• Kavya H

The Concept Of Liquidated And Unliquidated Damages

Updated: Dec 26, 2020



This article is authored by Kavya.H, student of SDM Law College Mangalore

Introduction


Damages refer to a form of compensation for a breach of a contractual duty. The injured party in a contractual obligation is given the right to claim reasonable compensation. The primary aim of awarding damages to the injured party is to put the plaintiff in as a good position as he would have been if the contract was performed. Under the Indian Contract Act, 1872, the two main types of damages are liquidated and unliquidated damages. This article focuses on analyzing the concept of liquidated and unliquidated damages with relevant case laws.


Damages


The term damages imply compensation for causing loss or injury through negligence or deliberate act. [1] According to Black’s Law Dictionary, damages refers to the money compensation sought or awarded as a remedy for a breach of contract or tortuous acts. [2] It provides the injured party a pecuniary satisfaction. [3] The concept of damages can be attributed as a common law remedy in cases of breach of contract. Generally, monetary compensation as a remedy is awarded by courts in civil cases wherein a party suffers due to the wrongful conduct of another party.

Damages are broadly classified into four different categories, namely, compensatory damages, nominal damages, punitive damages, liquidated, and unliquidated damages. Compensatory damages refer to the damages claimed for all the natural and direct wrongful acts of the defendant. Nominal damages refer to the damages awarded for the infringement of a legal right, however, there will be an absence of actual financial losses to the injured party. Punitive damages are often associated with exemplary damages and are a method to punish the wrongdoer for his wrongful conduct. The concept of liquidated and unliquidated damages are analyzed hereunder:


Liquidated Damages


Section 74 of the Indian Contract Act, 1872 deals with liquidated damages. Section 74 of the Act states that ‘When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.’ [4]

Liquidated damages refer to the actual damages as agreed by the parties at the time of entering the contract. These are stipulated by the parties themselves and imply that the breaching party shall pay an amount already fixed to the non-breaching party. The commercial contracts usually prescribe liquidated damages as the time and expense of the injured party is spared. Further, the party is not under an obligation to mitigate the loss and the concept of the remoteness of damage also does not arise. However, liquidated damages are always circumscribed with the risk of unenforceability. That is, liquidated damages will be enforceable only by satisfying the two conditions. [5] Firstly, when there is a difficulty in determining the damages if a contemplated breach occurred. Secondly, when the provision of the number of liquidated damages was reasonable to the actual damage suffered.

Therefore, if the terms of a contract are unambiguous and clear, the stipulated liquidated damages will be awarded and the party who has committed the breach is liable to pay such compensation. [6] Further, in the case of Construction & Design Services v. Delhi Development Authority, [7] it was held that the court has to determine whether the stipulated damages is reasonable and then grant it to the injured party.


Unliquidated Damages


Unliquidated damages are dealt with under Section 73 of the Indian Contract Act, 1872. Section 73 of the Act states that ‘When a contract has been broken, the party who suffers by such 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’. [8]

The unliquidated damages are not determined by the parties, however, is determined by the court of law. These are unascertained damages awarded for a breach of contract to the injured party. However, where the loss is not proved, only nominal damages will be awarded. Damages that are unliquidated are not punitive in nature. However, it is pertinent to note that there is no qualitative difference between the damages claimed under Section 73 and Section 74 of the Contract Act. [9]


Conclusion


Therefore, to conclude, it is pertinent to note that both the liquidated and unliquidated damages prove to be advantageous and disadvantageous to the parties. The inclusion of a liquidated damages clause benefits both parties as it restricts the number of damages that a party to the contract can claim. However, the unliquidated damages prove to be effective for the injured party in recovering losses for unforeseeable events. At the same time, unknown liability arises for the guilty party.


References


[1] A. S. Sharma v. Union of India, 1995 ACJ 493.

[2] Bryan A Garner, Black’s Law Dictionary, p. 389, 6th ed.

[3] R v. Agat Laboratories Ltd., 1998 ABPC 24.

[4] Section 74, Indian Contract Act, 1872.

[5] Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd., JT 2003 (4) SC 171.

[6] Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd., (1915) AC 79.

[7] Civil Appeal Nos. 1440-1441 of 2015.

[8] Section 73, Indian Contract Act, 1872.

[9] M/S. Kusal Construction Company v. Municipal Corporation of Delhi, (2011) HC Del.


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