This article was written by
and has been updated by
. The article revolves around the distinction between two types of contractual damages that are liquidated and unliquidated damages, exploring their legal implications and the advantages and disadvantages they present.
This article has been published by .
Innovation and evolution is the continuous process of this earth, and due to such process every second there is a change in one or the other thing be it the result of human action or human mind. It is also the fact that, one such result of evolution is the changes that have occurred in the law and order of the nation. Do you know why in ancient times the concept of compensatory damages was very different? Since in ancient times, there was a huge difference in geographical boundaries and general public cultural beliefs because of this such difference arose. However, in the present world, this concept is not only popular but is also very widely accepted, especially in the world of corporate’s. Hence where one individual violates his/ her promise to execute a contract, they have to provide a compensatory amount to restore the aggrieved party to their original position.
In cases where the parties have already agreed to the amount of damage to be paid when the violation of promise takes place then it is liquidated damage. Whereas, if we reverse the scenario, where the damages have occurred and the amount is yet not agreed then? Then under such circumstances the amount is agreed upon by the parties in accordance with the order of the court, such circumstances is referred to as the unliquidated damage. Hence, these are the two types of damages which can be granted by the court of law as a relief to the aggrieved party.
There are various other types of damages that an individual can claim which will be discussed in brief in upcoming sections to deliver a comprehensive view before jumping into the main differences between liquidated and unliquidated damages. Let’s first start by discussing the meaning of damages under Indian law to get better clarity over the concept.
As a legal personnel we refer damages as the punitive punishment or compensatory amount which is paid to the injured party for loss or injury caused by the wrongful act. For instance, when Zane promises to deliver Bharti certain good items but Zane fails to fulfil his promise, because of which Bharti has to suffer loss. Then under such circumstances, Bharti has the right to claim compensation for the loss she has suffered.
Now you might be wondering where you can find the usage of these concepts? You can have further read on the concepts in two statutory legislations. Those two statutory legislations are tort law and contract law. Now, under the contract law you will notice the concerns about the promise to fulfil certain obligations which have been agreed by the parties. Whereas under the law of tort, you are gonna notice the concerns that deal with the aim to bring back the party to the original situation in which they were before the happening of the incident.
Let us look at the types of damages under the Indian law to get better clarity. Since there are various types of damages covered under the provisions of the Indian Contract Act, 1872 let us understand some of them as mentioned below:
These are popularly known as “direct” or “ordinary” damages and generally arise as a result of the occurrence of an event that has occurred naturally and directly due to the non-performance of the contract. It is mainly awarded to compensate the injured party for the loss or harm that is a result of direct harm that has occurred.
It is a type of damages that has not occurred as the result of any breach of contractual terms or conditions but rather have occurred due to the occurrence of some special or unique circumstances which were pre-anticipated by both the parties at the formation of the contract.
Nominal damages are the kind of damages where the plaintiff in a lawsuit has not suffered any actual loss but his/ her legal right has been violated due to the breach of contract. The readers should know that the main motive of nominal damages is to address the concern. The concerns where the plaintiff’s rights are violated. The same further involves cases where the other party does not suffer any financial loss.
Now let’s ponder around another kind of damages which is the visa-versa of nominal damages. This kind is known as substantial damages. These are the kinds of damages which are awarded in situations where the extent of the contract breach is proved. However one should remember that only contractual breach is proved and uncertainties in regard to calculations are left to be taken into account.
Moving forward is the another kind which is aggravated damages. These are one of the types of damages, which are of compensatory nature. That is, such damages are awarded in situations where the wrongdoer has failed to perform the contract and because of which the victim party has suffered mental agony and stress.
Exemplary damages are another type, which are awarded in the circumstances where due to such failure to perform the contract the injured party has suffered the loss. And, therefore in order to compensate the injured party the wrongdoer has been asked to reimburse for such loss or may even have to face punishment. These damages are commonly known as punitive damages.
Consequential damages are the kind of damages, where the victim party has suffered the actual loss because of the failure which the other party has failed to fulfil his part of the contract.
On the other hand, incidental damages refer to the loss or the injury that the injured party has suffered due to the breach of contract.
In the case of a contract, parties might have to agree to pay a specific amount on the breach of the contract, where such provisions are provided in the contract they are popularly known as liquidated damages. Whereas as we mentioned above, unliquidated damages are generally granted by the courts. These are granted on the basis of an assessment of the loss or the injury caused to the party suffering such breach of contract.
So in simple terms we can say that the motive behind these damages is to hold the offender accountable. The wrongdoer is to be held accountable and also this will help in deterring the behaviour of the wrongdoer from happening of the event on the same lines in future. This article will majorly deal with liquidated and unliquidated damages. Moreover we will also look at the legal implications of it. Let us now take a deep dive to understand them along with case laws.
Now, let us have a deep understanding as to what is liquidated damages? These refer to the kind of damages where parties have agreed to pay a certain pre-agreed amount of money. This exact amount of money or an estimated compensation that the party has agreed to pay in case breach of contract will be the amount of compensation for the loss to the injured party. However, the reader should remember to mention the liquidated damages clause in the agreement. Such a clause should mention about the agreed amount by both the parties before the contract gets finalised. Henceforth, following this provision of law, the parties benefit from compensating the injured party without the need for lengthy legal proceedings or calculation of the amount of actual loss.
In the world full of commercial contracts the concept of liquidated damages has been of great importance as it has helped in serving a very crucial role under contract law. Furthermore it has also been supported in the circumstances where it is very difficult to quantify and measure the loss suffered by the other party in such circumstances of the breach of contract. In the upcoming section of the article, let us have a look at the legal meaning and essential of liquidated damages to get a better grasp of the content.
Let us now understand the statutory provision under of the which mentions liquidated damages.
What does the provision mention? The statutory provision mentions about the legal perspective of liquidated damages which relates to the stipulated damages. According to the same, there must be an incident of breach of the contract. Such an incident of breach of contract helps the plaintiff to claim damages. However, where there may be a reasonable revocation of the contract without any breach of the terms of the contract, there is no chance for the claim for damages to arise.
The mentioned provision speaks about the condition where the parties have agreed upon the amount of damages (compensation) and where one has to pay in case they breach the contract. However, it is also to be noted that, where the party who has been so affected due to the breach of contract should not receive compensation more than the loss so suffered.
