Kinds of damages — MCQs

All questions with answers and explanations

Read the full set here, or use the practice card above to test yourself one question at a time.

1. Under Section 73, compensation is NOT given for:

   • Loss naturally arising from the breach
   • Loss within both parties' contemplation at contract formation
   • Remote and indirect loss (correct answer)
   • Loss caused directly by the breach

   Explanation. Section 73 expressly excludes compensation for remote and indirect loss.

2. In Hadley v. Baxendale, the mill owners' claim for lost profits failed because:

   • The special circumstances that made lost profits a likely result were not communicated to the carrier when the contract was made (correct answer)
   • The mill owners never suffered any loss
   • The carrier delivered on time
   • The claim exceeded the limitation period

   Explanation. Special circumstances count only if they were communicated to, and so known by, both parties when the contract was made. Without that, the loss was too remote.

3. The two-limb test from Hadley v. Baxendale distinguishes between:

   • Liquidated and unliquidated damages
   • General damages and special damages (correct answer)
   • Nominal and exemplary damages
   • Civil and criminal damages

   Explanation. The first limb covers general damages (loss arising naturally in the usual course of things). The second covers special damages (loss from special circumstances known to both parties when contracting).

4. Exemplary damages for breach of contract are ordinarily:

   • Awarded in every breach case
   • Not awarded, except in a few recognised exceptions (correct answer)
   • Mandatory under Section 73
   • Only awarded to government parties

   Explanation. Contract damages compensate and do not punish. The usual exceptions listed are breach of a promise to marry and wrongful dishonour of a trader's cheque by a bank.

5. Nominal damages are awarded when:

   • The claimant suffered massive financial loss
   • A breach is proved but no real, quantifiable loss occurred (correct answer)
   • The defendant admits fraud
   • The contract was void from inception

   Explanation. Nominal damages are a small sum that marks the breach of the right when a breach is proved but no real loss is shown.

6. Under Section 74, a sum named in the contract as payable on breach:

   • Is always paid in full regardless of proof
   • Caps the reasonable compensation the court may award (correct answer)
   • Has no legal effect in India
   • Applies only to government contracts

   Explanation. Section 74 entitles the party to reasonable compensation not exceeding the named sum — the figure is a cap, not a guarantee.

7. In Fateh Chand v. Balkishan Dass, the Supreme Court held that Indian law:

   • Follows the English distinction between liquidated damages and penalty
   • Does not distinguish liquidated damages from a penalty clause (correct answer)
   • Bans all liquidated damages clauses
   • Only applies Section 74 to government contracts

   Explanation. The Court held Section 74 abolishes the English-law distinction — both are treated the same, capped at reasonable compensation.

8. Which of the following is one of the usual exceptions listed for exemplary damages in contract?

   • Late delivery of goods
   • Breach of a promise to marry (correct answer)
   • Failure to pay rent on time
   • Minor's void agreement

   Explanation. Breach of a promise to marry, and wrongful dishonour of a trader's cheque by a bank, are the two usual exceptions listed.

9. Under Section 75, a person who rightfully rescinds a contract is:

   • Barred from claiming damages
   • Entitled to compensation for damage sustained through non-fulfilment (correct answer)
   • Entitled only to a refund
   • Required to pay compensation to the other party

   Explanation. Section 75 gives a person who rightfully rescinds a contract compensation for any damage sustained through the non-fulfilment of the contract.

10. A gives B a bond for 1,000 rupees at 12 per cent interest, with 75 per cent interest from the date of default. Under Section 74, Illustration (d), this stipulation is:

    • Valid and enforced as written
    • A stipulation by way of penalty, so B gets only reasonable compensation (correct answer)
    • Void for uncertainty
    • A bail-bond

    Explanation. Section 74 treats the increased interest as a penalty; B is entitled only to such compensation as the court considers reasonable.

11. A will repay a loan by five equal monthly instalments, with the whole becoming due on default of any instalment. Under Section 74, Illustration (f):

    • This is a penalty
    • This is not a penalty, and the contract is enforced as written (correct answer)
    • The court reduces the loan
    • The contract is void

    Explanation. Illustration (f): the stipulation is not by way of penalty.

12. Under the exception to Section 74, a person who gives a bail-bond or recognizance is liable on breach to pay:

    • Reasonable compensation only
    • The whole sum mentioned (correct answer)
    • Half the sum
    • Nominal damages

    Explanation. The exception makes such persons liable to pay the whole sum mentioned in the instrument.

13. In Kailash Nath Associates v. DDA (2015), forfeiture of earnest money with no loss shown was held to be:

    • Valid under the auction terms
    • Arbitrary (correct answer)
    • Required by Section 73
    • A penalty under Article 14 only

    Explanation. The Court held DDA had waived the payment date and gave no notice, so forfeiting 78 lakh rupees with no loss was arbitrary.