Damages

What are Damages?

According to Fuller and Perdue, damages are sums of money granted for a breach, loss, or harm with the goal of defending the plaintiff's "expectation interest," "reliance interest," or "restitution interest." In order to compensate for the harm and meet the promisee's expectations, expectation interest seeks to put the plaintiff in the same situation as they would have been in had the contract been carried out. Restitution interest forces the defendant to reimburse the plaintiff for the value they acquired from them, preventing unjust enrichment. Reliance interest aims to return the plaintiff to their pre-reliance position on the promisor's promise. "Damages" are the monetary compensation received, as opposed to "damage," which refers to the hurt or loss (monetary or non-monetary) for which recompense is sought. While damages directly result from actionable wrongs, compensation is a more general notion that includes payouts for a range of losses. Compensation can apply to both liquidated and unliquidated losses under the Indian Contract Act of 1872. In business transactions and as a form of punishment for rights abuses, damages are important. They vary in kind depending on the context; for example, indemnity contracts release the indemnitor from obligation for damages incurred by third parties. This review addresses a wide range of topics related to contractual breaches in India, including sales of commodities, consumer disputes, indemnity contracts, arbitral processes, damages in torts, intellectual property rights, and EPC contracts.

Legal Provisions relating to Damages

Indian Contract Act

Sections 73 and 74 of the Indian Contract Act, 1872, deal with damages. Section 73 evaluates the loss or harm that results from a violation of contract and deals with real or unliquidated damages. Based on the court's evaluation of the injury done to the non-breaching party, these damages are granted. In order to be eligible for such damages, the breach must cause loss or damage that would typically occur or that would have resulted from events that both parties were aware of at the time the contract was formed. Conversely, liquidated damages—pre-established amounts specified in the contract that must be paid upon breach—are covered under Section 74. This section's compensation requirements include that it must be appropriate and not go over the set budget.

The following are the two parts' main differences:

1) Section 73: Deals with unliquidated damages in cases where a violation in the regular course of business or recognised conditions results in loss.

2) Section 74: Liquidated damages are covered, and as long as the compensation is appropriate, it is capped at the amount specified.

Sales of Goods Act

Sections 55 through 61 of the Sale of Goods Act, 1930, which controls the sale of moveable property in India, contain provisions for breach of contract. The Indian Contract Act's Section 73 serves as the foundation for these portions. When a customer willfully fails to pay for the goods, there has been a breach that gives the seller the right to file a lawsuit for damages. In a similar vein, the buyer may file a lawsuit for damages or demand specific performance if the vendor does not deliver the items. Particularly, damages for the seller's violation of guarantee are covered in Section 59. When one party withdraws from a contract before the delivery date, this is known as an anticipatory breach. In these situations, the other party may elect to uphold the terms of the agreement or regard it as repudiated and seek damages. Furthermore, in accordance with Section 73 of the Contract Act, Section 61 permits the buyer or seller to recoup interest, special damages, or the amount paid in the event that the consideration is not successful. This clause permits the parties to recover extraordinary damages for losses that beyond the regular course of events that they expected at the time the contract was signed. Therefore, in the sale of moveable items, the Sale of items Act guarantees just remuneration and conformity to contractual responsibilities.

Torts

Although their goals are different, damages in contract law and tort law are essentially compensatory. Damages, as defined by contract law, are intended to restore the non-breaching party's position in the event that the contract was fulfilled by making up for the anticipated profits lost as a result of the breach. Damages in tort law aim to put the harmed party back in the same situation as before the tort happened, frequently including pay for psychological suffering and anguish. Tort damages can be punitive, while contract damages are usually not. Contract law stipulates that in order for a loss to be considered distant, it must either naturally result from the breach or be within the parties' reasonable comprehension at the time the contract was formed. In contrast, a loss must simply be fairly foreseeable in order for tort law to apply. In contrast to tort law, contract law has a limited interpretation, which restricts the range of damages that may be recovered. Because of this, parties to contracts frequently include foreseeable scenarios in order to guarantee compliance and reduce breaches. This method makes parties more accountable and lowers the possibility of conflicts by outlining potential responsibilities and encouraging adherence to contractual agreements.

Consumer Laws

In the midst of India's consumer law's explosive expansion, damages have gained special attention in the many decrees that the pertinent fora have passed. According to the Consumer Protection Act of 2019, the party in default may be ordered to reimburse the consumer for any loss or harm they may have sustained as a result of the other party's negligence, up to and including the possibility of punitive damages.

