LIQUIDATED VS GENERAL DAMAGES
How are liquidated damages different from general damages? Are liquidated damages required to be proved?
Every contract which is made by parties is based upon mutual trust and confidence and every party to contract gives his consent only on the belief that every party to contract will perform his contractual obligations.
But, if any party to the contract does not perform his contractual obligation and breaches the contract, then in case of breach of contract, the aggrieved party has right to claim remedy from the wrongdoer.
Section 73 to 75 of the Indian Contract Act, 1872, deals with the provisions of compensation in case of breach of contract.
Section 74 of the Indian Contract Act, 1872, deals with the provisions of liquidated damages. If the parties to the contract at the time of entering into a contract decides that if any party to the contract will breach the contract in future, then he will have to pay a particular amount to the aggrieved party as a compensation.
That pre- determined amount of compensation is known as liquidated damages and according to section 74, if any party breaches the contract, then he has to pay the pre- determined amount and it is not necessary for the aggrieved party to prove the actual damages or loss.
In the leading case of Chunnilal Mehta & Sons. Ltd. vs. Century Spinning & Mfg. Co. Ltd., the Hon’ble court held that if the liquidated damages are mentioned in a contract, then in case of breach of contract, the aggrieved party is entitled to recover the damages and in this case the question of ascertaining the damages which has really been arisen does not exist.
Whereas, section 73 of the Indian Contract Act, 1872, deals with the provisions of general remedy and these general damages are totally different from liquidated damages because general damages are not determined by the parties at the time of making the contract and parties do not decide that if any party breaches the contract, then how much amount of compensation will have to be paid by him. These damages are determined by the court only.
According to section 73 of the Indian Contract Act, 1872, if any party breaches the contract and another party claims the compensation, then in such a case, if the aggrieved party suffers the damages or loss which has naturally arisen in the usual course of things from such breach or if the parties to the contract already know that the party will suffer such a loss if the contract has been broken, then only he is entitled to receive the compensation from the wrongdoer. Section 73 of the Indian Contract Act, 1872, does not include remote and indirect loss caused by breach of contract.
In the leading case of Hadley vs. Baxendale, the Hon’ble court held that party to a contract is only entitled to claim the compensation if: –
- Damages have arisen naturally in the usual course of things.
- Parties knew at the time of making a contract that such a damage will be caused in case of breach of contract.
Moreover, in the leading case of Ghaziabad Development Authority vs U.O.I., the Hon’ble court held that it is a duty of party to mitigate the losses and while determining the amount of compensation the inconvenience caused by the non- performance of contract must be taken into consideration.