CHAPTER: FOUR DAMAGES AS THE REMEDY FOR BREACH OF CONTRACTUAL OBLIGATIONS

Transcription

1 CHAPTER: FOUR DAMAGES AS THE REMEDY FOR BREACH OF CONTRACTUAL OBLIGATIONS This chapter is divided into two parts. Depending on the type of breach, we would proceed to discuss the subject under the following heads: (I) Damages under the Indian Contract, Act. (II) Damages under the Sales of Goods, Act. (I) DAMAGES UNDER THE INDIAN CONTRACT, ACT: Except in a few exceptional cases, when the law may permit specific enforcement of contract, damages is the only appropriate remedy for breach of contractual obligation. Two kinds of problems arise when the action for damages is brought. (A) (B) Problem of Remoteness Problem of Measure of Damages (A) Problem of Remoteness: The one general principle which pervades the law of damages is that no allowance can be made for damages which are remotely connected with the wrongful act complained of. It will be remembered that the aim of the law is not to afford complete compensation for the injury sustained, but to apportion the loss between the wrong-doer and the injured party to determine which

2 127 portion of the loss is to be borne by the wrong-doer and which portion by the sufferer. There is an infinite variety of effects I resulting from every cause, but to hold the author of the initial cause responsible for all the effects in the series is to interpose a great obstacle in the way of peace and orderly progress of the society. Therefore, law makes allowance only for the direct consequences and * refuse to consider any damage remotely resulting from the wrongful act. The damages thus rejected from consideration have to be born by the sufferer and are called remote damages and sometimes consequential damages. But these two terms are not interchangeable. All remote damages are consequential but all consequential damages are not remote. The basic for determining damage on the breach of contract in India is the rule contained in Section 73 of the Indian Contract Act. The section is as follows: When a contract has bfeen 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 know, when they made the contract, to be likely to result from the breach of it. Such compensation is not be given for any remote and indirect loss or damage sustained by reason of the breach. 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

3 128 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. The Indian provision is virtual incorporation of the general rule for determining damages as enunciated by Aldderson, B.J. in 1854 in Hadley v. Baxendale. Since the position in India and England in this regard is governed by similar rules, various decisions, both Indian and English, are being discussed to see the application and the interpretation of the rules applicable in such cases. The object of determining damages on the breach of a contract is to put the parties in a position in which they would have been had the breach not taken place. The basis of this well accepted principle is the often quoted statement of Blackburn in Livingatons v. Rawyards Coal Co.,^ where he described the measure of damages as "that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in, if he had not sustained the wrong for which he is now getting his compensation or. reparation.the 1. (1854) 9 EX 341 at : 96 RR 742 at (1 880) 5 AC Ibid at 29. The Statement is equally applicable to every civil wrong, be it a tort or a breach of contract.

4 129 statement has been frequently cited with approval^ and repeated s in similar expressions,in various cases. (a) The Rule in Hadley v. Baxendale: Some limitation has to be placed on the right of the plaintiff to damages because otherwise the law "would provide him (the plaintiff) with a...complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable."0 Such limit was placed by the rule enunciated by n Anderson B. in Hadley v. Baxendale which is considered to be the basis of the law to determine whether the damage is the proximate or remote consequence of'the breach of contract. The rule is as under: Whereby two parties have made a contract which one of them have broken, the damages which the other party ought to receive in 4. See Banco de Portugal v. Waterlow, (1 932) AC 452 at 474;. Monarch Stemship Co. v. Krlshamns, (1949) AC 196 at 221; British Transport Commission v. Gourley, (1956) AC 185 at 197; Czrnikow v. Koufos, (1969) 1 AC 330 at 420; General Tyre and Rubber Co. v. Firestone Tyre and Rubber Co., (1 975) 1 WLR 819 at In Victoria Laundry v. Newman, (1 949) 2 KB 528 at 539, Asquith L.J. stated that the aggrieved party is to be put "in the same position so far as money can do so, as if his rights had been observed". In The Albazero Lord Diplock observed that the Law should "put the person whose right has been invaded in the same position as if it had been respected so far as the award of a sum of money can do so." (1977) A.C Victoria Laundry v. Newman, (1949) 2 KB 528 at 539 (CA), (Per Asquith J.). 7. (1854) 9 Ex 341 at 354 : 96 RR 742 at 753.

5 130 respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Explaining the effect of the rule Alderson B.J. further stated.8 Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the. great multitude of cases not affected by special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them. 8. (1854) 9 Ex 341 at 354.

