Damages are a monetary compensation allowed to the injured party by the Court for the loss or injury suffered by him by the breach of a contract. The object of awarding damages for the breach of contract is to put the injured party in the same position, so far as money can do it, as if he had not been injured, i.e. in the position in which he would have been had there been performance and not breach. This is called the doctrine of restitution.
The rules relating to damages may be considered as under:
1. Damages arising naturally – Ordinary damages
When a contract has been broken, the injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach. This means that the damages must be the proximate consequence of the breach of contract. These damages are known as ordinary damages.
Example: A contracts to sell and deliver 5 tonnes of Farm Wheat to B at Rs.1000 per tonne, the price to be paid at the time of delivery. The price of wheat rises to Rs.1200 per tonne and A refuses to sell the wheat. B can claim damages at the rate of Rs.200 per tonne.
2. Damages in contemplation of the parties – Special damages
Special damages can be claimed only under the special circumstances which would result in a special loss in case of breach of a contract. Such damages, known as special damages, cannot be claimed as a matter of right.
Example: A, a builder, contracts to erect a house for B by the 1st of January, in order that B may give possession of it at that time to C to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that before the 1st January, it falls down and has to be rebuilt by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of the contract. A must make compensation to B for the cost of rebuilding the house, for the rent lost, and for the compensation made to C.
3. Vindictive or Exemplary damages
Damages for the breach of a contract are given by way of compensation for loss suffered, and not by way of punishment for wrong inflicted. Hence, ‘vindictive’ or ‘exemplary’ damages have no place in the law of contract because they are punitive (involving punishment) by nature. But in case of (a) breach of a promise to marry, and (b) dishonor of a cheque by a banker wrongfully when he possesses sufficient funds to the credit of the customer, the Court may award exemplary damages.
4. Nominal damages
Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages recoverable by him are nominal. These damages merely acknowledge that the plaintiff has proved his case and won.
Example: A firm consisting of four partners employed B for a period of two years. After six months two partners retired, the business being carried on by the other two. B declined to be employed under the continuing partners. Held, he was only entitled to nominal damages as he had suffered no loss.
5. Damages for loss of reputation
Damages for loss of reputation in case of breach of a contract are generally not recoverable. An exemption to this rule exists in the case of a banker who wrongfully refuses to honor a customer’s cheque. If the customer happens to be a tradesman, he can recover damages in respect of any loss to his trade reputation by the breach. And the rule of law is: the smaller the amount of the cheque dishonored, the larger the amount of damages awarded. But if the customer is not a tradesman, he can recover only nominal damages.
6. Damages for inconvenience and discomfort
Damages can be recovered for physical inconvenience and discomfort. The general rule in this connection is that the measure of damages is not affected by the motive or the manner of the breach.
Example: A was wrongfully dismissed in a harsh and humiliating manner by G from his employment. Held, (a) A could recover a sum representing his wages for the period of notice and the commission which he would have earned during that period; but (b) he could not recover anything for his injured feelings or for the loss sustained from the fact that his dismissal made it more difficult for him to obtain employment.
7. Mitigation of damages
It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach. He cannot claim to be compensated by the party in default for loss which he ought reasonably to have avoided. That is he cannot claim compensation for loss which is really due not to the breach, but due to his own neglect to mitigate the loss after the breach.
8. Difficulty of Assessment
Although damages which are incapable of assessment cannot be recovered, the fact that they are difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them. The Court must do its best to estimate the loss and a contingency may be taken into account.
Example: H advertised a beauty competition by which readers of certain newspapers were to select fifty ladies. He himself was to select twelve out of these fifty. The selected twelve were to be provided theatrical engagements. C was one of the fifty and by H’s breach of contract she was not present when the final section was made. Held, C was entitled to damages although it was difficult to assess them.
9. Cost of Decree
The aggrieved party is entitled, in addition to damages, to get the cost of getting the decree for damages. The cost of suit for damages is in the discretion of the Court.
10. Damages agreed upon in advance in case of breach
If a sum is specified in a contract as the amount to be paid in case of its breach, or if the contract contains any other stipulation by way of a penalty for failure to perform the obligations, the aggrieved party is entitled to receive from the party who has broken the contract, a reasonable compensation not exceeding the amount so mentioned.
Example: A contracts with B to pay Rs.1000 if he fails to pay B Rs.500 on a given day. B is entitled to recover from A such compensation not exceeding Rs.1000 as the Court considers reasonable.
Liquidated Damages and Penalty
Sometimes parties to a contract stipulate at the time of its formation that on the breach of the contract by either of them, a certain specified sum will be payable as damages. Such a sum may amount to either ‘liquidated damages’ or a ‘penalty’. ‘Liquidated damages’ represent a sum, fixed or ascertained by the parties in the contract, which is a fair and genuine pre-estimate of the probable loss that might arise as a result of the breach, if it takes place. A ‘penalty’ is a sum named in the contract at the time of its formation, which is disproportionate to the damage likely to accrue as a result of the breach. It is fixed up with a view to securing the performance of the contract.