Law Of Damages In India - Nishith Desai Associates

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M U M BA IS I L I C O N VA L L E YBA N G A LO RES I N G A P O REM U M BA I B KCNEW DELHIMUNICHN E W YO RKLaw of Damagesin IndiaJanuary 2017 Copyright 2017 Nishith Desai


Provided upon request only Nishith Desai Associates 2017

Law of Damages in IndiaContents1.INTRODUCTION012.TYPES OF DAMAGES02I.II.III.IV.V.02020202033.4.5.General and special damagesNominal damagesSubstantial damagesAggravated and exemplary damagesLiquidated and unliquidated damagesTHE LAW OF DAMAGES UNDER INDIAN CONTRACT ACT 187204I.II.III.IV.V.VI.VII.05050708101113Breach of contractProof of damage for a claim of liquidated damagesCausationRemoteness of DamagesMitigationMeasure and calculation of damagesInterests on damagesAPPLICABILITY OF THE LAW OF s under Sale of Goods ActGrant of damages under indemnity contractsDamages under tort and contract lawGrant of liquidated damages in arbitral proceedingsDamages under consumer lawsDamages under contracts of employmentDamages under cases relating to intellectual propertyLAW OF DAMAGES IN INDIA, U.K. AND SINGAPORE: AN OVERVIEW23I.II.III.232324Liquidated damages and penalty clausesThe principle of remoteness of damagesGrant of punitive damages6.CONCLUSION257.TABLE OF CASES27 Nishith Desai Associates 2017

Law of Damages in India1. IntroductionDamages, in simple terms, refer to a form of compen-in practical terms, there isn’t much difference andsation due to a breach, loss or injury. As explained bycompensation is often used to refer to damages asFuller and Perdue,1 damages may seek protection ofwell. Moreover, the Contact Act 1872, uses the term“expectation interest”, “reliance interest” or “restitu-“compensation” in the sections referring to liquidatedtion interest”. Expectation interest (otherwise knownand unliquidated damages, which shall be discussedas performance interest) refers to placing the a position that he would have occupied, had thedefendant performed his promise by compensatingfor the injury, thus, aiming at fulfilling the expectation of the promisee; reliance interest (otherwiseknown as status quo interest) refers to a restoring theplaintiff to a position which he was in before thepromise was made in the course of which the promisealtered his position by placing reliance on the promisor; and restitution interest refers to prevention ofgain by the defaulting promisor at the expense of thepromisee or to compel the defendant to pay for thevalues received from the plaintiff thereby preventingunjust enrichment.2“Damages” are often confused with “damage”.However, it should be known that these two termsare significantly distinct, and different from eachother. While “damages” refer to the compensationawarded or sought for, “damage” refers to the injuryor loss which such compensation is claimed for orbeing awarded. ‘Damage’ could be monetary or nonmonetary (which could in cases where there is lossof reputation, physical or mental pain or suffering)while ‘damages’ refer to pecuniary compensation.At this juncture, it is noteworthy that damages can bedistinguished from compensation, in general. Compensation is a broader concept which encompassespayments made to a person in respect of some kindDamages have gained much significance especiallyamong commercial transactions, and as punitivemeasures for violation of rights of concernedpersons. The nature of damages granted acrossvarious areas varies significantly.For example, with respect to damages granted underindemnity contracts, it is pertinent to understand thesignificant differences between the two.4 Indemnityis a kind of protection from third party losses, whichis ensured by an indemnity agreement between theclaimant (indemnified) and the indemnifier.5A claim for indemnity arises from the originalcontract of indemnity while a claim for damagesarises on breach of a contract. Unlike damages underordinary contracts where the defendant has theprimary liability to pay the damages, under indemnitycontracts, the risk of future losses and liability to paydamages shifts to the indemnifier.Damages are popularly granted in cases of tort oron breach of contract. This paper broadly coversdamages in cases of contractual breaches in India,with a brief overview of claim and grant of damagesin cases of torts, indemnity contracts, arbitralproceedings, sale of goods, consumer law andintellectual property rights (copyrights, trademarksand patents).of loss or damage suffered due to reasons like acquisition of property by another party, or statutory violations, termination of employments, requiring theaggrieved party to be compensated; however, damages emanate from actionable wrongs.3 However,1.L.L. Fuller and Willian R. Perdue Jr., ‘The Reliance Interest inContract Damages’ (1936) 46 Yale Law Journal 522.ibid3.Halsbury’s Laws of England, Damages, vol 12 (4th edn) para815 as cited in R.G Padia (ed.), Pollock and Mulla Indian Contractand Specific Relief Acts, vol 2 (13th edn, LexisNexis ButterworthsWadhwa 2006) 1498 Nishith Desai Associates 20174.5.Refer to our article titled “Revisiting the Indemnity v/s DamagesDebate” available tml?no cache 1&cHash 7a971feea52445663d1b3b87e707a6f5 See, Indian Contract Act 1872, s 1241