In general, the Consumer Protection Act awards damages where it can be demonstrated that the other party's carelessness resulted in the consumer's loss or harm. Since the consumer disputes redressal forums are expected to apply their "best judgement" in determining the loss that can plausibly be utilised for the award of compensation, it is not necessary to specify the precise loss or harm. This appropriately acknowledged the challenge of accurately estimating loss under consumer law. For example, it would not be possible to get a definitive conclusion on the lack of services provided by an architect or a medical expert.

Intellectual Property Laws

A plaintiff in an intellectual property (IP) infringement action may request an accounting of profits or damages, but not both. While an account of profits seeks to return the infringer's earnings, damages make up for the loss caused by the infringement. Infringers may be granted damages for copyright infringement under the Indian Copyright Act, 1957, unless they can demonstrate that they were unaware of the copyright's existence. Copyright holders also have the option to sue for damages if copies that violate their rights are converted. These damages vary depending on the type of infringement and market value, and they are cumulative. In trademark disputes involving infringement or passing off, the Trademarks Act, 1990, permits damages, even nominal damages, in circumstances where substantial loss cannot be demonstrated. Unless the offender was ignorant of the patent or specified circumstances pertaining to patent specifications and renewal fees apply, the Patents Act, 1970, allows for damages or an accounting of profits in situations of patent infringement. Damages are often computed by taking into account the direct effects of the infringement, such as lost royalties or sales. The plaintiff's decision to seek damages or an account of profits in every IP infringement lawsuit is contingent upon the particular facts and the likelihood that each claim will be proved.

Cases Relating to Damages:

Remoteness of Damage

According to the Indian Contract Act, the remoteness of damages concept in contract law states that losses that result directly from a breach or that both parties knew about at the time the contract was formed cannot be covered by damages. In the famous case of Hadley v. Baxendale, the court established this concept by ruling that damages are only recoverable if they naturally result from the breach or were anticipated by the parties. The decision made clear that in order to seek further damages, the defendant must be informed of any unique circumstances. In Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd, the distinction between actual knowledge of unusual circumstances and assumed knowledge of ordinary outcomes was made, providing greater clarification to this rule. These rules are often applied by Indian courts, which highlight that defendants are only accountable for damages that were anticipated at the time of the contract and that were natural and proximate. It is customary to deny compensation for distant or indirect losses, which emphasises the need for sufficient foreseeability of damages in cases of contract violations. By doing this, a just balance is maintained between holding violators responsible and avoiding placing disproportionate blame on them for unanticipated outcomes.

Causation

Causation in the context of damages necessitates a distinct connection between the breach and the loss or harm that follows. If the defendant's violation is the main factor that leads to the damage, then this connection is made. In order to establish causality, courts frequently employ the "but for" test, which asks whether the damage would have happened had the defendant not taken certain acts. In the case of Reg Glass Pty Ltd v. Rivers Locking Systems Ltd, for example, the court determined that the installation of the necessary security system by the defendant would have prevented a burglary. As stated in Alexander v. Cambridge Credit Corp Ltd., causality should not be strictly restricted to the "but for" test; instead, a reasonable strategy that takes into account all relevant facts is recommended. In a case where failure to insure commodities resulted in a direct loss, the Indian Supreme Court followed this approach, emphasising a direct causal relationship. However, if the damage is too far away, unexpected, or if the contract contains provisions that disclaim obligation, causation by itself does not guarantee culpability. Furthermore, interruptions in the chain of causation, such as acts by third parties, occurrences of natural disasters, or the plaintiff's own carelessness, may prevent damage claims from being made, particularly when it comes to equity concepts like "clean hands."

Calculation of Damages

The expectation interest principle is frequently used in contract damage awards to make sure the plaintiff gets the value anticipated from the agreement. It is important to distinguish between the measure of damages, which takes legal factors into account, and the quantum of damages, which is the amount granted. The main objective is to compensate the aggrieved party for their real losses while putting them back in the same situation as before the breach happened. The Indian Supreme Court has stressed that the amount of damages awarded must account for the discrepancy between the contract price and the going rate in the market at the time of the breach. For example, the supplier is entitled to the difference between the supply price and the procurement cost if the customer refuses to accept the items. In a similar vein, damages pay for project completion costs in the event that a contractor defaults. The harmed party's mitigation efforts—like finding replacement items or reducing losses—are also taken into account. According to the Supreme Court, the claimant is required to reduce losses and is not eligible to recover damages for failing to do so. In order to determine damages, courts frequently depend on fair market value and utilise market prices at the time and location of delivery. Tribunals may estimate lost earnings in arbitrations by "honest guess work" based on the facts presented.

