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<Table of Contents
TOC \o "1-3" \h \z \u HYPERLINK \l "_Toc434572876" Introduction................ PAGEREF _Toc434572876 \h 1
HYPERLINK \l "_Toc434572877" Types of damages........................................ PAGEREF _Toc434572877 \h 2
HYPERLINK \l "_Toc434572878" Compensatory Damages................................ PAGEREF _Toc434572878 \h 3
HYPERLINK \l "_Toc434572879" General Damages/ Expectation damages.. PAGEREF _Toc434572879 \h 3
HYPERLINK \l "_Toc434572880" Special Damages....................................... PAGEREF _Toc434572880 \h 3
HYPERLINK \l "_Toc434572881" Punitive Damages.......................................... PAGEREF _Toc434572881 \h 4
HYPERLINK \l "_Toc434572882" Liquidation Damages..................................... PAGEREF _Toc434572882 \h 4
HYPERLINK \l "_Toc434572883" Nominal Damages.......................................... PAGEREF _Toc434572883 \h 4
HYPERLINK \l "_Toc434572884" Restitution...................................................... PAGEREF _Toc434572884 \h 4
HYPERLINK \l "_Toc434572885" Remoteness of damage............................. PAGEREF _Toc434572885 \h 5
HYPERLINK \l "_Toc434572886" General damages............................................ PAGEREF _Toc434572886 \h 6
HYPERLINK \l "_Toc434572887" Special damages............................................. PAGEREF _Toc434572887 \h 6
HYPERLINK \l "_Toc434572888" Position in India............................................. PAGEREF _Toc434572888 \h 6
HYPERLINK \l "_Toc434572889" Liquidated damages................................... PAGEREF _Toc434572889 \h 7
HYPERLINK \l "_Toc434572890" Position in India............................................. PAGEREF _Toc434572890 \h 8
HYPERLINK \l "_Toc434572891" Position in England........................................ PAGEREF _Toc434572891 \h 8
HYPERLINK \l "_Toc434572892" Measure of damages...................................... PAGEREF _Toc434572892 \h 9

The term contract is defined in Section 2(h) of the Indian Contract Act, 1872, as follows: An
agreement enforceable by law is a contract. In other words, it is a legally enforceable and
binding agreement, which is voluntarily entered into between two or more competent parties, for
consideration and with mutual obligations.
Breach of contract is a legal concept in which a binding agreement or negotiated for exchange is
not respected by one or more of the parties to the contract by non-performance or interference
with the other parties performance. A breach of contract occurs when a party thereto renounces
his liability under it, or by his own act makes it impossible that he should perform his obligations
under it or totally or partially fails to perform such obligations.1 Contracts bind the parties of a
contract to the terms of the agreement. As such, contracts form the basis of many business
transactions and if one party breaches the agreement, the other party can be severely injured. In
order to discourage people from breaching a contract and also to compensate the injured party
for any losses, the law provides several remedies for breach of contract. These remedies include
damages among other things.
According to the Oxford dictionary the term damages are defined as financial compensation
for loss or injury . The Blacks law dictionary says In law, damages are money claimed by, or
ordered to be paid to, a person as compensation for loss or injury. In context of the Indian
Contract Act, 1872 damages are referred to as i.e. a partys failure to perform some contracted
for or agreed upon act or his failure to comply with a duty imposed by law which is owed to
another or to the society. On the breach of a contract by a defendant, a court generally awards
damages the sum that would restore the injured party to the economic position they expected
from the performance of the promise or promises. When it is not possible or desirable to award
damages measured in that way, a court may award money/damages designed to restore the
injured party to the economic position they occupied at the time the contract was entered into or
designed to prevent the breaching party from being unjustly enriched.

Types of damages
A contract is only a promise upon which either the remedy of specific performance or damages is
available. The party who is injured in by the breach of a contract may bring an action for
damages which is a compensation in terms of money for the loss suffered by the injured party.
There are two general categories of damages that may be awarded if a breach of contract claim is
proved. They are:
Compensatory Damages.

