Issues and Challenges in Determining the Quantum of Damages in A Contract

INTRODUCTION:

When two parties enter into a contract, they assume the risk of “breach of contract,” which occurs when one of them fails or refuses to carry out the obligations as promised under the agreement. A breach of contract is defined as any failure to perform all or a portion of a promise that constitutes all or a portion of the agreement without justification. The party that violates or neglects to carry out the promises under the agreement is liable for the damages and loss incurred by the aggrieved party, and such remedies are granted under Part VI of the Indian Contract Act, 1872.

On the other hand, the technique of calculating damages resulting from a contract breach is not covered by Part VI of the Act. The Indian Contract Act, 1872 (Act, 1872) offers compensation for losses or damages resulting from contract breaches in Section 73. When a contract has been broken, the party that suffers from such infringement is entitled to collect compensation for any loss or harm resulting from such infringement. Such compensation shall not be given for any remote and indirect loss or damage sustained as a result of the breach.

HOW DOES AN OFFER TURN INTO A CONTRACT?

Offer: An offer is a proposal made by the offeree to the offeror which becomes binding when accepted. It is a promise to do or refrain from doing something.

Acceptance: According to Section 2(b) of the Indian Contract Act, 1872, (Act, Section-2(b), 1872) acceptance is when a person to whom the proposal has been made signifies his assent, and the offer is said to be accepted. Here, it becomes a promise. When a proposal is made by one party and it is accepted by the other, here, it becomes a promise.

Agreement: A promise, when made by both parties turns out to be an agreement. According to Section 2(e) of the Indian Contract Act, 1872 (Act, Section-2(e), 1872), every promise which comes under consideration from both parties is an agreement.

Contract: According to Section 2(h) of the Indian Contract Act, 1872, (Act, Section-2(h), 1872) contract is an agreement that is enforceable by the law and involves reciprocal promises between both parties.

All agreements are not enforceable by the law, and hence, all agreements are not contracts. Only those agreements are considered as contracts that satisfy all the essentials of a contract mentioned in Section-10 of the Indian Contract Act, 1872 (Act, Section-10, 1872).

BREACH OF CONTRACT

A Contract is legally binding and holds weight when taken to the court. It occurs when one party breaks the terms and conditions of the prevailing contract or fails to deliver it according to the terms of the condition. If a contract is proven to be breached, a remedy is given to the victim party that was initially promised before in the agreement. The breach can happen in either oral or written formats. It’s the parties choice if they want to resolve their issue mutually among themselves or in the court of law. The breach of contract is not considered a crime and results in extra monetary compensation. Sometimes the process of the breach of contract is written in the original contract.

TYPES OF BREACH IN A CONTRACT:

1. Minor Breach: A minor breach takes place when a service is not fulfilled by the due date.
2. Material Breach: A material breach takes place when a service received is different from what was stated in the agreement.
3. Actual Breach: An actual Breach takes place when one party denies to fully perform the terms of the contract.
4. Anticipatory Breach: An Anticipatory Breach is when a party states that they will not be fulfilling the terms of the Contract.

HOW A BREACH OF CONTRACT IS FILED IN A LAWSUIT:

The plaintiff (either of the one-party) brings a lawsuit in the courtroom claiming that the other party has not abided by the terms and conditions of the contract and there has been a breach of contract. The plaintiff, at first, must prove to the court that a contract is made between the two parties. The plaintiff also needs to prove how the defendant failed to meet the requirements of the contract and against whom the claim has been charged. So, therefore, the burden of proof lies with the Plaintiff.

REASONS FOR BREACH OF CONTRACT:

It is the duty of the court to assess the legal reason for the Breach Of Contract.

1. It is because it might happen that the plaintiff might misinterpret the facts that the contract was fraud. It’s essential for the court to check where the fault lies.
2. If the defendant on the other hand can alternatively argue that the contract was duly signed by him/her but under duress.
3. If the Plaintiff compels the other party to sign the agreement by force or threat.
4.  Also, there might be reasons that the error was committed by both the plaintiff and the Defendant.