Types of Damages:

The purpose for which damages are being sought for determines the type of damages that are employed or sought. As a result, damages fall into one or more of the following categories:

1)  Special and general damages

Special damages are defined as those that occur in situations that the parties reasonably anticipated when they entered into the contract, whereas general damages are defined as those that occurs in the regular course of events. General damages are believed to follow proved damages, but particular proof of damages must be provided in order to pursue a claim for special damages.

2)  Nominal damages

In situations where a legal right has been violated without any actual harm being proven, or even in situations where there has been no actual loss or injury to the party against whom the breach has occurred, nominal damages may be given. Therefore, nominal damages may be awarded if one party is unable to demonstrate genuine harm arising from a contract violation. If a party can demonstrate that they have experienced losses as a direct result of the contract violation, nominal damages may also be awarded; however, it can be challenging to determine these amounts mathematically. In cases where there has been a technical breach of contract or if the defendant is not at fault for the losses, nominal damages may also be granted.

3)  Substantial injury

In India, substantial injury damages are granted in cases when a major breach of contract causes the aggrieved party to suffer a great deal of loss or pain, even if it is difficult to determine the precise amount of damages. These damages are intended to make up for the concrete and substantial harm caused by the breach, acknowledging that the aggrieved party has endured a loss that is quantifiable, if not precisely so. To ensure that the compensation accurately represents the seriousness of the breach and the loss that resulted, the courts consider both facts and reasonable conclusions when determining the degree of the injury. This strategy attempts to provide fair and sufficient compensation for the significant harm inflicted while putting the harmed party as near as practicable to the position they would have been in had the breach not happened. When the amount of the contract violation is established but the damages calculation is unclear, substantial damages are granted.

4)  Indirect losses

Speculative damages are those that are permitted when it becomes speculative to believe that a particular situation will occur and constitute a necessary component of compensation. Uncertain damages are not recoverable since they are not a guaranteed outcome of a violation or an injustice. Damages that are unquestionably caused by the wrong but whose exact amount is unknown may still be recovered. Even if the damages in this situation might not be ascertained by pure guesswork or conjecture, it will suffice if the evidence supports the magnitude of the damages based on a just and reasonable conclusion, even if the outcome is only approximative. Nonetheless, Indian courts often exercise caution when awarding speculative damages.

5) Aggravated and exemplary damages

Due primarily to the defendant's dishonest behaviour, these damages are of a kind that beyond the damages determined. When the plaintiff's feelings and dignity are violated, leading to mental suffering, and the harm is made worse by the intent, actions, or method of inflicting the injury, then aggravated damages become significant. Since the goal of aggravated damages is to compensate the plaintiff for the exacerbated loss they have incurred, they are primarily compensatory in nature. However, exemplary damages are punitive in nature since they aim to penalise the defendant rather than just make up the difference or deny the defendants their gains. Agraved and exemplary damages are more common in torts than in contractual breaches as the former do not take the defendants' intent or behaviour into account. This is mainly due to the fact that the goal of contractual remedies is to make up for the breach on the part of the promisee rather than requiring the promisor to execute. However, exemplary damages—which are not limited to payment equal to the real monetary losses incurred by the aggrieved party—may be awarded in cases where elements of fraud, oppression, malice, etc. are proven.

6) Damages, both liquidated and unliquidated

In the event of a breach of the agreement, the parties may agree to pay a particular amount. Liquidated damages are what happens when such clauses are included in a contract. Conversely, unliquidated damages are granted by the courts based on an evaluation of the harm or loss incurred by the party that was the victim of the contract violation. Parties may stipulate that some violations will result in liquidated damages, whereas violations of other types may only result in unliquidated damages being awarded. For example, a liquidated losses provision would set a cap for delivery delays, but it wouldn't stop a party from suing for damages if the products they were delivered under contract turned out to be faulty.

