Contract Damages

Contract Damages
HASIT SETH
16 October 2020
(c) 2020, Hasit Seth. HLaw Chambers

Disclaimer
The materials in this presentation are not legal advice and is
not intended to solicit legal work. This material is intended
for an academic discussion among professionals. If you are
seeking legal advice, please contact a lawyer licensed in your
jurisdiction.

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Contract Remedies
♔Damages
♔Equitable Remedies
♕Specific Relief
♕Injunction
♔Restitution
♕Quantum Merut

Contract Damages

Damages
♔“Damages are an award in money for a civil wrong.”
♕McGregor on Damages, 20th Edn.
♔Compensatory damages for losses are the most common form of
damages.
♔They can be: pecuniary or non-pecuniary.
♔General & Special damages
♕Contract, tort, proof & pleading contexts.
♔Nominal Damages

ExpectationInterest- Restatement2nd ofContract
♔Injured party has a a right to damages based on his expectation
interest as measured by
♔(a) the loss in the value to him of the other party's performance
caused by its failure or deficiency, plus
♔(b) any other loss, including incidental or consequential loss, caused
by the breach, less
♔(c) any cost or other loss that he has avoided by not having to
perform.

RelianceInterest- Restatement2nd ofContract
♔As an alternative to the measure of damages stated in § 347, the
injured party has a right to damages based on his reliance interest,
including expenditures made in preparation for performance or in
performance, less any loss that the party in breach can prove with
reasonable certainty the injured party would have suffered had the
contract been performed.

Normal Damages

S.73 - Compensation for loss or damage caused by breach of contract.
♔73. … 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.
♔Compensation for failure to discharge obligation resembling those
created by contract.
♔ For Contract damages
♕means which existed of remedying the inconvenience caused by the non-
performance of the contract must be taken into account.

Rulein Hadleyv.Baxendale(1854)9 Exch341
[T]he proper rule in such a case as the present is this:- 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, ie,
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. (emphasis supplied)

ArmyWelfarev.Sumangal,(2004) 9SCC 619(3 JJ)
♔ Contractor had no responsibility to approve building plans.
♔Architect and Employer agreed that Contractor will approve
building plans.
♔Delay as municipality asked Employer to stop work without proper
building plans.
♔Contractor was held not to be liable for such delay.

UOIv.SugauliSugar, (1976)3 SCC 32 (3 JJ)
♔“3. The plaintiffs …goods were booked on September 5, 1955 to
several destinations under railway risk. The goods did not reach the
destinations. The respondents alleged that non-delivery was on
account of gross negligence and misconduct on the part of the
railways.”
♔“4. The defence was that the wagons containing the goods in suit
along with other wagons were taken on Barge No. 6 from
Samariaghat to Mokamahghat on September 7, 1955. There was an
accident. The barge with all the wagons sank in the river Ganges. The
railways contended that the employees were not guilty of any
negligence or misconduct.”

UOIv.SugauliSugar, (1976)3 SCC 32 (3 JJ)
♔“22.The market rate is a presumptive test because it is the general
intention of the law that, in giving damages, for breach of contract,
the party complaining should, so far as it can be done by money, be
placed in the same position as he would have been in if the contract
had been performed...The market value is taken because it is
presumed to be the true value of the goods to the purchaser. “
♔“One of the principles for award of damages is that as far as possible
he who has proved a breach of a bargain to supply what he has
contracted to get is to be placed as far as money can do it, in as good
a situation as if the contract had been performed.The fundamental
basis thus is compensation for the pecuniary loss which naturally
flows from the breach.”

MSEBv.DatarSwitchgear,(2018) 3SCC 133
♔Contract for electrical low-tension management system installation.
♔Disputes. Arbitration.
♔ Award ordered MSEB to pay ₹185,97,86,399 as damages:
♕ ₹ 109 crores towards the installed object.
♕₹ 71 crores towards the objects manufactured and ready for installation
♕₹ 6.52 crores towards raw material purchased for the manufacture of
balance equipment.
♔Main breach contended was that MSEB did not provide a list of
installation locations – an issue of ‘fundamental breach’.
♔Rejected mitigation claim because equipment was custom made.

