Remedies for Breach of Contract; Damages [Measure of Damages and Remoteness of Damages] | Indian Contract Act, 1872

When a party to a contract fails to perform his contractual obligation, the other party is said to have suffered a breach of contract. The law provides various remedies to the aggrieved party against such breach. Among these remedies, damages are the most common remedy.

The fundamental object of awarding damages for breach of contract is compensation and not punishment. The purpose is to place the aggrieved party, so far as money can do so, in the same position in which he would have been if the contract had been duly performed.

The principal statutory provisions relating to compensation for breach of contract are contained in Sections 73, 74 and 75 of the Indian Contract Act, 1872.

The law relating to contractual damages principally involves two questions:

1. Measure of damages: How is the amount of compensation to be calculated?
2. Remoteness of damages: Which losses are sufficiently connected with the breach to be legally recoverable?

Section 73 [Compensation for Loss or Damage Caused by Breach of Contract]

Section 73 lays down the general rule governing compensation for breach of contract.

A party who suffers because of a breach is entitled to compensation for:

• loss or damage which naturally arose in the usual course of things from the breach; or
• loss or damage which the parties knew, when they made the contract, to be likely to result from the breach.

However, compensation is not payable for remote and indirect loss or damage.

Thus, Section 73 incorporates the basic principles of:

• causation;
• remoteness;
• reasonable foreseeability;
• compensation; and
• mitigation of loss.

Causation of Loss

The claimant must establish a sufficient causal connection between the breach and the loss claimed. The mere fact that a loss occurred after the breach does not make it recoverable. The breach must be an effective cause of the loss for which compensation is claimed. Therefore, a claimant cannot recover every financial consequence that can be traced in some indirect manner to the defendant’s breach. The court considers whether the claimed loss is sufficiently connected with the breach and whether it falls within the categories of loss recognised by Section 73.

Principle of Compensation

The fundamental object of damages is to place the injured party, so far as money can do so, in the position in which he would have been if the contract had been performed. Damages are therefore compensatory rather than punitive.

In A.T. Brij Paul Singh & Bros. v. State of Gujarat (AIR 1984 SC 1703), the Supreme Court recognised the compensatory principle and accepted that loss of profits may form part of the damages where the circumstances justify such an award.

The claimant is therefore entitled to compensation for legally recoverable loss resulting from the breach, but not to a windfall or an amount designed merely to punish the party in breach.

Measure of Damages

The measure of damages refers to the method by which the amount of monetary compensation payable to the injured party is calculated. The precise measure depends upon the nature of the contract, the type of breach, the loss suffered and the circumstances in which the contract was made.

Ordinary Measure (Difference Between Contract Price and Market Price)

In contracts involving the sale or purchase of goods, the usual measure of damages for non-delivery or wrongful refusal to accept goods is the difference between Market price at the relevant date and Contract price. The precise application depends upon whether the buyer or seller is the party suffering from the breach.

For example:

A agrees to sell 50 bags of rice to B at ₹5,000 per bag. A fails to deliver the rice on the agreed date. On that date, the market price is ₹5,500 per bag. B’s ordinary loss is ₹500 per bag. Thus, subject to the applicable circumstances, B may claim ₹500 per bag as ordinary damages.

Date for Assessment of Damages

Ordinarily, damages are assessed with reference to the loss existing at the date of breach, rather than by waiting to see what happens to the market at a later date.

• In Jamal v. Moola Dawood Sons & Co. [(1916) 43 IA 6], the Privy Council held that damages in a contract for sale of shares were to be assessed by reference to the market position at the date of breach. The subsequent rise or fall in the market does not ordinarily alter the measure of damages. This rule prevents a claimant from postponing the assessment of loss and then claiming the benefit of a favourable subsequent market movement.

Place for Assessment of Market Price

Where market price is used as the measure of damages, the relevant market is ordinarily the market at the place where the contract was required to be performed, subject to the terms and circumstances of the contract.

• In M/s Murlidhar Chiranjilal v. M/s Harishchandra Dwarkadas (AIR 1962 SC 366), the Supreme Court considered a contract requiring delivery of canvas at Kanpur and held that the relevant market price was the price at Kanpur, the place of performance.

Remoteness of Damages under Section 73

The principle of remoteness of damages determines whether a particular loss is sufficiently connected with the breach to be recoverable. Section 73 expressly excludes compensation for remote and indirect loss or damage. Thus, even where the claimant proves that a loss was caused in some broad sense by the breach, the loss will not necessarily be recoverable. It must also be legally proximate and fall within the scope of the loss contemplated by Section 73.

