Damages for Breach of Contract under Section 73 of the Indian Contract Act, 1872: The Rules in Hadley v. Baxendale, Remoteness, Causation, Mitigation, the Measure of Damages and the Heads of Loss

Section 73 is the principal remedial provision of the Act and it codifies, almost word for word, the two rules laid down in Hadley v. Baxendale twelve years before the Act was passed. Compensation is recoverable for loss which naturally arose in the usual course of things, or which the parties knew when they made the contract to be likely to result; remote and indirect loss is excluded; and the means of remedying the inconvenience must be taken into account, which is the statutory form of the duty to mitigate. Everything else in this area is the application of those three sentences.

The two rules, and what falls outside both

1. The Provision

Section 73, Indian Contract Act, 1872

When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, 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.

Compensation for failure to discharge obligation resembling those created by contract. When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default as if such person had contracted to discharge it and had broken his contract.

Explanation. In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

2. The Two Rules in Hadley v. Baxendale

📖 Hadley v. Baxendale, (1854) 9 Exch 341

Facts: The crankshaft of a mill broke and had to be sent to engineers as a pattern for a new one. The mill owners engaged carriers to take it, and the carriers delayed delivery for several days. The mill stood idle in the meantime. The mill owners claimed the profits lost during the period of delay. The carriers had not been told that the mill was stopped for want of the shaft, or that the shaft was the only one the mill possessed.

Held: The claim for lost profits failed. Alderson B laid down the rule in two limbs. Damages recoverable are such as may fairly and reasonably be considered as arising naturally, according to the usual course of things, from the breach itself; or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of its breach. Where special circumstances have been communicated, the damages are those that would ordinarily follow from a breach in those circumstances; where they have not, only such loss as would arise generally. Since the carriers had not been told that the mill was idle, the loss of profits was not recoverable under either limb.

Ratio: Damages are limited to loss arising naturally in the usual course of things, or loss within the contemplation of both parties at the time of contracting because of special circumstances communicated to the defendant.

	The first rule	The second rule
Statutory words in Section 73	Loss which naturally arose in the usual course of things from the breach	Loss which the parties knew, when they made the contract, to be likely to result
Kind of loss	Ordinary or general damages	Special damages
What the claimant must show	That the loss is of a kind that ordinarily follows such a breach	That the special circumstances were communicated to the defendant at the time of contracting
Knowledge	Imputed. The defendant is taken to know what ordinarily follows	Actual. He must in fact have known of the special circumstances
Timing of knowledge	Not in issue	At the time the contract was made, not at the time of breach
Typical instance	The difference between contract price and market price on a broken sale	Loss of an exceptionally profitable sub-contract of which the defendant was told

3. Remoteness in Operation

📖 Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., [1949] 2 KB 528 (CA)

Facts: Launderers and dyers bought a large boiler for use in their business, the sellers knowing the nature of that business and that the boiler was wanted for immediate use. Delivery was some five months late. The buyers claimed loss of the ordinary profits they would have earned with the boiler, and also the exceptionally large profits they would have made on certain highly lucrative dyeing contracts with the Ministry of Supply, of which the sellers had not been told.

Held: The ordinary business profits were recoverable and the exceptional profits were not. The governing criterion is whether the loss was reasonably foreseeable as liable to result from the breach, judged by what the defendant knew or is taken to have known at the time of contracting. The sellers, knowing the buyers' business and the urgency, were taken to foresee some loss of business profit. They could not have foreseen the exceptional contracts, which had not been communicated.

Ratio: The two limbs of Hadley turn on the defendant's actual or imputed knowledge at the time of contracting. Loss of ordinary profits is recoverable where the defendant knew the nature of the business; exceptional profits require communication of the special circumstances.