Lost Profits
Consequential Damages

AttorneyGeneralv.GlobalWater[2020] UKPC18
♔Govt. of BVI entered in two contracts with GWA for a water
treatment plant, viz.:
♕1st contract was a design & build (DBA) contract
♕2nd contract was a manage/operate/maintain agreement ( MOMA) for 12
years
♔Govt. failed to provide site, which was Govt.’s responsibility in DBA
♔In arbitration, the award held that:
♕Govt. has breached the DBA’s term of providing site.
♕But rejected GWA’s claim that Govt. also breached an implied term of
MOMA that Govt. will provide site under DBA. Claim for loss of profit from
MOMA’s operation was too remote.

♕The arbitrators also found that, ““Breach of the DBA prevented the fulfilment
of a condition precedent to the performance of a distinct and separate contract;
separate contract; it prevented the MOMA from commencing.”
♔Govt. appealed to court. Single judge upheld GWA’s contentions.
♔The Court of Appeal, reversed, rejecting damages claimed as too
remote by arguing:
♕Govt. could have got water plan built by someone else if GWA terminated
DBA for breach. And then Govt. could have given MOMA to GWA.

♔Privy Council held that damages were NOT remote, because:
♕1st - “…the contracts were entered into between the same parties on the
same day and they both related to the same Plant on the same site, giving
rise to special knowledge under the second limb of the rule in Hadley v
Baxendale.”
♕2nd – Govt. knew and intended that performance by both the parties would
lead to commencement of MOMA.

♔Privy Council held that damages were NOT remote, because:
♕3rd – “Design Build Documents which were incorporated into the DBA were
the same documents as were incorporated into the MOMA, identifying
Purestream as the manufacturer of the Plant and GWA as its exclusive
representative…”
♕4th - “…there is no express term in the DBA which limits the Government’s
liability in damages to GWA’s loss of earnings under the DBA and no finding
by the arbitrators that such a term was to be implied into the DBA. “

"...[1]
purpose of
damages for
breach of
contract is to
put the party
whose rights
have been
breached in
the same
position, so
far as money
can do so, as
if his or her
rights had
been
observed.
...[2] party in a
breach of contract is
entitled to recover
only such part of the
loss actually
resulting as was, at
the time the
contract was made,
reasonably
contemplated as
liable to result from
the breach. To be
recoverable, the
type of loss must
have been
reasonably
contemplated as a
serious possibility ...
.... [3] what
was
reasonably
contemplated
depends
upon the
knowledge
which the
parties
possessed at
that time or,
in any event,
which the
party, who
later commits
the breach,
then
possessed.
... [4] test to be
applied is an objective
one. One asks what
the defendant must
be taken to have had
in his or her
contemplation rather
than only what he or
she actually
contemplated. In
other words, one
assumes that the
defendant at the time
the contract was
made had thought
about the
consequences of its
breach.
... [5] the
criterion for
deciding
what the
defendant
must be
taken to
have had in
his or her
contemplati
on as the
result of a
breach of
their
contract is
a factual
one."

A.T.BrijPaulv.Gujarat,(1984)4 SCC 59, 65(3JJ)
♔ A concrete was to be built.
♔Contractor quoted below estimate at ₹16,59,900.
♔Road was partly built.
♔The state rescinded the contract due to delay in execution.
♔State settled final bill which contractor accepted under protest.
♔Contractor filed a suit to demand 11 lakhs:
♕Rs 7 lakhs by way of damages, goodwill, prestige and loss of expected profit,
♕Rs 3 lakhs by way of damages on account of loss sustained while executing
the work
♕Rs 1 lakh as damages for the extra .

