In India, all contractual agreements are governed by the Indian Contract Act, 1872. According to this act, a contract is essentially an agreement, between two or more parties describing or stating their terms and conditions of operations, which can be enforced by the courts in accordance with the law.
In furtherance, a breach of contract occurs when either parties, by commission or omission, act in contravention to the said contract. When a breach of contract happens, the party whose actions have resulted in the breach is usually called the defaulting party and the party adversely affected by such breach is called the aggrieved party.
Section 73 of the Indian Contract Act, 1872 describes damage as the monetary compensation that the aggrieved party is entitled to, for the loss suffered by them as a direct consequence of the breach of contract committed by the other party, as a method of remedy. The aim of the concept of damages is to ensure that the aggrieved party is in the same position as they would have been, had the breach not occurred. The Indian Contract Act mainly indicates two types of damages, namely, liquidated and unliquidated. In brief, unliquidated damages is the compensation that is not a pre-decided amount by the parties, but, instead is an amount that is decided by the competent court according to the circumstances in the specific case.
Liquidated damages on the other hand are damages which are pre decided by the parties and incorporated into the contract in case a breach of contract occurs during the time period of the contract, in order to prevent confusion, avoiding unnecessary expenditure and exhausting resources to decide the amount to be paid as compensation after the occurrence of a breach of contract. The court in Hadley v. Bexendale laid down a principle stating that the compensation paid as damages for the breach of contract should only include the losses which were a direct result of the breach of the contract and nothing else.
However, it should not be neglected that for a suit for claim of damages, it is essential for a breach to have occurred. The defaulting party becomes inherently liable to pay the damages as soon as the breach occurs unless they can prove otherwise.
In the case of Murlidhar Chiranjilal v. Harishchandra Dwarkadas, the appellant and the respondent had made a contract to deliver a certain canvas from Kanpur to Calcutta by a specific date and an advance was given to appellant, however, the appellant was unable to deliver the goods by the date mentioned and informed the respondent that the bookings from Kanpur to Calcutta were all full. The appellant said that the performance of this agreement had now become impossible so he returned the advance and cancelled the contract. However, the respondent refused to accept the cancellation of the contract and demanded that the damages be paid and hence brought the suit. The Supreme court said that it is clear in this case that the parties knew that a breach could possibly lead to the loss of profits, and the respondent had to prove the price of similar canvas in the Kanpur markets to verify their entitlement. But due to the respondent’s failure to do so, the court decided that the respondent is not entitled to any damages in this case. The Supreme Court also said that there is also a duty on the aggrieved party to ensure that they take all necessary caution to make sure that the loss that has already occurred does not increase. In addition to this, the Supreme Court also said that no claims of an aggrieved party should be encouraged if there has been an element of neglect by the aggrieved party, themselves, that has resulted in the losses.
According to section 74 of the Indian Contract Act 1872, the court does not provide compensation as damages of an amount more than what is already pre decided by the parties and mentioned in the contract. However, if the court sees fit, they may provide for damages of an amount which is less than the specific stipulated amount decided by the parties. Another element in this section explicitly mentions that there is no necessity to prove the resulting damage or loss which was caused by the breach in order to have the right to claim the damage as a remedy to the breach of contract, it is more of an inherent entitlement that the aggrieved party has as soon as the breach of the contract occurs.
Section 74 also specifically also describes the situation where a party contracts with either the state or central government via an undertaking, to perform some specific function for the public, then on the eventuality of a breach of such contract the whole sum mentioned in the undertaking needs to be paid. However, it is not necessary that all contracts that are entered into, with the state or central government, have the obligation of public duty.
In Chunilal V. Mehta and Sons v. The Century Spinning and Mfg. Co. Ltd, the appellants were employed by the respondent as managing agents for 21 years. However, the respondent wrongfully terminated the contract before its conclusion and the appellants filed a suit for recovery of damages. In appeal of this case, the Supreme Court observed that by providing express terms for claims of damage in the contract, the appellants have eliminated their right to claim damages under the general law.
In conclusion, when parties decide to include a clause of liquidated damages in their contract, there is a requirement to look at all the perspectives from a bird’s eye point of view and in correlation with everything, so as to be certain of all the aspects that could possibly arise, in the future, as an issue that could have a negative impact on the suit for claim of damages due to breach of contract, and to be prepared to provide all necessary evidence to guarantee the possibility of the suit being in their favour.
This article is written by Sharon Nair of ILS Law College.