Two Categories of Recoverable Loss

The principle may broadly be understood through two categories.

1. Loss Arising Naturally from the Breach

Loss which arises naturally in the usual course of things from the breach is ordinarily recoverable. Such loss represents the ordinary and foreseeable consequence of the breach.

• For example, if a seller wrongfully refuses to deliver goods and the buyer has to purchase identical goods at a higher market price, the additional amount may ordinarily be recoverable.

2. Loss Arising from Special Circumstances

Loss arising from special circumstances may also be recoverable where those circumstances were communicated to or were within the knowledge of the other party when the contract was made. The purpose of this rule is to ensure that a party is not made liable for unusual consequences which he could not reasonably have contemplated when entering into the contract.

Case: Hadley v. Baxendale (Rule of Remoteness)

The traditional common-law rule relating to remoteness is explained by Hadley v. Baxendale.

In that case, the crankshaft of a mill broke and was sent through a carrier for repair. The carrier delayed delivery, and the mill remained idle for a longer period. The mill owner claimed loss of profits. The claim for loss of profits failed because the carrier had not been informed of the circumstances which would make such loss a consequence of the delay.

The rule is traditionally stated in two parts:

1. Natural Consequences - Damages may be recovered for loss which arises naturally, according to the usual course of things, from the breach.
2. Special Circumstances - Damages arising from special circumstances may be recovered where those circumstances were communicated to or were within the contemplation of the parties when the contract was made.

The principle of Hadley v. Baxendale substantially corresponds with the statutory rule contained in Section 73 of the Indian Contract Act. Therefore, a claimant cannot ordinarily recover every loss which is indirectly connected with the breach.

Ordinary and Special Damages under Section 73

Ordinary Damages

Ordinary damages are damages for loss which naturally arises in the usual course of things from the breach. They do not depend upon unusual or exceptional circumstances.

• For example, A agrees to sell 50 bags of rice to B at ₹5,000 per bag. A fails to deliver them and the market price on the date of breach is ₹5,500 per bag. B may ordinarily claim ₹500 per bag as damages.

The loss is the natural and ordinary consequence of A’s failure to deliver.

Special Damages

Special damages arise because of special circumstances surrounding the contract. They are recoverable only where the relevant circumstances were communicated to or known by the party in breach at the time the contract was made.

• For example, A delivers a machine to B, a common carrier, for transportation to A’s mill and informs B that the mill is stopped for want of the machine. B delays delivery. A consequently loses profits from the operation of the mill. Since B was informed of the special circumstance, A may be entitled to recover the loss of profits if the other requirements of proof and causation are satisfied.

However, if A had an independent and undisclosed contract with a third party which was lost because of the delay, A ordinarily cannot recover that additional loss merely because it ultimately resulted from B’s delay. The special circumstance must have been within the relevant knowledge or contemplation of the parties.

Loss of Profits

Loss of profits may be recoverable as damages, but it is not automatically recoverable merely because a contract has been breached. The claimant must establish that:

• the loss resulted from the breach;
• the loss was not too remote;
• it naturally arose from the breach or was within the contemplation of the parties;
• the relevant special circumstances were known where necessary; and
• the amount claimed can be established with reasonable certainty.

Courts do not award damages based upon profits which are merely speculative, hypothetical or uncertain.

In A.T. Brij Paul Singh & Bros. v. State of Gujarat, the Supreme Court recognised that loss of profits can form part of recoverable damages where the circumstances establish the entitlement to such compensation.

Thus, the law does not prohibit recovery of lost profits; it prohibits recovery of remote or speculative profits.

Consequential and Remote Loss

A claimant cannot recover a loss merely because it is ultimately connected with the breach.

For example, where A fails to deliver machinery to B:

• B may recover the reasonable additional cost of obtaining substitute machinery;
• B may recover ordinary loss naturally resulting from the delay; but
• B ordinarily cannot recover loss arising from an undisclosed contract with a third party unless the relevant circumstances were within A’s knowledge when the contract was made.

Similarly, if B intended to use the machinery for producing a particular seasonal product, B cannot automatically claim all anticipated profits from that business. Such profits must satisfy the requirements of causation, foreseeability, remoteness and reasonable certainty.

The law therefore compensates legally proximate loss, rather than every consequential loss flowing from a breach.

