Kinds of damages
Sections 73 and 75 of the Indian Contract Act, 1872
In one minute
Damages are money paid to a party who has suffered by a breach of contract. The aim is to put him, as far as money can, where he would have been if the contract had been performed. Damages are not a punishment.
Section 73 sets two limits. The loss must arise naturally from the breach or be one the parties knew was likely, and it must not be remote or indirect. In exams, the kinds of damages, the rule in Hadley v. Baxendale, the market-price measure and the Act's illustrations earn the marks. In real life, they decide how much a wronged party can actually recover.
Exam focus
- Frequency: Frequently asked
- Usually asked as: Both (long answer and short answer)
Legal provision
- Section 73, first paragraph: when a contract has been broken, the party who suffers by the breach is entitled to receive compensation for any loss or damage caused to him which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from it.
- Section 73, second paragraph: such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
- Section 73, third paragraph: when an obligation resembling those created by contract has been incurred and not discharged, the injured person is entitled to the same compensation as if he had contracted to discharge it and had broken his contract.
- Section 73, Explanation: in estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance must be taken into account.
- Section 75: a person who rightfully rescinds a contract is entitled to compensation for any damage he has sustained through the non-fulfilment of the contract.
The Act gives eighteen illustrations, (a) to (r), to section 73. The table of illustrations in this note groups them under the rule each one shows.
Meaning and definition
Damages are the compensation, in money, that the law awards to a person for loss caused to him by a breach of contract. The Act uses the word "compensation". The word "damages" is the one used in the courts and in exam questions.
The principle is that the injured party should be compensated for his loss, and he should not profit from the breach. Section 73 therefore asks three questions. Was the loss caused by the breach? Is it a loss that the law counts as not too remote? Could the injured party have reduced it? The flow of those questions is in the decision tree.
- 1. Was the loss caused by the breach? section 73No: it is not recoverable.
- 2. Did it arise naturally in the usual course of things from the breach, or did both parties know when they made the contract that it was likely to result? section 73No: it is remote and indirect, and it is not recoverable.
- 3. Has the claimant proved the loss and its amount?No: the court may award only nominal damages.
- 4. Did he take reasonable steps to reduce the loss? Explanation to section 73No: the part that reasonable steps would have avoided is not recoverable.
- All answers "Yes": the loss is recoverable, measured as the law of damages requires.
Detailed explanation
Step 1: general damages
General damages (also called ordinary damages) cover the loss that flows naturally and directly from the breach in the usual course of things. Any reasonable person would expect them. No special knowledge needs to be shown.
Example. A contracts to deliver 50 maunds of saltpetre to B at a fixed price, and breaks his promise. B recovers the amount by which the price at which he could buy like saltpetre when delivery was due exceeds the contract price (section 73, illustration (a)).
Step 2: special damages
Special damages cover loss that is unusual in the transaction. They are recoverable only if the special circumstances were known to both parties when the contract was made, so that the loss was likely to result from a breach. Without that knowledge the loss is too remote.
Example. A contracts with C to buy 1,000 tons of iron at 80 rupees a ton, telling C that he does so to perform his own contract to supply B at 100 rupees a ton. C fails, and A cannot get other iron. B rescinds. C must pay A 20,000 rupees, the profit A would have made (illustration (j)). C knew of the resale, so this loss was within the second limb.
Step 3: nominal damages
Nominal damages are a small sum awarded when a breach is proved but no real loss is shown. They mark that the right was infringed. A claimant who proves no loss cannot recover substantial damages. Illustration (a) to section 73 itself says the buyer gets "the sum, if any," by which the contract price falls short of the market price.
Step 4: exemplary damages
Exemplary damages punish the wrongdoer and warn others. They are not part of the law of contract, because contract damages compensate and do not punish. Textbooks list two usual exceptions: breach of a promise to marry, and the wrongful dishonour of a trader's cheque by a bank. Section 73 itself speaks only of compensation for loss.
