Restitutionary Damages Vs Compensatory Damages: Analysis

Coverage of this Article

KEY TAKEAWAYS

Madras High Court explains the difference between compensatory damages and restitutionary damages.

INTRODUCTION

-A contract is a legally enforceable agreement which is created between two or more parties creating legal obligations. When there is any breach of contract, the aggrieved party is entitled to damages. These damages may be restitutionary or compensatory.

REMEDIES FOR BREACH OF CONTRACT

-Breach of contract is dealt with under Section 39 of the Indian Contract Act 1872. Breach of contract refers to a situation where one of the parties refuses or fails to perform its contractual obligations. Section 39 of the Indian Contract Act states that when a party refuses or disables itself from performing its promise, then it is known as breach of contract except unless the party, by conduct or words, expresses his acquiescence in its continuance.

STATUTORY PROVISIONS RELATING TO DAMAGES

-The Indian Contract Act is the primary statute in India which deals with the contractual obligations, breach of contracts and its consequences, etc.

RECENT MADRAS HIGH COURT JUDGMENT

-In the case of E-merge Tech Global Services P Ltd. v. Mr M.R.Vindhyasagar & Anr., the plaintiff company had moved the High Court against its former employee for violation of non-disclosure and non-compete agreements.

DOCTRINE OF RESTITUTION WHEN NOT APPLICABLE

-In certain cases, the doctrine of restitution may not be applicable. In cases where the contract was void ab initio, or where the contract provided for the performance of an impossible task or where the contract was entered into by two incompetent persons, the doctrine of restitution will not come into play.

CONCLUSION

-The primary purpose of damages is not to punish the defaulting party, but to redress the grievances of the aggrieved party by putting him in the same condition as existed prior to the contract.

KEY TAKEAWAYS

• Madras High Court explains the difference between compensatory damages and restitutionary damages.
• The Court held that an employee is bound by the confidentiality clauses even after the employment is terminated. However, non-compete clauses cannot be enforced against the employee after he has left the employment.
• The Court shall award restitutionary damages only in exceptional cases where compensatory damages cannot be determined in the normal course of things.
• The court held that restitutionary damages and compensatory damages are alternates of each other and the plaintiff may be awarded either compensatory damages or restitutionary damages

INTRODUCTION

A contract is a legally enforceable agreement which is created between two or more parties creating legal obligations. When there is any breach of contract, the aggrieved party is entitled to damages. These damages may be restitutionary or compensatory.

The compensatory damages are awarded in accordance with the loss suffered by the plaintiff while the restitutionary damages are decided with respect to the gains undertaken by the defendant. Restitution is aimed at preventing unjust enrichment of the defaulting party at the expense of the aggrieved party.

The plaintiff is entitled to only reasonable losses arising out of the breach of contract. Such losses must be reasonably foreseeable and must be contemplated by the parties at the time of entering into the contract. Furthermore, the losses must be the natural and proximate consequences of the breach of contract. Natural and proximate consequences are those which can be reasonably foreseen by a natural prudent man. Where the loss is a remote consequence of the breach of contract, the plaintiff cannot claim damage for the same.

REMEDIES FOR BREACH OF CONTRACT

Breach of contract is dealt with under Section 39 of the Indian Contract Act 1872. Breach of contract refers to a situation where one of the parties refuses or fails to perform its contractual obligations. Section 39 of the Indian Contract Act states that when a party refuses or disables itself from performing its promise, then it is known as breach of contract except unless the party, by conduct or words, expresses his acquiescence in its continuance.

Where a contract is breached, the aggrieved party is entitled to certain remedies. There are various types of remedies that may be claimed by the aggrieved party.

Firstly, certain damages may be awarded to the aggrieved party to cover the losses suffered. The aggrieved party may claim liquidated or unliquidated damages. Liquidated damages refer to such an amount which the parties agree to pay in the event of any breach of contract. This amount is specified in the contract itself. Unliquidated damages are those which are determined by a Court.

Secondly, the aggrieved party may plead for the specific performance of the contract. Under this remedy, the Court may order the defaulting party to fulfil its contractual obligations.

Thirdly, the aggrieved party may also plead for an injunction order restraining the other party from performing a particular act. An injunction order is granted by the Court restraining the defendant from doing something which he promised not to do.

Fourthly, the aggrieved party may also plead for quantum meruit. Quantum meruit refers to a reasonable remuneration that is paid to the aggrieved party for the part of the contract that is performed by the aggrieved party.

STATUTORY PROVISIONS RELATING TO DAMAGES

The Indian Contract Act is the primary statute in India which deals with the contractual obligations, breach of contracts and its consequences, etc. There are several types of damages such as nominal damages, compensatory damages, special damages, etc. Section 73 of the Indian Contract Act deals with the grant of damages. The damages stipulated under Section 73 are compensatory in nature. The Section does not provide for penal damages. Furthermore, the Section also provides that the defaulting party must also take all reasonable steps to mitigate the losses arising out of the breach of contract.

Under Section 73, a party is entitled to such damages which arise in the natural course of things due to the breach of contract and which could be reasonably contemplated by the parties at the time of entering into contract. Furthermore, the loss suffered by the aggrieved party must be a proximate and not remote consequence of the breach of contract. The Court, while deciding the quantum of damages under this Section, must also take into consideration the inconvenience caused to the aggrieved party due to the non-performance of the contract. Under Section 73, such inconvenience must also be remedied.

In the case of Hadley v. Baxendale (1854) 9 Ex. 354, the Court held that in the event of a breach of contract, the aggrieved party is entitled to such fair and reasonable compensation as may have been reasonably contemplated by the parties at the time of entering into the contract.