Compensatory damages (also called actual damages) cover the loss the non-breaching party
incurred as a result of the breach of contract. The amount awarded is intended to make good or
replace the loss caused by the breach.
There are two kinds of compensatory damages that the non-breaching party may be entitled to

General Damages/ Expectation damages.

General damages cover the loss directly and necessarily incurred by the breach of contract.
General damages are the most common type of damages awarded for breaches of contract. An
example of a case in which general damages would be awarded is: - A delivered the wrong goods
to B. After discovering the mistake B insisted that A pick up the wrong goods and deliver the
right goods. A refused to pick up the goods and supply the right goods because it was not in

Associated cinemas of America, Inc. v World Amusement Co. (1937) 201 Minn 94
stock. B successfully sued for breach of contract. The general damages for this breach could

Refund of any amount B had prepaid for the goods;

Reimbursement of any expense B incurred in sending the goods back to A;
Payment for any increase in the cost B incurred in buying the right goods, or its nearest
equivalent, from another seller.

Special Damages.
Special damages (also called consequential damages) cover any loss incurred by the breach of
contract because of special circumstances or conditions that are not ordinarily predictable. These
are actual losses caused by the breach, but not in a direct and immediate way. To obtain damages
for this type of loss, the non-breaching party must prove that the breaching party knew of the
special circumstances or requirements at the time the contract was made.

Example: In the scenario above, if A knew that B needed the goods on a particular day because
of prior obligations, the damages for breach of contract could include all of the damages awarded
in the scenario above, and

Payment for Bs expense in procuring the goods.

Punitive Damages.

Punitive damages (also called exemplary damages) are awarded to punish or make an example
of a wrongdoer who has acted wilfully, maliciously or fraudulently. Unlike compensatory
damages that are intended to cover actual loss, punitive damages are intended to punish the
wrongdoer for egregious behaviour and to deter others from acting in a similar manner. Punitive
damages are awarded in addition to compensatory damages. However they are rarely awarded
for breach of contract. Though they may be available in some fraud or tort cases that overlap
with contract law.2
Apart from these there also exist the following forms of damages-

Liquidation Damages.

Damages that are specifically stated in the contract. These are available when damages may be
hard to foresee and must be a fair estimate of what damages might be if there is a breach. Both
parties determine what would be an appropriate amount during contract negotiations.

Nominal Damages.

These are damages that are awarded when the injured plaintiff does not actually incur a
monetary loss, but the judge wants to show that the winning party was in the right. These are
typically rarely awarded in contract cases because breaches of contract usually involve some sort
of loss to one party, however they might be awarded in tort cases that cross over with a breach of
contract case.


These are not really legal damages per se, but rather are an equitable remedy awarded to prevent
the breaching party from being unjustly enriched. For example, if one party has delivered goods
but the other party has failed to pay, the party that delivered the goods may be entitled to
restitution, i.e. the cost of the delivered goods, in order to prevent the unjust enrichment.3

Every action for damages raise two problems. The problem of remoteness of damage and the
problem of measure of damages.

Remoteness of damage
The expectations of the plaintiff are upset in every case of breach of contract. The consequences
may be felt by the injured party for a long time. For example a person contracts to supply pure
sunflower oil to a shopkeeper but he sells impure oil which constitutes a breach of contract. The
impure oil is seized by an inspector and destroyed. The shopkeeper is arrested, prosecuted and
convicted. The loss of oil, potential profits on sale, loss of social prestige, business reputation
and mental trauma are all consequences of the breach of contract. The theoretical consequences
of a breach may be endless but the law limits the liability. Beyond the limit the damage is said to
be too remote and therefore irrecoverable. The earliest attempt to limit the liability in a case of
breach of contract was in the 1854 case of Hadley vs. Baxendale.4
The facts of the case are as follows-
A shaft in the plaintiff Hadleys mill broke rendering the mill inoperable. Hadley hired the
defendant Baxendale to transport the broken mill shaft to an engineer in Greenwich so that he
could make a duplicate. Hadley told Baxendale that the shaft must be sent immediately and
Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be
inoperable until the new shaft arrived.
Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain
shut down for an additional five days.

