Damages, under contract law, refer to monetary compensation awarded to a party that suffers loss or injury as a result of the breach of a contract. Damages aim to restore the injured party to the position he would have been in if the contract had been performed. Under the Indian Contract Act, 1872 (Section 73), compensation for losses that naturally arise from the breach or were reasonably foreseeable at the time of contract formation is provided; remote or indirect losses are not covered. Damages include the following types: compensatory, nominal, liquidated, and consequential.

Elevate your career with a 4-month Certification in Contract Drafting & Negotiation, focusing on AI tools. Gain expertise in drafting contracts across sectors, handling negotiations, and mastering contract life cycle management.

Types of Damages

The amount given to a wronged party, in the event of a breach of contract, is known as damages in contract law. Under the Indian Contract Act, 1872, Section 73, rules for compensation regarding loss or damages caused due to the breach of contract have been stipulated below. It seeks to place the injured party in the position he or she would have been without the wrong. The following are the kinds of damages:

1. Compensatory Damages

Compensatory damages constitute the largest category of awarded damages arising in the context of contract breach. They essentially seek compensation for the loss or injury of the non-defaulting party. They may be categorised into;

General Damages: These are damages that naturally result from the breach in the ordinary course of events. For example, if a supplier fails to deliver goods, the buyer can recover damages for the difference between the contract price and the market price.

Special Damages: These are damages resulting from peculiar or special circumstances, provided the breaching party was aware of such circumstances at the time of the contract. For instance, if a delayed delivery results in a buyer losing a potential business deal, such losses can be claimed as special damages.

2. Nominal Damages

Nominal damages are awarded after a breach of contract has occurred when the aggrieved party cannot prove any real loss or injury. The amount recovered is usually very small and made only as a token for the breach. These damages establish the fact of breach and vindicate the rights of the non-breaching party.

3. Liquidated Damages

Liquidated damages are that particular sum agreed upon by the parties in the contract, in case of breach. They must represent a genuine pre-estimate of the probable loss. For example, for construction contracts, parties are likely to specify a penalty that will be levied when there is a delay in the completion of a particular project.

Under Indian law, the amount of liquidated damages enforced by courts is reasonable and not penal in nature. However, if the stipulated amount is excessive, it may be reduced by the court.

Also, Get Familiar with How to draft a Business Contract

4. Punitive Damages

Punitive damages, also known as exemplary damages, are awarded to punish the breaching party for willful misconduct or egregious behaviour. These damages are not to compensate the injured party but to deter similar conduct in the future. However, punitive damages are rarely found in contract law and are more frequently encountered in tort cases.

5. Consequential Damages

Consequential damages, also called indirect damages, include such losses that are a result of the breach and are not direct consequences but would yet flow from it. Provided the non-breaching party can show that the breaching party should have reasonably foreseen such losses at the inception of the contract, then those damages will be recoverable.

For instance, when a machinery manufacturer fails to deliver its products within the time scheduled and this results in factory shutdown, the company will recover consequential damages incurred in such an event.

Know What are all the types of contract breaches

6. Incidental Damages

Incidental damages: These are reasonable expenses incurred by the aggrieved party in protecting or mitigating the harm caused by the breach. This could be the cost of searching for alternative goods or services, the cost of transportation and storage, or attorneys' fees. If a supplier refuses to deliver goods. For example, the buyer should recover the additional expense incurred in searching for those goods from another supplier.

7. Reliance Damages

Reliance damages pay the injured party the cost of expenses incurred in reliance on the contract. Such damages are recoverable when the aggrieved party has acted in good faith in attempting to perform their part of the contract, but the breach renders those efforts useless. For example, a party can recover costs spent on establishing infrastructure or hiring personnel in anticipation of a contract that was later breached.

8. Restitution Damages

Restitution damages prevent the breaching party from unjust enrichment. Where a benefit was conferred on the breaching party by the injured party, restitution damages necessitate that the breaching party return or repay the benefit. For example, an advance payment received by a contractor to whom the work was promised should be returned when no work is done.

9. Exemplary Damages

Exemplary damages are relatively rare in contract law but are awarded in the few cases where the breach causes significant emotional distress, reputational harm, or humiliation. Such damages are more than compensatory and reflect the aggravated nature of the harm caused.

Know What are the 10 Essential Elements of a Valid Contract

Section 73 of the Indian Contract Act, 1872

Section 73 ensures that compensation for contract breaches is fair and reasonable, limited to foreseeable and direct losses, while excluding speculative or unrelated damages. The accompanying illustrations clarify its practical applications.

