Table of Contents
Contract Law pdf-Breach of Contract measure of Damages and liquidated Damages and Penality
BA LLB 3rd semester for Contract-I Law pdf
Q. 5. Elaborate on the following with regard to Breach of
Contract :
(a) Measure of Damages
(b) Liquidated Damages and Penality.
Ans.
(a) Measure of Damages
After the extent of loss which the plaintiff can recover has been
determined, it will be necessary to evaluate it in terms of money. In this
connection, following two principles deserve special consideration :
(1) Compensatory Nature of Damages : As aptly remarked by
ANSON, “Damages for breach of contract are given by way of
compensation for loss suffered, and not by way of punishment for wrong
inflicted. The measure of damage is therefore not affected by the motive
or manner of the breach.” In fact, “The object of awarding damages for
breach of contract is to put the injured party into the position in which
he would have been had the contract been performed.”
“The normal rule for computing damages for non-supply of the
goods would be the difference between contract price and the market
price of such goods at the time when the contract is broken. If there is
no available market, at the place of delivery, the market price at the
nearest place or the price prevailing in the controlling market may be
taken into consideration. This was held by the Division Bench of Delhi
High Court in M/s. Saraya Distillary, Sardar Baggar v. Union of India,
Further, “what the buyer is deprived of in the usual course delivery of
things by non-delivery is the value of the goods at the time and place of
the delivery, less price payable to him under the contract. The loss of
value is the natural result of the breach, the only kind of damage that
ensures in the usual course of things. The quantum of damages on account
of the breach of such contract would be the difference between the
contract price and the market price of the goods in question at the time
when the contract is broken. The provisions contained in section 37 do
not envisage that the buyer must resort to actual purchase and suffer,
loss before claiming damages.”
In Devender Singh v. State of U.P., The Allahabad High Court
“The measure of damages in contract is compensation for the
consequences which flows as a natural and capable consequence of the
breach or, in other words, which could be foreseen”.
It may be noted here that damages for anguish and vexation caused
by breach of contract cannot be awarded in an ordinary commercial
contract.
provides : “In estimating the loss or damage arising from a breach of
contract, the means which existed or remedying the inconvenience caused
by the non-performance of the contract must be taken into account.”
In M.N. Gangappa v. A.N. Setty and Co. and another, the Supreme
Court reaffirmed this principle and observed that the rule for
compensation of damages on the basis of the difference between the rate
mentioned under the contract and the lowest market rate at the time of
the breach of contract was neither “illegal nor unreasonable”.
Yet another important Supreme Court case on the point is M’s.
Murlidhar Chiranjilall case, wherein the Supreme Court examined the
scope of Section 73 and the explanation thereto, while dealing with a
case arising out of a breach of contract of sale of goods. After examining
the scope of Section 73 of the Act, the Supreme Court has laid down
the principles on which damages for the breach of Contracts have to be
determined. The Supreme Court observed :
“The two principles on which damages in such cases are calculated
are well-settled. The first is that, as far as possible, he who has proved
a breach of a bargain to supply what he contracted to get is to be placed,
as far as money can do it, in as good a situation as if the contract had
been performed; but this principle is qualified by a second, which imposes
on a plaintiff the duty of taking all reasonable steps to mitigate the loss
consequent on the breach, and debars him from claiming any part of the
damages which is due to his neglect to take such steps. These two
principles also follow from the law as laid down in Section 73 read with
the explanation thereof.”
Though the case dealt with by the Supreme Court was of a breach
of a commercial contract of sale of goods, as the decision was rendered
on the construction of Section 73 read with explanation thereof, the
principles laid down by the Supreme Court are of general application in
respect of all breaches of contracts to which Section 73 of the Act applies.
The general principles deducible from the judgment of the Supreme
Court are as follows:
(i) As far as possible a party who has proved a breach of contract
is to be placed, as far as money can do it, in as good a situation as if
the contract had been performed.
(ii) A statutory duty is cast on the plaintiff who has proved the
breach of the contract of taking all reasonable steps to mitigate the loss
consequent on the breach of the contract.
(iii) If the plaintiff, who proves the breach of the contract but fails
to prove that he took all reasonable steps to mitigate the loss consequent
on the breach of the contract, he will be debarred from claiming damages
to the extent he could have mitigated the same by taking such steps.