6 In Hadley v. Baxandale^ the.plaintiff's mill at Gloucester was stopped because of breakage of a crankshaft. The broken I crankshaft had to be sent to the-makers at Greenwich as a pattern for a new one. The defendants, who were common carriers, promised to carry the broken crankshaft to Greenwich. The only information given to the carriers was 'that the article to be carried was the broken shaft of a mill and the plaintiffs were 1 n the millers of that mill'. Due to negligence on the part of the defendant carriers the delivery of the shaft was delayed, and as a consequence thereof the mill remained stopped for a longer time than it would have been had the shaft been delivered at Greenwich without delay. The. plaintiffs brought an action to recover damages for the loss of profit caused by the delay. The principles stated in this case were applied to the situation. It was held that it could not be contemplated that the mill would be stopped in the usual course of things, by sending the shaft, for the millers may be having another shaft in reserve. Moreover, the special circumstances were not communicated by the plaintiffs to the defendants. plaintiffs, therefore could not recover the loss. The 9. (1854) 9 Ex Ibid. at 355, per Alderson B. In Voctoria Laundry (Windsor),- Ltd. v. Newman Industries Ltd. (1949) 2 KB 528 at 537, the Court of Appeal has pointed out that the headnote in Hadley v. Baxendale is misleading in so far. as it mentions that the carrier was told about mill having been stopped and the necessity of immediate delivery of the crank shaft. '

7 It was observed by the court : I It is obvious that in the great multitude of cases of the millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows., therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances which,perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants. The test of remoteness as laid down in Hadley v. Baxendale was reformulated by Asquith, J. In Victoria Laundry (Windsor) 1 Ltd. v. Newman Industries Ltd. y The substance of the test stated is as follows: 1 1 (1) It is well settled that the governing purpose of damages is to.put the.party whose rights have been violated in the same 11. (1854) 9 Ex 341 at 356,.(Per Alderson, B.). 12. (1949) 2 KB 528: (1949) 1 All. ER (1949) 2 KB : (1949) 1 All. ER at

8 133 position, so far as money can do so, as if his rights had been observed. This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting" from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognised as too harsh a rule. Hence, (2) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach. ' * (3) What was at that time reasonably so foreseeable depends on the knowledge that possessed by the parties, or, at all events, by the party who later commits the breach. (4) For this purpose, knowledge "possessed" is of two kinds -one imputed, the other actual. Everyone, as a reasonable person, is taken to know the "ordinary course of things" and consequently what loss is liable to result from a breach of that ordinary course. This is the subject matter of the "first rule" in Hadley v. Baxendale, but to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses of special circumstances outside the "ordinary course of things" of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the "second rule" so as to make additional loss also recoverable. (5) In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what, loss is liable to result from a breach. As has often been pointed out, parties at the time of contracting contemplate not the breach of contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result.

9 134 (6) Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state of knowledge the defendant could foresee it was likely so to result. It is enough... if the loss (or some factor without which it would not have occurred) is a "serious possibility" or a "real danger". For short,we have used the word "liable" to result. Possibly the colloquialism "in the cards" indicates the shade of meaning with some apprpach to accuracy. One thing which requires to be noticed is that according to the above mentioned rule compensation can be claimed for the loss "which was reasonably foreseeable as liable to result form the breach" as has been stated in the second proposition and further explained in fifth and sixth propositions. 'Contemplation' of the likely loss is more appropriate than the test of foreseeability, which is a test recognised under the Law of Torts. Lord Reid in Koufos v. c. Czarnikow Ltd. ^ did not agree with Asquith J.S. proposition of foreseeability and expressed that this was likely to cause confusion as a test for measure of damages in contract. 1 f\ In his words : In paragraph (2) it is said that the plaintiff is entitled to recover" such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach." To bring in reasonable foreseeability appears to 14. See Overseas Taokship (U.K.) Ltd. v. Morts Dock and Engg. Co. Ltd (The Wagon Mound Case), (1961) AC 388: (1 961 ) 1 All. ER 404 (PC). 15. (1 969) 1 AC Ibid, at 389.

10 1 35 me to be confusing measure of damages in contract with measure of damages in tort. A great many extremely unlikely results are reasonably foreseeable: it is true that Lord Asquith may have mqant foreseeable as. a likely result, and if that is all he meant I would not object further than to- say that I think that this phrase is liable to be misunderstood. Lord Upjohn observed that although in many cases the word foresee or foreseeable is being used in connection with contract but it is preferable to use the term contemplation in connection 1 7 with contract. In his words: And nowadays the concept of "foreseeability" and "contemplation of the parties" are different concepts in law. It is true that as a matter of language there will in many cases be no great difference between foreseeing the possibility of an event happening and contemplating the possibility of that event happening and in some of the cases, from Mackburn J. in Cory v. Thames 1 ft Ironworks Co. onwards the word foresee of foreseeable is used ' in connection with contract but it is clear that it has really been used in the sense of reasonable contemplation arid in my view it is better to use contemplate or contemplation in case of contract, leaving foresee or foreseeability to the realm of torts. 17. Ibid at LR 3 QB 181 at 188.

