DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY,LUCKNOW

SESSION 2016-17

SUBJECT: CONTRACT

PROJECT

ON

“SPECIAL DAMAGES TO CONTRACT”

Submitted By Submitted To

Tanmaya Gupta Dr. Manoj Kumar

2nd Semester RMLNLU Assistant Professor Law

180101146 RMLNLU

1|Page
 DECLARATION

We hereby declare that this project entitled

SPECIAL DAMAGES TO CONTRACT.

is written by us and are our own efforts and that no part has been plagiarized
and hereby, we declare it as an original piece of work.

Tanmaya Gupta.

2|Page
 ACKNOWLEDGEMENT.

I have taken a lot of efforts in this project. However, it would not have been
possible without the kind support and help of many individuals. I would like to
extend my sincere thanks to all of them.

I am highly indebted to Dr. Manoj Kumar for his guidance and constant
supervision as well as for providing necessary information regarding the project
& also for his support in completing the project.

I would like to express my gratitude towards my parents & members of RMLNLU

for their kind co-operation and encouragement which help us in completion of
this project.

I would like to express our special gratitude and thanks to every person for giving
us such attention and time.

My thanks and appreciations also go to people who have willingly helped us out
with their abilities.
Regards,
Tanmaya Gupta

3|Page
 RESEARCH METHODOLOGY.

The Research Methodology would be doctrinal in nature. The research is

primarily based on the data collected from various authentic internet sources and
books on “Indian Contract Act”.

OBJECTIVE.

To study the provision of special damages awarded under the act and find loopholes (if
any).This project ,further , aims to highlight and discuss the legitimacy of claiming
indirect / consequential damages arising out of the breach of the terms of the contract.

TABLE OF CHAPTERIZATION.
 
 Introduction……………………………………………………………..05
 
 The section 73 of Indian Contract Act…………………………………06
 
 The Suits for Damages……………………………………...………….08
 
Conclusion………………………..………………………...………….16

4|Page
 INTRODUCTION

The Indian Contract Act, 1872 ("Act") governs the law of contracts in India and is
predominantly based on English common law. The Act defines the term "contract" as
an agreement enforceable by law1 . 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. In today's dynamic business
environment, majority of the commercial transactions are successfully and effectively
undertaken through contracts. The list of such transactions include manufacturing
arrangements, supply arrangement, sub-contracting, infra projects, EPCs, advisory, etc.
Moreover, due to the aggressive growth in the field of technology, the parties entering
into such commercial transactions, are more cautious than ever, thus making the parties
deliberate even on the minutest of details / specifications so as they can best secure their
interest.

Therefore, contents of a contract have become highly detailed and elaborate.

Particularly, as a measure of safeguarding, securing and protecting their respective
interests in an event of breach of the terms of the contract, parties generally negotiate
and agree upon the various remedies that the injured party can invoke to mitigate and
compensate for the losses it may suffer on account of such breach. In other words, any
breach of the terms and conditions of the contract by either party ("Defaulting Party"),
entitles the other party ("Non-Defaulting Party") to claim for damages and / or other
remedies from the Defaulting Party.

The term "damages" is not defined under the Act. However, it can be said to mean an
award of money to be paid by the Defaulting Party to the Non-Defaulting Party as
compensation for loss or injury caused on account of the Defaulting Party's breach of
the terms and conditions of the contract. Damages can be broadly divided into two
categories, (i) direct damages; and (ii) indirect / consequential damages.

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 suffer majorly.

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:
damages, specific performance, contract recession, and contract modification.

1
Section 2(h) of the Indian Contract Act, 1872

5|Page
 Section 73 of the Act.

Section 73 of the Act provides that:

"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 account."

It appears from Section 73 of the Act that the general principle for assessment of
damages is compensatory, i.e. the innocent party is to be placed, so far as money can
do, in the same position as if the contract had been performed. However, the question
which arises for deliberation is that whether the Defaulting Party can be held liable for
the indirect damages / consequential damages suffered by the Non-Defaulting Party?

In the judgment as passed by the Supreme Court in Oil & Natural Gas Corporation
Ltd. vs. SAW Pipes Ltd2. The Court dealt with the issue relating to determination of
compensation for loss and damage caused due breach of contract vis-à-vis scope of
Sections 73 and 74 of the Indian Contract Act . The holding arrived at in this matter can
certainly be considered as timeless ratio and worth including in this category.