That is to put it simply if according to the wrongdoer, the amount agreed is a bit too high than the actual loss or if the contrary the victim party is of the opinion that the loss suffered is higher than the agreed amount, then the courts of law might not consider the agreed amount and shall have a look at the case as fresh.
Let us look at the below mentioned representation of Section 74 to understand the steps involved:
Section 74
Contract comes into being
↓
The contract mentions the pre-agreed amount as compensation or penalty that would be generated in the event of a breach of the contract
↓
Breach of Contract
↓
Compensation is to be paid by the party who failed to perform the contract, however, it is to be noted that such compensation shall be appropriate and not more than the amount of damages as determined in the clause of the contract.
The general concept of damages is ideally to claim and get awarded in order to restore the plaintiff’s situation in which he/ she would have been if the breach had not occurred. Such damages are ideally being claimed from the party that causes such breach of contract.
Under the circumstances where the clause for the liquidated damages under Section 74 has been mentioned, both the victim party and the defendant have the chance to present their own claims. But readers should also remember that where the claim for liquidated damages is already pre-decided, under such circumstances there can not be more possibility of compensation assurance. Therefore, in such scenarios, it would be expected that since the risks of a party causing a breach would be lower, damages are already determined.
Nevertheless, it is worth mentioning that even though the concept of liquidated damages guarantees a fixed monetary amount as a form of compensation. It can also raise the doubt of possibility that either the injured party has the belief that the liquidated damages are not appropriate or even the breaching party may believe that the damages are unreasonably high. Therefore, if you think if you are stuck under such circumstances, the court of law may not allow liquidated damages if the mentioned amount is unreasonably high or is contrary to public policy.
You can claim liquidated only after the following conditions are satisfied:
The agreement you have entered, which has its provision mentioned under the clause of of the Indian Contract Act, 1872. Also, one must also be aware that the contract must be valid and supported by lawful consideration and also must be freely signed by both parties. Since the agreements which are not enforceable by law, are termed as void as mentioned under .
Moving towards the next pointer would be that to claim damages there should be mandatory breach of one or the other contract condition. Therefore, no matter how much profit one tries to claim out of the claimed damages, there will be no award unless the breach of contract is proven. And additionally, the party who is responsible for such breach of contract would be held liable to compensate or the claimed damages. Further in order to prove a breach the same must be adjudicated and be proven and not merely decided by the parties.
For the purpose of claiming damages, in the circumstances where one party has voluntarily expressed their failure to perform the anticipated contractual obligation. However, here this information should have been expressed before the actual performance of the obligation. Then in such a case the other party still has the option to seek damages. However, under such circumstances the other party is needed to prove that there was the intention to continue the agreement before terminating the same.
It is worth mentioning that the clause “whether or not actual damage or loss is proven to have been caused by it” would not dispense with the establishment of proof in toto for a claim of liquidated damages. This helps us to understand that the reasonable compensation agreed upon as liquidated damages in case of breach of contract is in respect of some loss or injury; thus, the existence of loss or injury is indispensable for such claim of liquidated damages.
There must be a causal link between the breach committed and the loss or injury suffered for a claim of damages and attaching liability. This causal link is said to have been created if the defendant’s act of infringement of the contract is the only “real and effective” cause of the injury or damage for which damages are claimed. Moreover, in this case the “dominant and effective” cause is to be taken into consideration in the presence of multiple causes.
Where a party is injured due to the breach of contract, may tend to recover only those damages which either “should reasonably be considered as occurring normally or naturally. Further, that is in accordance with the regular course of events” from the breach, or “should reasonably have been considered by both parties at the time they entered into the contract, as the likely result of the breach thereof.”
It is very important to mention that if you claim any damages on breach of a contract which ought to have been performed or was ready to perform the required part of the contract. Therefore it will be your duty to mitigate the losses before claiming damages.
In the current , the plaintiff has entered into two different contracts with the Government. Out of two, one was for supplying vegetables and the other for poultry eggs. Therefore as a part of the contract Maula Bux the plaintiff had to also deposit a specific amount of security to the government for the performance of the contract. However, he made some defaults while performing his part of the obligation, which resulted in the rescinding of the contract. The Union of India Post claims the right to rescind the contract and to also to forfeit the security deposit. The main concern here was raised in regard to the breach of contract and the forfeiture of the amount of the security deposit made by Maula Bux (contractor).
The matter thereby went to trial court, where they ruled in favour of Maula Bux, stating that the government was wrong in forfeiting the deposit, since, they have failed in proving the actual loss suffered due to such loss. The court further emphasised the amount deposited was not earnest money but rather security for performance. The Allahabad High Court while disallowing the plaintiff’s case held that the plaintiff was not entitled to any interest and awarded interest at 3% on the claim amount, as no contractual or statutory basis for higher interest was established.
Disagreeing with the decision the plaintiff thereby approached the Hon’ble Supreme Court, where it was held that the forfeiture of the deposit should not exceed rational compensation for the breach. And since, in the present case at hand, the court found that the government has failed to prove the actual loss suffered, therefore the action by the government for the forfeiture of the security amount was considered unjust.
In the present , there was a contractual agreement between the State of Karnataka and Shri Rameshwara Rice Mills for the supply of paddy. The mentioned terms and conditions of the agreement particularly states the consequences for the breach of contract, as per which “any amount that may become due or payable by the first party to the second party under any part of the agreement, shall be deemed to be and may be recovered from the first party as if they were arrears of land revenue”.
The State later claimed that the Rice Mill had failed to perform the contract by making short delivery of rice and had thereby breached its part of the obligation under the said contract. Because of such breach, the State filed a claim under the in order to recover the amount under the arrears of the land revenue.
The Rice Mills therefore filed the suit to challenge the proceeding stating that it is illegal and asked for a permanent injunction so as to restrain the State from pursuing the recovery proceedings. It was further argued by the respondent that the damages arose from the breach of contract and the same is not directly related to land revenue or taxes.
The matter therefore was listed before the Trial Court which had dismissed the appeal post that the matter was later listed before the Appellate Court and post that the High Court where the Full Bench was of the view that the State is not entitled to recover damages under the arrears of land revenue. The court stated that, as the damages for breach of conditions will not amount to “money due under the contract”.
Unhappy from the court’s orders the case was transferred to the Supreme Court, where it was held by the Hon’ble Supreme Court that it was unjustified to recover damages for the contract as arrears of land. Furthermore, in this case while talking about the liquidated damages the court considered it to be a predetermined law. The court here held that it should only be deemed as the predetermined loss and should not be taken into account as a punishment for the breaching party.