Contractual Limitation and Exclusion of Liability Clauses

While Section 73 establishes the baseline statutory rules for assessing loss and remoteness, modern commercial contracts frequently contain express terms designed to modify, restrict, or exclude the operation of these rules.

Courts generally recognise the right of freedom of contract, allowing parties to allocate risks and limit their potential financial exposure in advance through specific contractual clauses.

• Exclusion of Consequential Losses: Parties frequently insert terms excluding liability for indirect, special, or consequential losses (such as loss of profits, loss of opportunity, or business interruption). Where such a clause is valid, it restricts recovery under the second limb of Section 73 (Hadley v. Baxendale), even if the special circumstances were known or communicated to the party in breach.
• Limitation of Liability Caps: A contract may cap the total damages recoverable for breach to a fixed monetary ceiling (for example, limiting liability to the contract price or a specified multiple of fees paid). In such cases, even if the actual loss calculated under Section 73 exceeds the agreed cap, recovery remains constrained by the contractual ceiling.
• Judicial Control over Exclusion Clauses: The enforcement of limitation and exclusion clauses is not absolute. Courts interpret such clauses strictly against the party seeking to rely on them (contra proferentem rule) and may decline to enforce them where:
  • The clause is contrary to public policy or unconscionable under Section 23 of the Indian Contract Act.
  • The breach amounts to deliberate fraud, bad faith, or intentional misconduct.
  • The clause completely negatives the primary core obligation of the contract, rendering performance illusory.

Duty to Mitigate Damages

The injured party is under a duty to take reasonable steps to reduce the loss resulting from the breach. The Explanation to Section 73 provides that, while estimating damages, the means which existed for remedying the inconvenience caused by non-performance must be taken into account. This embodies the principle of mitigation of damages.

The claimant cannot deliberately allow the loss to increase and then recover the additional loss from the party in breach.

Reasonable Nature of the Duty

The duty to mitigate is a duty of reasonableness. The injured party is not required to:

• take extraordinary risks;
• incur unreasonable expenditure;
• destroy his property;
• injure himself; or
• take measures which would cause disproportionate harm to his business or reputation.

The claimant is required only to take reasonable steps which a prudent person would ordinarily take in the circumstances.

If the party in breach establishes that reasonable means of avoiding or reducing the loss were available and were unreasonably ignored, the damages may be reduced to the extent of the avoidable loss.

In K.G. Hiranandani v. Bharat Barrel & Drum Mfg. Co. (AIR 1963 Bom. 373), the principle underlying the Explanation to Section 73 was considered in the context of assessment of damages.

Similarly, in M. Lachia Setty & Sons Ltd. v. Coffee Board, Bangalore [(1980) 4 SCC 636], the Supreme Court recognised mitigation as an important principle in assessing contractual damages.

Mitigation in Contracts for Sale of Goods

The principle of mitigation has particular importance in contracts for the sale of goods.

• Where the Buyer Breaches - If the buyer wrongfully refuses to accept the goods, the seller should take reasonable steps to resell them where resale is reasonably possible. The seller may generally claim the loss properly attributable to the breach, subject to the applicable measure of damages and the duty to mitigate. If the seller unreasonably retains the goods and allows their value to fall, he cannot ordinarily recover the additional loss caused by his own unreasonable conduct.
• Where the Seller Breaches - If the seller refuses to deliver the goods, the buyer should ordinarily attempt to obtain substitute goods where reasonably available. If equivalent goods can reasonably be purchased in the market, the buyer cannot deliberately refrain from doing so and then claim losses which could reasonably have been avoided.

Case: Jamal v. Moola Dawood Sons & Co. (Date of Breach and Mitigation)

In Jamal v. Moola Dawood Sons & Co. (1916), shares had been sold under a contract, but the buyer refused to accept them on the date fixed for delivery. On the date of breach, the market position resulted in a loss of ₹1,09,218 to the seller. The seller subsequently sold the shares when the market had improved and the actual loss was only ₹79,862.

The buyer argued that the seller should receive only the smaller subsequent loss. The Privy Council rejected this argument and held that the damages were to be assessed by reference to the loss existing at the date of breach.

The case illustrates the importance of determining the contractual loss at the appropriate date rather than allowing subsequent market fluctuations to determine the measure retrospectively.

Mental Pain, Suffering and Distress

Damages for mental pain, disappointment or distress are ordinarily not awarded for breach of an ordinary commercial contract. The general rule is that contractual damages compensate financial or legally recognised loss rather than emotional disappointment.