Compensation for Loss/Damage Due to Breach: The injured party is entitled to compensation for:

• Loss or damage that arises naturally in the ordinary course of events.

• Loss or damage that both parties knew would likely occur at the time of the contract.

• Exclusion: No compensation is provided for remote or indirect losses.

Obligations Resembling Contracts:

• If an obligation (similar to a contract) is breached, the injured party can claim the same compensation as if it were a formal contract.

Duty to Mitigate:

• While estimating damages, courts consider the injured party's ability to mitigate the inconvenience caused by the breach.

Find out the Common Clauses in Legal Contracts

Illustrations

1. Market Price vs. Contract Price: Compensation is based on the difference between the market price and the contract price at the time of the breach. (e.g., failure to deliver goods or perform services).

2. Incidental Costs: Expenses incurred due to the breach (e.g., arranging alternative transport or sourcing substitutes) are recoverable.

3. Anticipatory Breach: If a party cancels the contract in advance, damages are based on market conditions and expected losses.

4. Quality and Warranty: Breach of quality warranties can lead to recovery of costs paid to third parties due to defective goods.

5. Foreseeable vs. Unforeseeable Losses: Losses communicated at the time of the contract are compensable. Remote or indirect losses (e.g., third-party profits or government contracts) are not.

6. Performance Delays: Delayed performance entitles the injured party to compensation for loss of value due to the delay but not for speculative or unrelated losses.

Learn the Key Difference Between Contingent Contract and Wagering Agreement

Key Principles

• Direct Losses Only: Only direct and foreseeable damages are compensable.

• Mitigation Required: The injured party must minimize their losses where possible.

• Reasonableness: Courts consider what a reasonable person would expect as damages.

Notable Case Laws

Here are a few cases that state damages under the Indian Contract Act of 1872:

Fateh Chand v. Balkishan Dass (1964)

• Principle: Liquidated damages and penalty

• Facts: The plaintiff sold the property to the defendant. The sale contract included a forfeiture clause in case the advance payment was not paid due to default by the buyer. The buyer defaulted in consummating the sale. The seller claimed the forfeiting of the advance

• Judgment: The Supreme Court held that the forfeiture clause was penal in nature and under the Indian Contract Act, reasonable compensation could be awarded alone under Section 74.

• Significance: Established the principle that courts can reduce liquidated damages if they are unreasonable.

Get to Know What are the Differences Between Contract of Indemnity & Contract of Guarantee

Murlidhar Chiranjilal v. Harishchandra Dwarkadas (1962)

• Principle: Difference between general and special damages

• Facts: The defendant failed to supply goods to the plaintiff, who then claimed special damages for losses arising from a resale agreement.

• Judgment: The Supreme Court ruled that the plaintiff had a right to general damages (difference in market price) but no right to special damages since the resale contract was not notified to the defendant.

• Importance: Made the principle of foreseeability and communication relevant for claims of special damages.

Indian Airlines v. Madhuri Chowdhury (2002)

• Principle: Nominal damages

• Facts: Due to the negligence of an airline, a passenger's ticket was cancelled and thus suffered inconvenience.

• Judgment: The court awarded nominal damages since the plaintiff failed to prove significant financial loss.

• Significance: Highlights the use of nominal damages in cases of breach without substantial loss.

Get to Know What is Contingent In Indian Contract Law

Conclusion

Damages in contract law are part of the enforcement mechanism of making contracts sacred and redressing victims. There are different kinds of damages - compensatory, nominal, or liquidated damages which have various purposes to redress the breach. This will be known to individuals and businesses while drafting enforceable contracts and suitable remedies when any dispute arises.

Types of Damages in Contract Law: FAQs

Q1. What are damages in contract law?

Damages are monetary compensation awarded to the injured party for losses caused by a breach of contract.

Q2. Which section of the Indian Contract Act governs damages?

Section 73 governs compensation for losses due to breach of contract.

Q3. What types of losses are compensable under Section 73?

Losses that naturally arise from the breach or those that were foreseeable at the time of contract formation are compensable.

Q4. Are remote or indirect losses recoverable?

No, Section 73 provides that remote or indirect losses are not recoverable.

Q5. What is the duty to mitigate losses in the contract?

The injured party must take reasonable steps to reduce his loss after the breach.