Compensation for Loss or Damage Caused by Breach

In one line

Section 73 is the section the whole paper leads to: it says what a broken contract is worth, and it draws the line between loss the law will pay for and loss it will not.

In the words a student can write in an exam: section 73 of the Indian Contract Act 1872 provides that 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", and that "Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach." The section also extends to obligations resembling those created by contract, and its Explanation requires the means of remedying the inconvenience to be taken into account.

Why compensation and not punishment

The law's aim in awarding damages for breach of contract is compensatory, not punitive. The innocent party is to be put, so far as money can do it, in the position he would have been in had the contract been performed. He is not to be enriched, and the party in breach is not to be punished for breaking his word.

Two consequences flow from that single idea, and they explain most of the rules in this chapter and the next.

The claimant must have suffered a loss. Section 73 speaks of compensation for any loss or damage caused. Where the breach caused no loss, nothing is payable, however clear the breach.

The loss must be attributable to the breach. Not every misfortune that follows a breach was caused by it in the sense the law requires, which is why the section excludes remote and indirect loss.

The word the Act uses throughout is compensation, not damages. The two are used interchangeably in practice, and it is worth writing the Act's word when quoting the section.

The provision itself

"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.

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."