THE INDIAN CONTRACT ACT,

1872
Principles of assessment
of damages under Contract Act
Presented by:
Ankur Gupta 80118150063
Amol Dhuri 80118150059
Nehal Thakkar 80118160046
Somesh Prasad 80118150072
Yogesh Maheshwari 80118160024
Content
Introduction Law
Chapter VI of the Consequences of Breach of Contract
Section 73
Section 74
Reasons for Disputes
Liquidity Damages
Dispute Resolution - Case
Introduction - Law
The Indian Contract Act, 1872 came into force with effect from
September 1, 1872. Till then all agreements between people
were oral and people respected all obligations arising word of
mouth. When Britishers through their traders began to enter into
agreements with Indian people, they wanted something in
writing. Therefore, they brought this Act, which was more or less
replica of its English counterpart. It is this law that forms the
substratum of mercantile law. All the transactions in the business
world (baring few exceptions) are contracts before anything
else they could be.
Chapter VI of the Consequences of Breach of
Contract
Section 73:
Compensation for loss or damage caused by breach of
contract:- When a contract has been broken, the party who
suffers by such breach is entitled to receive, from the party who
has broken the contract, compensation for any loss or damage
caused to him thereby, which naturally arose in the usual
course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result
from the breach of it.

Such compensation is not to be given for any remote and indirect

loss or damage sustained by reason of the breach.
Illustrations Section 73
A contracts to repair B's house in a certain manner, and receives
payment in advance. A repairs the house, but not according to
contract. B is entitled to recover from A the cost of making the
repairs conform to the contract.
A contracts to buy B's ship for 60,000 rupees, but breaks his
promise. A must pay to B, by way of compensation, the excess, if
any, of the contract price over the price which B can obtain for the
ship at the time of the breach of promise.
A contracts to supply B with a certain quantity of iron at a fixed
price, being a higher price than that for which A could procure and
deliver the iron. B wrongfully refuses to receive the iron. B must
pay to A, by way of compensation, the difference between the
contract price of the iron and the sum for which A could have
obtained and delivered it.
Chapter VI of the Consequences of Breach of
Contract
Section 74:
Compensation for breach of contract where penalty
stipulated for: - When a contract has been broken, if a sum is
named in the contract as the amount to be paid in case of
such breach, or if the contract contains any other
stipulation by way of penalty, the party complaining of the
breach is entitled, whether or not actual damage or loss is
proved to have been caused thereby, to receive from the
party who has broken the contract reasonable compensation
not exceeding the amount so named or, as the case may be,
the penalty stipulated for.
Illustrations Section 74
A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500
on a given day. A fails to pay B Rs. 500 on that day. B is entitled to
recover from A such compensation, not exceeding Rs. 1,000, as
the Court considers reasonable
A contracts with B that, if A practises as a surgeon within Calcutta,
he will pay B Rs. 5,000. A practises as a surgeon in Calcutta. B is
entitled to such compensation, not exceeding Rs. 5,000, as the
Court considers reasonable.
A gives a recognizance binding him in a penalty of Rs. 500 to
appear in Court on a certain day. He forfeits his recognizance. He
is liable to pay the whole penalty.
Reasons of Dispute
Disputes arise and result into claims due to various reasons in a
construction contract. They are:
1. Due to an unbalanced contract.
2. Due to causes for which owner/ employer is responsible.
3. Due to causes for which contractor is responsible.
4. Due to causes beyond the control of both sides.
 Reasons of Dispute Contd

1. Due to an unbalanced contract:

Basic structure of contract is in favor of client and loaded
against the contractor.
Risk is unilaterally transferred to one side.
Absence of Neutralization mechanism.
Progress of project is not the basis of contract.
 Reasons of Dispute Contd

2. Due to causes for which owner/ employer is responsible:

Poor site investigation by the owner at the pre-tender stage.
Delay in acquisition of land and delay in handing over the site to contractors in time,
including non-availability of sufficient work-fronts during the execution of the project.
Delay in issue of drawings by the owner.
Delay in issue of owner issue materials by the client.
Delay in releasing payments leading to cash-flow problems to the contractors.
Non-fulfillment of contractual obligations.
 Reasons of Dispute Contd

3. Due to causes for which contractor is responsible:

Poor rates quoted for a few or several or all items.
Managerial problems of the contractor.
Strikes, militancy of the labour, and other labour related problems in the contractors
organization.
Lockout by contractors.
Delay in mobilizing the required resources in time.
Reasons of Dispute Contd

4. Due to causes beyond the control of both sides:

Force majeure conditions like heavy rains, floods, snow, landslides,
earthquake, etc.
Political problems, riots, bandhs, etc.
Health hazards and non-availability of medical facilities.
Engineering and technical problems not previously understood.
Inter-state disputes.
Obstruction by mafia-gangs.
Law and order problems
Local problems
Non availability of construction materials (cement, steel pipes, CGI
sheets) in the market.
Non-availability of appropriate and adequate labour Pre & Post
Liquidated Damages - Applicability and Enforceability

