The Curious Case of Damages

Definition of Damages in paragraph 383 at page 216, Halsbury’s Laws of England, Third Edition, Volume II, which reads as follows:

Damages may be defined as the pecuniary compensation which the law awards to a person for the injury he has sustained by reason of the act or default of another, whether that act or default is a breach of contract or a tort; or, put more shortly, damages are the recompense given by process of law to a person for the wrong that another has done him.

In paragraph 404 of Halsbury’s Laws of England, Third Edition, Volume II, the following passage occurs:

Damages normally limited to actual loss: The measure of damages will normally permit the recovery of damages in respect of damage, injury or loss which arises naturally and directly from the act or omission complained of, but this is to be regarded as establishing a maximum. Where damages are capable of computation in money, and the damage actually suffered is less than such as might naturally have arisen from the act or omission complained of, only such damages as have actually accrued can be awarded.

Types of Damages

v  Exemplary damages or Punitive Damages

Exemplary damages or Punitive Damages are not compensatory but are awarded to punish the defendant and to deter others from similar behavior in the future.

Under English law, The House of Lords1 has devised three categories under which such damages can be levied:-

a. Oppressive, arbitrary or unconstitutional action any the servants of the government;

b. Wrongful conduct by the defendant which has been calculated by him for himself which may well exceed the compensation payable to the claimant; and

c. Any case where exemplary damages are authorised by the statute.

The later decision2upheld the categories for awarding exemplary contract and made important observations. The Relevant extract is reproduced below:-

“ (i) that the burden of proof rests on the plaintiff to establish the facts necessary to bring the case within the categories,

(ii) That the mere fact that the case falls within the categories does not of itself entitle the jury to award damages purely exemplary in character. They can and should award nothing unless

(iii) they are satisfied that the punitive or exemplary element is not sufficiently met within the figure which they have arrived at for the plaintiff’s solatium in the sense I have explained and

(iv) that, in assessing the total sum which the defendant should pay, the total figure awarded should be in substitution for and not in addition to the smaller figure which would have been treated as adequate solatium, that is to say, should be a round sum larger than the latter and satisfying the jury’s idea of what the defendant ought to pay.”

Compensatory Damages

“Compensatory damages” means damages intended to make good the loss of an injured party, and no more.  The term includes general and special damages and does not include nominal, exemplary or punitive damages.

Requirements for proving Compensatory Damages:-

1.       Causation of Damage

In a suit for damages, ‘causation of damage’ is the crucial question and the burden is on the plaintiff to prove that the damage was caused by the wrongful act of the defendants.

2.       Foreseeability of damage

Foreseeability of damage is relevant to decide whether the act complained of was negligent or not, but the liability for damages is not restricted to foreseeable damage but extends to all the damage directly traceable to the negligent act.3

3.       Remoteness of Damage

In Common parlance remoteness of damages can be stated only such loss may be compensated as the parties could have contemplated at the time of entering into the contract. The party held liable to compensation shall be obliged to compensate for such losses as directly flow from its breach under the Contract.

4.       Mitigation of Damages

In English jurisprudence, under conclusion of Legal principle in Para 64 it was held that : – “Whilst a mitigation analysis requires a sufficient causal connection between the breach and the mitigating step, it is not sufficient merely to show in two stages that there is (a) a causative nexus between breach and mitigating step and (b) a causative nexus between mitigating step and benefit. The inquiry is also for a direct causative connection between breach and benefit (Palatine), in cases approached by a mitigation analysis no less than in cases adopting a measure of loss approach. Accordingly, benefits flowing from a step taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach”.4

Liquidated and Unliquidated damages

There is no qualitative difference between liquidated damages and unliquidated damages. Save and except that in case of liquidated damages no compensation is payable in excess of sum stipulated in the Contract. Both liquidated and unliquidated damages are to be proved, hence the damages are been proved the parties are not entitled for any award.

1.       Liquidated Damages and Penalty5

The parties to a contract may at the time of entering into it provide, that in case of breach the party in default is to pay to the other a sum certain specified in, or ascertainable from, the contract.
When a contract contains a term which, not being an integral part of the contract, is introduced only for the purpose of securing the performance of the contract, that term is penal, and, as such, a penalty is a term which is extraneous and collateral to the actual contract. A penal clause, therefore, must be one which imposes, some penalty for the default, that is to say, which puts the defaulter in a worse position than he would occupy if there were no penal clause.
Principle of Liquidated damages is the liability to pay damages accrues and arises when the claim is either accepted by parties in a dispute or matter is finally judicially determined upon.6
Principle of Penalty is if in making provision for breach of contract, the promisee puts in a stipulation not by way of reasonable compensation to the promisee on the breach of contract but in order that by reason of its burdensome or oppressive character that it“may operate in terrorem i.e. meant as a punishment inflicted on party committing default over the promisor so as to drive him to fulfil the contract, then the stipulation is one by way of penalty.”
2.       Distinction between Penalty and Liquidated Damages7

·         The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. Where the parties themselves, call the sum made payable a penalty, the onus lies on those who seek to show that it is liquidated damages to prove that such was the intention.

·          It will be held to be a penalty, if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

·         It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.

·         There is a presumption (but no more) that it is a penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage i.e. unimportant”.

·            Where a contract contains a variety of stipulations, and the amount of damages for the breach of each stipulation is unascertainable, or not readily ascertainable, then the sum payable on the breach of any of the stipulations is liquidated damages.

·            Where a contract contains only a single stipulation, on the breach of which a specified sum, whether large or small, is to become payable, such a sum is liquidated damages especially where there is no adequate means of ascertaining the precise damage which may result from the breach; but if the single stipulation is very insignificant or can only give rise to nominal damages, and the sum payable is considerable, the disproportion between the two may be so great as to make it plain that the sum was fixed as a penalty.