The Supreme Court, in the case of Mahanagar Telephone Nigam Ltd. v. TATA Communications Ltd., held that damages arising out of breach of contract are to be treated separately from the damages arising out of obligations resembling those created by the contract

Liquidated damages are dealt with under Section 74 of the Indian Contract Act. Where the concerned contract provides that in the event of any breach, a predetermined sum or penalty will have to be paid by the defaulting party to the other party, then the defaulting party will be liable to pay such penalty or sum to the other party irrespective of whether any actual loss is suffered by the aggrieved party or not.

The Supreme Court in the case of Kailash Nath Associates v. DDA, (2015) 4 SCC 136, held that damage of loss is sine qua non for the applicability of Section 74 of the Indian Contract Act. The Court also explained the expression “whether or not actual damage or loss is proved to have been caused thereby” and stated that it means "that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded".

Section 73 and 74 of the Indian Contract Act provide the remedy of damages in the event of any breach of contract. However, the quantum of damages depends on the discretion of the Courts.

Furthermore, under Section 75 of the Indian Contract Act, a party that rightfully rescinds a contract is entitled to damages that may have been borne by the party due to non-fulfilment of the contract.

The basic objective of granting damages is to place the aggrieved party in the same place as it would have been had the breach of contract not occurred. The appropriate damages have to be decided on a case-to case-basis in accordance with the facts and circumstances of the case. The plaintiff has the burden to prove that a breach of contract has taken place and that he has suffered a loss due to such breach.

However, in certain cases, merely awarding damages to cover the loss suffered by the plaintiff is not considered to be complete justice. In such cases, the Courts have the authority to take into consideration the gains made by the wrongdoer due to the breach of contract. In some instances, the plaintiff may even be given an option to choose between the compensatory damages or an account of profits.

Section 65 of the Indian Contract Act stipulates the doctrine of restitution. Section 65 comes into play only when a contract is rendered void at a subsequent stage. In the case of Kujiu Collieries limited v/s Jharkhand mines ltd 1974 AIR 1892, the Court held that where an agreement is rendered void at a subsequent stage, the advantageous party would be liable to provide damages to the aggrieved party.

However, where a contract was void ab initio, the doctrine of restitution contemplated under Section 65 would not come into play. The same was held by the Delhi High Court in the case of Bank of Rajasthan Ltd v/s Sh Pala Ram Gupta AIR 2001 Delhi 58

RECENT MADRAS HIGH COURT JUDGMENT

Recently, the Madras High Court, while dealing with a case of breach of contract, explained the difference between restitutionary damages and compensatory damages. The Court also explained the circumstances under which restitutionary damages may be awarded to a party.

In the case of E-merge Tech Global Services P Ltd. v. Mr M.R.Vindhyasagar & Anr., the plaintiff company had moved the High Court against its former employee for violation of non-disclosure and non-compete agreements. The Court held that the employee had violated the non-disclosure clauses of the agreement. The Court held that an employee is bound by the confidentiality clauses even after the employment is terminated. With regards to the non-compete clauses, the Court held that the same cannot be enforced against the employee after he has left the employment.

The Court explained that the objective of compensatory damages is to redress the loss suffered by the aggrieved party. Restitutionary damages, on the other hand, are aimed at ensuring fair distribution of the gains made by the defendant at the expense of the aggrieved party. The Court pointed out that compensatory damages can be awarded only when the damages are identifiable in the normal process. The Court further explained that there are always certain difficulties in computing the adequate amount of compensatory damages.

Where the Court is unable to adequately compute the compensatory damages in such a manner that the amount of compensatory damages would place the aggrieved party in the same position as if the contract would have not been breached, the Court is empowered to award restitutionary damages to the plaintiff.

The Madras High Court relied on the English Case of One Step (Support) Limited v Morris-Garner (2018), where the Supreme Court of England had held that where the pecuniary loss can be identified by the normal and conventional methods, compensatory damages must be awarded. Thus, the High Court held that where the damages can be ascertained in the normal way, there is no need to award restitutionary damages.

Furthermore, the Court relied on State of Kerala v. K. Bhaskaran, AIR 1985 Ker 49 and held that the liability under Section 73 of the Indian is restricted only to reasonable expenses. The High Court held that normally, the damages must be determined with respect to the loss suffered by the aggrieved party and not in accordance with the gains made by the breaching party.

The Court explained that only in exceptional cases shall the Court award restitutionary damages. While determining the restitutionary damages, the account of profits is made which is followed by disgorgement of the concerned profits. Thus, the focus in restitutionary damages shifts from losses suffered by the aggrieved party to the gains made by the other party due to the alleged breach.

The Court held that since there was a legitimate basis, in the instant case, to arrive at the amount of damages, there was nothing exceptional in the case and hence there was no need to award restitutionary damages.

Lastly, the court held that restitutionary damages and compensatory damages are alternates of each other and the plaintiff may be awarded either compensatory damages or restitutionary damages.

DOCTRINE OF RESTITUTION WHEN NOT APPLICABLE

In certain cases, the doctrine of restitution may not be applicable. In cases where the contract was void ab initio, or where the contract provided for the performance of an impossible task or where the contract was entered into by two incompetent persons, the doctrine of restitution will not come into play.

CONCLUSION

The primary purpose of damages is not to punish the defaulting party, but to redress the grievances of the aggrieved party by putting him in the same condition as existed prior to the contract.

The Court has rightly held that where compensatory damages can be determined in the normal course, there is no need to award restitutionary damages. Furthermore, the aggrieved party cannot claim both restitutionary and compensatory damages. If both damages were to be awarded to the aggrieved party, then it would result in arbitrary damages.