Moreover, as stated by the court that to claim liquidated damages the concerned party has to prove the occurrence of loss. And also that they have to suffer from such loss due to the breach of contract. And hence it was concluded that to claim amount here is just and reasonable to reinstate the victim party in their original position as they would have been had their no breach occurred.
In the mentioned , the plaintiff M/S Kailash Nath Associates took active participation in the public auction which was held by the Delhi Development Authority (DDA) for one of the piece of land. The stated rules for the auction states that the higher bidder needs to pay 25% as the earnest money. However, due to the sudden break of economic recession, the appellant M/S Kailash Nath was not able to pay the amount and sought an extension for the payment, which was also granted by the DDA. But even after multiple attempts for the extension DDA authorities eventually cancelled the allotment and also forfeited the earnest money.
It was therefore argued by the Kailash Nath Associates that DDA has not suffered any actual loss and therefore the forfeiture of the amount was unreasonable. It was further held that the forfeiture of the amount by DDA was unjustified. The Hon’ble Supreme Court furthermore emphasised that for the liquidated damages to be valid there must be a breach of contract by the defaulting party and the victim party must have suffered actual loss due to such breach.
Since every coin has two sides, let us look at both the pros as well as the cons of the concept of liquidated damages.
Lets first understand the importance of liquidated damages. The mentioning the clause of liquidated damages can be beneficial for both owners and operators. If you pre-determine the amount of damages that the other party may claim, then it can allow you to delineate your risks. It can also help in minimisation of the time, cost, and risk of litigating issues pertaining to the other party entitlement and value of his / her claim for loss of profits. The owners therefore can also use their negotiating power to limit the amount of damage payable to the operator to one or more years of lost profits.
Even if the liquidated damages have their own positive pointers, there are certain negative aspects as well related to the same. Since the amount mentioned for the compensation in the case of breach must be a reasonable ask the courts therefore have jurisdiction to reduce the disproportionate or punitive amounts (if any).
Also, in order to avoid having the recovery reduced, the non-breaching party may reduce their damages. Further, the major point to be noted here is that even though liquidated damages clauses help in reducing litigation burden. It is because they require proof of actual loss and leave room for judicial interpretation their enforcement may become more difficult.
Now it’s time to understand the concept of unliquidated damages under the Indian Contract Act, 1872. Unliquidated damages are the kind of damages which occur in cases where the liquidated clause is not specifically mentioned during the formation of such contract. Therefore in such circumstances where the breach occurs, the matter may directly be forwarded to the court of law.
Here the court will further decide based on the actual loss or the injury that the other party had suffered due to the breach, whereas under liquidated damages the parties have to agree on the pre-approved amount of compensation to be recovered from the other party. This part of the article basically deals with unliquidated damages and its legal implications.
The meaning of unliquidated damages as per law is discussed here. So as per the provision of of the Indian Contract Act which states the law on unliquidated damages according to which in the event of any breach of contract, the aggrieved has the right to receive compensation for the loss or injury so suffered by the victim party. However, it is to be emphasised that such loss must have occurred naturally or within the scope of both parties while forming the contract.
Hence it can be said that the statute deals with the actual damages resulting from the infringement of the contract. Also, the injury arising from such a breach is in the nature of unliquidated damages. It is because the damages are granted by the courts on the basis of the evaluation of the loss or injury caused to the party against which the infringement occurred.
Herein the steps involved as per Section 73 are represented to get an easier grasp of the concept. Let us take a look at the steps involved:
Section 73
↓
Contract comes into being
↓
Breach of Contract
↓
Loss or damage as a consequence of this breach
↓
The loss or the damages should have arisen from the circumstances that were foreseeable by the parties or should be of the nature that it resulted due to the natural course of events
↓
In case of breach, the wrongdoer has to pay compensation
Further, below mentioned are the key pointers to be remembered about liquidated damages, do give them a good read:
Let us analyse the working of the unliquidated damages. The provision of unliquidated damages is the kind of damages that are claimed for any unforeseeable loss or where there is no mention of a liquidated damages clause in the agreement. In such situations where there has been no contractual violation, such types of damages are being awarded. But, since the amount of damages is not predetermined this may also lead to long legal proceedings for determining the amount of damages one should receive in order to serve justice.
Therefore in order to avoid long proceedings big industries like that of engineering and construction companies generally deal with the liquidated damages.
In order to award unliquidated damages the court of law generally follows a compensatory approach:
It is therefore important to note that the losses incurred by the plaintiff must be the result of natural consequences for the breach of contract, which has to be taken into consideration while determining the compensation.
It is also very important for one to disclose all the facts or specific details relating to the work about the unusual losses, since, if in any instance, it is found that the other party was aware of the possibility of damages that could have arisen from a breach of contract. But if he/she has voluntarily chosen not to disclose such important information and or to take the necessary precautions to mitigate those damages. Then under such circumstances the court will only compensate for the loss that would have been incurred had those safety precautions been taken. When taking reasonable precautions could have stopped or minimise losses the plaintiff cannot let them accumulate.
It is essential for both the parties to clearly mention their objectives in the contract. Mentioning the same would also help both the parties in preventing all the feuds and ambivalence caused by confusion and ambiguity. In general, if in the contract “NIL” is mentioned for liquidated damages for those who do not wish to claim it. This can also be interpreted as unliquidated damages are also not applicable.
Let us first have a brief understanding of the upside i.e. benefit that both the parties can have because of the mentioning of the clause of unliquidated damages. It can help the victim party in recovering the losses that were not predicted or might be difficult to calculate prior to the breach of contract. On the other side of the party i.e. the injured party should also be ready to present proof of their real loss which they have incurred at the time of the occurrence of the incident. Moreover, the victim party might also have to prove that the losses which are not “remote” but rather are the natural outcome of the breach of contract.
However, do you know that even though the provision of mentioning unliquidated damages has its own upside, it might also be disadvantageous in certain circumstances. As such, type of damages can cause issues between both the parties i.e. the victim party and the wrongdoer. And since it is unpredictable kind of the damage, the party who is responsible for breaching the agreement might not even be aware of future possible obligations. For better understanding we can have a simple example, in the event of any non-economic losses, where the non-breaching party can have trouble proving their true losses.Therefore in precise it can be said that determination of any such unliquidated damages will be difficult and expensive, and there can be an excess of compensation if the non-breaching party does not take steps to lessen their losses.