In Banco de Portugal v. Waterlow, Lord Macmillan aptly observed:
“Where the sufferer from a breach of contract finds himself in
measure which he may be driven to adopt in order to extricate himself
ought not to be weighed in nice scales at the instance of the party whose
breach of contract has occasioned
the difficulty. It is often easy after an
emergency has passed to criticise the steps which have been taken to
meet it, but such criticism does not come well from those who have
themselves created the emergency. The
law is satisfied if the party placed
in a difficult situation by reason of the breach of a duty owed to him
has acted reasonably in the adoption of remedial measures and he will
not be held disentitled to recover the cost of such measures merely
because the party in breach can suggest that other measures less
burdensome to him might have been taken.”
The above observations were quoted with approval and applied by
the Madras High Court in R.J. Mohamed Jacub Sahib v. The Indian Bank
Ltd., Madras.
(b) Liquidated Damages and Penalty
Section 74 provides : “When a contract has been broken, if a sum
is named in the contract as the amount to be paid in case of such
breach, or the contract contains any other stipulation by way of penalty,
the party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby, to receive from
the party who has broken the contract reasonable compensation not
exceeding the amount so named or as the case may be, the penalty
stipulated for.”
The essential elements of Section 74 are as follows:
(1) when a contract has been broken;
(2) if a sum is named in the contract payable on breach or any
other stipulation by way of penalty;
(3) whether or not the actual loss is proved to have been caused
thereby;
(4) the party complaining the breach is entitled to receive
reasonable compensation from the party who has broken the contract;
and
(5) the compensation should not exceed the amount named or the
For example, P and Q agreed to play a wrestling match on the
condition that the party who did not appear on the day fixed for the
match would give Rs. 500 to the opposite party. P did not turn up on
the fixed day. Q sued P for Rs. 500.
Q will succeed in his suit but he will get only reasonable
compensation not exceeding Rs. 500. If the court deems fit, it may allow
Rs. 500 i.e., the sum named in the contract. If the court does not deem
fit to award Rs. 500/- in accordance of the facts and circumstances of
the case, it may award any sum below Rs. 500. In short, the court may
award any sum not exceeding Rs. 500.
increased interest from the date of default may be a stipulation by way of
penalty.”
Section 74, however, provides an exception :
“in case of bail-bond when any person enters into any bail-bond
recognizance or any other instrument of the same nature, or under the
provisions of any law, or under the orders of the Central Government
or of any State Government, the person giving the bond “for the
performance of any public duty or act in which the public are interested”
shall be liable upon the breach of the condition of any such instrument,
to pay the whole sum named or mentioned therein”.
Explanation to above exceptions adds by way of clarification that :
“a person who enters into a contract with the Government does
not necessarily thereby undertake any public duty, or promise to do an
act in which the public are interested.”
Illustration to Sec. 74
(a) A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs.
500 on a given day. A fails to pay B Rs. 500 on that day B is entitled to
recover from A such compensation, not exceeding Rs. 1,000 as the Court
considers reasonable.
(b) A contracts with B that, if A practises as a surgeon within
Calcutta, he will pay B Rs. 5,000. A practisee as a surgeon in Calcutta.
B is entitled to such compensation, not exceeding Rs. 5,000 as the Court
considers reasonable.
(c) A gives a recognizance binding him in a penalty of Rs. 500 to
appear in Court on a certain day. He forfeits his recognizance. He is
liable to pay the whole penalty.
(d) A gives B a bond for the repayment of Rs. 1,000 with interest
at 12 percent at the end of six months, with a stipulation that, in case
of default
, interest shall be payable at the rate of 75 per cent, from the
date of default. This is a stipulation by way of penalty, and B is only
entitled to recover from A such compensation as the Court considers
reasonable.
(e) A, who owes morey to B, a money-lender, undertakes to repay
him by delivering to him 10 maunds of grain on a certain date, and
stipulates that, in the event of his not delivering the stipulated amount
by the stipulated date, he shall be liable to deliver 20 maunds. This is a
stipulation by way of penalty and B is only entitled to reasonable
compensation in case of breach.
(1) A undertakes to repay B a loan of Rs. 1,000 by five equal
monthly instalments, with a stipulation that, in default of any installment,
the whole shall become due. This stipulation is not by way of penalty,
and the contract may be enforced according to its terms.