DAMAGES IN A CONTRACT:

Damages refer to the compensation that is awarded for the loss for not fulfilling the terms of the contract. In other words, damages are the remedies that a party requests to the court in order to recover the loss that the party suffered. The court charges the Defendant damages if it finds out that the party breached his/her duties and violated the terms of the contract. The damages in the form of money can be either compensatory i.e. it is based on the harm that the party suffered or it can be punitive i.e. it means to punish the wrongdoer from committing such loss.

Illustration: A and B are in a contract. B violates certain terms of the contract where A suffers losses. B is alleged to have infringed the contract and is asked to pay compensation to recover the losses incurred by B.

ELEMENTS OF DAMAGES IN A CONTRACT:

1. The contract must exist: A contract must be valid to be enforced by the law. There must be proof that the contract exists between two parties to move forward with a case of breach of contract. It can be an oral contract or a written contract, however, a written contract is easier to prove.
2. The plaintiff must perform according to the terms of the contract: The plaintiff who is filing a suit against the defendant must be able to prove that he/she is able to perform all the obligations under the contract. There should not be any breach from his/her side.
3. Breach of contract by the defendant: Breach of contract is of two types. If it’s a minor breach, where the defendant has not performed his/her duties according to the contract then the interference of the court might not be worth pursuing. If it’s a material breach, where the other party receives something different than the contract as a result of failure to perform according to the contractual terms. If the breach prohibits to performance of the contract, then it requires legal action.
4. The plaintiff suffers losses: Due to the breach of contract by the defendant, the plaintiff suffers losses.

TYPES OF DAMAGES:

Section 73 of the Indian Contract Act, 1872 (Act, Section-73, 1872), provides compensation for the loss caused by the breach of contract. When a contract is broken, the suffering party is entitled to receive compensation for any loss resulting from the infringement of the contract. Such compensations are not entitled to any indirect loss or damage sustained as a result of the breach.

1. General damages: It refer to those damages that arise naturally during the course of the contract. The complaints are presumed to be a natural consequence of the result and the losses suffered are usually not monetary.
2. Special damages: It refers to those losses that do not arise from the Defendant’s fault and can only be recovered if they had reasonable consideration present in their contract. The losses must be pleaded and proven. The losses must be capable of calculated financially.
3. Nominal damages: If the Defendant is liable for breach of contract, then the Plaintiff is entitled to the nominal damage even if no actual damage is proved. Nominal charges are awarded for the infringement of the legal right.
4. Substantial damages: When an offence is proven, many authorities may claim substantial damages even when it is difficult to calculate the damages with accuracy. When the breach is partial and the extent of the failure is identified, only nominal damage is awarded.
5. Aggravated damages: It compensates the victim for mental distress which was caused due to the wrong committed by the defendant’s behaviour. It is compulsory in nature.
6. Exemplary damages: It is the punishment which is given to the defendant where it is not intended to compensate the Plaintiff but to punish them. It is punitive in nature.
7. Liquidated damages: Section 74 of the Indian Contract Act, 1872(Act, Section-74, 1872) applies that the parties fix an amount of money that is given to the defendant in case there is a breach of contract. This sum of money is decided by both the parties while making a contract.
8. Unliquidated damages: Here, the court assess and quantifies the damage suffered by the Plaintiff when there is a breach of contract by the Defendant.