In the present cited analysis, the Union of India (UOI) and Raman Iron Foundry were in commercial contractual relationship, where the contract for the supply of certain materials was formed. The terms and conditions in the contract specifically states that a certain penalty would be levied in the situation of delay in the performance of obligation mentioned under the contract. However, due to various reasons which also include delay and deficiencies in performance by Raman Iron Foundry the Union of India sought to impose a penalty and claim damages. The major concern here involves in regards to the unliquidated damages i.e. can the Union claim damages for unliquidated damages for the alleged breach of contract without proving actual loss.
The matter thereby was listed before the Delhi High Court under of the . The Hon’ble High Court therefore held that the Union has no authority to stop payment of pending bills as a way to satisfy its claim for damages without obtaining a judicial adjudication on that claim. It was moreover emphasised that the claim for damages be it liquidated or unliquidated must be assessed and adjudicated before any amounts can be appropriated from pending payments.
However, not satisfied by the decision, the matter was then listed before the Hon’ble Supreme Court. Where the hon’ble court held that Union is entitled to unliquidated damages, the court further mentions that such an amount would be fixed only on the basis of foreseeability and remoteness factors. It was moreover pointed out that while parties may have agreed on certain penalties, these cannot be enforced unless there is clear evidence of loss. If a party claims unliquidated damages, it must provide evidence that such damages were suffered.
Let us recapitulate the differences between liquidated and unliquidated damages by way of the table.
After going through the whole article, in summary, it can be said that liquidated and unliquidated damages both are practical tools in contract law, and both of them has unique features of bringing advantages and disadvantages on the table. On one hand where we have noticed that, the performance of the contract is enhanced and conflict is reduced due to the predictability and clarity from liquidated damages. The same must also follow the reasonableness requirements which may not accurately reflect the actual loss. On the other hand, even though they provide a flexible way to compensate for a variety of losses, the unliquidated damages can be challenging and unpredictable to calculate for both parties.
Therefore observing at the nitty-gritty of a contract, the parties’ choices and the risks involved, then you have to decide whether liquidated or unliquidated damages are to be granted. However, taking into consideration the guidelines and the norms governing both types of damages, it can help parties to draft more beneficial contracts and settle disputes in a way that conforms with legal requirements.
If in case the actual damages of an individual exceed the compensation amount, as is specified under the agreement as liquidated damages. Moreover, the injured party as such cannot claim more than the agreed-upon amount unless they can prove any specific loss that is not mentioned under the liquidated damage clause.
Yes, even if in case where liquidated damages clause has been exhausted the parties can seek other legal remedies as the clause does not prevent parties from seeking other legal remedies. The other legal remedies can include the reliefs from the court such as specific performance or equitable relief, depending on the terms of the contract and applicable law.
No,the statement won’t be considered right. Even though since ages we consider damages as a form of punishment, however it will be wrong to assume liquidated damages as punitive in nature. The conceptual thinking behind liquidated damages is to compensate the injured party instead of punishing the wrongdoer or the breaching party.
Even though both the terms hold similar meaning in layman’s language, both the terms hold different conceptual meanings. And despite this fact both damages and penalties have differences in their meanings under their respective legal principles and definitions. Also, none of the legal statutes mentions the explicit distinction between the two, however, it should be kept in mind that both terms have different implications, which are as mentioned below:
Yes, there are remedies available under certain circumstances where the party fails to perform his/ her part of the promise. In scenarios where one party fails to perform his or her part of promise then the other party gets the right to seek damages i.e. monetary compensation, under those circumstances. The remedy can be availed under three types of concepts, which are as follows:
Above mentioned are the few types of damages, which are limited to the consequences, that are reasonably foreseeable by both parties at the time of the contract. These remedies can be used in different combinations in the situations of breach of contract. The same was further expressed by the contract scholars Fuller and Perdue as according to them the damages shall be sought under the protection of “expectation of interest”, “reliance of interest” or “the restitution on interest”.
The post appeared first on .
This article has been published by .
Introduction
Innovation and evolution is the continuous process of this earth, and due to such process every second there is a change in one or the other thing be it the result of human action or human mind. It is also the fact that, one such result of evolution is the changes that have occurred in the law and order of the nation. Do you know why in ancient times the concept of compensatory damages was very different? Since in ancient times, there was a huge difference in geographical boundaries and general public cultural beliefs because of this such difference arose. However, in the present world, this concept is not only popular but is also very widely accepted, especially in the world of corporate’s. Hence where one individual violates his/ her promise to execute a contract, they have to provide a compensatory amount to restore the aggrieved party to their original position.
In cases where the parties have already agreed to the amount of damage to be paid when the violation of promise takes place then it is liquidated damage. Whereas, if we reverse the scenario, where the damages have occurred and the amount is yet not agreed then? Then under such circumstances the amount is agreed upon by the parties in accordance with the order of the court, such circumstances is referred to as the unliquidated damage. Hence, these are the two types of damages which can be granted by the court of law as a relief to the aggrieved party.
There are various other types of damages that an individual can claim which will be discussed in brief in upcoming sections to deliver a comprehensive view before jumping into the main differences between liquidated and unliquidated damages. Let’s first start by discussing the meaning of damages under Indian law to get better clarity over the concept.
Meaning of damages
As a legal personnel we refer damages as the punitive punishment or compensatory amount which is paid to the injured party for loss or injury caused by the wrongful act. For instance, when Zane promises to deliver Bharti certain good items but Zane fails to fulfil his promise, because of which Bharti has to suffer loss. Then under such circumstances, Bharti has the right to claim compensation for the loss she has suffered.
Now you might be wondering where you can find the usage of these concepts? You can have further read on the concepts in two statutory legislations. Those two statutory legislations are tort law and contract law. Now, under the contract law you will notice the concerns about the promise to fulfil certain obligations which have been agreed by the parties. Whereas under the law of tort, you are gonna notice the concerns that deal with the aim to bring back the party to the original situation in which they were before the happening of the incident.