However, an exception may arise where the very object or nature of the contract is to provide:

• pleasure;
• enjoyment;
• entertainment;
• relaxation;
• peace of mind; or
• a special personal experience.

In Jarvis v. Swan Tours Ltd. (1973), damages were awarded for disappointment and distress resulting from the failure to provide the promised holiday experience.

In Ghaziabad Development Authority v. Union of India (AIR 2000 SC 2003), the Supreme Court observed that mental anguish cannot ordinarily be treated as a normal head of damages for breach of an ordinary commercial contract.

Thus, mental distress may be compensable in appropriate cases, but it is not ordinarily recoverable merely because a commercial contract has been breached.

Nominal Damages

Nominal damages refer to a small sum awarded where a legal right has been violated but substantial compensable loss has not been established. However, the concept must be applied carefully under Section 73 because the statutory provision is primarily concerned with compensation for loss or damage caused by the breach. Mere breach does not automatically entitle a claimant to substantial damages.

In State of M.P. v. Recondo Ltd. (1989 MPLJ 822), nominal damages were considered in circumstances where the contractor was unable to establish a substantial claim for loss of profits.

Thus:

• Substantial damages compensate legally recoverable loss; whereas
• Nominal damages recognise a contractual right where a breach is established but substantial loss is not proved, subject to the principles governing contractual damages.

Exemplary or Vindictive Damages

The general rule is that damages for breach of contract are compensatory and not punitive. Therefore, exemplary or vindictive damages ordinarily have little place in contractual law.

Traditional exceptions have been recognised in limited situations, particularly:

• wrongful dishonour of a customer’s cheque by a banker where the circumstances justify such damages; and
• certain historical claims relating to breach of promise to marry.

The latter should not be treated as a general principle of contemporary Indian contractual law. The central principle remains that contractual damages are intended to compensate rather than punish.

Section 74 [Compensation Where Penalty is Stipulated]

Section 74 deals with cases where the contract itself specifies a sum payable in the event of breach or contains a stipulation by way of penalty.

It applies where:

• a sum is named in the contract as the amount payable upon breach; or
• the contract contains any other stipulation by way of penalty.

The injured party is entitled to reasonable compensation, whether or not actual loss or damage is proved, but such compensation cannot exceed the amount named or the penalty stipulated.

Therefore, the stipulated sum is generally the maximum ceiling, not an amount which must automatically be awarded.

Section 74 and Reasonable Compensation

The principal rules under Section 74 are:

• The court is not automatically bound to award the entire stipulated amount.
• The court may award a lesser amount where that is what constitutes reasonable compensation.
• The amount named in the contract operates as the maximum limit.
• Compensation cannot exceed the stipulated amount.
• The traditional English distinction between liquidated damages and penalty is not applied as a rigid technical distinction under Indian law.
• The court must examine the circumstances of the breach and the nature of the contractual stipulation.
• Section 74 must be read together with the general compensatory principle in Section 73.

The essential question is therefore not simply, “What amount did the contract mention?”, but, “What amount constitutes reasonable compensation, subject to the contractual ceiling?”

Legal Injury and Proof of Loss under Section 74

The words “whether or not actual damage or loss is proved” do not mean that every breach automatically entitles the claimant to the stipulated amount.

In Maula Bux v. Union of India [(1969) 2 SCC 554], the Supreme Court explained that Section 74 may dispense with detailed proof of actual loss in appropriate circumstances, particularly where the loss is difficult or impossible to quantify.

However, Section 74 does not eliminate the requirement of a legally cognisable injury. Where loss can readily be calculated in monetary terms, the claimant may be required to establish the loss.

The section therefore seeks to balance two considerations:

• protection of contractual stipulations; and
• prevention of unjustified or excessive recovery.

Case: ONGC Ltd. v. Saw Pipes Ltd. (Genuine Pre-Estimated Damages)

In ONGC Ltd. v. Saw Pipes Ltd. (AIR 2003 SC 2629), the contract contained a provision prescribing damages for delay in supply. The Supreme Court held that where the parties have genuinely pre-estimated the probable loss and the stipulated amount is not penal, the court may award the stipulated amount as reasonable compensation even without insisting upon detailed proof of actual loss, particularly where the loss is difficult to quantify. The decision therefore recognises the importance of a genuine contractual pre-estimate of loss. However, it does not mean that every stipulated sum is automatically enforceable.

The court must still consider:

• whether the stipulation represents a genuine pre-estimate;
• whether it is penal in nature;
• whether legal injury has resulted; and
• what constitutes reasonable compensation in the circumstances.

