Compensation for Loss or Damage Caused by Breach

Broken down: four rules in one section

Rule one: compensation for loss caused by the breach

The claimant must show a breach, a loss, and a causal connection between them. The measure is what will put him in the position he would have occupied had the contract been performed, which is called the expectation measure.

Rule two: the two limbs of recoverability

This is the heart of the section, and the wording deliberately reproduces the two rules stated in the English case of Hadley v. Baxendale.

Limb one, the ordinary loss: loss "which naturally arose in the usual course of things from such breach". This is the loss any contract of that kind would produce, and it needs no special knowledge on the defendant's part. He is taken to have contemplated it.

Limb two, the special loss: loss "which the parties knew, when they made the contract, to be likely to result from the breach of it". Note the three requirements packed into the phrase: the parties must have known; the knowledge must have existed when they made the contract; and the loss must have been known to be likely to result.

The practical consequence is that a claimant who has an unusual loss in prospect must bring it home to the other party at the time of contracting. Telling him afterwards is too late. See [Remoteness of Damage, and the Duty to Mitigate].

Rule three: no remote or indirect loss

The second paragraph is a limit stated in the section's own words: "Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach."

Remoteness is not the same as causation. A loss may be caused by a breach in a factual sense and still be too remote, because it falls outside both limbs. This paragraph is what makes the two limb test a test of recoverability rather than a mere description.

Rule four: obligations resembling those created by contract

The third paragraph extends section 73 to quasi contractual obligations, that is those in Chapter V, sections 68 to 72. A person injured by the failure to discharge such an obligation gets the same compensation as if the defaulter had contracted to discharge it and had broken his contract. See [Quasi Contracts: Obligations Resembling Those Created by Contract].

The Explanation: mitigation

"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."

This is the duty to mitigate in statutory form, and it is examined in the next chapter. The claimant cannot sit still and let his loss grow.

The measure in the common cases

Applying the expectation measure produces settled rules of thumb, and knowing them turns a general answer into a precise one.

• Seller fails to deliver goods: the difference between the contract price and the market price at the time and place of the breach, because the buyer can buy substitutes.
• Buyer fails to accept and pay: the difference between the contract price and the market price, being the seller's loss on resale.
• No available market: the actual loss, which may include lost profits on a sub sale where the two limb test is satisfied.
• Defective performance: the cost of putting it right, or the diminution in value, according to what is reasonable.
• Delay: the loss caused by the delay itself, for example the value of the use lost.

Interest. Section 73 gives compensation for loss, and interest is not automatically part of it. It may be awarded under a contractual stipulation, under a statute, or under the general law where the loss consists of being kept out of money.

A worked example

Ekta contracts to deliver a printing machine to Farooq's press on 1 July for eighteen lakh rupees. She fails to deliver.

• Farooq buys an identical machine elsewhere on 3 July for twenty lakh. The ordinary loss under limb one is the difference of two lakh rupees, and buying the substitute is also mitigation as the Explanation requires.
• He also loses two weeks of ordinary printing work worth three lakh rupees. Loss of the use of a printing machine by a printer is loss that naturally arose in the usual course of things, so it falls within limb one.
• He additionally loses an exceptionally lucrative government contract worth forty lakh, which he had told Ekta nothing about. This is not ordinary loss, and it was not known to the parties when they made the contract. It fails both limbs and is remote and indirect. Not recoverable.
• Change one fact: at the time of contracting Farooq told Ekta the machine was for a specific government contract worth forty lakh, and that it would be lost without timely delivery. The loss is now within limb two, because the parties knew, at the time of contracting, that it was likely to result from a breach.
• Change it again: Farooq told her about the government contract in June, after the contract was made. Too late. Limb two requires the knowledge to have existed when they made the contract.
• Farooq makes no attempt to buy a substitute although several were available, and loses six weeks of work. The Explanation applies: the means of remedying the inconvenience must be taken into account, so he recovers only what he would have lost had he acted reasonably.

What it does NOT mean

"Damages punish the party in breach." They compensate. The measure is the innocent party's loss, not the defaulter's fault or gain.

"Every loss that follows the breach is recoverable." Only loss within the two limbs, and the second paragraph excludes remote and indirect loss expressly.

"Telling the other party about a special loss at any time is enough." Limb two requires the knowledge when they made the contract.

"A claimant may sit back and let the loss run." The Explanation requires the means of remedying the inconvenience to be taken into account.

"Section 73 applies only to contracts." Its third paragraph extends the same compensation to obligations resembling those created by contract, that is the quasi contracts in sections 68 to 72.

"Interest is always payable on the compensation." It is not automatic under section 73 and must come from the contract, a statute, or the general law.

Quick revision

• s.73: the party who suffers by a breach is entitled to compensation for any loss or damage caused thereby, being loss that naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from it.
• Second paragraph: no compensation for remote and indirect loss.
• Third paragraph: the same compensation for the breach of an obligation resembling one created by contract, that is ss.68 to 72.
• Explanation: the means of remedying the inconvenience must be taken into account. This is mitigation.
• The two limbs reproduce Hadley v. Baxendale: ordinary loss needs no notice; special loss must be known AT THE TIME OF CONTRACTING.
• Aim is compensatory, not punitive: the innocent party is put where performance would have put him.
• Usual measure for non delivery or non acceptance: the difference between the contract price and the market price.

Test yourself

1. State section 73. When a contract has been broken, the party who suffers by the breach is entitled to receive from the party who has broken it compensation for any loss or damage caused to him thereby which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it; and such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

2. What are the two limbs of recoverable loss? The first limb covers loss which naturally arose in the usual course of things from the breach, which the defendant is taken to have contemplated without any special notice. The second covers loss which the parties knew, when they made the contract, to be likely to result from the breach, which requires actual knowledge of the special circumstances at the time of contracting.

3. A buyer tells the seller about a lucrative sub contract only after the contract is made. Can he recover his loss on it? No. Limb two requires that the parties knew, when they made the contract, that the loss was likely to result from a breach. Knowledge acquired afterwards does not bring the loss within the section, and as extraordinary loss it will not fall within limb one either, so it is remote and indirect.

4. What does the Explanation to section 73 require? That in estimating the loss or damage arising from a breach the means which existed of remedying the inconvenience caused by the non performance must be taken into account. It is the statutory statement of the duty to mitigate, and it reduces the recoverable loss to what the claimant would have suffered had he acted reasonably.

5. Does section 73 apply outside contract? Yes, in one respect. Its third paragraph provides that where an obligation resembling those created by contract has been incurred and has not been discharged, the person injured is entitled to the same compensation as if the defaulter had contracted to discharge it and had broken his contract. That extends the section to the quasi contractual obligations in sections 68 to 72.