11 136 In Parsons (Livestock) v. Uttley Ingham and Co.19 Scarman L.J. also mentioned jabout the difference between the tests of on foreseeability and contemplation, when he observed: It may be that the necessary reconciliation is to be. found, notwithstanding the structures of Lord Reid, in holding that the difference between 'reasonably foreseeable* (the test in tort) and 'reasonably contemplated' (the test in contract) is semantic, not substantial. Certainly, Asquith L.J. in Victoria Laundry (Windsor) v. Newman industries and Lord Pearce in Czarnikow v. Koufos thought so; and I confess I think so too." In Victoria Laundry' case the plaintiffs were carrying on business as launders and dyers. In January,1946 they wanted to expand their business and for that purpose they required a boiler of much greater capacity than the one they already possessed. They entered into a contract with the defendants and the latter agreed to supply a boiler, the delivery to be made by June 5. When the plaintiffs sent a lorry to take delivery of the boiler, they were told that the same had got damaged. Necessary repairs to the boiler were made- thereafter and it could not be delivered until November 8,1946, -and their claim included in particular loss due to certain highly lucrative dyeing contracts which they could have obtained with the government. It was held by the court of Appeal that the defendants had the knowledge that the plaintiffs were laundry men and needed the boiler immediately 1 9. (1 978) QB 791 (CA). 20. ' Ibid, at 807.

12 137 and, therefore, some loss of profits due to delay could be anticipated. But sinqq the fact that the plaintiffs could have certain highly lucrative contracts was not within their knowledge, they could not be made liable for the loss,of profits on the proposed "highly lucrative" contracts. The case was referred to the Official Referee to decide about the loss which could normally be expected under the circumstances. The rule as restated in Victoria Laundry's case has been qualified in Czarnikow v. Koufos. A result which is "not unlikely" to happen was regarded as being within the contemplation of the parties, and for this purpose reliance was 99 placed on the House of Lord s earlier decision in Hall v. Pim, 9 9 where Lord Dunfermline had said: The main business fact is that they (the parties) are thinking of the contract being performed and not of its being not performed. But with regard to the latter if their contract shows that there were t instances of stages which made ensuing losses or damage, a not unlikely result of the breach of the contract, but the contemplation of the parties as to its breach... What the parties to a contract such as this do is not to estimate that the chances will be one way or the other, but simply to contemplate that trade chances are not unlikely to occur, and to make a contract to cover such- chances if any. 21. (1969) 1 AC Com Cas Ibid.' at 333, 335, 336.

13 In Koufos v. Czarnikow (The Hercn II)24 the respondents, who were a firm of sugar merchants chartered a ship, Haronll belonging to the appellant, for carrying sugar from Constanza to Basrah. Due to the negligence of the appellant the delivery of the sugar was delayed. The price of the sugar having fallen in the meanwhile the respondents claimed a sum of 3,800 being the difference between-the price of sugar when it ought to have been delivered and when it was actually delivered. It was held by the House of Lords that the respondents were entitled to the same as the fluctuation in the price of such articles was not unlikely to result. According to Lord Morris: The present case is one in which no special information was given to the carrier as to what the respondents intended to do with the goods after they arrived at Basrah. In those circumstances in deciding what damages would fairly and reasonably be regarded as arising if the delivery of the goods was. delayed I think that the reasonable contemplation of a reasonable shipowner at the time of the making of the charterparty must be considered. I. think that such a ship owner must reasonably have contemplated that if he delivered the sugar at Basrah some nine or ten days later than he could and should have delivered it, then a loss by reason of a fall in the market price of sugar at Basrah was one that was liable to result.or at least was not unlikely to result (1 969) 1 AC Ibid, at 406

