Damages for Breach of Contract — Section 73 — Kinds & Measure — KSLU Contract I Notes

Damages — Kinds, Remoteness & Measure

You lose ₹10,000 because your supplier was late — but you also lost a special ₹1 lakh contract you never told him about. Can you recover both? The answer is the heart of the law of damages: you get what flows naturally from the breach, plus what the parties knew about — no more. That single rule, from Hadley v Baxendale, is the most-tested idea in the whole subject.

Compensation, not punishment

Damages are money compensation for loss caused by breach. The Indian rule is in Section 73.

A. The governing principle — compensatory, not penal.

Damages aim to put the injured party, so far as money can, in the position he would have occupied had the contract been performed — no better, no worse. They are compensatory, not penal: the law compensates for the actual loss suffered, not to punish the party in breach. Remote and indirect loss is not recoverable (s.73), and the injured party has a duty to mitigate (Explanation to s.73) — he cannot recover for loss he could reasonably have avoided.

B. Remoteness of damage — the rule in Hadley v Baxendale.

Recoverable loss falls into two limbs:

Ordinary/general damages — loss arising naturally, in the usual course of things, from the breach. This is always recoverable.
Special damages — loss arising from special circumstances known to both parties at the time of contracting. Recoverable only if those circumstances were communicated/known.

Loss that is neither natural nor within known special circumstances is too remote and irrecoverable. Section 73 embodies this rule, so Hadley v Baxendale is fully applicable in India.

C. Kinds of damages.

Ordinary/general (compensatory) — the natural loss (limb 1 above).
Special — loss from known special circumstances (limb 2).
Nominal — a token sum where a breach caused no real loss (the right was infringed but no damage).
Exemplary/punitive — awarded rarely (e.g. breach of promise of marriage, wrongful dishonour of a cheque) — the exception to “compensatory, not penal”.
Liquidated damages — a sum fixed by the contract itself (see Topic 3).

🧩 WORKED EXAMPLE — the undisclosed lucrative sub-contract.

Facts. A carrier delays delivering a mill-shaft; because of the delay the mill stays shut and the owner loses profits he never mentioned when contracting.

Rule. Only loss arising naturally, or from special circumstances known to both, is recoverable (Hadley v Baxendale, s.73).

Apply. The lost profits were not communicated and were not the natural consequence assumed; they are too remote.

Conclusion. The owner recovers ordinary damages only, not the undisclosed lost profits.

Section 73, Indian Contract Act, 1872: “When a contract has been broken, the party who suffers by such breach is entitled to receive… 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.”

In Simple Terms: you recover the loss that naturally follows the breach plus any special loss the other side was told about — but nothing remote, and only if you took reasonable steps to limit your loss.

flowchart TD
    S73["Damages (s.73) — compensatory, not penal"]
    S73 --> L1["Limb 1: ordinary/general — natural loss (always recoverable)"]
    S73 --> L2["Limb 2: special — from circumstances KNOWN to both"]
    S73 --> REM["Remote/indirect loss — NOT recoverable"]
    S73 --> MIT["Duty to MITIGATE (Explanation)"]
    S73 --> K["Kinds: ordinary, special, nominal, exemplary, liquidated"]

Case Laws

[C-10] Hadley v Baxendale (1854) — the two-limb rule of remoteness: natural loss + loss from known special circumstances; the mill-shaft profits were too remote.
Victoria Laundry v Newman Industries (1949) — refines the rule: recoverable loss is that reasonably foreseeable as liable to result from the breach.

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