by Damages refer to a monetary compensation awarded to a party who has suffered loss or injury due to the breach of a contract by another party. When one party fails to fulfill the terms of a legally binding agreement, the injured party is entitled to receive damages to compensate for the loss sustained. The primary objective of awarding damages is to place the injured party in the position they would have been in had the contract been properly performed.
Under the Indian Contract Act, 1872, damages are not meant to punish the defaulting party but to compensate the aggrieved party. Section 73 of the Act clearly lays down that when a contract is broken, the party who suffers a loss due to this breach is entitled to receive compensation for any loss or damage that naturally arose in the usual course of things from such breach or which the parties knew, at the time of contract, to be likely to result from the breach.
Damages can be general or special, nominal or substantial, and sometimes liquidated or unliquidated. The courts assess the nature of the loss and determine the amount that will fairly compensate the injured party. However, compensation is not awarded for remote or indirect loss unless it was foreseeable by both parties at the time of contract formation.
In essence, damages serve as a remedy to enforce contractual obligations and provide justice to the aggrieved party by ensuring they are financially restored, as far as money can do so, to the position they would have been in if the contract had been performed. It acts as a crucial mechanism to uphold the sanctity and enforceability of contractual agreements.
Types of Damages:
- General or Ordinary Damages
General damages, also known as ordinary damages, arise naturally and directly from the breach of contract. These are the most common form of damages awarded by courts. They compensate the aggrieved party for losses that are predictable and within the contemplation of the parties when the contract was formed. For example, if a seller fails to deliver goods, the buyer may claim the difference between the contract price and the market price on the date of breach. No special circumstances need to be proved. Under Section 73 of the Indian Contract Act, 1872, such damages are recoverable as a natural consequence of breach. They are calculated objectively and do not consider subjective loss or emotional harm. The claimant must establish the breach and the usual loss that would result from such a breach.
- Special Damages
Special damages refer to compensation for losses that do not naturally arise from a breach but occur due to specific circumstances known to both parties at the time of contract formation. These damages are awarded when a party can prove that the loss was foreseeable and communicated at the time the contract was entered into. For instance, if a supplier fails to deliver machinery knowing it was essential for fulfilling a large customer order, and this leads to a loss of business, the buyer may claim special damages. The burden of proof lies on the claimant to establish that the other party was aware of the special conditions. Courts strictly interpret these claims. These damages encourage parties to disclose special conditions and risks when forming contracts and to maintain transparency in their dealings.
- Nominal Damages
Nominal damages are symbolic awards, usually of a small amount, granted when a breach has occurred but the claimant has not suffered any significant loss. The primary aim of such damages is to uphold the principle of law and recognize that a legal right has been violated. For example, if someone trespasses on another’s land without causing harm or loss, the court may award nominal damages. These damages serve more of a moral or legal acknowledgment than compensation. Though not substantial, nominal damages can have significance in business or reputational contexts, as they affirm that the breaching party was at fault. Courts grant nominal damages when the breach is proven but actual loss is either absent or cannot be quantified reasonably. They are especially useful in maintaining legal clarity in commercial disputes.
- Exemplary or Punitive Damages
Exemplary or punitive damages are rarely awarded in contract law. They are intended not merely to compensate the injured party, but to punish the breaching party for particularly egregious or malicious behavior and to deter others from similar conduct. These damages are more commonly found in tort law but may apply in contract cases involving fraud, oppression, or willful breach of fiduciary duty. Indian contract law, particularly under Section 73, generally limits damages to compensation rather than punishment. However, courts may consider exemplary damages in cases involving public service contracts or unlawful breaches with malicious intent. For example, if an insurance company unreasonably withholds payment of a valid claim, the court might grant punitive damages to discourage such conduct. These damages are exceptional and awarded only in cases with strong justifying circumstances.
- Liquidated Damages
Liquidated damages are pre-determined sums specified within the contract itself, which a party agrees to pay in case of breach. These clauses aim to provide certainty and avoid litigation by agreeing in advance on the quantum of damages. Under Section 74 of the Indian Contract Act, even if the amount stated is excessive or no actual damage occurs, the court may award reasonable compensation not exceeding the stipulated amount. Courts evaluate whether the sum is a genuine pre-estimate of probable loss or a penalty. If it’s reasonable, it will likely be enforced. Liquidated damages are especially useful in construction, IT, or supply contracts where the exact measure of loss may be hard to determine later. It reduces uncertainty and ensures smoother enforcement. However, excessive or punitive clauses are not upheld.
- Unliquidated Damages
Unliquidated damages refer to compensation not specified in the contract but determined by the court based on the actual harm suffered due to the breach. These damages are assessed by considering evidence, the nature of the contract, and the loss incurred. They are awarded when the contract does not contain a clause for pre-estimated compensation. Courts exercise discretion to calculate reasonable compensation, ensuring the injured party is restored to the position they would have enjoyed had the contract been fulfilled. For instance, if a vendor fails to deliver goods, and the buyer incurs extra costs in purchasing elsewhere, the court may award unliquidated damages for the additional expense. Unlike liquidated damages, these are based on proof of real loss. The claimant must prove the extent of loss through documents or expert testimony.