(g) A borrows Rs. 100 from B and gives him a bond for Rs 200
payable by five yearly installments of Rs. 40 with a stipulation, that, in
default of payment of any installment, the whole shall become due. This
is a stipulation by way of penalty,
Explaining the provisions contained in Section 74 the Supreme
The court further observed :
Section 74 of the Indian Contract Act deals with the measure of
damages in two classes of cases: (i) where the contract names sum to
be paid in case of breach and (ii) where the contract contains any other
stipulation by way of penalty… The measure of damages in the case of
breach of a stipulation by way of penalty is by Section 74: reasonable
compensation not exceeding the penalty stipulated for. In assessing
damages the Court has subject to the limit of the penalty stipulated,
jurisdiction to award such compensation as it deems reasonable having
regard to all the circumstances of the case.”
Explaining the expression “the contract contains any other
stipulation by way of penalty” the Supreme Court remarked :
“In our judgment, the expression…..comprehensively applied to
every covenant involving a penalty whether it is for payment on breach
of the contract of money or delivery of property in future, or for forfeiture
of right to money or other property already delivered. Duty not to enforce
the penalty clause but only to award reasonable compensation is
statutorily imposed upon the courts by Section 74. In all cases, therefore,
where there is a stipulation in the nature of a penalty for forfeiture of an
the amount deposited pursuant to the terms of contract which expressly
provides for forfeiture, the Court has jurisdiction to award such sum only
as it considers reasonable, but not exceeding the amount specified in the
contract as liable to forfeiture.”
Regarding the scope of Section 74, the Supreme Court finally
observed: “…..the application of the enactment is not restricted to cases,
where the aggrieved party claims relief as a plaintiff. The section does
not confer a special benefit upon any party, it merely declares the law
that notwithstanding any term in the contract predetermining damages
or providing for forfeiture of any property by way of penalty, the Court
will award to the party aggrieved only reasonable compensation not
exceeding the amount named or penalty stipulated.”
In Jhurai Lai v. Mohin Das Bose, while construing a compromise
decree to find out whether the default clause was penal or not, the
Allahabad High Court observed the following:
“Coming to the point as to what is a penal clause, certain facts
have to be borne in mind. The first fact which should weigh in deciding
the question would be as to whether the decree-holder was claiming
something more than what he claimed in a suit, or he claimed in the
execution by way of penalty only that much of the just claim to which
he was entitled to. The second consideration should as to whether the
just part of the claim was conceded by the defendant-debtor in complying
with the terms of the compromise within a certain period. And third
the condition should be as to whether the judge failed to comply with
the terms of the compromise without any just and proper cause so as to
disentitle him to the concession allowed to him by the decree-holder
under the compromise. The Court further added, “In a case where only
a part of the prima facie just claim is given up or conceded in consideration
of a certain condition and on failure to comply with that conditions, the
default clause comes into operation, it cannot be said that it is penal
because nothing is demanded from judgment-debtor by way of penalty.”
Stipulation by way of penalty or forfeiture clause in bail-bond,
recognizance or other instruments under the order of State or Central
Government: As pointed out earlier, an exception to Section 74 provides
that when any person enters into bail-bond, recognizance, or other
instrument of the same nature, or under the provisions of any law, or
under the orders of the Central Government or of any State Government,
gives any bond for the performance of any public duty or act in which
the public are interested, he shall be liable, upon breach of the condition
of any such instrument, to pay the whole sum mentioned.
In order to attract this exception following essentials must be
present”:
(1) A bail bond, recognizance, or other instrument is entered into
with the Government.
(2) The contract is entered into under the provisions of any law
or under the orders of the Central or State Government.
(3) The instrument is for the performance of any public duty or
act in which the public is interested.
(4) In case of breach of contract, the whole sum named or
mentioned in the instrument shall be payable.
Thus where the plaintiff has committed a breach of the contract
and one of the clauses of the contract gives discretion to the Government
to forfeit the security deposit, such forfeiture operating as a penalty, the
a court cannot in view of the exception to Section 74 of the Contract Act,
1872, directly relieve the party concerned of the hardship on that score.
It may also be noted that recourse to Section 74 can be taken only
in the event of a breach of contract. Recourse to Section 74 cannot be
taken if there is no concluded contract.