Types of damages under Indian Contract Act, 1872
Let us look at the types of damages under the Indian law to get better clarity. Since there are various types of damages covered under the provisions of the Indian Contract Act, 1872 let us understand some of them as mentioned below:
General damages
These are popularly known as “direct” or “ordinary” damages and generally arise as a result of the occurrence of an event that has occurred naturally and directly due to the non-performance of the contract. It is mainly awarded to compensate the injured party for the loss or harm that is a result of direct harm that has occurred.
Special damages
It is a type of damages that has not occurred as the result of any breach of contractual terms or conditions but rather have occurred due to the occurrence of some special or unique circumstances which were pre-anticipated by both the parties at the formation of the contract.
Nominal damages
Nominal damages are the kind of damages where the plaintiff in a lawsuit has not suffered any actual loss but his/ her legal right has been violated due to the breach of contract. The readers should know that the main motive of nominal damages is to address the concern. The concerns where the plaintiff’s rights are violated. The same further involves cases where the other party does not suffer any financial loss.
Substantial damages
Now let’s ponder around another kind of damages which is the visa-versa of nominal damages. This kind is known as substantial damages. These are the kinds of damages which are awarded in situations where the extent of the contract breach is proved. However one should remember that only contractual breach is proved and uncertainties in regard to calculations are left to be taken into account.
Aggravated damages
Moving forward is the another kind which is aggravated damages. These are one of the types of damages, which are of compensatory nature. That is, such damages are awarded in situations where the wrongdoer has failed to perform the contract and because of which the victim party has suffered mental agony and stress.
Exemplary damages
Exemplary damages are another type, which are awarded in the circumstances where due to such failure to perform the contract the injured party has suffered the loss. And, therefore in order to compensate the injured party the wrongdoer has been asked to reimburse for such loss or may even have to face punishment. These damages are commonly known as punitive damages.
Consequential damages and incidental damages
Consequential damages are the kind of damages, where the victim party has suffered the actual loss because of the failure which the other party has failed to fulfil his part of the contract.
On the other hand, incidental damages refer to the loss or the injury that the injured party has suffered due to the breach of contract.
Liquidated and unliquidated damages
In the case of a contract, parties might have to agree to pay a specific amount on the breach of the contract, where such provisions are provided in the contract they are popularly known as liquidated damages. Whereas as we mentioned above, unliquidated damages are generally granted by the courts. These are granted on the basis of an assessment of the loss or the injury caused to the party suffering such breach of contract.
So in simple terms we can say that the motive behind these damages is to hold the offender accountable. The wrongdoer is to be held accountable and also this will help in deterring the behaviour of the wrongdoer from happening of the event on the same lines in future. This article will majorly deal with liquidated and unliquidated damages. Moreover we will also look at the legal implications of it. Let us now take a deep dive to understand them along with case laws.
Liquidated damages under the Indian Contract Act, 1872
Now, let us have a deep understanding as to what is liquidated damages? These refer to the kind of damages where parties have agreed to pay a certain pre-agreed amount of money. This exact amount of money or an estimated compensation that the party has agreed to pay in case breach of contract will be the amount of compensation for the loss to the injured party. However, the reader should remember to mention the liquidated damages clause in the agreement. Such a clause should mention about the agreed amount by both the parties before the contract gets finalised. Henceforth, following this provision of law, the parties benefit from compensating the injured party without the need for lengthy legal proceedings or calculation of the amount of actual loss.
In the world full of commercial contracts the concept of liquidated damages has been of great importance as it has helped in serving a very crucial role under contract law. Furthermore it has also been supported in the circumstances where it is very difficult to quantify and measure the loss suffered by the other party in such circumstances of the breach of contract. In the upcoming section of the article, let us have a look at the legal meaning and essential of liquidated damages to get a better grasp of the content.
Meaning of Liquidated Damages
Let us now understand the statutory provision under of the which mentions liquidated damages.
What does the provision mention? The statutory provision mentions about the legal perspective of liquidated damages which relates to the stipulated damages. According to the same, there must be an incident of breach of the contract. Such an incident of breach of contract helps the plaintiff to claim damages. However, where there may be a reasonable revocation of the contract without any breach of the terms of the contract, there is no chance for the claim for damages to arise.
The mentioned provision speaks about the condition where the parties have agreed upon the amount of damages (compensation) and where one has to pay in case they breach the contract. However, it is also to be noted that, where the party who has been so affected due to the breach of contract should not receive compensation more than the loss so suffered.
That is to put it simply if according to the wrongdoer, the amount agreed is a bit too high than the actual loss or if the contrary the victim party is of the opinion that the loss suffered is higher than the agreed amount, then the courts of law might not consider the agreed amount and shall have a look at the case as fresh.
Let us look at the below mentioned representation of Section 74 to understand the steps involved:
Section 74
Contract comes into being
↓
The contract mentions the pre-agreed amount as compensation or penalty that would be generated in the event of a breach of the contract
↓
Breach of Contract
↓
Compensation is to be paid by the party who failed to perform the contract, however, it is to be noted that such compensation shall be appropriate and not more than the amount of damages as determined in the clause of the contract.
The general concept of damages is ideally to claim and get awarded in order to restore the plaintiff’s situation in which he/ she would have been if the breach had not occurred. Such damages are ideally being claimed from the party that causes such breach of contract.
Under the circumstances where the clause for the liquidated damages under Section 74 has been mentioned, both the victim party and the defendant have the chance to present their own claims. But readers should also remember that where the claim for liquidated damages is already pre-decided, under such circumstances there can not be more possibility of compensation assurance. Therefore, in such scenarios, it would be expected that since the risks of a party causing a breach would be lower, damages are already determined.
Nevertheless, it is worth mentioning that even though the concept of liquidated damages guarantees a fixed monetary amount as a form of compensation. It can also raise the doubt of possibility that either the injured party has the belief that the liquidated damages are not appropriate or even the breaching party may believe that the damages are unreasonably high. Therefore, if you think if you are stuck under such circumstances, the court of law may not allow liquidated damages if the mentioned amount is unreasonably high or is contrary to public policy.
Conditions to be considered to claim liquidated damages
You can claim liquidated only after the following conditions are satisfied:
- Valid form of contract
The agreement you have entered, which has its provision mentioned under the clause of of the Indian Contract Act, 1872. Also, one must also be aware that the contract must be valid and supported by lawful consideration and also must be freely signed by both parties. Since the agreements which are not enforceable by law, are termed as void as mentioned under .
