Damages are basically compensation payable to aggrieved person/party for breach of contract by other person/party and loss suffered thereby.

In commercial arena, there are numerous contracts which contain provisions for compensation and/or damages and/or penalty payable for breach of Contract.

Under Indian Law, in particular under Indian Contract Act, 1882 (Contract Act) penalty in not recoverable and hence clauses drafted in the nature of penalty are redundant.

With respect to compensation or what is popularly known as “Damages”, the same may be quantified or unquantified. Hence there are two kinds of Damages:-

  1. The quantified damages or legally termed as “Liquidated Damages” means where contract specifies amount of money payable as Damages or provides a method for computation of the same.
  2. The unquantified damages or legally termed as “Unliquidated Damages” means where contract does not specify amount of Damages nor provides method for computation of the same.

THE ESSENTIAL CONDITIONS TO BE SATISFIED FOR AWARD OF DAMAGES:-

  1. There has to be breach of Contract; and
  2. There has to be loss suffered due to such breach; and
  3. The party aggrieved shall take reasonable steps to mitigate losses.

IMPORTANT LEGAL PRINCIPLES:-

*In case of liquidated damages, the court in no circumstances award amount bigger than amount specified in contract.

*Even if there is breach of contract but no loss is suffered by party, no damages can be awarded by Courts.

*If party aggrieved does not take reasonable steps to mitigate losses, then such party is not entitled to damages to the extent loss suffered due to such neglect.

MYTHS ABOUT DAMAGES UNMASKED:-

  1. In India as per jurisprudence evolved from equitable English doctrines, Damages are in the nature of compensation for loss suffered due to breach of contract to restore the party aggrieved in so far as possible to same position as existed prior to breach. Damages are not “debt” due and payable in present and also does not create an obligation in “presaenti”.
  2. There is no qualitative difference between Liquidated and Unliquidated Damages. Only in case of Liquidated Damages, the outer limit of damages is specified. The essential conditions to be satisfied for awarding of damages are the same.
  3. Damages have to be sealed with “fiat” of a decree of a court to become a debt payable under the eyes of law.
  4. Hence the same cannot be claimed to be payable until Court of Competent Jurisdiction (“Civil Court”) adjudicates it and hence cannot be claimed as set off or counter claim to other parties claim until one sets it up as defense and allowed by court.
  5. The party claiming damages cannot deny payment on account of other transactions or invoices on the basis of claim for damages under other transactions.

* The same is irrespective of the clauses of the contract as no contract can override the provisions of law.

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Devul Dighe is a practising advocate appearing for Resolution Professionals and other Professionals in National Company Law Tribunals. Mr. Dighe also handles Insolvency Applications apart from other property, consumer, testamentary, trust matters and other commercial litigation matters. Mr. Dighe obtained his LLB as well as his LLM degree from University of Mumbai. You can reach him at advdevul@gmail.com.


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