Damages, in simple terms, refer to a form of compensation due to a breach, loss or injury.
“Damages” are often confused with “damage”. However, it should be known that these two terms are significantly distinct, and different from each other. While “damages” refer to the compensation awarded or sought for, “damage” refers to the injury or loss which such compensation is claimed for or being awarded. ‘Damage’ could be monetary or non-monetary (which could in cases where there is loss of reputation, physical or mental pain or suffering) while ‘damages’ refer to pecuniary compensation.
At this juncture, it is noteworthy that damages can be distinguished from compensation, in general. Compensation is a broader concept which encompasses payments made to a person in respect of some kind of loss or damage suffered due to reasons like acquisition of property by another party, or statutory violations, termination of employments, requiring the aggrieved party to be compensated; however, damages emanate from actionable wrongs. However, in practical terms, there isn’t much difference and compensation is often used to refer to damages as well. Moreover, the Contact Act 1872, uses the term “compensation” in the sections referring to liquidated and unliquidated damages, which shall be discussed subsequently.
Damages are popularly granted in cases of tort or on breach of contract.
The nature of damages used or sought for depends on the objective for which damages are being claimed for. Thus, damages can be categorized into one or more of the following kinds:
- Nominal damages.
When a party approaches the court for claiming damages, the court has the discretion to award nominal damages. This may be awarded even when there is no actual loss or injury caused to a party against whom a breach has been caused, or in cases where there has been a violation of a legal right, without any actual damage being proved. Thus, in cases where a party fails to prove actual loss resulting from a breach of contract, nominal damages may be granted.
- Substantial damages.
Contrary to nominal damages, substantial damages are awarded when the extent of breach of contract is proved but there are uncertainties regarding calculation.
- General and special damages.
Damages which arise in the normal course of events are known as general damages while special damages refer to those that arise under circumstances which were reasonably anticipated by the parties when they entered into the contract.
- Aggravated and Exemplary Damages.
These damages are of such nature that they exceed the damages ascertained, mostly resulting from the mala fide conduct of the defendant. Aggravated damages gain significance where the damage caused to the plaintiff are aggravated due to the motives, conduct or manner of inflicting injury, whereby the plaintiff’s feelings and dignity are adversely affected resulting in mental distress. Aggravated damages are mostly compensatory in nature since they aim at compensating the plaintiff for the aggravated loss suffered. On the other hand, exemplary damages are punitive in nature since they intend to punish the defendant and not merely compensating or depriving the defendants of the profits made.
- Liquidated and unliquidated damages.
In case of contracts, parties may agree to payment of a certain sum on breach of the contract. When such stipulations are made in the contract, they are known as liquidated damages. On the other hand, unliquidated damages are awarded by the courts on an assessment of the loss or injury caused to the party suffering such breach of contract.
Law of Damages under Indian contract Act 1872.
Under the Indian Contract Act 1872, unliquidated and liquidated damages are given under sections 73 and 74 respectively, which shall be discussed in the subsequent chapter of this paper
Sections 73 deals with actual damages following breach of contract and the injury resulting from such breach which are in the nature of unliquidated damages since these damages are awarded by the courts on an assessment of the loss or injury caused to the party against whom breach has taken place.
Section 74 deals with liquidated damages, referring to damages that are stipulated for. Thus, for a claim of damages, there has to be a breach of the contract.
Damages are generally claimed and granted to enable restoration of the position of the plaintiff in which he would have been, if the breach would not have taken place. Generally, these damages are to be claimed from the party causing such breach. In case of liquidated damages under Section 74, claims can be made by plaintiff as well as defendant.
In case of liquidated damages, there is an assurance of compensation since a reasonable compensation is agreed upon. Thus, it would be expected that since the risks of a party causing a breach would be lesser since damages are already stipulated for.
BREACH OF CONTRACT.
- “Breach of contract” constitutes the pre-condition for a claim of damages, be it liquidated, unliquidated or otherwise. Thus, irrespective of the extent to which the defendant profits from the contractual arrangement, there can be no claim for damages unless there is a breach of the contract. Further, the party committing the breach is liable to compensate by way of damages. To establish a breach, it has to be adjudicated upon and be proved, and not merely decided by the parties.
- A contract is said to be breached in case of contravention with the terms of the contract or when the promise made is broken. It may so happen that the terms are not complied in a manner which had been contemplated in the contract. For example, if a party contracts with another for repairing the other’s house in a certain manner, and the repair was not done in the manner which was decided, then the aggrieved party in entitled to damages to the extent of costs of making repairs in conformity with the contract.
- Damages may also be claimed in case of anticipatory breach of contract. An anticipatory breach is said to have been committed when a party refuses to perform, or has disabled himself from the performance of the promise in its entirety.
- In such a scenario the other party may acquiesce to the continuation of the contract or rescind it.18 In case of an anticipatory breach of contract, the plaintiff would be entitled to claim damages on establishing the intention to perform the contract prior to rescission of the contract.
PROOF OF DAMAGES FOR A CLAIM OF LIQUIDATED DAMAGES
- This emanates from the understanding that the reasonable compensation agreed upon as liquidated damages in case of breach of contract is in respect of some loss or injury; thus, existence of loss or injury is indispensable for such claim of liquidated damages.21 In such cases, the requirement to prove loss or injury or damage may be dispensed with, if it is difficult or impossible to prove that the genuinely pre-estimated can be awarded.22 Thus, it is expected that the stipulation for liquidated damages should be bona fide and a fair estimate of the damages arising from the breach, and not done with a sole intent to penalize the other party.23 Courts have repeatedly required parties to draft clauses within the contracts which aren’t ambiguous.
- Irrespective of stipulations in the form of liquidated damages, a plaintiff can recover damages to the extent of the claim being reasonable compensation for the injury sustained by him, and not the entire sum laid down as liquidated damages; thereby, erasing the differences between liquidated damages and unliquidated damages.24 Thus, provisions 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.”
- Often, prior to a claim of liquidated damages, courts have required time as the essence of the contract, or provide the other party with such notice so that reasonable time is given for performing the contractual obligations. On consideration of the facts of the case, in the case of Kailash Nath v. Delhi Development Authority,30 it was observed that,
“Based on the facts of this case, the single judge was correct in observing that the letter of cancelation dated 06.10.1993 and consequent forfeiture of earnest money was made without putting the appellant on notice that it has to deposit the balance 75% premium of plot within a certain stated time. In the absence of such notice, there is no breach of contract on the part of the appellant and consequently earnest money could not be forfeited.”
Thus, an automatic pecuniary liability does not arise in the event of a breach of a contract which contains a clause for liquidated damages. Till the time, it is determined by the court that the party complaining of the breach is entitled to damages, the plaintiff shall not be granted compensation by the mere presence of a liquidated damages clause
Difference between Liquidated damages and Penalty.
- When the amount of damages is fixed by the parties on the basis of a reasonable estimate of the probable actual loss which a party will suffer in case of breach is called liquidated damages.
On the other hand, if the amount, if the amount of damages is not based upon a reasonable calculation of actual loss but is fixed by way of punishment and as threat is called penalty.
- In case of liquidated damages English court allows only the amount stipulated, never more or less even though the actual loss is different from the amount mentioned. In case of penalty the court allows only reasonable compensation by way of damages but no exceeding the amount mentioned.
- In case of penalty the court has a power to discretion to grant or not to grant the amount mentioned in the contract but in case of liquidated damages the court has no such option and the court is bound to grant the entire amount to the plaintiff.
The entire content of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. This is only a knowledge sharing initiative and author do not intend to solicit any business or profession.
Advocate Surbhi Khanna.