⚠ Remoteness in contract is narrower than in tort

The two tests are often confused. In tort the wrongdoer is liable for all loss that is reasonably foreseeable as a possible consequence, and the standard is set at the date of the wrong. In contract the standard is set at the date the contract was made, and the loss must have been within the contemplation of both parties as likely to result, which is a higher degree of probability. The reason is consent: a contracting party can protect himself by disclosing special circumstances and paying for the added risk, and it would be unfair to fix him with exposure he never had the chance to price.

4. Causation

The loss must be caused by the breach. Section 73 speaks of loss caused to the claimant thereby, and a loss that would have occurred anyway is not recoverable.
An intervening act may break the chain, where it is unreasonable, independent of the breach and not within the contemplation of the parties.
The claimant's own unreasonable conduct may break the chain or reduce the recovery, and overlaps with the duty to mitigate.
Concurrent causes. Where the breach is one of several causes, the question is whether it was an effective cause of the loss, not whether it was the sole cause.

5. Mitigation

The Explanation to Section 73 requires the court to take into account the means which existed of remedying the inconvenience caused by the non-performance. This is the statutory expression of the duty to mitigate, and it is not strictly a duty at all: the claimant commits no wrong by failing to mitigate, but he cannot recover loss he could reasonably have avoided.

📖 Murlidhar Chiranjilal v. Harishchandra Dwarkadas, AIR 1962 SC 366

Facts: A contract for the sale of goods required the seller to arrange despatch by rail and to supply the railway receipt, delivery being at the place of despatch. The seller failed to obtain and deliver the railway receipt, and the buyer claimed damages calculated on the difference between the contract rate and the market rate at the place of delivery.

Held: The Supreme Court restated the two governing principles. First, the party complaining of a breach must, so far as money can do it, be placed in the same position as if the contract had been performed. Second, that principle is qualified by the duty on the claimant to take all reasonable steps to mitigate the loss consequent on the breach, and he is debarred from claiming any part of the loss which is due to his neglect to take such steps. On the facts the buyer had failed to prove the market rate at the relevant place, and the claim as framed could not succeed.

Ratio: Damages place the injured party in the position he would have occupied had the contract been performed, subject to his duty to take all reasonable steps to mitigate. Loss attributable to a failure to mitigate is not recoverable, and the claimant must prove the market rate on which his claim rests.

The claimant must take reasonable steps to reduce his loss, such as buying substitute goods or accepting a reasonable alternative offer.
He need not take unusual risks, incur disproportionate expense, or damage his commercial reputation.
Steps actually taken that reduce the loss are credited to the defendant, even if they went beyond what was required.
The burden of proving a failure to mitigate lies on the defendant.
Mitigation does not arise where the claim is for an agreed sum as a debt, which is why the innocent party in White & Carter (Councils) Ltd. v. McGregor, [1962] AC 413 could recover the full price.

6. The Measure of Damages

Situation	Ordinary measure
Seller fails to deliver goods	The difference between the contract price and the market price at the time and place fixed for delivery
Buyer fails to accept goods	The difference between the contract price and the market price at that time and place, plus reasonable expenses of resale
Defective goods or work	The cost of making good the defect, or the difference in value where that cost would be disproportionate
Delay in delivery	The difference in value at the time delivery should have been made and when it was, together with loss of use where foreseeable
Breach of a contract to lend money	The additional cost of borrowing elsewhere, and ordinarily nothing more
Wrongful dismissal	The salary and benefits for the notice period, subject to mitigation by seeking other employment

7. The Heads of Loss

Ordinary or general damages, recoverable under the first rule for loss arising naturally in the usual course of things.
Special damages, recoverable under the second rule only where the special circumstances were communicated at the time of contracting.
Nominal damages, awarded where a breach is established but no loss is proved. They vindicate the right without compensating, and in India a plaintiff who proves breach but no loss will ordinarily recover a nominal sum only.
Exemplary or punitive damages are not available for breach of contract under the Act, which speaks throughout of compensation. Two traditional exceptions in English law are the wrongful dishonour of a customer's cheque by a banker and breach of a promise to marry.
Liquidated damages, where the contract names a sum, which are governed by Section 74 and are capped at the stated figure.
Unliquidated damages, which are assessed by the court under Section 73 where no sum is named.
Loss of profit, recoverable where it falls within either rule, as the ordinary business profits did in Victoria Laundry.
Loss of opportunity or chance, recoverable where the lost chance was of real and measurable value, the award being discounted to reflect the probability that the opportunity would have been realised.
Interest, considered below.

