has all rights to recover damages even if the assessment of the loss is difficult. The damages in this case may be awarded on an approximation of the loss.




CONCLUSION

Speaking broadly there are 16 observations made by the researcher under Sec. 73

1)      The law requires
a)      The claimant should not himself be guilty of any negligence or other improper conduct; he should have taken all reasonable steps to minimise the loss suffered by him: and
b)      The amount of damages awarded should never exceed the loss
i)                    Actually suffered by claimant, or
ii)                  Which he was likely to suffer, provided his acts were lawful, just and reasonable, and not contrary to the law, rules or bye-laws, duly enacted.

2)      If the special circumstances, under which the contract was actually made, were known to both the parties, the damages resulting from the breach of such a contract is the amount of loss or damage which could ordinarily follow from a breach of contract under those special circumstances. But, if those special circumstances were wholly unknown to the party breaking the contract, he can only be supposed to have had in his contemplation the amount of injury which would arise generally, and, in a great multitude of cases, not affected by any special circumstances from such a breach of contract.

3)      A person whose contract has been broken should be placed, as nearly as possible, in the same position, as if it would not have been broken.

4)      In case of contract, the injured party is entitled to recover only such part of the loss, actually resulting, as was, at the time of contract, reasonable foreseeable as likely to result from the breach.

5)      To make a particular loss recoverable, it need not be proved, that on a given state of knowledge, defendant could as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough, if he could foresee it was likely so to result.

6)      There is only one area of indemnity to be explored, and that is, what is within the provision of the defendant as a reasonable man in the light of the knowledge, actual or imputed, which he had at the time of the contract.

7)      The compensation awarded should,  as nearly as possible, be the sum which will put the injured party in same position as he would have been, if he had not sustained the wrong.

8)      The breach of contract must be of a nature such as will entitle the plaintiff to recover damages.

9)      The right to recover compensation may be excluded by the agreement of the parties.

10)  The measure of compensation depends upon the circumstances of each individual case. But the loss to damage complained of must be fairly attributable, to the breach of contract as a natural result of the same.

11)  The loss must be a real loss, or actual loss and not merely a probable or a possible one.

12)  The burden of proof is on plaintiff to show how much loss he has suffered.

13)  If the agreement between the parties mentions the damages to be paid for the breach of contract, it is the agreement that governs the matter.

14)  The court has access damages, as best as it can, on the basis of material available.

15)  If it is clear that the plaintiff has suffered substantial loss or damage, the fact, that is assessment is difficult is no ground for not awarding damages. The court must do the best it can.

16)  Lack of relevant evidence may make it impossible to access damages at all. But even in such cases, if it is established that loss or damage has been incurred, for which the defendant should be held liable, the plaintiff must be given the benefit of every reasonable presumption as to loss suffered. And the court may, in ends of justice, go even to the extent of making a pure guess.


The Supreme Court has verified many of these principles during course of the judgements given.




[1] Tarsem Singh v. Sukhminder Singh, (1998)3 SCC 471.
[2] (1854)9 Ex. 341, 355, [1843-60] All ER Rep 461 cited by Pollock & Mulla, Indian Contract and Specific Relief Acts, 1516 (Nilima Bhadbhade Ed., New Delhi: Butterworths, 2001)
[3] Ibid
[4] Ibid
[5] Ibid
[6] Ibid
[7] Ibid
[8] Ibid
[9] Ibid
[10] Ibid
[11] Ibid
[12] Ibid
[13] Ibid
[14] Ibid
[15] Ibid
[16] [1962] 1 SCR 653, AIR 1962 SC 366
[17] Ibid
[18] Ibid
[19] Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 1 All ER 997
[20] Prema v. Mustak Ahmed A.I.R. 1987 Guj. 106
[21] (1854)9 Ex. 341, 355, [1843-60] All ER Rep 461
[22] (2000)6 SCC 113
[23] Sardar Mohar Singh v. Mangilal (1997) 9 SCC 217
[24] (2000)6 SCC 113
[25] AIR 1987 Guj. 106
[26] Surjit Kaur v. Naurta Singh and Anothers (2000) 7 379
[27] Prema Korgaokar v. Mushtak Ahmed AIR 1987 Guj. 106
[28] Pollock & Mulla, Indian Contract and Specific Relief Acts, 1614 (Nilima Bhadbhade Ed., New Delhi: Butterworths, 2001)

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  1. nice analysis! Have you gone through the Heron II case of the House of Lords decided iin 1969

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