A.T.BrijPaulv.Gujarat,(1984)4 SCC 59, 65(3JJ)
♔“11. Now if it is well-established that the respondent was guilty of
breach of contract inasmuch as the rescission of contract by the
respondent is held to be unjustified, and the plaintiff contractor had
executed a part of the works contract, the contractor would be
entitled to damages by way of loss of profit.”
♔ “Adopting the measure accepted by the High Court in the facts and
circumstances of the case between the same parties and for the
same type of work at 15 per cent of the value of the remaining parts
of the work contract, the damages for loss of profit can be
measured.”
♔2 lakh awarded as “loss of profit” after other damages upheld by HC.

Liquidated Damages

S.74 - Compensation for breach of contract where penalty stipulated for.
♔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 for.

S.74 -Explanations
♔stipulation for increased interest from the date of default may be a
stipulation by way of penalty.
♔When any person enters into any bail-bond, recognizance or other
instrument of the same nature, … shall be liable, upon breach of the
condition of any such instrument, to pay the whole sum mentioned
therein.
♔A person who enters into a contract with Government does not
necessarily thereby undertake any public duty, or promise to do an
act in which the public are interested.

FatehChandv. BalkishanDass,AIR 1963SC 1405 (5 JJ)
♔Sale of leasehold rights not completed.
♔“8… 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 the aggrieved party only reasonable compensation.”
♔“The Indian Legislature has sought to cut across the web of rules
and presumptions under the 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. “

♔“10 …The measure of damages in the case of breach of a stipulation
by way of penalty is by Section 74 reasonable compensation not
exceeding the penalty stipulated for. “
♔“…In assessing damages the Court has, subject to the limit of the
penalty stipulated, jurisdiction to award such compensation as it
deems reasonable having regard to all the circumstances of the case.
Jurisdiction of the Court to award compensation in case of breach of
contract is unqualified except as to the maximum stipulated; but
compensation has to be reasonable, and that imposes upon the
Court duty to award compensation according to settled principles.”

♔“10 …The section undoubtedly says that the aggrieved party is
entitled to receive compensation from the party who has broken the
contract, whether or not actual damage or loss is proved to have
been caused by the breach.Thereby it merely dispenses with proof of
“actual loss or damage”; it does not justify the award of
compensation when in consequence of the breach no legal injury at
all has resulted, because compensation for breach of contract can be
awarded to make good loss or damage which naturally arose in the
usual course of things, or which the parties knew when they made
the contract, to be likely to result from the breach.”

MaulaBuxv.UOI(1969), 2 SCC 554, (3JJ)
♔Facts:
♔2 Contracts with Govt. to supply potatoes & non-veg food.
♔Maula paid ₹10,000 and ₹8,000 as performance security.
♔Govt. rescinded the contracts and forfeited the deposits for
persistent supply defaults.
♔Maula filed a suit for Rs 20,000 for performance security.

♔Supreme Court:
♔“Where the Court is unable to assess the compensation, the sum
named by the parties if it be regarded as a genuine pre-estimate may
be taken into consideration as the measure of reasonable
compensation… ”
♔“… but not if the sum named is in the nature of a penalty.
♔“…Where loss in terms of money can be determined, the party
claiming compensation must prove the loss suffered by him.”
♔Key here: Govt. led no evidence of actual loss. So trial court and later
SC decreed the suit for not proving losses suffered by Govt.

♔SC also said,
♔“5. Forfeiture of earnest money under a contract for sale of property —
Movable or immovable — If the amount is reasonable, does not fall
within Section 74.That has been decided in several cases: …easily
explained, for forfeiture of reasonable amount paid as earnest money
does not amount to imposing a penalty. “
♔“But if forfeiture is of the nature of penalty. Section 74 applies.”
♔ ”Where under the terms of the contract the party in breach has
undertaken to pay a sum of money or to forfeit a sum of money which he
has already paid to the party complaining of a breach of contract, the
undertaking is of the nature of a penalty.”

BSNLvReliance,(2011)1 SCC 394(3 JJ)
♔ Matter was remanded back toTDSAT but observations matter.
♔Issue: International calls masked a domestic calls to avoid IUC.
♔The court held that clauses provided a reasonable pre-estimate of
damages because:
♕(1) international calls can be identified even when made on a local port.
Hence, a international call from a masked number alone cannot be
considered.
♕(2) Limited time period for recognizing higher IUC rates.