Provided upon request only2. Types of DamagesThe nature of damages used or sought for depends onthe objective for which damages are being claimed for.III. Substantial damagesThus, damages can be categorized into one or more ofthe following kinds:Contrary to nominal damages, substantial damagesare awarded when the extent of breach of contractI. General and specialdamagesDamages which arise in the normal course of eventsare known as general damages while special dam-is proved but there are uncertainties regardingcalculation.IV. Aggravated andexemplary damagesages refer to those that arise under circumstanceswhich were reasonably anticipated by the partiesThese damages are of such nature that they exceedwhen they entered into the contract. Once a damagethe damages ascertained, mostly resulting fromis proven, general damages are presumed to followthe mala fide conduct of the defendant. Aggra-such damage, while specific proof of such damage isvated damages gain significance where the damagenecessary for which special damages are claimed.6caused to the plaintiff are aggravated due to themotives, conduct or manner of inflicting injury,II. Nominal damagesWhen a party approaches the court for claimingdamages, the court has the discretion to awardnominal damages. This may be awarded even whenthere is no actual loss or injury caused to a partyagainst whom a breach has been caused, or in caseswhere there has been a violation of a legal right,without any actual damage being proved. Thus, incases where a party fails to prove actual loss resultingfrom a breach of contract, nominal damages maybe granted. Additionally, nominal damages may beawarded where a technical breach of contract hasbeen committed or when the breach has taken placedue to an external reason which is not attributable tothe defendant.76.Nilima Bhadbhade (ed.), Pollock & Mulla, The Indian Contract Actand Specific Relief Acts, vol 2 (updated 14th edn, LexisNexis Butterworths Wadhwa) 11717.Weld & Co. v. Har Charn Das AIR 1921 Lah 316; Grant Smith andCo. and McDonnel Ltd v. Settle Construction and Dry Dock Co. AIR1919 PC 85 as cited in R.G Padia (ed.), Pollock and Mulla IndianContract and Specific Relief Acts, vol 2 (13th edn, LexisNexis Butterworths Wadhwa 2006) 15192whereby the plaintiff’s feelings and dignity areadversely affected resulting in mental distress.Aggravated damages are mostly compensatory innature since they aim at compensating the plaintiff for the aggravated loss suffered. On the otherhand, exemplary damages are punitive in naturesince they intend to punish the defendant and notmerely compensating or depriving the defendants of the profits made.8 Since damages undercontractual breaches do not consider the motiveand conduct of defendants, it is to be understoodthat aggravated and exemplary damages are moreprominent in torts and not under contractualbreaches.9 This is primarily because of the factthat the objective behind contractual remedies isto compensate the promisee for the breach ratherthan compelling performance on the promisor.108.Nilima Bhadbhade (ed.), Pollock & Mulla, The Indian Contract Actand Specific Relief Acts, vol 2 (updated 14th edn, LexisNexis Butterworths Wadhwa) 11739.The Common law approach has been that aggravated damagescannot be awarded in an action for breach of contract (Addis v.Gramaphone Co. Ltd. (1909) AC 488; Bliss v. SE Thames RegionalHealth Authority (1987) ICR 700); however, where fraud, oppression, malice etc. are established, exemplary damages may begranted (Sheikh Jaru Bepari v. AG Peters AIR 1942 Cal 493; Alexander Brault v. Indrakrishna Kaul AIR 1933 Cal 706)10.William S. Dodge, ‘The Case for Punitive Damages in Contracts’(1999) 48(4) Duke Law Journal 629, 630 Nishith Desai Associates 2017