Sections 73 and 74 of Contract Act contemplates that in a contract the party who suffers
by such breach is entitled to receive compensation for any loss which naturally arises
in the usual course of things from such breach. If parties knew when they made the
contract that a particular loss is likely to result from such breach, they can agree for
payment of such compensation. In such a case, there may not be any necessity of leading
evidence for proving damages, unless the Court arrives at the conclusion that
2
AIR 2003 SC 2629

6|Page
no loss is likely to occur because of such breach. Section 74 is to be read along with
Section 73 and, therefore, in every case of breach of contract, the person aggrieved by
the breach is not required to prove actual loss or damage suffered by him before he can
claim a decree.Where Court concludes that the term contemplating damages is by way
of penalty, the Court may grant reasonable compensation not exceeding the amount
mentioned in the contract on proof of damages.

Section 74 deals with the measure of damages in two clauses of cases (i) where the
contract names a sum to be paid in case of breach, and (ii) where the contract contains
any other stipulation by way of penalty. 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. 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 damages"; 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.

Section 74 of the Indian Contract Act eliminates the somewhat elaborate refinements
made under the English common law in distinguishing between stipulates providing for
payment of liquidated damages and stipulations in the nature of penalty.

The principle of award of compensation is that the injured party should as far as possible
be placed in the same position in terms of money as if the contract had been performed
by the party in default. Where the contract is one of sale, this principle calls for
assessment of damages as at the date of breach. Under a contract for the sale of goods,
the measure of damages upon a breach by the buyer is the difference between the
contract price and the market price at the date of breach. On a breach of contract to
supply goods by the seller, the buyer is entitled to recover all the expenses of procuring
same or similar goods. This was held by the Calcutta High Court in the case of Tata
Iron & Steel Co Ltd v Ramanlal Kandoi3 . In case of non-delivery of goods, the
damages are fixed on the basis of the price prevailing on the date on which delivery is
to be made, as was held by the Supreme Court in the case of Union of
India v. Jolly Steel Industries (Pvt) Ltd4 .

3
1971 2 Cal. Rep. 493, 528.
4
AIR 1980 SC 1346.

7|Page
 Suit For Damages

The term ‘damages’ may be defined as the monetary compensation payable by the
defaulting party to the aggrieved party for the loss suffered by him. The aggrieved party,
may therefore bring an action for damages against the party who is guilty of the breach
of the contract. And the party, guilty of the breach, id liable to pay damages to the
aggrieved party. The primary aim of damages is to compensate the aggrieved party, and
to place him in the same position which he would have occupied had the breach of
contract not occurred. It may, therefore, be noted that the damages are given by way of
compensation for the loss suffered by the aggrieved party, and not for the purpose of
punishing the default party.

Kinds Of Damages

Law recognizes various kinds of damages or losses. Once the court has determined
which loss may be recovered, it is then faced with the problem of quantifying the loss,
i.e. determining just how just how much the aggrieved party should receive. The kinds
of damages are as follows:

1) Compensatory Damages -

There are two categories of compensatory damages. The first category, general
damages, includes all those damages that arise naturally from breach of contract. The
second category called special damages arise due to the special circumstances
foreseeable by the parties at the time of making contract.

a) General damages (ordinary damages) -

There are damages that arise naturally from the breach of contract. They are
restricted to the ‘direct and proximate’ consequences and not to the remote or
indirect losses or consequences of the breach of a contract.

In the case of Hadley v. Baxendale5, the crankshift of a mill broke and it was necessary
for it to be sent to the manufacturers as a pattern for the new one. The mill owners
engaged carriers for this purpose, but the carriers delayed delivery, and the mill owners
were unable to use the mill for longer than if there had been no delay. Consequently,
the loss of profits suffered by the millers was greater than if no delay

5
[1984] 9 Exch. 34

8|Page
had occurred. The millers sued the carriers for such loss of profits. The courts held that
since the only information given by the millers was that the article to be carried was the
broken shaft of a mill, and it was not made known to them that the delay would result
in loss of profits, they were not liable for the loss of profits.

b) Special damages –

These are the consequential damages caused by the breach of contract due to the
existence of special circumstances. Such damages are awarded by the courts only
when at the time of making a contract, these special circumstances were
forseeable by the party committing the breach.

In the case of Victoria Laundry Limited v. Newman Industries Limited6, V the

launders and dyers required a bolier for the purpose of expanding their business. V
entered into an agreement with N where N was to supply the Bolier on June 5th. Due to
the fault of N, the Bolier was not delivered till November 8th. Consequently, V could
not service his new customers and had a loss of lucrative profits worth 278 Pounds. V
claimed this loss from N. N contended that he did not know about V’s lucrative business
contacts. The court held that V could recover the loss of ordinary laundry profits but not
the loss resulting from some lucrative contacts with specific customers because N was
not aware of these contacts and such a loss was not in contemplation of both the parties
when the contract was made.