Step 5: liquidated and unliquidated damages
The classification also includes liquidated damages, which the contract itself fixes in advance, and unliquidated damages, which the court assesses after the breach. Section 74 governs the first kind, and section 73 governs the second. Section 74, the penalty rule and the leading cases are explained under liquidated and unliquidated damages and penalty.
Step 6: the rule of remoteness, Hadley v. Baxendale
Section 73 codifies the rule in Hadley v. Baxendale (1854). Millers at Gloucester sent a broken crank shaft by carrier to Greenwich as a pattern for a new one. The carrier delayed delivery by neglect, and the mill stood idle longer. The Court said that damages are those that arise "naturally, i.e., according to the usual course of things, from such breach of contract itself", or those that may reasonably be supposed to have been in the contemplation of both parties as the probable result. The carrier had been told only that the mill had stopped and the shaft must go at once, so the lost profits were not recoverable on the facts before the jury.
English cases have refined the test. In Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. (1949), a boiler was delivered five months late. The laundry could recover its ordinary lost profits but not the exceptional profits of special Government dyeing contracts that the supplier did not know of. In C. Czarnikow Ltd. v. Koufos (The Heron II) (1967), the House of Lords held that the test is whether the loss was "not unlikely" to result, which needs a degree of probability well short of an even chance.
The Supreme Court applied section 73 in Karsandas H. Thacker v. Saran Engineering Co. (1965). The seller agreed in July 1952 to supply 200 tons of scrap iron at Rs 100 a ton and said on 30 January 1953 that he could not deliver. The buyer had separately contracted to sell the iron to a third party. The Court held that the buyer could not recover the compensation he had to pay to the third party, because the seller had not been told of that contract. The buyer also could not recover any price difference, because the market price had not risen above the contract price.
Step 7: the measure of damages
For goods that can be bought elsewhere, the usual measure is the difference between the contract price and the market price at the time of the breach. Illustrations (a), (c), (d), (g) and (h) show this rule. In Jamal v. Moolla Dawood, Sons & Co. (Privy Council, 1915), the seller of 23,500 shares sued the buyers when they failed to take them on the delivery date of 30 December 1911. The Council held that the measure was the difference between the contract price and the market price on the date of breach. Later changes in the market were the seller's own risk.
Other rules follow from section 73. The loss must be proved with the evidence that is available. Reasonable expenses of reducing the loss are recoverable, as illustration (b) shows. The injured party cannot recover the same loss twice. He may recover interest on money not paid in time (illustration (n)).
Step 8: remote loss, in the Act's own illustrations
The Act shows what is too remote. In illustration (p), A sells 500 bales of cotton to B and breaks his promise, so that B has no cotton and must close his mill. A knew nothing of B's business, so he is not liable for the closing of the mill. In illustration (k), a late machine forces B to pay compensation under a contract with a third person that A did not know of. A pays the price difference but not the third-party compensation.
Illustration (n) shows the limit for money debts. A fails to pay a sum of money on the day, and B, in consequence, is unable to pay his debts and is ruined. A pays the principal and interest to the day of payment, but not the ruin of B.
The kinds of damages at a glance
| Kind | What it covers | Condition | Example |
|---|---|---|---|
| General (ordinary) | Loss that naturally follows from the breach | Proof of loss | The price difference on undelivered saltpetre |
| Special | Loss from unusual circumstances | Known to both parties when contracting | A's lost profit on a resale he told C about |
| Nominal | A small sum to mark the breach | Breach proved, no loss proved | Market price equals contract price |
| Exemplary | Punishment of the wrongdoer | Not part of contract law, except rare listed cases | Breach of a promise to marry |
| Liquidated | A sum fixed in the contract | Section 74: reasonable compensation up to that sum | Rs 500 for each month of delay |
| Unliquidated | A sum the court assesses | Section 73 | Loss from a delayed machine |
The Act's eighteen illustrations to section 73 show the rules at work.