Law of Damages in IndiaHowever, punitive damages may be granted in“i) The first is that exemplary damages, otherwise knowncertain exceptional cases. The Canadian Supremeas punitive damages, are awarded against a defendantCourt’s finding in this respect is of utmost relevance,as a punishment, so that the assessment goes beyondwherein it was observed that:mere compensation of the claimant. Whilst such dam-“Punitive damages are very much the exception than therule, imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct thatdeparts to a marked degree from ordinary standards ofdecent behaviour. Where they are awarded, punitivedamages should be assessed in an amount reasonablyproportionate to such factors as the harm caused, thedegree of the misconduct, the relative vulnerability ofthe plaintiff and any advantage or profit gained by thedefendant, having regard to any other fines or penaltiessuffered by the defendant for the misconduct in question.Punitive damages are generally given only where theages are capable of being awarded in tort (albeit only invery limited circumstances), there is no right to recoverexemplary damages for breach of contract. If any right todamages arises in the present case, it would be foundedupon (or by analogy with) a cause of action in contract.Therefore, as a matter of principle, exemplary damageswould not be recoverable in the present case. ii) The second answer is that, even if such an award is availablein principle, it should be by reference to the principlesdeveloped in tort and subject to the restrictions laid downin Rookes v. Barnard [1964] AC 1129. The facts of thepresent case do not fall within those principles.”12misconduct would otherwise be unpunished or whereSimilarly, in India, courts have held that the natureother penalties are or are likely to be inadequate toof compensation should be such that the award ofachieve the objectives of retribution, deterrence andcompensation for damages cannot be considereddenunciation. Their purpose is not to compensate theeither punitive or in the nature of a reward.13plaintiff, but to give a defendant his or her just desert(retribution), to deter the defendant and others fromsimilar misconduct in the future (deterrence), and tomark the community collective condemnation (denunciation) of what has happened. Punitive damages areawarded only where compensatory damages, which tosome extent are punitive, are insufficient to accomplishthese objectives, and they are given in an amount that isno greater than necessary to rationally accomplish theirpurpose.” 11Nevertheless, courts in U.K. and India have beenstrict regarding grant of punitive damages in caseof contractual breaches. For example, in a recentcase, the England and Wales High Court (ChanceryDivision), in an obiter, agreed with the claimants that:V. Liquidated and unliquidated damagesIn case of contracts, parties may agree to paymentof a certain sum on breach of the contract. Whensuch stipulations are made in the contract, they areknown as liquidated damages. On the other hand,unliquidated damages are awarded by the courtson an assessment of the loss or injury caused to theparty suffering such breach of contract.Under the Indian Contract Act 1872, unliquidatedand liquidated damages are given under sections 73and 74 respectively, which shall be discussed in thesubsequent chapter of this paper.11.Whiten v. Pilot Insurance Company [2002] 1 RCS 595 Nishith Desai Associates 201712.IBM United Kingdom Holdings Ltd & Another v. Dalgleish & Ors(Rev 1) [2015]EWHC 389(Ch)13.Kerala State Road Transport Corporation Rep. by the ManagingDirector v. Feethambaran Rep. by his Next Friends Sukhmmari 1994(2) KLJ 646 (para 8)3

Provided upon request only3. The Law of Damages under Indian ContractAct 1872Sections 73 deals with actual damages followingIn cases, where there is a valid termination of thebreach of contract and the injury resulting fromcontract, without any violation of the terms of thesuch breach which are in the nature of unliquidatedcontract, the question of claim for damages shoulddamages since these damages are awarded by thenot arise since there is no breach per se. Thesecourts on an assessment of the loss or injury caused toprovisions are subsequently discussed in detail.the party against whom breach has taken place, whileSection 74 deals with liquidated damages, referringto damages that are stipulated for. Thus, for a claim ofdamages, there has to be a breach of the contract.Based on the requirements mandated for claim ofdamages, basic comparison between Section 73 andSection 74 has been done below:Section 73:Section 74:Contract materializedContract materializedBreach of a contractContract has a certain sum stipulated ascompensation or penalty which would beLoss or damage resulting from sucheffectuated on breach of contractbreachBreach of a contractThe loss or damage should be of suchnature that:-It arose in the usual course of thingsfrom such breach; or-Parties knew that such a loss ordamage could subsequently arise atCompensation by party causing breach.The compensation shall be reasonableand not more than the sum determinedin the contract as liquidated damages.the end of the time of entering into thecontract.Compensation for such loss or damageby party causing the breach4 Nishith Desai Associates 2017