7.1 Mental distress

The general rule is that damages are not recoverable for mental distress, disappointment or injured feelings caused by a breach of contract, because the object of the award is financial compensation for a commercial loss. Two established departures exist. Where the very object of the contract was to provide pleasure, relaxation or peace of mind, as with a holiday or a wedding arrangement, damages for disappointment may be awarded. And where the breach causes physical inconvenience or discomfort, damages for that inconvenience are recoverable, and mental suffering directly consequent on it may be taken into account.

7.2 Interest

Interest is not automatically payable merely because a sum has been withheld. It must be claimed on a recognised basis.
Contractual interest is payable where the contract provides for it, subject to Section 74 and its Explanation, under which a stipulation for increased interest from the date of default may be a penalty.
Statutory interest may be awarded under the Interest Act, 1978 where a demand in writing has been made, and under Section 34 of the Code of Civil Procedure, 1908 the court may award pendente lite and future interest on a decree.
Interest as damages may be recovered under Section 73 where the loss of the use of money was within the contemplation of the parties.
Mercantile usage or a course of dealing may supply an entitlement.

8. Quasi-Contractual Obligations

The third paragraph of Section 73 extends the same measure to obligations resembling those created by contract, that is the obligations in Sections 68 to 72. A person injured by the failure to discharge such an obligation recovers the same compensation as if the defaulting party had contracted to discharge it and had broken his contract. The rules on remoteness and mitigation therefore apply to a claim against a finder who fails to return goods, or against a person who fails to repay money paid by mistake.

9. The Position Stated Shortly

Section 73 codifies the two rules in Hadley v. Baxendale: loss arising naturally in the usual course of things, and loss the parties knew at the time of contracting to be likely.
Special damages require the special circumstances to have been communicated when the contract was made, not when it was broken.
Victoria Laundry: ordinary business profits were recoverable where the defendant knew the business; exceptional profits were not, not having been communicated.
Remoteness in contract is narrower than in tort, being fixed at the date of the contract and requiring loss to be likely rather than merely possible.
Remote and indirect loss is expressly excluded by the second paragraph.
The Explanation requires the means of remedying the inconvenience to be taken into account, which is the duty to mitigate.
Murlidhar Chiranjilal: the claimant is placed in the position he would have occupied had the contract been performed, subject to taking all reasonable steps to mitigate.
The burden of proving a failure to mitigate lies on the defendant, and mitigation does not arise where the claim is for an agreed sum as a debt.
Exemplary damages are not available for breach of contract under the Act; nominal damages are awarded where breach is proved but no loss.
Mental distress is not compensable save where the object of the contract was pleasure or peace of mind, or where physical inconvenience was caused.
The third paragraph applies the same measure to quasi-contractual obligations under Sections 68 to 72.

10. Related Topics and Provisions

Topic or provision	Connection
Breach of Contract under Sections 73 to 75	The chapter and the remedies map
Penalty and Liquidated Damages under Section 74	Where a sum is named in the contract
Compensation on Rightful Rescission under Section 75	Damages compared with restitution and specific performance
Anticipatory Breach under Section 39	The date at which damages are assessed on the election
Unjust Enrichment vs Quantum Meruit	The alternative measure where the bargain was a losing one
Section 73, Indian Contract Act	The two rules, remoteness and mitigation
Sections 68 to 72, Indian Contract Act	The obligations to which the third paragraph extends
Interest Act, 1978 and Section 34, Code of Civil Procedure, 1908	Interest on a claim and on a decree
Specific Relief Act, 1963	Where damages are not an adequate remedy