7) Differing between penalty and liquidated damages

Penalties are typically higher than potential losses resulting from a breach of contract and are disproportionate to the losses, even though liquidated damages are pre-determined estimates of losses and corresponding compensation that are payable upon breach of contract. These provisions are made with the intention of ensuring contract performance and preventing any breaches.  The Indian Contract Act's Section 74 deals with penalty clauses; it applies where a sum is specified as a punishment to be paid in the event of a future violation, but it does not apply when a sum that has already been paid is subject to forfeiture under the terms of the contract. Usually, there is no penalty if a fair sum is forfeited, such as earnest money or an advance deposit. In the event that the vendee is at fault for the transaction's failure, earnest money—a portion of the purchase price—may be forfeited. However, it can be seen as a punishment if one party agrees to pay back or forfeit money that has already been paid because of a breach. Deposits that are forfeited as "earnest money" or "security" must have a special clause in the contract. The right to forfeit does not exist in the absence of such a clause, highlighting the need for a clear contractual agreement respecting forfeiture.

Comparative Jurisdictions on Damages: India, USA, UK, and Singapore

United Kingdom:

Penalty clauses and liquidated damages are tightly controlled in the United Kingdom. Penalty clauses are regarded unenforceable if they are deemed excessive or exorbitant, whereas liquidated damages are enforced only if they represent a true pre-estimate of loss. These stringent guidelines are in place to guarantee equity in the duties outlined in contracts. The Hadley v. Baxendale rule, which places an emphasis on foreseeability and a clear link between the breach and the consequent losses, governs the notion of remoteness of damages. In contract disputes, punitive damages are not frequently granted in the UK. Punitive damages are usually reserved for tort cases, and the courts are often unwilling to give them. Instead, the focus is on compensatory remedies.

India:  

In India, the approach to liquidated damages and penalty provisions is similar to the UK and Singapore but allows for more judicial discretion. Penalty clauses may be enforced under specific circumstances, giving judges broader discretion. The principle of remoteness of damages follows the Hadley v. Baxendale rule, as recognized under Section 73 of the Indian Contract Act, emphasizing foreseeability and maintaining consistency. India is reluctant to grant punitive damages in commercial disputes, focusing primarily on compensatory remedies, similar to the UK, and generally avoids punitive damages in contract cases.

Singapore:

Singapore adopts a similar strategy to the UK when it comes to liquidated damages and penalty clauses. Penalty clauses are deemed invalid if they are punitive or irrational, while liquidated damages are enforced if they represent a true pre-estimate of loss. Equity in contractual obligations is ensured by this stringent enforcement. The Hadley v. Baxendale rule, which emphasises foreseeability and a clear link between the breach and the consequent losses, serves as the foundation for the notion of remoteness of damages. In Singapore, punitive penalties are not commonly granted for contract violations. Rather, as in the UK and India, the emphasis is on compensating remedies for genuine losses, with a general avoidance of punitive penalties under contract law.

United States:

Although punitive damages are seldom granted in contract lawsuits, liquidated damages are enforceable in the US. Compensation in the form of damages is the main remedy; specific performance may also be used in certain situations. Applying a similar logic to the UK and India, the idea of remoteness of damages emphasises predictable losses that directly result from the violation. Punitive damages are more frequently awarded in tort cases, particularly where there has been deliberate or careless behaviour. However, in contract law, compensatory damages are prioritised, and punitive penalties are only awarded in very rare situations.

Comparison

While the common law basis of damages legislation is shared by the UK, Singapore, India, and the USA, there are notable differences in how penalty clauses are handled, whether liquidated damages can be enforced, and when punitive damages are applied. To maintain justice, the UK and Singapore tightly enforce liquidated damages as a true pre-estimate of loss, and they deem any excessive penalty terms invalid. Similar in nature, Indian law gives courts more latitude in applying punishment clauses under particular circumstances. In the United States, liquidated damages are enforceable; nevertheless, in contract proceedings, punitive damages are seldom and compensatory damages are the usual remedy, with specific performance as a backup. In these jurisdictions, the concept of remoteness of damages is consistently acknowledged, according to the Hadley v. Baxendale ruling that highlights the necessity of foreseeability and a clear connection between violation and loss. Punitive damages are rarely awarded in business disputes in the UK or India; instead, compensating remedies are prioritised. On the other hand, while contract law still favours compensatory damages, punitive damages are more frequently awarded in tort situations involving deliberate or careless behaviour in the USA. Singapore avoids punitive damages in contract breaches by standing with the UK and India. This comparative study demonstrates how damage rules are used differently and more similarly in each of these legal systems.