Law of Damages in IndiaDamages are generally claimed and granted tothe other party may acquiesce to the continuation ofenable restoration of the position of the plaintiff inthe contract or rescind it.18 In case of an anticipatorywhich he would have been, if the breach would notbreach of contract, the plaintiff would be entitled tohave taken place. Generally, these damages are to beclaim damages on establishing the intention to per-claimed from the party causing such breach. In caseform the contract prior to rescission of the contract.19of liquidated damages under Section 74, claims canbe made by plaintiff as well as defendant.14In case of liquidated damages, there is an assuranceof compensation since a reasonable compensation isagreed upon. Thus, it would be expected that sincethe risks of a party causing a breach would be lesserII. Proof of damage fora claim of liquidateddamagessince damages are already stipulated for.It is noteworthy that for a claim of liquidated dam-I. Breach of contractages, the clause “whether or not actual damage or lossis proved to have been caused thereby” would not bedispensing with the establishment of proof in toto.20“Breach of contract” constitutes the pre-condition fora claim of damages, be it liquidated, unliquidated orotherwise. Thus, irrespective of the extent to whichthe defendant profits from the contractual arrangement, there can be no claim for damages unlessthere is a breach of the contract. Further, the partycommitting the breach is liable to compensate byway of damages. To establish a breach, it has to beadjudicated upon and be proved, and not merelydecided by the parties.15This emanates from the understanding that the reasonable compensation agreed upon as liquidateddamages in case of breach of contract is in respect ofsome loss or injury; thus, existence of loss or injuryis indispensable for such claim of liquidated damages.21 In such cases, the requirement to prove lossor injury or damage may be dispensed with, if it isdifficult or impossible to prove that the genuinelypre-estimated can be awarded.22 Thus, it is expectedthat the stipulation for liquidated damages shouldbe bona fide and a fair estimate of the damages aris-A contract is said to be breached in case of contraven-ing from the breach, and not done with a sole intenttion with the terms of the contract or when the prom-to penalize the other party.23 Courts have repeatedlyise made is broken. It may so happen that the termsrequired parties to draft clauses within the contractsare not complied in a manner which had been con-which aren’t ambiguous.templated in the contract. For example, if a party contracts with another for repairing the other’s house ina certain manner, and the repair was not done in themanner which was decided, then the aggrieved partyin entitled to damages to the extent of costs of makingrepairs in conformity with the contract.16Damages may also be claimed in case of anticipatoryIrrespective of stipulations in the form of liquidateddamages, a plaintiff can recover damages to theextent of the claim being reasonable compensationfor the injury sustained by him, and not the entiresum laid down as liquidated damages; thereby,erasing the differences between liquidated damagesand unliquidated damages.24 Thus, provisionsbreach of contract. An anticipatory breach is said tohave been committed when a party refuses to per-18.ibidform, or has disabled himself from the performance19.Foran v. Wight (1989) 168 CLR 385, 408 (Mason CJ)of the promise in its entirety.17 In such a scenario,20.ONGC v. Saw Pipes (2003) 5 SCC 70521.ibid22.ibid23.B.V.R. Sharma, ‘Adjudication of claim for damages under Sections73, 74 and 75 of Indian Contract Act, 1872’ d/30C28D5D-262B-4A4A-AE17-C4D86F92BCE0.pdf accessed 10 September 201624.Union of India v. Raman Iron Foundry AIR 1974 SC 126514.Kailash Nath v. Delhi Development Authority (2015) 4 SCC 13615.P Radhakrishna Murthy v. NBCC Ltd. (2013) 3 SCC 747; J.G. Engineers (P) Ltd., v. Union of India (2011) 5 SCC 75816.Indian Contract Act 1872, s 73 (illustration (f))17.ibid s 39 Nishith Desai Associates 20175

Provided upon request onlyrelating to liquidated damages are required tothe nature of a penalty. Where loss in terms of money can bebe drafted with clarity and it has to be proven thatdetermined, the party claiming compensation must prove thethe amount was a genuine pre-estimate of the loss orloss suffered by him.”27damage likely to be suffered. It is pertinent to note thatamount stipulated as liquidated amount or penaltyis the “upper limit beyond which the court cannot grantreasonable compensation”.25 Meanwhile, other factorslike extent of mitigation of losses, along with other factsand circumstances cannot be overlooked and warrantsufficient consideration.Based on this reasoning, recently a Division Bench ofthe Delhi High Court had upheld the finding ofa Single Judge who had set aside the arbitral awardon the ground that the award for grant of liquidateddamages had been made even though no evidence hadbeen led to prove any loss or damage.26Such mandates are required even in the presence ofa pre-determined sum agreed by both the parties asliquidated damages,

IV. Aggravated and exemplary damages 02 V. Liquidated and unliquidated damages 03 3. THE LAW OF DAMAGES UNDER INDIAN CONTRACT ACT 1872 04 I. Breach of contract 05 II. Proof of damage for a claim of liquidated damages 05 III. Causation 07 IV. Remoteness of Damages 08 V. Mitigation 10 VI. Measure and calculation of damages 11 VII.

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