Case: Kailash Nath Associates v. Delhi Development Authority (Section 74)

The Supreme Court’s decision in Kailash Nath Associates v. Delhi Development Authority is important in understanding the relationship between breach, legal injury and Section 74. The principle emerging from the decision is that Section 74 does not create an automatic right to recover the stipulated amount merely because a contract contains a forfeiture or damages clause. The claimant must establish the legal basis for compensation, and the court must determine reasonable compensation in accordance with Section 74.

Thus, a contractual clause cannot be used as a means of obtaining a windfall unrelated to the loss or legal injury resulting from the breach. This reinforces the principle that Section 74 regulates compensation; it does not make contractual penalties automatically recoverable.

While ONGC v. Saw Pipes allows dispensing with strict proof of loss when loss is difficult/impossible to prove, Kailash Nath reiterated that proof of legal injury remains a prerequisite where loss is easily quantifiable.

Liquidated Damages and Penalty

Under traditional English law, a distinction was drawn between:

• Liquidated Damages - A genuine pre-estimate of the loss likely to be suffered from breach.
• Penalty - A sum imposed primarily to secure performance or punish the party in breach.

Indian law adopts a somewhat different approach through Section 74.

The court is principally concerned with reasonable compensation, subject to the maximum amount stipulated in the contract. Consequently, the label used by the parties is not conclusive.

A clause described as “liquidated damages” is not automatically payable in full, and a clause described as a “penalty” does not simply become irrelevant. The court examines the substance of the stipulation and determines reasonable compensation within the statutory framework.

Forfeiture of Earnest Money and Security Deposit

Section 74 is also relevant where a contract provides for forfeiture of money deposited by one of the parties.

A distinction is generally made between earnest money and a security deposit.

• Earnest Money - Earnest money is ordinarily a sum paid at the time of entering into a contract to demonstrate the purchaser’s commitment to the transaction. It generally forms part of the purchase price if the transaction is completed.
• Security Deposit - A security deposit is ordinarily given as security for due performance of contractual obligations. It is not necessarily part of the purchase price.

The consequences of forfeiture depend upon:

• the true nature of the payment;
• the terms of the contract;
• the circumstances of the breach; and
• the requirement of reasonable compensation under Section 74.

The label given to the payment by the parties is not necessarily conclusive.

Case: Fateh Chand v. Balkishan Das (Forfeiture)

In Fateh Chand v. Balkishan Das (AIR 1963 SC 1405), the Supreme Court considered a contractual provision providing for forfeiture of amounts paid under an agreement for sale. The Court held that Section 74 applies to forfeiture provisions and that the court may award only such amount as constitutes reasonable compensation, subject to the contractual ceiling.

Therefore, a forfeiture clause is not automatically enforceable merely because it appears in the contract. The court must determine whether the amount sought to be forfeited represents reasonable compensation in the circumstances.

Case: Maula Bux v. Union of India (Security Deposit)

In Maula Bux v. Union of India [(1969) 2 SCC 554], the contractor had deposited ₹18,500 as security for the performance of a contract to supply food items to military authorities. Following breach, the Government forfeited the deposit. The Supreme Court treated the amount as a security deposit rather than earnest money and considered the question of actual loss. The Court emphasised that where loss is capable of being established, the claimant may be required to prove the loss in order to justify compensation under Section 74.

The case is therefore important for distinguishing security deposits from earnest money and for understanding the requirement of reasonable compensation.

Case: Shri Hanuman Cotton Mills v. Tata Aircraft Ltd. (Earnest Money)

In Shri Hanuman Cotton Mills v. Tata Aircraft Ltd. (AIR 1970 SC 1986), the Supreme Court examined the nature of earnest money.

The principal characteristics of earnest money include:

1. It is ordinarily given at the time the contract is concluded.
2. It signifies the intention of the purchaser to bind the contract.
3. It forms part of the purchase price if the transaction is completed.
4. It may be liable to forfeiture upon the purchaser’s default, subject to the contractual terms and applicable law.
5. Its legal treatment depends upon its true nature and the circumstances of the transaction.

The case is therefore important in distinguishing earnest money from an ordinary advance payment or security deposit.

Case: Tarsem Singh v. Sukhminder Singh (Forfeiture Where Contract is Void)

In Tarsem Singh v. Sukhminder Singh (AIR 1998 SC 1400), the Supreme Court dealt with the forfeiture of money paid under an agreement which was itself void.