If the special circumstances was already in the knowledge of the party responsible for
the breach of contract, the formality of communicating them to him may not be
necessary.

In the case of Simpson v. London & North Western Railway Company7, S a

manufacturer used to exhibit his samples of his equipment at agricultural exhibitions.
He delivered his samples to railway company to be exhibited at New Castle. On the
occasion he wrote “must reach at New Castle on Monday certain”. On the account of
negligence on the part of railway company, the samples reached only after the
exhibition was over. S, claimed damages from railway company for his loss of profits
from the exhibition. The court held that the railway company was liable to pay these
damages as it had the knowledge of special circumstances, and must have contemplated
that a delay in delivery might result in such loss.

6
[1949] 2 KB 528.
7
[1876] 1 Q.B.D. 274

9|Page
c) Measuring of compensatory damages-

Section 73, of the Indian Contract Act, 1872, provides that, “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 given for any remote and indirect loss or damage sustained
by the reason of the breach.”

This section warrants the need to assess such damages, general or special, according to
the facts of the case.

In the case of a contract for sale or purchase general rule as regards to measuring of the
damage is that –

i. The damage would be assessed on the difference between the contract price and the
market price on the date of the breach.

In the case of Jamal v. Moola Dawood Sons & Co.8, M agreed to purchase certain
shares from J on a particular date and subsequently declined to purchase them on that
date. The difference between contract price and market price on that date was Rs. 1, 09,
218. J later on sold those shares and the actual loss amounted Rs. 79, 862. J sued M
claiming Rs. 1, 09, 218 as damages. The courts held that he was entitled to Rs, 1, 09,
218, because the damages are measured according to the circumstances existing on the
date of breach.

ii. Under a contract of sale of goods, damages can be claimed for breach of condition,
or warranty and such damages include all damages flowing from the breach.

In the case of Jackson v. Walson & Sons9, J’s wife died from poisoning caused by the
tinned fish supplied by W. in an action for damages for breach, the court held that J was
entitled to damages incurred by – employing extra servants by reason of the loss of
wife’s services during illness, medical expenses, pecuniary loss occasioned by the death
of his wife.

iii. If the seller is selling services rather than something tangible and the buyer
breaches the contract, the calculation of general damages is somewhat different.

8
[1916] 43. I.A. 6
9
[1909] 2 KB 193.

10 | P a g e
d) Duty to mitigate damages suffered-

The way in which liability for contract damages is limited by the courts imposing a
duty on the party who has been harmed by a breach of contract to mitigate the
damages resulting from the breach. In other words, the party who has been harmed
may not sit idly and watch the damages accumulate. Moreover the party is
supposed to act prudently to minimize such damages.

In the case of Neki v. Pribhu10, A took a shop from B on rent and paid one month’s
rent in advance. B could not give possession of shop to A. there were other shops
available in the vicinity but A chose not to do business for eight months. After eight
months, A sued B for breach of contract claiming damages including advance rent and
loss of profits for eight months. The court held that he was entitled to a refund of his
advance and nothing more, as he failed in his duty to minimize the loss by not taking
another shop in the neighbourhood.

In another case, Derbshire v. Warran11, D was the owner of ‘X’ brand of car which
was damaged in an accident by negligence of W. D was informed that the pre-accident
value of the car was 85 pounds and the estimated cost of repair was 192 pounds, and as
such an uneconomic proposition. D, however, decided to have the car repaired and
claimed the damages from W amounting to 137 pounds (192 pounds – 80 pounds
claimed from insurance 25 pounds the cost of hiring another vehicle until his car was
repaired). W argued that D could have purchased a similar vehicle in the open market
for 85 pounds; he should have not taken this uneconomic step. The court accepted this
view and awarded the replacement value of the vehicle, i.e., 30 pounds (85 pounds
replacement price 25 pounds cost of hiring another vehicle – 80 pounds claimed from
the insurance).

2) Vindictive Damages-

At time breach of contract by one party not only results in monetary loss to the injured
party but also subjects him to disappointment and mental agony. In such cases monetary
compensation alone cannot provide an appropriate remedy to the sufferings of the
injured party. Thus there is a need for vindictive damages.

Vindictive damages do not form part of the law of contract. The concept is borrowed
from English law. There are two kinds of contracts where Indian courts consider
awarding vindictive damages:

i. Breach of contract to marry. In this case the amount of damages will depend upon
the extent of injury to the party’s feeling. One may be ruined, other may not mind so
much.

10
100 I.C. 662
11
[1929] 23 CWN 949.

11 | P a g e
ii. Where a banker refuses to honour the cheque of a customer while having his money
in his hands, and the customer thereby suffers loss of reputation.