KailashNathv.DDA,(2015)4 SCC 136 (2 JJ)
♔Auction of a plot for 3.12 crores to the highest bidder.
♔Highest bidder deposited earnest money, 78 Lakhs, for auction.
♔DDA twice gave extension for balance money.
♔Allotment was cancelled.
♔Kailash filed a suit. Plot was reauctioned at 11.78 crores.
♔Matter reached SC.

♔SC held that DDA’s forfeiture was invalid, because:
♔Earnest money could not be forfeited under auction terms as DDA itself
increased time to make balance payment.
♔[There were time is of essence issues that are not considered here]
♔Liquidated Damages (LD) are are payable if it is a genuine pre-estimate of
damages by both the parties and so found by court.
♔In other cases, only reasonable compensation up to LD. But if amount stated is a
penalty than only a reasonable amount up to the penalty can be ordered.
♔In both above cases, amount stated in contract is the upper limit that court can
grant.

♔“43.1. Where a sum is named in a contract as a liquidated amount
payable by way of damages, the party complaining of a breach can
receive as reasonable compensation such liquidated amount only if it
is a genuine pre-estimate of damages fixed by both parties and found
found to be such by the court. In other cases, where a sum is named
in a contract as a liquidated amount payable by way of damages, only
only reasonable compensation can be awarded not exceeding the
amount so stated. Similarly, in cases where the amount fixed is in the
nature of penalty, only reasonable compensation can be awarded not
exceeding the penalty so stated. In both cases, the liquidated amount
amount or penalty is the upper limit beyond which the court cannot
grant reasonable compensation.”

Some KeyDecisions
♔Alternate rates of interest if mortgage interest not paid in time are
not penalties but part of written contract.
♕Banke Behari v. Sunder Lal, 1893 SCC OnLine All 28, (Allahabad, 6 JJ)
6 JJ)
♔Earnest money
♕Shree Hanuman v.Tata Aircraft (1969) 3 SCC 522, (3 JJ)

S.75 - Party rightfully rescinding contract, entitled to compensation
♔ A person who rightfully rescinds a contract is entitled to
compensation
♕for any damage which he has sustained
♕through the non-fulfilment of the contract.

Restitution

Quasi Contract
♔For ‘Quasi Contract’, also known as ‘Constructive Contract’
♔Depends on independent, non-contractual doctrine – ‘unjust
enrichment’ which is now the basis of restitution remedies
♔Neither tort nor contracts
♔Contract Act uses the words:
♕ “Certain Relations ResemblingThose Created by Contracts”
♕ to broaden the English law’s concept of “Quasi Contracts” and

♔Unjust Enrichment
♕Has D been enriched?
♕Is enrichment at benefit of P?
♕Was enrichment unjust?
♕Any defenses / policy reasons?
♔ Lipkin Gorman v. Karpnale [1991] 2 AC 548
♔S.68 – Claim for necessaries supplied to person incapable of
contracting, or on his account

S.69
♔Reimbursement of person paying money due by another in payment
of which he is interested
♕A person who is interested in the payment of money
♕ which another is bound to pay
♕, and who therefore pays it,
♕is entitled to be reimbursed by the other.
♔Person paying must be interested in the payment and not himself
liable to pay

S.70
♔Obligation of Person enjoying benefit of non-gratuitous act
♕Where a person lawfully does anything for another person, or delivers
anything to him,
♕not intending to do so gratuitously, and
♕such other person enjoys the benefit thereof,
♕the latter is bound to make compensation to the former in respect of,
♕ or to restore, the thing so done or delivered

S.71
♔Responsibility of finder of goods
♕A person who finds goods
♕Belonging to another,
♕And takes them into his custody,
♕is subject to same responsibility as a bailee

S.72
♔Liability of person to whom money is paid, or thing delivered, by
mistake or under coercion.
♕A person to whom money has been paid, or anything delivered,
♕by mistake
♕or under coercion,
♕must repay or return it.

Contract Damages

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