- Contract Breach:
Moving towards the next pointer would be that to claim damages there should be mandatory breach of one or the other contract condition. Therefore, no matter how much profit one tries to claim out of the claimed damages, there will be no award unless the breach of contract is proven. And additionally, the party who is responsible for such breach of contract would be held liable to compensate or the claimed damages. Further in order to prove a breach the same must be adjudicated and be proven and not merely decided by the parties.
- Reasonable estimate of damages
For the purpose of claiming damages, in the circumstances where one party has voluntarily expressed their failure to perform the anticipated contractual obligation. However, here this information should have been expressed before the actual performance of the obligation. Then in such a case the other party still has the option to seek damages. However, under such circumstances the other party is needed to prove that there was the intention to continue the agreement before terminating the same.
- Proof of damage
It is worth mentioning that the clause “whether or not actual damage or loss is proven to have been caused by it” would not dispense with the establishment of proof in toto for a claim of liquidated damages. This helps us to understand that the reasonable compensation agreed upon as liquidated damages in case of breach of contract is in respect of some loss or injury; thus, the existence of loss or injury is indispensable for such claim of liquidated damages.
- Causation
There must be a causal link between the breach committed and the loss or injury suffered for a claim of damages and attaching liability. This causal link is said to have been created if the defendant’s act of infringement of the contract is the only “real and effective” cause of the injury or damage for which damages are claimed. Moreover, in this case the “dominant and effective” cause is to be taken into consideration in the presence of multiple causes.
- Remoteness of damage
Where a party is injured due to the breach of contract, may tend to recover only those damages which either “should reasonably be considered as occurring normally or naturally. Further, that is in accordance with the regular course of events” from the breach, or “should reasonably have been considered by both parties at the time they entered into the contract, as the likely result of the breach thereof.”
- Mitigation
It is very important to mention that if you claim any damages on breach of a contract which ought to have been performed or was ready to perform the required part of the contract. Therefore it will be your duty to mitigate the losses before claiming damages.
Key case laws
Maula Bux vs. Union of India (1969)
In the current , the plaintiff has entered into two different contracts with the Government. Out of two, one was for supplying vegetables and the other for poultry eggs. Therefore as a part of the contract Maula Bux the plaintiff had to also deposit a specific amount of security to the government for the performance of the contract. However, he made some defaults while performing his part of the obligation, which resulted in the rescinding of the contract. The Union of India Post claims the right to rescind the contract and to also to forfeit the security deposit. The main concern here was raised in regard to the breach of contract and the forfeiture of the amount of the security deposit made by Maula Bux (contractor).
The matter thereby went to trial court, where they ruled in favour of Maula Bux, stating that the government was wrong in forfeiting the deposit, since, they have failed in proving the actual loss suffered due to such loss. The court further emphasised the amount deposited was not earnest money but rather security for performance. The Allahabad High Court while disallowing the plaintiff’s case held that the plaintiff was not entitled to any interest and awarded interest at 3% on the claim amount, as no contractual or statutory basis for higher interest was established.
Disagreeing with the decision the plaintiff thereby approached the Hon’ble Supreme Court, where it was held that the forfeiture of the deposit should not exceed rational compensation for the breach. And since, in the present case at hand, the court found that the government has failed to prove the actual loss suffered, therefore the action by the government for the forfeiture of the security amount was considered unjust.
State of Karnataka etc. vs. Shri. Rameshwara Rice Mills (1987)
In the present , there was a contractual agreement between the State of Karnataka and Shri Rameshwara Rice Mills for the supply of paddy. The mentioned terms and conditions of the agreement particularly states the consequences for the breach of contract, as per which “any amount that may become due or payable by the first party to the second party under any part of the agreement, shall be deemed to be and may be recovered from the first party as if they were arrears of land revenue”.
The State later claimed that the Rice Mill had failed to perform the contract by making short delivery of rice and had thereby breached its part of the obligation under the said contract. Because of such breach, the State filed a claim under the in order to recover the amount under the arrears of the land revenue.
The Rice Mills therefore filed the suit to challenge the proceeding stating that it is illegal and asked for a permanent injunction so as to restrain the State from pursuing the recovery proceedings. It was further argued by the respondent that the damages arose from the breach of contract and the same is not directly related to land revenue or taxes.
The matter therefore was listed before the Trial Court which had dismissed the appeal post that the matter was later listed before the Appellate Court and post that the High Court where the Full Bench was of the view that the State is not entitled to recover damages under the arrears of land revenue. The court stated that, as the damages for breach of conditions will not amount to “money due under the contract”.
Unhappy from the court’s orders the case was transferred to the Supreme Court, where it was held by the Hon’ble Supreme Court that it was unjustified to recover damages for the contract as arrears of land. Furthermore, in this case while talking about the liquidated damages the court considered it to be a predetermined law. The court here held that it should only be deemed as the predetermined loss and should not be taken into account as a punishment for the breaching party.
Moreover, as stated by the court that to claim liquidated damages the concerned party has to prove the occurrence of loss. And also that they have to suffer from such loss due to the breach of contract. And hence it was concluded that to claim amount here is just and reasonable to reinstate the victim party in their original position as they would have been had their no breach occurred.
M/S Kailash Nath Associates vs. Delhi Development Authority (2015)
In the mentioned , the plaintiff M/S Kailash Nath Associates took active participation in the public auction which was held by the Delhi Development Authority (DDA) for one of the piece of land. The stated rules for the auction states that the higher bidder needs to pay 25% as the earnest money. However, due to the sudden break of economic recession, the appellant M/S Kailash Nath was not able to pay the amount and sought an extension for the payment, which was also granted by the DDA. But even after multiple attempts for the extension DDA authorities eventually cancelled the allotment and also forfeited the earnest money.
It was therefore argued by the Kailash Nath Associates that DDA has not suffered any actual loss and therefore the forfeiture of the amount was unreasonable. It was further held that the forfeiture of the amount by DDA was unjustified. The Hon’ble Supreme Court furthermore emphasised that for the liquidated damages to be valid there must be a breach of contract by the defaulting party and the victim party must have suffered actual loss due to such breach.
Pros and cons of the liquidated damages clauses in agreements
Since every coin has two sides, let us look at both the pros as well as the cons of the concept of liquidated damages.