The important principle is that the remedies under Sections 73 and 74 presuppose a valid contractual relationship and a legally relevant breach. Where the underlying agreement is void, a party cannot simply rely upon a contractual forfeiture clause as though a valid contract had been breached.

Similarly, where a contract comes to an end through frustration or discharge by operation of law, the situation is legally different from a case of breach. A forfeiture clause cannot automatically be invoked as though the other party had committed a breach.

Section 75 [Compensation on Rightful Rescission]

Section 75 provides that a person who rightfully rescinds a contract is entitled to compensation for damage sustained through the non-fulfilment of the contract.

Thus, where one party commits a breach which entitles the other party to rescind, the innocent party may:

• rescind the contract; and
• claim compensation for the damage caused by the non-fulfilment.

For example:

A singer agrees to perform at a theatre for two nights every week for two months. After performing for several weeks, she wilfully stops attending. The theatre manager rightfully rescinds the contract. The manager may claim compensation for the loss suffered because of the singer’s non-performance.

Section 75 therefore connects the remedy of rescission with the right to seek compensation.

Quantum Meruit (Claim for Value of Work Done)

In addition to standard damages under Section 73, the doctrine of quantum meruit, meaning “as much as he has earned”, provides a remedy where a party has performed part of his contractual obligation and the contract is subsequently discharged by the other party’s breach, or becomes void.

While an action for damages under Section 73 seeks to compensate the innocent party for expectation loss, a claim on quantum meruit seeks reasonable remuneration for the value of the goods supplied or services actually rendered before the contract came to an end.

Requirements for the Claim:

1. The original contract must have been discharged or rendered void without default by the claimant.
2. The work or service rendered must have been accepted or enjoyed by the defendant under circumstances implying an obligation to pay for it.
3. The claim is unliquidated and requires judicial assessment of what constitutes reasonable compensation for the benefit conferred.

Where a contract is divisible and part performance yields an independent benefit, a claim on quantum meruit may arise for the performed portion. However, where a contract is entire and indivisible, partial performance does not ordinarily entitle the performing party to recover under this doctrine unless the other party’s breach or wrongful prevention hindered complete performance.

Expectation, Reliance and Restitution

• The principal objective of contractual damages is generally to protect the expectation interest of the innocent party, i.e., to place the party, so far as money can do so, in the position he would have occupied if the contract had been performed.
• In appropriate circumstances, damages may also compensate expenditure or loss incurred in reliance upon the contract.
• Restitution is conceptually different. It is concerned with restoring benefits received by one party from the other rather than simply compensating the expectation loss caused by breach.

These three interests form the conceptual foundation that dictates how damages are measured and awarded under Section 73.

Conclusion

The law relating to damages for breach of contract seeks to balance two competing considerations; protecting contractual rights while limiting recovery to losses which are legally attributable to the breach.

Section 73 establishes the general principle of compensation. A claimant may recover loss which naturally arises from the breach or loss which the parties knew, when they entered into the contract, was likely to result from the breach. Remote and indirect loss is excluded.

The measure of damages ordinarily seeks to place the injured party, so far as money can do so, in the position he would have occupied had the contract been performed. In appropriate cases, the difference between the market price and contract price provides the measure of loss, generally with reference to the date and place relevant to the breach.

The principle of remoteness, explained through Hadley v. Baxendale, prevents recovery of losses which are too remote or which arise from special circumstances not known to the party in breach. Similarly, the claimant must take reasonable steps to mitigate the loss and cannot recover loss which could reasonably have been avoided.

Loss of profits may be recoverable where it is sufficiently connected with the breach, foreseeable or within the contemplation of the parties, and capable of reasonable proof. Speculative or remote profits are not recoverable.

Section 74 deals with contractual stipulations concerning damages and penalties. The stipulated amount is not automatically payable merely because it appears in the contract. The court awards reasonable compensation, subject to the maximum amount stipulated. The principles stated in Fateh Chand, Maula Bux, ONGC v. Saw Pipes and Kailash Nath Associates are particularly important in understanding this provision.

Forfeiture of earnest money and security deposits must likewise be examined according to their true nature, the contractual terms, the circumstances of the breach and the requirement of reasonable compensation.

Finally, Section 75 permits compensation where a party rightfully rescinds the contract because of the other party’s non-performance.

The fundamental principle running through Sections 73 to 75 is therefore, Contractual damages are intended to compensate the innocent party for legally recoverable loss, not to punish the party in breach.