LEGAL REMEDIES FOR THE DAMAGES:

1. Recession of contract: When one party does not fulfill the obligations of the contract, then the other party can rescind the contract and refuse his/her performance of his obligations. According to Section 65 of the Indian Contract Act, 1872(Act, Section-65, 1872), the party who rescinds the contract must restore the benefits he/she has got under the agreement. Section 75 of the Indian Contract Act, 1872 (Act, Section-75, 1872), states that the plaintiff is entitled to compensation for the recession.
2. Sue for damages: Section 73 states that the plaintiff can claim compensation for the losses suffered to them in the course of the business. There are two types of damages according to the act.
3. Liquidated Damages: the parties here will agree to the amount payable to themselves in case of a breach.
4. Unliquidated Damages: the amount payable due to the breach is assessed by the courts or any other authorities.
5. Sue for specific performance: The court may insist the defendant carry out his/her duties according to the contract. In certain cases, they may insist the party to carry out the agreement. It is a decree of specific performance and granted instead of damages.
6. Injunction: An injunction is a court order restraining a person from performing an act. A court can stop the Defendant from doing something he/she was supposed to do. In prohibitory Injunction, the court can stop the commission of that particular act in mandatory injunction, the court will stop the continuance of that particular act that is unlawful.
7. Quantum meruit: When one party is prevented from performing his duties in a contract by the other party, he/she can claim quantum meruit. The party must be paid a reasonable remuneration for the work he/she has performed. This can be the remuneration of the services or the value of the work done.

ANALYSIS OF ISSUES AND CHALLENGES IN A CONTRACT:

The Indian Contract Act, 1872 is very old. The act being old contains a few loopholes that need to be corrected for smooth conduct and functioning of business. One such loophole is in Section 73 of the Indian Contract Act, 1872 (Act, Section 73, 1872)  and Section 74 of the Indian Contract Act, 1872 (Act, Section 74, 1872). Section-73 of the Indian Contract Act, 1872 (Act, Section-73, 1872) talks about unliquidated damages where the liquidated damages clause is absent in the contract. Section 74 of the Indian Contract Act, 1872 (Act, Section-74, 1872) speaks about liquidated damages but the definition of liquidated damages is not presently provided in the Act and the court ends up giving confusing judgments in different cases. The judgments made by the court are often interpreted wrongly.

There are some contracts where the damages cannot be calculated when it comes to breach of contract. Claiming liquidated damages amounting to the actual damages is difficult in these types of cases. The courts here give importance to the “genuine pre-estimate of damages” in the contract where the party who breaks the contract tries to take advantage of this clause to determine if the damage is liquidated or unliquidated. The Contract Law of India has no difference between penalty and liquidated damages as the compensation granted cannot exceed the amount specified in the contract.

Determining the amount of damages committed in a breach of contract is of utmost importance. The quantum of damages depends upon the magnitude of the injury caused to the other party for the breach. As the breach of the contract is proved, the injured party is placed in a manner as the compensation can put him/her in a good situation, as the contract couldn’t have been performed. The plaintiff is also bound to mitigate the losses arising out of the breach and prevent him/her from claiming any kind of damages which is a consequence of his failure to mitigate the damages.

Since, the legal provisions in the Indian Contract Act, 1872 do not provide any measure for computation of the damages, most of the time the courts have given a free hand to the arbitrators for computation of the damages. When it comes to the measurement of the damages, the parties involved in that contract may execute stipulated norms as a measure for the calculation of the damages for the breach of contract.

CASE: Oil and Natural Gas Corporation Ltd. vs. Saw Pipes Ltd (2003) (Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd., 2003)

ONGC advertised a tender for the supply of casing pipes which was replied to by Saw Pipes Ltd in a letter. The letter contained all the terms and conditions of the contract. The deed contained that if there is a failure in supply within the stipulated time period    It also contained that the appellant will be entitled to liquidated compensation and not a penalty. A general strike by mill workers in Italy affected the supply of the raw materials and they could not deliver the goods on time. Respondent took an extension for delivering the goods and appellant granted the extension with a condition that the damages suffered will be recovered from the respondent. After delivering the goods the appellant makes a payment where he kept an amount of rs.15,75,559. This amount was disputed according to the respondent. The dispute was referred to the Arbitration Tribunal under the Arbitration and Conciliation Act, 1996 to seek relief. The decision made by the Arbitral Tribunal was in favour of the appellant. i.e. saw pipes direct the defendant to pay the amount. ONGC moves this case to the High Court against the decision of the Tribunal.  The application was dismissed by the high court. The defendant then moved to the Supreme Court where the judgment was that the Arbitral Tribunal adjudged beyond its jurisdiction. ONGC here, is eligible to get the refund with interest which was deducted for the breach of contract.