Pros
Lets first understand the importance of liquidated damages. The mentioning the clause of liquidated damages can be beneficial for both owners and operators. If you pre-determine the amount of damages that the other party may claim, then it can allow you to delineate your risks. It can also help in minimisation of the time, cost, and risk of litigating issues pertaining to the other party entitlement and value of his / her claim for loss of profits. The owners therefore can also use their negotiating power to limit the amount of damage payable to the operator to one or more years of lost profits.
Cons
Even if the liquidated damages have their own positive pointers, there are certain negative aspects as well related to the same. Since the amount mentioned for the compensation in the case of breach must be a reasonable ask the courts therefore have jurisdiction to reduce the disproportionate or punitive amounts (if any).
Also, in order to avoid having the recovery reduced, the non-breaching party may reduce their damages. Further, the major point to be noted here is that even though liquidated damages clauses help in reducing litigation burden. It is because they require proof of actual loss and leave room for judicial interpretation their enforcement may become more difficult.
Unliquidated damages under Indian Contract Act, 1872
Now it’s time to understand the concept of unliquidated damages under the Indian Contract Act, 1872. Unliquidated damages are the kind of damages which occur in cases where the liquidated clause is not specifically mentioned during the formation of such contract. Therefore in such circumstances where the breach occurs, the matter may directly be forwarded to the court of law.
Here the court will further decide based on the actual loss or the injury that the other party had suffered due to the breach, whereas under liquidated damages the parties have to agree on the pre-approved amount of compensation to be recovered from the other party. This part of the article basically deals with unliquidated damages and its legal implications.
Meaning of Unliquidated Damages
The meaning of unliquidated damages as per law is discussed here. So as per the provision of of the Indian Contract Act which states the law on unliquidated damages according to which in the event of any breach of contract, the aggrieved has the right to receive compensation for the loss or injury so suffered by the victim party. However, it is to be emphasised that such loss must have occurred naturally or within the scope of both parties while forming the contract.
Hence it can be said that the statute deals with the actual damages resulting from the infringement of the contract. Also, the injury arising from such a breach is in the nature of unliquidated damages. It is because the damages are granted by the courts on the basis of the evaluation of the loss or injury caused to the party against which the infringement occurred.
Herein the steps involved as per Section 73 are represented to get an easier grasp of the concept. Let us take a look at the steps involved:
Section 73
↓
Contract comes into being
↓
Breach of Contract
↓
Loss or damage as a consequence of this breach
↓
The loss or the damages should have arisen from the circumstances that were foreseeable by the parties or should be of the nature that it resulted due to the natural course of events
↓
In case of breach, the wrongdoer has to pay compensation
Further, below mentioned are the key pointers to be remembered about liquidated damages, do give them a good read:
- Victim party to be reimbursed: Where under the circumstances of the breach of agreement between the parties the victim party deserves the compensation to be paid by the party responsible for such breach of contract. However, it is to be noted that such compensation to be reimbursed depends on the actual harm the party has sustained due to the breach.
- Foreseeability: At the time of formation of a contract it is required that both the sides of parties at the time of the contract must have anticipated the events that may lead to the award of damages. Legally, reparation needs to occur naturally after the violation.
- Damages assessment: As per the provision of unliquidated damages, courts shall have the authority to assess the loss or injury suffered by the victim party. Therefore in order to restore the innocent party in the same situation they would have been had the breach not occurred.
- Proof of loss: As per the provision of unliquidated damages, the amount of compensation or damages the victim has asked for, they have to submit proof for the actual loss they have suffered. It is however the evidence shown should be reasonable and should have a connection between the alleged damages and the breach.
Working of unliquidated damages
Let us analyse the working of the unliquidated damages. The provision of unliquidated damages is the kind of damages that are claimed for any unforeseeable loss or where there is no mention of a liquidated damages clause in the agreement. In such situations where there has been no contractual violation, such types of damages are being awarded. But, since the amount of damages is not predetermined this may also lead to long legal proceedings for determining the amount of damages one should receive in order to serve justice.
Therefore in order to avoid long proceedings big industries like that of engineering and construction companies generally deal with the liquidated damages.
In order to award unliquidated damages the court of law generally follows a compensatory approach:
- Recover the loss incurred by the complainant
- Bring back the complainant to the position he had before the breach
- Lessen the penalty to the respondent
- Avoid enhancing the complainant’s position over and above where it would have been if the breach had not taken place
It is therefore important to note that the losses incurred by the plaintiff must be the result of natural consequences for the breach of contract, which has to be taken into consideration while determining the compensation.
It is also very important for one to disclose all the facts or specific details relating to the work about the unusual losses, since, if in any instance, it is found that the other party was aware of the possibility of damages that could have arisen from a breach of contract. But if he/she has voluntarily chosen not to disclose such important information and or to take the necessary precautions to mitigate those damages. Then under such circumstances the court will only compensate for the loss that would have been incurred had those safety precautions been taken. When taking reasonable precautions could have stopped or minimise losses the plaintiff cannot let them accumulate.
It is essential for both the parties to clearly mention their objectives in the contract. Mentioning the same would also help both the parties in preventing all the feuds and ambivalence caused by confusion and ambiguity. In general, if in the contract “NIL” is mentioned for liquidated damages for those who do not wish to claim it. This can also be interpreted as unliquidated damages are also not applicable.
Upside downside of unliquidated damages
Let us first have a brief understanding of the upside i.e. benefit that both the parties can have because of the mentioning of the clause of unliquidated damages. It can help the victim party in recovering the losses that were not predicted or might be difficult to calculate prior to the breach of contract. On the other side of the party i.e. the injured party should also be ready to present proof of their real loss which they have incurred at the time of the occurrence of the incident. Moreover, the victim party might also have to prove that the losses which are not “remote” but rather are the natural outcome of the breach of contract.
However, do you know that even though the provision of mentioning unliquidated damages has its own upside, it might also be disadvantageous in certain circumstances. As such, type of damages can cause issues between both the parties i.e. the victim party and the wrongdoer. And since it is unpredictable kind of the damage, the party who is responsible for breaching the agreement might not even be aware of future possible obligations. For better understanding we can have a simple example, in the event of any non-economic losses, where the non-breaching party can have trouble proving their true losses.Therefore in precise it can be said that determination of any such unliquidated damages will be difficult and expensive, and there can be an excess of compensation if the non-breaching party does not take steps to lessen their losses.