3) Nominal Damages –

Sometimes, a person brings a legal action for breach of contract and proves that a breach
actually occurred but fails to prove that any actual damage has been suffered. This may
happen, for example, because of the rules for measuring damages and requirement that
damages should be foreseeable and proved with certainity. In such a situation, injured
party is awarded nominal damages.

Such damages are awarded simply to recognise the right of the injured party to claim
damages, and are of very small amount.

For ex:

a) A contracted to purchase ‘LML Scooter’ from B, a dealer, for Rs. 25, 000. But A
failed to purchase the Scooter. However, the demand for the Scooter far exceeded the
supply and B could sell the Scooter to Z for Rs. 25, 000, i.e., without any loss of profit.
Here if B makes a claim upon A for breach of contract, he will be entitled to nominal
damages only.

4) Liquidated Damages And Penalty-

The contracting party may stipulate in the contract a sum of money to be paid in case
the contract is broken by either party. It may be termed as ‘liquidated damages’ or
‘penalty’ depending upon the purpose to fix the sum.

The purpose of fixing a sum as ‘liquidated damages’ is to compensate the injured party
for the loss to be incurred by the breach of the other. Thus it is a fair pre-estimation of
the loss to be caused by non-performance of the contract.

The purpose of providing a ‘penalty’ in a contract is to discourage a party from

breaching it and to provide a special punishment if the contract is breached anyway.
Thus it is a sum which has no relation to the probable loss, and generally is
disproportionate to the damages likely to accrue as a result of the breach.

The above differentiation is required to understand the position of English Law in this
respect. English Law awards ‘liquidated damages’ as compensation, irrespective of the
fact whether the sum so specified is more or less than the actual damages. But does not
allow the sum specified as ‘penalty’ on the ground that only the government, not private
individuals can determine appropriate remedies for breach of contract.

Indian Contract Law differs from English law in this matter. It does not recognise any
difference between ‘liquidated damages’ and ‘penalty’. Nor does it allow any sum fixed
by the parties as damages. It says that the injured party is entitled to a reasonable

12 | P a g e
compensation in case of breach subject to the maximum of the amount fixed as
‘liquidated damages’ or ‘penalty’ by the parties to the contract.

Section 74 of the Indian Contract Act, 187212, provides that, “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 other party who has broken the contract
reasonable compensation not exceeding the amount so named or, as the case may be the
penalty stipulated for.”

Thus in India, the sum named in the contract is not awarded as damages. It is left to the
court to ascertain the actual loss or reasonable compensation and award the same, which
will, however, not exceed the sum named in the contract.

For ex:

a) A agreed to sell B his house for Rs. 1, 05, 000, provided that on breach of contract,
the defaulting party will pay Rs. 10, 000 as damages to the other. B broke the contract
and A resold the house for Rs. 1, 04, 000. A sued B and claimed Rs. 10, 000. It was
held that A cannot recover Rs. 10, 000 as liquidated damages or penalty, he could only
get the actual loss suffered by him, i.e., Rs. 1000 [7]

Exception to the rule in the context of ‘penalty’ –

Section 7413 provides that when any person enters into a bailbond, recognizance or
other instrument of the same nature, or under the provisions of any law, or under the
orders of the Central Government, gives any bond for the performance of any public
duty or act in which the public are interested, he shall be liable, upon breach of condition
of any instrument, to pay the whole sum mentioned therein.

Measuring interest damages –

By and far the large number of cases decided under section 74 relate to stipulations
providing for interest. These stipulations are discussed below.

1) Stipulations for enhanced rate of interest –

Such a stipulation occuring in a contract may have twofold character :

i) Stipulation for increased interest from the rate of bond. This is always considered as
‘penalty’.

12
Section 74 of the Indian Contract Act, 1872
13
Section 74 of the Indian Contract Act, 1872

13 | P a g e
ii) Stipulation for increased interest from the date of default. It may or may not be in
the nature of penalty. It is a question of fact to be considered in each case. Generally if
the rate of interest payable on default si unreasonable, the court considers it as a penalty.

Explanation to Section 74 provides that – a stipulation for the increased interest from
the date of default may be stipulation by way of penalty.

2) Stipulations for compound interest – following rules are deduced from various past
judicial decisions in this regard :

i) A stipulation for payment of compound interest in place of simple interest at the

same rate is not considered as penalty.

ii) A stipulation for payment of compound interest in place of simple interest at a

higher rate is considered as penalty.

3) Stipulations for payment of interest at a lower rate, if interest is paid regularly on

due dates –

A stipulation to accept interest at reduced rate if it is paid punctually does not make
the original rate of interest a penalty.