The rule relating to remoteness of damage was found in Hadley vs. Baxendale wherein it was
held that
where two parties have made a contract which one of them has broken, the damages the other
party ought to receive in respect of such breach of contract should be either such as may fairly
and reasonably be considered as arising naturally i.e. in accordance with usual course of things
from such breach of contract itself or such as may reasonably be supposed to have been in the

9 Exch. 341, 156 Eng. Rep. 145 (1854)
contemplation of both parties at the time they made the contract as the probable result of breach
of it

Thus the rule formulated by this case was that amount damages for breach of contracts would be
as arising naturally from the contract itself. Damages for special circumstances are assessed
against a party only when they were reasonably within the contemplation of both parties as a
probable consequence of a breach. Where the special circumstances under which the contract
was actually made were communicated by one party to the other and was thus known to both
parties, the damages arising from breach would take into account the said circumstances. Where
the special circumstances are wholly unknown to the party breaking the contract, he at the most
can only be supposed to have known the amount of injury which would arise generally and not
affected by any special circumstances from such breach of contract.

In the present case the court held that Baxendale did not know that the mill was shut down and
would remain closed until the new shaft arrived. Loss of profits could not fairly or reasonably
have been contemplated by both parties in case of a breach of this contract without Hadley
having communicated the special circumstances to Baxendale. On basis of this principle the
defendants Hadley were held not liable for the loss of profits.
This decision has always been taken as creating these two categories of damages-
General damages.
These are the damages that arise naturally in the usual course of things from the breach itself.
Special damages.
These are those damages which arise on account of unusual circumstances affecting the plaintiff.
They are not recoverable unless the special circumstances were known by the defendant and thus
the possibility of special loss was in contemplation of the parties.

Position in India

The Section 73 of the Indian Contract Act 1872 which speaks of the compensation for loss or
damage caused by breach of contract states the following
"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 of damage sustained by reason
of the breach"
It further states that
"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."
The explanation to Section 73 states that
"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
The section appears to incorporate the two rules of Hadley vs. Baxendale. Compensation is
recoverable for any loss or damage-
Arising naturally in the usual course of things from the breach, or
Which the parties knew at the time of the contract as likely to result from the breach.
This section is therefore in consonance with the principles formulated in Hadley vs. Baxendale
and the same principles are applicable in India.
An illustration of the application of this section which is similar to the principles given in
Hadley vs. Baxendale is the following Madras High Court decision.
In the case of Madras Railway co vs. Govind Rau5, the defendant was not informed of the
forthcoming festival (special circumstance) for which the plaintiff contracted with the defendant
to transport a sewing machine and cloth to a certain place. Upon breach of contract the plaintiff
sought to claim special damages to the tune of expenses of traveling and staying at place of
festival and loss of special profit due to festival season. The court did not uphold his claim as the
damages were too remote and the special circumstances had not been brought to the notice of the

Liquidated damages
Liquidated damages in a contract are a genuine pre-estimate of the reasonable compensation to
which the non-defaulting party would be entitled in case of a breach. Section 74 of the Act deals
with compensation for breach of contract where penalty has been stipulated for (i.e. liquidated
It states-
When a contract has been broken, if a sum is named in the contract as the amount to be paid in
case of such breach, or if the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is proved to have
been caused thereby, to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the case may be, the penalty stipulated
Explanation. A stipulation for increased interest from the date of default may be a stipulation
by way of penalty.

Position in India

Section 74 provides that damages, not exceeding the amount stipulated in the contract, must be
given to the injured party on breach of the contract. The rule is that where a sum is named in a
contract as the amount to be paid in case of breach regardless whether it is a penalty or not the
party suffering from breach is entitled to receive reasonable compensation not exceeding the
amount named. The Indian courts have abolished the distinction between damages and penalty.6
The section further provides that such damages must be given to the injured party irrespective of
any actual loss or damage proved by them in Chunilal V. Mehta and Sons Ltd vs. Century Spg.
ILR(1898) 21 Mad 172
Contract and Specific Relief, Avtar Singh, 11th Edition, Eastern Book Company.
&Mfg. Co.,7 the view was expressed that the section does not justify the award of compensation,
when in consequence of breach no legal injury at all has resulted. This is so because
compensation can only be awarded under Section 73 for loss which naturally arose or was in the
contemplation of the parties. Thus proof of some loss is necessary although it will not be
necessary to prove the extent of it. This view was affirmed in Maula Bux vs. Union of India.8