In all contracts, whether commercial or construction contracts,

breach often occurs due to failure of one contracting party to fulfill
its contractual obligations. In law the party, which commits breach
of contract, is required to pay damages to the other party.
Such damages are calculated on the basis of legal principles
enacted in the statute or the party are also at liberty to provide in
there contract that in case of non performance or delayed
performance the party in default shall pay a fixed sum called
liquidated damages the amount of which may be calculated
either as a lump-sum or on a scale varying with the length of
default.
Liquidated Damages - Applicability and Enforceability Contd

The Honble Supreme Court recently in the case ONGC Vs SAW

PIPES LTD. (JT 2003 (4) SC 171, after considering the judgements
of Maula Bux (1970 (1) SCR 929), Fateh Chand vs Balkishan Das
( 1964 (1) SCR 515) laid down the following propositions of law
with regard to liquidated damages..
1. Terms of the contract are required to be taken into
consideration before arriving at the conclusion whether the
party claiming damages is entitled to the same.
2. If the terms are clear and unambiguous stipulating the
liquidated damages in case of the breach of the contract unless
it is held that such estimate of damages/compensation is
unreasonable or is by way of penalty, partly who has
committed the breach is required to pay such compensation
and that is what is provided in Section 73 of the Contract Act.
Liquidated Damages - Applicability and Enforceability Contd

3. Section 74 is to be read along with Section 73 and, therefore, in

every case of breach of contract, the person aggrieved by the
breach is not required to prove actual loss or damage suffered
by him before he can claim a decree. The Court is competent to
award reasonable compensation in case of breach even if no
actual damage is proved to have been suffered in
consequences of the breach of a contract
4. In some contracts, it would be impossible for the court to
assess the compensation arising from breach and if the
compensation contemplated is not by way of penalty or
unreasonable, court can award the same if it is genuine pre-
Thisestimate
judgementbyof the parties Supreme
the Honble as the Court
measure of reasonable
has summarized the
compensation
law relating to liquidated damages in a very concise manner
Special Damages

Special damages refer to damages incurred under unusual circumstances and

cannot be recovered unless special circumstances are brought to the knowledge of
the other party.
Special damages are a specifictype of Damagesavailable for breach of contract.
Indirect Damages : Special damages may be awarded to reimburse the non-
breaching party for damages that indirectly connected to the breach
Special damages are often requested in addition to general damages.
Also Termed as consequential damages. Special damages are the
consequence of a contractual breach, though they might not have been directly
caused by thebreach of contract.
Special damages cover most losses that are not remedied through a general
damages award.
Losses that flow from a breach may include:
Loss of profits, business opportunities, or contacts , Damage or harm to business
reputation (Goodwill)
Special Damages
For example, suppose that two parties enter into a contract for the sale of a
painting worth $5,000 and the buyer intended to re-sell the painting at
$6,000. If the seller breaches the contract by selling the painting to a
different buyer, the non-breaching party may be entitled to special
damages.Which would be equal $1,000 ($6,000-$5,000), which is the
amount of profit that the buyer would have gained through the resale.

Entitled to Special Damages?

Special damages must be specifically requested during filing.
Foreseeable: The losses must be reasonably foreseeable or within the
contemplation of the parties at the time the contract was formed.
Flowing from the Breach :However, there should be some causal
connection between the losses and the breach.
Calculable: Since special damages cover losses not provided for in the
contract terms, it can be difficult to calculate the amount. It may be difficult
to determine how much one has lost due to a damaged business reputation.
Indirect Damages (Loss of Profits)
Let us consider the following example. A delivers to B, a
courier company, a machine to be delivered overnight to As
factory. B does not deliver the machine on time, and A, in
consequence, loses a profitable contract with the Government.
A is entitled to receive from B, by way of compensation, the
average amount of profit which would have been made by the
working of the factory during the time that delivery of it was
delayed, but not the loss sustained through the loss of the
Government contract.
 Dispute Resolution - Case
Contractor A has constructed XYZ Highway for Highway
Authority
During the execution of the contract, A have to cut the trees
and excavate the roots from earth
The quantum of this item was more than the anticipation and
specification of the contract
So after completion of the activity, A lodged the claim
regarding the root removal and back filing
The arbitrators were appointed and AT passed the Award in
favor of Contractor A
Highway Authority challenged the Award before the High
 Dispute Resolution - Case Contd

The application was dismissed by the Single Bench of Delhi

High Court
Subsequently Highway Authority challenged the Order of
Single Bench before the Division Bench of High Court u/s
section 37 of Arbitration Act
The application u/s 37 was dismissed by Division Bench of
Delhi High Court
Meanwhile A have filed the Execution Petition before the
High Court of Delhi
Later Highway Authority filed the Special Leave Petition
before the Supreme Court of India against the order/judgment
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