Other related provisions –

Two important aspects in the context of compensation by way of damages are:

1) Cost of bringing a suit in the court of law, and

2) Treatment of ‘earnest money’, or ‘secuirty deposit’ in contracts.

Cost of suit – when a party brings upon a suit in the court of law, he incurs expenditure
thereby. If his point is proved in the suit, he is entited to recover the cost of suit in
addition to the damages from the defaulter party. However, it is under the descretion of
the court to award or not to award such costs.

‘Earnest Money’ and ‘Security Deposit’ – sometimes a party to the contract is

required to deposit some money with the other party. This is generally done with a view
to ensure performance of the contract. The money so deposited may be either ‘earnest
money’ or ‘security deposit’.

The ‘earnest money’ is part of the purchase price paid in advance. When the transaction
goes through it is adjusted against the bill. When transaction fails through by reason of
default or failure of the buyer, the other party can rescind the contract and retain the
earnest money. Thus, the earnest money is liable to be forfeited.

14 | P a g e
In the case of Shree Hanuman Cotton Mills v. Tata Aircraft Ltd.14, A contracted with
B to purchase from him aeroscrap for Rs. 1, 00, 000 and paid rs. 25, 000 as earnest
money, being 25% of the purchase price. One of the conditions of the contract was that
if A failed to pay the balance, contract would be cancelled and earnest money would be
forfeited. A defaulted in paying the balance and in consequence, B forfeited the deposit.
A filed a suit for recovery of the deposit. The court held that the deposit was intended
as earnest money, and the seller was entitled to forfeit it.

The ‘security deposit’ is deposited only as a security for performance of the contract.
It is not a part of the purchase price. Thus when a contract is completed it is not
adjusted against the purchase price. Law considers it as ‘penalty’. Thus it is not liable
to be forfeited.

14
AIR 1970 SC 1986

15 | P a g e
 CONCLUSION.
General damages:
General damages are awarded for pain, suffering and the impact on the claimant’s life
and livelihood. This is the agreed award that reflects the nature and extent of past,
present and future physical and psychological symptoms suffered by a claimant as a
result of the incident. In other words, it is a valuation of the financial award required to
compensate the claimant for the impact on their life and livelihood. It is a subjective
evaluation, which largely depends upon such things as the type of injury, how severe it
is, how long the impact of the injury is likely to last. We also consider any complications
that result from the injury. So a whiplash injury where the claimant fully recovers after
three months will attract a lower general damages compensation amount than another
that largely recovers after nine months and has lingering on going symptoms. The
severity of the impact on a person’s life is reflected in the damages awarded.

Within this general damages award, there may be an amount to reflect loss of amenity.
This compensates for an inability or restriction in carrying out day to day tasks e.g.
shopping,housework, hobbies.

Special damages :
Special damages are more measurable losses that are often more straightforward and
less subjective than general damages. They can be more easily evidenced and in some
instances mathematically calculated.

In their simplest definitions, special damages are financial awards that can be calculated
with greater accuracy and reflect specific losses that can be measured. When there are
little or no specific measurements of what impact the injury has had on a person these
are called general damages. General damages is a compensation award for pain and
suffering. A judgement is not necessary for these damages to be awarded as claims
handlers will make these assessments and offers of settlement pre-litigation.

Losses are recoverable as was at the time of the contract reasonably foreseeable as liable
to result from the breach. Foreseeability depends upon knowledge. Accordingly what
was at the time reasonably foreseeable depends upon the knowledge then possessed by
the parties or , at all events , by the party who later commits the breach . For this purpose
, knowledge "possessed " is of two kinds: one imputed and the other actual. Every one
as a reasonable person , is taken to know the "ordinary course of things" and
consequently to know what loss is liable to result from a breach of the

16 | P a g e
contract in that ordinary course . And since there are no specified conditions carved out
for special damages in the Indian Contract Act upon which the certainty of special
damages can be lied upon, this rule leaves the judgment at the discretion of the judges
and their sense of "reasonable foreseeability" which might at times , owing to human
nature, be biased or absurd and thus leading to uncertainty with accordance to law.

WEBLIOGRAPHY.

1. http://www.legalmatch.com/law-library/article/types-of-damages-available-
for-breach-of-contract.html
2. http://www.tcl-india.net/node/102
3. http://scholarship.law.stjohns.edu/cgi/viewcontent.cgi?article=6387&context=
lawreview

BIBLIOGRAPHY.

1. Law of contracts and Tenders- T.S. Venkatesa Iyer.

2. Law of Contracts and specific relief act – Dr. Avtar Singh.

17 | P a g e