Position in England

Under English Common Law, there is a clear distinction between penalty and liquidated
damages. When the parties name a sum to be payable in case of breach, if the sum is classified
by the court as a penalty it is irrecoverable but if classified as liquidated damages it is
recoverable. In Dunlop Pneumatic Tyres Co. Ltd vs. New garage and Motor Co Ltd.,9 The House
of Lords made the following observations distinguishing penalty and liquidated damages
The parties who use the expression `penalty' or liquidated `damages' may prima facie
mean what they say, yet the expressions are not conclusive.

The essence of a penalty is a payment of money in terrorem of an offending party; the

essence of liquidated damages is a genuine pre-estimate of damages.

The question whether a sum is a penalty or liquidated damages is a matter of construction

of the particular contract, to be judged at the time of its formation and not at the time of its

To assist in this task of construction, various tests have been suggested, which if
applicable to the case under construction may prove helpful or even conclusive.

Some such tests are: -

The sum stipulated shall be a penalty if it is extravagant and unconscionable in amount in
comparison with greatest loss that could conceivably be proved to follow from breach.
It would be a penalty if breach consists only in not paying sum of money and sum
stipulated is greater than sum which ought to have been paid;
Presumption (but no more) that it is a penalty when single sum made payable by way of
compensation, or occurrence of one or more or all of such events, which may occasion serious
damage or trifling damage, on the other hand; and
No obstacle to sum stipulated being a genuine pre-estimate of damage that consequences
of breach are such as to make precise pre-estimation almost impossible. On the contrary, that is
the situation when probably the pre-estimated damage was true bargain between parties.

AIR 1962 SC 1314
(1969) 2 SCC 554
1915 AC 79
Measure of damages

The amount of money which is to be given as damages is governed by some fundamental

principles. These determine the adequacy of damages. These principles are-
0 Claim for damages is not a debt
A claim for damages is not a debt the minute a contract is breached. It remains a claim till its
adjudication by the court and becomes a debt after the court awards.
1 Damages are compensatory
The primary aim or principle of law of damages for a breach of contract is to place the plaintiff
in the same position he would be in if the contract had been fulfilled or to place the plaintiff in
the position in the position he would have occupied had the breach of contract not occurred. The
reason for this is that the consequences of a breach of contract are endless and it is impractical
and unfair to penalize the defendant beyond a reasonable limit. Therefore damages are given by
way of compensation for the loss suffered by the plaintiff and not for the purpose of punishing
the defendant for the breach.

2 Inconvenience caused by breach

The inconvenience caused by the breach of a contract is often taken into consideration when
damages are awarded. In Hobbs vs. London and South Western Railway Co.10 the inconvenience
of the passengers ,who had to walk home after the defendant committed breach of contract by
driving the train the opposite direction, was taken into account.
3 Mitigation
The principle of mitigation i.e. whether the plaintiff took reasonable measures to prevent losses
after the breach has been committed. In M Licha Setty & Sons Ltd. vs. Coffee Board Bangalore,
the Supreme Court held that the principle of mitigation does not give any right to a party in
breach of contract but is a concept that has to be borne in assessing damages.11 In this case it
was held that the plaintiff must take all reasonable steps to mitigate the loss and if he fails to do
so he cannot claim such loss which could have been avoided. The plaintiff is only required to act
reasonably and whether he has done so or not is not a question of law but a question of fact in
each case. He must act reasonably not only in his own interest but also in the interest of the
defendant and lower the damages by acting reasonably in the matter. However the plaintiff is
under no obligation to destroy his property or to injure himself or his commercial reputation to
reduce the damages payable by defendant.

Therefore the types of damages include general, special, nominal, liquidated and punitive
damages. Also there are certain fundamental principles that are to be kept in mind by the courts
before deciding the measure of damages.

(1875) LR 10 QB 111