CASE: M/S. Kailash Nath Associates vs Delhi Development Authority & Anr (2015) (M/S. Kailash Nath Associates vs Delhi Development Authority & Anr, 2015)

In this case, Kailash Nath is a successful bidder by the respondent DDA. In an auction, the petitioner had deposited 25% of the bid amount as earnest money. However, without putting the petitioner to notice that it has to deposit the balance of 75% of the bid within a certain stipulated time, the respondent cancelled the allotment of the petitioner and forfeited the 25% earnest money. The Supreme Court held that it would be arbitrary for DDA to forfeit the earnest money on two fundamental grounds.

1. There is no breach of contract on the part of the appellant.
2. DDA not having been put to any loss, even if DDA could insist on a contractual stipulation in its favour, it would be arbitrary to allow DDA as a public authority to appropriate the amount without any loss being caused.
3. Later in the judgment, the Supreme Court restated the principles applicable to Section 74 of the Indian Contract Act, 1872(Act, Section 74, 1872). In doing so, the Court held that like Section-73 of the Indian Contract Act, 1872 (Act, Section-73, 1872) and Section-75 of the Indian Contract Act, 1872 (Act, Section-75, 1872), compensation is payable for breach of contract under Section 74 of the Indian Contract Act, 1872 (Act, Section-74, 1872), only where damage or loss is caused by such breach.

CONCLUSION

An agreement becomes a contract after an offer is made by one party and it is accepted by the other. There can be involvement of either two parties or more than that. An agreement to be a contract must be legally binding to be performed lawfully. A breach of contract takes place when one party fails to oblige to the terms and conditions of that contract or fails to fulfill the conditions mentioned. Damages are viewed as a more advantageous remedy available for the contract breach. To calculate the damages from the contractual breach, the judicial authorities used their discretion and adopted jurisprudence from foreign courts. Due to an increase in the number of contractual breaches, contracting parties prefer to have arbitration procedures in place for calculating damages if one of the parties breaches the contract in the future. The legitimate basis for awarding damages to the plaintiff is to restore the rights and responsibilities that have been infringed by the other party as a result of the victim party’s breach of contract. The Supreme Court of India has interpreted the legislative objectives of Section 73 and Section 74 in the Indian Contract Act, 1872 (Act, Section-74, 1872) in order to award damages to the injured party.

References

Act, B. (1872). Section-10. In The Indian Contract Act (p. 7). Universal LexisNexis.

Act, B. (1872). Section-2(b). In The Indian Contract Act (p. 2). Universal LexisNexis.

Act, B. (1872). Section-2(e). In The Indian Contract Act (p. 3). Universal LexisNexis.

Act, B. (1872). Section-2(h). In The Indian Contract Act (p. 3). Universal LexisNexis.

Act, B. (1872). Section-65. In The Indian Contract Act (pp. 31-32). Universal LexisNexis.

Act, B. (1872). Section-73. In The Indian Contract Act (p. 34). Universal LexisNexis.

Act, B. (1872). Section-74. In The Indian Contract Act (pp. 37-39). Universal LexisNexis.

Act, B. (1872). Section-75. In The Indian Contract Act (p. 39). Universal LexisNexis.

M/S. Kailash Nath Associates vs Delhi Development Authority & Anr, CIVIL APPEAL NO. 193 OF 2015: SLP (CIVIL) NO.32039 OF 2012 (Supreme Court of India January 9, 2015).

Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd., Appeal (civil) 7419 2001 of 518 (Supreme Court of India April 17, 2003).