Key Case Laws
Union of India vs. Raman Iron Foundry (1974)
In the present cited analysis, the Union of India (UOI) and Raman Iron Foundry were in commercial contractual relationship, where the contract for the supply of certain materials was formed. The terms and conditions in the contract specifically states that a certain penalty would be levied in the situation of delay in the performance of obligation mentioned under the contract. However, due to various reasons which also include delay and deficiencies in performance by Raman Iron Foundry the Union of India sought to impose a penalty and claim damages. The major concern here involves in regards to the unliquidated damages i.e. can the Union claim damages for unliquidated damages for the alleged breach of contract without proving actual loss.
The matter thereby was listed before the Delhi High Court under of the . The Hon’ble High Court therefore held that the Union has no authority to stop payment of pending bills as a way to satisfy its claim for damages without obtaining a judicial adjudication on that claim. It was moreover emphasised that the claim for damages be it liquidated or unliquidated must be assessed and adjudicated before any amounts can be appropriated from pending payments.
However, not satisfied by the decision, the matter was then listed before the Hon’ble Supreme Court. Where the hon’ble court held that Union is entitled to unliquidated damages, the court further mentions that such an amount would be fixed only on the basis of foreseeability and remoteness factors. It was moreover pointed out that while parties may have agreed on certain penalties, these cannot be enforced unless there is clear evidence of loss. If a party claims unliquidated damages, it must provide evidence that such damages were suffered.
Difference between Liquidated and Unliquidated damages
Let us recapitulate the differences between liquidated and unliquidated damages by way of the table.
| Particulars | Liquidated Damages | Unliquidated Damages |
| Meaning | The term liquidated damages mentions the condition where one party has to pay the compensation i.e. pre-agreed amount of damages to the victim party. | The term unliquidated damages mention the condition, where there are no as such any concept of pre-agreed damages but in case of any breach, the court of law has the authority to serve justice to the victim party. |
| Is evidence required to prove loss? | As per the statutory provision under liquidated damages, there is no evidence required to prove the loss suffered by the victim party. | Whereas under unliquidated damages, one has to show evidence which is mandatorily required to prove the loss suffered by the victim, and also the onus to make such a claim is on the victim itself. |
| Statutory provision | Liquidated damages is defined under Section 74 of the Indian Contract Act, 1872. | Whereas the provision relating to unliquidated damages are mentioned under Section 73 of the Indian Contract Act, 1872. |
| Damages | Under liquidated damages the compensation amount of damages is fixed, however, if the parties feel the amount is not fair they also have the option to claim the same before the court of law. | However, under unliquidated damages the amount of damages is not fixed, and therefore the court of law restores the power to serve justice. |
| Contract claim | The injured party has the right to get damages in case of breach of contract. | In any case of any unanticipated damages, the victim party has to make a claim. |
Conclusion
After going through the whole article, in summary, it can be said that liquidated and unliquidated damages both are practical tools in contract law, and both of them has unique features of bringing advantages and disadvantages on the table. On one hand where we have noticed that, the performance of the contract is enhanced and conflict is reduced due to the predictability and clarity from liquidated damages. The same must also follow the reasonableness requirements which may not accurately reflect the actual loss. On the other hand, even though they provide a flexible way to compensate for a variety of losses, the unliquidated damages can be challenging and unpredictable to calculate for both parties.
Therefore observing at the nitty-gritty of a contract, the parties’ choices and the risks involved, then you have to decide whether liquidated or unliquidated damages are to be granted. However, taking into consideration the guidelines and the norms governing both types of damages, it can help parties to draft more beneficial contracts and settle disputes in a way that conforms with legal requirements.
Frequently Asked Questions (FAQ’s)
If my actual damages exceed liquidated damages can you guide the consequence?
If in case the actual damages of an individual exceed the compensation amount, as is specified under the agreement as liquidated damages. Moreover, the injured party as such cannot claim more than the agreed-upon amount unless they can prove any specific loss that is not mentioned under the liquidated damage clause.
Can I still seek other remedies in case a liquidated damages clause is availed?
Yes, even if in case where liquidated damages clause has been exhausted the parties can seek other legal remedies as the clause does not prevent parties from seeking other legal remedies. The other legal remedies can include the reliefs from the court such as specific performance or equitable relief, depending on the terms of the contract and applicable law.
Will I be right in saying that liquidated damages are punitive in nature?
No,the statement won’t be considered right. Even though since ages we consider damages as a form of punishment, however it will be wrong to assume liquidated damages as punitive in nature. The conceptual thinking behind liquidated damages is to compensate the injured party instead of punishing the wrongdoer or the breaching party.
In what ways do penalties and liquidated damages different?
Even though both the terms hold similar meaning in layman’s language, both the terms hold different conceptual meanings. And despite this fact both damages and penalties have differences in their meanings under their respective legal principles and definitions. Also, none of the legal statutes mentions the explicit distinction between the two, however, it should be kept in mind that both terms have different implications, which are as mentioned below:
- Penalty, which refers to the amount of compensation in the form of punishment one has to face in the case of the actual loss being suffered by the party, the same however also restricts the violating party from committing such breach.
- Liquidated damages, refer to the pre-term clause in a contract where both the parties agree on the stipulated amount to be recovered from the other party as a form of compensation in the cases of breach of contract.
Are there any remedies available under the damages of contract?
Yes, there are remedies available under certain circumstances where the party fails to perform his/ her part of the promise. In scenarios where one party fails to perform his or her part of promise then the other party gets the right to seek damages i.e. monetary compensation, under those circumstances. The remedy can be availed under three types of concepts, which are as follows:
- First one is known as, restitution which refers to the scenario where the victim party is being restored to its original position i.e. the goods, services, or money that was promised or that has been so suffered by them is being restored.
- Second one is known as expectation, which refers to the scenario where the wrongdoer is rewarded with the kind of punishment to get the injured party or the victim in the position, had the contract been fully performed. It moreover also involves the profits anticipated had the contract been completed.
- And third the last one is reliance, which refers to the scenario, in which the injured party is forced to get compensation for the expense. Compensation should be for the amount being invested or the debts being incurred in order to complete the contract.
Above mentioned are the few types of damages, which are limited to the consequences, that are reasonably foreseeable by both parties at the time of the contract. These remedies can be used in different combinations in the situations of breach of contract. The same was further expressed by the contract scholars Fuller and Perdue as according to them the damages shall be sought under the protection of “expectation of interest”, “reliance of interest” or “the restitution on interest”.
References
The post appeared first on .