| Illustration | Facts in short | Result |
|---|---|---|
| (a), (c), (d), (g), (h) | Goods, a ship or a hire are not delivered, taken or paid for | The difference between the contract price and the market price at the time of delivery or breach |
| (b) | A ship does not sail, and the customer finds other transport on equal terms | Compensation for the trouble and expense of arranging it |
| (e) | A boat starts late, and the jute price falls before arrival | The difference between the price at the due arrival and the price at actual arrival |
| (f) | A repair is done, but not as contracted | The cost of making it conform to the contract |
| (i) | A carrier delays a machine, and the owner was told the mill was stopped | Average profit of the mill during the delay, but not the loss of a Government contract |
| (j), (l), (m) | The defendant knew of the resale, onward letting or onward warranty | Lost profit, rebuilding cost with rent lost and compensation paid, or the sum paid to the sub-buyer |
| (k), (o), (p), (q) | The defendant did not know of the plaintiff's third-party contract or business, or the resale was not shown to be known to him | Only the price or market difference, not the third-party compensation, resale profit (illustration (o): the market price on the due date governs), mill closure or cap profits |
| (n) | A money debt is not paid on the day, and the creditor is ruined | The principal and interest to the day of payment only |
| (r) | A ship does not sail, and the passenger loses money by arriving late | The deposit with interest, the expense of detention and the extra fare, but not the loss from arriving late |
Don't confuse: general, special, nominal and exemplary damages
The four kinds answer different questions: what is expected, what was known, what is merely symbolic, and what punishes.
| Point | General | Special | Nominal | Exemplary |
|---|---|---|---|---|
| Basis | Usual course of things | Knowledge of both parties at contracting | Right infringed, no loss | Conduct to be punished |
| Amount | The proved loss | The proved special loss | A token sum | Above the loss |
| Common in contract? | Yes | When circumstances were communicated | Occasionally | Very rare |
Inside the idea. A caterer cancels at the last moment, and the family hires another at a higher price. The extra price is general damages. If the family had told the caterer that a food critic would attend and the caterer failed, the extra loss from a bad review is special damages, because it was communicated.
Just outside it. A seller fails to deliver goods, but the market price on the due date is the same as the contract price. The buyer has no loss to recover. He gets only nominal damages, and he cannot claim the profit he might have made on a resale he never told the seller about.
Common mistakes
- Giving exemplary damages as a normal contract remedy. Contract damages compensate and do not punish.
- Claiming special damages for a loss that the defendant was never told about.
- Forgetting that the loss must be proved. A breach alone does not give a large sum.
- Measuring damages at a date after the breach. For goods, the market price at the breach governs.
- Confusing the Act's word "compensation" with a punishment. Section 73 is about loss.
Apply it
Problem
Anand owns a rice mill in Vijayawada. He engages a transporter to deliver a replacement motor to the mill by 1 March. He tells the transporter that the mill is stopped for want of the motor. The transporter delivers on 11 March. Anand claims Rs 40,000 for hiring a substitute motor and Rs 8 lakh for a big export order that he lost because the mill was idle. Anand never mentioned any export order. What can he recover?
Issue. Which of Anand's losses are recoverable under section 73?
Rule. Compensation is given for loss that arose naturally in the usual course of things from the breach, or that the parties knew to be likely when they made the contract. It is not given for remote and indirect loss (section 73). The means of remedying the inconvenience must be taken into account (Explanation).
Application. The cost of hiring a substitute motor, and the ordinary profits lost through the delay in a mill, are natural results of delay in delivering a motor to a mill. The transporter was told that the mill was stopped for want of the motor. The Rs 8 lakh export order was a special circumstance that Anand never mentioned, so it is outside both limbs (Hadley v. Baxendale; illustration (i)). Rs 40,000 is recoverable if the hire was reasonable and in mitigation.
Conclusion. Anand can recover the reasonable cost of the substitute motor and the ordinary profits that the mill lost through the delay, if he proves them. He cannot recover the Rs 8 lakh export order loss.
Leading case laws
- Hadley v. Baxendale (1854)
Facts. The crank shaft of a Gloucester steam mill broke. The mill owners sent it by carrier to Greenwich as a pattern for a new one. The carrier delayed delivery by neglect, and the mill lost profits. (1854) 9 Exch 341.
Principle. Damages are those that arise naturally from the breach, or that both parties reasonably contemplated as its probable result when they made the contract. Special circumstances count only if they were communicated.
