Compensation for breach of contract

A brief note on Compensation for breach of contract

Unlike in England, a party faced with breach of contract in India is not compelled to prove the extent of the loss or damage suffered by him in fact or actually. However, if he proves it, that will certainly help the Court to arrive at the proper compensation. Even if he fails to prove it, court cannot throw out his case on that ground, but must proceed to assess reasonable compensation which is to be awarded to him, on the materials before the Court and subject to the limit of the amount stipulated in the contract. What Section 74 dispenses is the basic condition of the breach resulting in any loss or damage which can be called "legal injury". The interpretation canvassed by the appellants would go against the legislative purpose in using the word "compensation" in all the three sections, viz., Sections 73, 74 and 75 of Chapter VI of The Indian Contract Act, 1872. One cannot compensate a person, who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage. Section 74 of the Act exempts him from such responsibility and enables him to claim compensation in spite of his failure to prove the actual extent of the loss or damage provided of course he establishes the basic requirement for award of "compensation", viz.. the fact that he has suffered some loss or damage. The proof of this basic requirement is not dispensed with by Section 74 of the Act.

Kerala High Court refer the decision reported in Fateh Chand v. Balkishan Dass, (1964) 1 SCR 515 : (AIR 1963 SC 1405), Shah, J. speaking for the Court explained the background of Section 74 of the Act thus (at pp. 1410-11 of AIR):

"The section is clearly an attempt to eliminate the somewhat elaborate refinement made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties; a stipulation in a contract in terrorem is a penally and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations miming amount to be paid in case of breach and stipulations by way of penalty."

The scope of Section 74 has been explained by Shah, J. (as he then was) in the following manner at pages 526 and 527 (of SCR): (at p. 1411 of AIR):

"Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases

(i) where the contract names a sum to be paid in case of breach and

(ii) where the contract contains any other stipulation by way of penalty.

We are in the present case not concerned to decide whether a contract containing or covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Sec. 74 reasonable compensation not exceeding the penalty stipulated for. In as-tessing 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. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss of damage"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss of damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach. In Maula Bux v. Union of India, (AIR 1970 SC 1955) again speaking for another Bench of the Court. Shah, Ag. C. J. stated:

" . .. .. Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused there by (tm) is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, white in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him,"