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Damages (Contract Act)

Damages (Contract Act)
Damages (Contract Act)


The principle of damages for breach serves as a mechanism to provide compensation to the aggrieved party for the loss suffered due to the non-performance or inadequate performance of contractual obligations by the other party.

However, the assessment and awarding of damages entail meticulous examination, considering factors like remoteness of damage and the appropriate measure of damages.

Remoteness of Damage

A fundamental aspect in the determination of damages for breach of contract is the concept of remoteness of damage. While a breach of contract may lead to various consequences, liability cannot extend infinitely. The landmark case of Hadley v Baxendale (1854) laid down two rules elucidating the notion of remoteness of damage:

  1. General Damages: These damages arise naturally from the breach itself and are foreseeable by a reasonable person. They are inherent consequences that occur in the ordinary course of events.

  2. Special Damages: Special damages, on the other hand, arise from unusual circumstances specific to the plaintiff, known as special circumstances. For these damages to be recoverable, the party in breach must have been aware of these circumstances at the time of contracting.

The principle enunciated in Hadley v Baxendale was further expounded in Victoria Laundry Ltd. v Newman Industries Ltd. (1949), emphasising foreseeability as the basis for determining liability for damages.


However, the subsequent case of Heron II, Koufos v Czarnikow Ltd. (1967) reemphasized the significance of the "contemplation of the parties" in assessing damages, restoring the distinction between general and special damages.

Application of Rules in Major English Cases

Several notable English cases illustrate the application of the rules established in Hadley v Baxendale:

  • British Columbia Saw Mills v Nettleship: Lack of knowledge of special circumstances precluded recovery of special damages, where a carrier was unaware of the purpose behind transporting machinery.

  • Simpson v London & North Western Railway Co.: Liability for damages was imposed on a railway company for late delivery of goods, as the company was aware of the special circumstance - the goods were intended for an exhibition.

  • Diamond v Campbell-Jones: Damages for loss of profits were denied, as the defendants were unaware of the plaintiff's intention to convert premises into offices.


Section 73 of the Contract Act

In India, Section 73 of the Contract Act embodies the principles governing damages for breach of contract. It echoes the rule laid down in Hadley v Baxendale, stating that the party suffering from a breach is entitled to compensation for losses that naturally arose from the breach or were reasonably foreseeable by both parties at the time of contracting.

The section further emphasises that compensation shall not be awarded for remote or indirect losses. It provides clarity on the scope of recoverable damages, ensuring that compensation is commensurate with the foreseeable consequences of the breach.

Indian Cases

Several Indian cases demonstrate the application of Section 73:

Madras Railway Co. v Govinda Raifi: Damages for loss of profits due to delayed delivery were denied, as the special purpose of delivering goods for a festival was not communicated to the railway company.

Dominion of India v All India Reporter Ltd.: Recovery was allowed only for the value of lost volumes of books, as the defendant was unaware of the special circumstance rendering the entire set useless.

Union of India v Steel Stock Holder's Syndicate, Poona: Interest on blocked funds was awarded as damages for delay in delivery of goods, compensating for the loss suffered by the plaintiff.

Dwarka Das v State of M.P: Damages were awarded for loss of expected profits from a project due to improper rescission of a contract, highlighting the entitlement of the aggrieved party to claim damages beyond actual losses incurred.


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