Why it matters. It is the source of the rule on remote loss in section 73.
- Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. (1949)
Facts. A boiler for a laundry was delivered five months late. The laundry claimed its ordinary lost profits and the profits of exceptional Government dyeing contracts. [1949] 2 KB 528.
Principle. The ordinary profits were recoverable. The profits of the special contracts were recoverable only if the supplier knew of them when contracting.
Why it matters. It applies the Hadley limbs to a business loss.
- C. Czarnikow Ltd. v. Koufos (The Heron II) (1967)
Facts. The Heron II carried 3,000 tons of sugar to Basra and arrived nine days late. The price of sugar had fallen by then. [1969] 1 AC 350.
Principle. The House of Lords held that the test of remoteness in contract is whether the loss was "not unlikely" to result from the breach. This needs a probability much less than an even chance.
Why it matters. It states the degree of likelihood needed under the second limb.
- Karsandas H. Thacker v. Saran Engineering Co. (1965)
Facts. A seller promised 200 tons of scrap iron at Rs 100 a ton and said in January 1953 that he could not deliver. The buyer had separately contracted to sell the iron to a third party. AIR 1965 SC 1981.
Principle. The seller was not liable for what the buyer had to pay the third party, because it had not been communicated. The buyer proved no loss on the market price.
Why it matters. It applies section 73 to remote loss and to the measure of damages.
- Jamal v. Moolla Dawood, Sons & Co. (1915)
Facts. A seller of 23,500 shares sued buyers who failed to take them on 30 December 1911, when the shares had fallen in value. The Privy Council decided the appeal in 1915. AIR 1915 PC 48.
Principle. The measure is the difference between the contract price and the market price on the date of breach. A claimant must take reasonable steps to reduce the loss.
Why it matters. It fixes the time at which the loss is measured.
- Fateh Chand v. Balkishan Dass (1963)
Facts. A seller claimed to forfeit Rs 25,000 paid under an agreement to sell a Delhi house. He proved no loss from the breach apart from being kept out of possession, for which mesne profits were awarded separately. AIR 1963 SC 1405.
Principle. The Court held that compensation for breach is to make good loss that naturally arose, or that the parties knew was likely, and that it cannot be awarded when no legal injury resulted. The seller kept only the Rs 1,000 earnest money.
Why it matters. It shows that damages need proof of loss, even where a sum is named.
How to write this answer in the exam
5-mark answer
- Define damages: money compensation for loss caused by breach (section 73).
- List the kinds: general, special, nominal, exemplary, liquidated and unliquidated.
- State the two limbs of section 73 and the rule on remote loss.
- Name Hadley v. Baxendale.
10-mark answer
- Meaning and aim of damages, with section 73.
- Each kind of damages, with an example.
- The rule in Hadley v. Baxendale and the Act's illustrations on remote loss.
- The rules for assessing damages: causation, remoteness, market price at breach, proof, mitigation.
- Indian cases: Karsandas Thacker and Fateh Chand.
- A short problem applying the rules.
Key points to remember
- Damages compensate the injured party for loss caused by the breach. They do not punish.
- Section 73 gives compensation for natural loss, and for loss that the parties knew to be likely, but not for remote and indirect loss.
- The kinds are general, special, nominal, exemplary, liquidated and unliquidated.
- Hadley v. Baxendale (1854) is the source of the two limbs of section 73.
- For goods, the usual measure is the contract price against the market price at the time of breach.
- The injured party must prove his loss and must take reasonable steps to reduce it.
Quick self-test
1. What are the two limbs of the rule in Hadley v. Baxendale?
Loss arising naturally in the usual course of things from the breach, and loss that both parties reasonably contemplated when they made the contract as the probable result of breach.
2. When can special damages be recovered?
Only if the special circumstances were known to both parties when the contract was made, so that the loss was likely to result from the breach.
3. Are exemplary damages normally awarded for breach of contract?
No. Contract damages compensate. The usual exceptions listed are breach of a promise to marry and wrongful dishonour of a trader's cheque by a bank.