3.       Test for Determining Penalty8


·         Various Courts in India have laid down a number of tests. The most important test to determine whether the stipulation amounts to penalty or not, is the question as to whether or not the payment of money was in terrorem i.e. it was meant as a punishment to be inflicted on the party committing default. This, therefore, envisages that there must be two agreements, the primary agreement and the subsidiary agreement.


·         To determine whether a particular clause is penal or not would be the fact as to whether the damages fixed are much more in proportion to the actual breach caused.


·         Another test that has to be applied is as to whether If the parties are placed in the same position as they were the party committing default, is put in a worse position or not.

These tests may not be conclusive one way or the other but they may give the Court a general idea in particular case to determine whether the clause in dispute amounts to penalty or not.

Consequential damages

The concept of “consequential damages” in contract law relates to the concept of foreseeability at the time the contract is executed and not as the petitioner would have it, foreseeability at the time of the breach.

The assertion of “examples” of circumstances per se where “foreseeability does not of itself, and automatically, lead to a duty of care”. In other words, it can be stated that there is a prima facie duty of care whenever, in the reasonable contemplation of a person in the sense of what can be reasonably viewed or foreseen, carelessness on other party’s part may be likely to cause damage to another.

It was held in this judgement9:-

“The defendant is liable only for ‘natural and proximate consequences of a breach or those consequences which were in the contract’. The above quoted phrases are words of art and usually represent two ways of expressing a single requirement. Proximate and natural consequences are those that flow directly or closely from the breach in the usual and normal course of events – those which a ‘reasonable man’ or a person or ordinary prudence would when the bargain is made foresee, as expectable results of later breach. Brevity and clarity are better served by abandoning these traditional phrases of legal art and using instead that gist of their meaning. We propose the following statement of the rule. The defendant is liable only for reasonably foreseeable losses – those that a normally prudent person, standing in his place possessing his information when contracting would have had reason to foresee as probable consequences of future breach.”

v  Disgorgement Damages

Black’s Law Dictionary defines disgorgement as “The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.”

In commercial terms, disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity.10

v  Calculating disgorgement damages

Damages can be perused by adopting a “two-step burden-shifting framework” for calculating disgorgement, which “requires the FTC to first ‘show that its calculations reasonably approximated’ the amount of the defendant’s unjust gains, after which the ‘burden shifts to the defendants to show that those figures were inaccurate1

In case of IPR infringement, the owner must prove these four elements required for recovery of lost profit :-  (1) Demand for the patented product, (2) Absence of acceptable non-infringing substitutes, (3) Manufacturing and marketing capability to exploit the demand, and (4) The amount of the profit owner would have made.12

v  Nominal and Substantial damages

“Nominal damages” are defined in Bouvier’s Law Dictionary as “a trifling sum awarded where a breach of duty or an infraction of the plaintiff’s right is shown, but no serious loss is proved to have been sustained”; or “where, from the nature of the case, some injury has been done, the amount of which the proofs fail entirely to show”.

They are given not as an equivalent for the wrong but in recognition of a technical injury, and by way of declaring the right.

“Substantial damages” on the contrary are those damages which a plaintiff with a good cause of action, is entitled to receive as a fair and adequate compensation for the damage he has suffered from the wrongful act of the defendant. The principle of  restitutio in integrum is more faithfully adhered to. The Court will endeavour to get that sum of money which will put the party who has been injured in the same position in which he would have been but for the wrongful act of the defendant.13

v  Conclusion

The essential requirement for claiming damages are loss must be foreseeable at time of conclusion of contract, loss must by proved by aggrieved party and loss is caused despite aggrieved party taking steps to mitigate the risk. Damages remains a civil and not a criminal remedy, hence the judiciary shall not lose sight of the fact that in while awarding damages they are putting money in plaintiff’s pockets. Hence judiciary shall take a holistic view in awarding Damages.

.                                                                                                                               .

1-      Rookes v. Barnard. [1964] 1 All ER 367)

2-      Cassell & Co. Ltd. v. Broome, 1972 AC 1027

3-      United India Insurance Company Limited vs. P.N. Thomas and Ors. (27.11.1998 – 2000 ACJ 536)

4-       Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U. (formerly Travelplan S.A.U) of Spain, May 21,2014

5-      Union Of India (UOI) vs Vasudeo Agarwal and Anr. on 23 September, 1958 AIR 1960 Pat 87)

6-      Kaveri Engg. Industries Ltd. vs. Deputy Commissioner of Income Tax (31.07.1992)

7-      ( Para 30 –  Union Of India (UOI) vs Vasudeo Agarwal and Anr. on 23 September, 1958 AIR 1960 Pat 87)

8-      Pandit Janki Nath Zutshi and Anr. vs. Ghulam Qadir Mir and Ors. (04.09.1963 – JKHC))

9-      Titanium Tantalum Products Ltd. vs Shriram Alkali and Chemicals on 11 May, 2006 2006 (2) ARBLR 366 Delhi)

10-   Karvy Stock Broking Ltd. vs Securities And Exchange Board Of … on 2 May, 2008 2008 84 SCL 208 SAT)

11-    Federal Trade Commission Vs. Bluehippo Funding dated August 12,2014 – 2nd Circuit)

12-    Panduit Corp. Vs. Stahlin Bros. Fibre Works dated April 25, 1978 – 6th Circuit)

13-    Indian Hume Pipe Co. Ltd. vs. Vendra Venkanna, Proprietor of Jai Bharathi Cement Works, Penugonda,October 13,1961








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