14 (1) Application of the rule in Hadley v. Baxendale:.... / 1 The rule in Hadley v. Baxendale consists of two parts. On the breach of a contract by one party, the right of the other party is to recover such damages: (i) as may fairly and reasonably be considered arising naturally, i.e., according to the usual course of things from such breach, or (ii) as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract. In both the cases it is necessary that the resulting damage is the probable result of the breach of contract. The basis of the rules is the knowledge of the parties, if may be imputed, or the actual knowledge. The first branch of the rule concerns the imputed knowledge, as a reasonable person is presumed to know the "ordinary course of things", whereas the second branch of the rule concerns the actual knowledge because of the knowledge of the special circumstances, i.e.,the circumstances "outside the ordinary course of things is required if that is the reason of. special kind of loss. In its actual application it is difficult to ascertain whether it is the first or the second part of the rule which governs the case because sometimes a claim "may be said to be within both parts of the 9 ft rule" or in some case the damages sustained "fall under one, or 26.. Koufos v. Czarnikow, (1 967)' 3 WLR See Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., (1949) 2 KB 528 at Hall v. Mayrick, (1957) 2 QB 455 at' 471.

15 1 40 under both, of the limbs of the rule".29 Since either branch of the rule depends on the knowledge of the parties, Lord Reid did "not think that it was intended that there were to be two rules *3 Q or that two different standards or tests were to.be a applied" to ascertain the liability in any case.. (i) The Degree of Likelihood Required: The degree of likelihood of the loss as contemplated at the time of the making the contract determines as to which branch of the rule is applicable, and whether the liability should or should not be there.. The position as emerging by various decided cases is being examined hereunder. *3 i In Hadley v. BaxendaleJ the plaintiffs had sent a broken crank shaft through the defendants, who were common carriers, as a pattern for a new one. The delivery of the shaft was delayed by the carriers and in the meanwhile the plaintiff's mill remained stopped for want of shaft. Loss of profit arising due to stoppage of the mill was not allowed as -the defendants could not contemplate the stoppage of the mill in the usual course of things. Similarly, in Wilson v. Lancashire and Yorkshire Rly., the plaintiff, who was the manufacturer of caps bought some cloth for manufacturing caps and delivered the cloth to the defendants in 29. Compania Naviera Manorpan v. Bowaters, (1955) 2 QB 68 at Czrnikow v. Koufos (1969) 1 AC 350 at 385. \ 31.. (1 854) 9 EX (1861) 9 CB (NS) 632).

16 141 for carriage. Due to the delay in delivery by the defendants the plaintiff could not exdcute the orders for the caps as the season for the same passed away. It was held that the plaintiff was entitled to the difference between the value of the cloth at the timings of the stipulated and the actual delivery. Thus the loss due to the diminution in the value of cloth only could be claimed, whereas the loss of profits due to the caps not having been prepared and sold was disallowed. In the same way in Collard v. South Eastern Railway, it has been held that if due to carrier's fault the goods are damaged and consequently there is delay in disposing off such goods, the loss due to the fall in the market value of the goods can be claimed as compensation. The facts of the case are: A consignment of hops was entrusted to the defendant for carriage. The delivery of the goods was delayed and hops were also damaged through exposer. The sale of hops was further delayed because they had to be fried before being disposed of. It was held that the defendants were liable to pay compensation not only for the damage to the goods, but also loss due to the fall in their market value consequent on restoring them into marketable condition. The principles governing damages are the same whether any default in the performance of the contract is by the carrier, the seller or any other persons. Since the carrier is generally not familiar with the trade being carried on by the consignee and the likely effect of the breach on his part as compared to the seller, who is generally familiar with such aspect of the buyer's business, the liability of the two may differ according to the 33. (1861) 7 H & N 79.

17 142 knowledge possessed.34 For instance, in Dominion of India v. All India Reporter33 due to the negligence of - the railway authorities 3 volumes of a digest sent by the plaintiffs-respondents through them were lost in transit. The three volumes formed part of a set of 8 volumes and the plaintiffs claimed the price of the whole set. Since the defendant railway did not have the knowledge of the special circumstances and also that the loss to the plaintiffs did not arise in the usual course of things, the defendants were not liable for the value of the whole set. *3 ZT Similarly, in Horne v. Midland Railway Company30 there was delay on the part of the carriers in conveying a consignment of military shoes. The shoes were to be supplied to the French Army at unusually high price. On account of the delay, the plaintiffs lost the contract and the shoes had then to be disposed off at the prevailing market price, which was much lower then the special contract price. It was held that since the special circumstances resulting in the special loss were not within the knowledge of the carriers, they could not be made liable for the same. But if the market price of the goods falls by the time the delayed delivery of goods is there, such loss is deemed to arise 34. The -position _in case of breach by the seller and the. carrier has been discussed in greater detail in the chapter of: 'Damages in a Contract, of Sale of Goods', and 'Damages in a. Contract of Carriage of Goods'. 35. AIR 1952 Nag (1873) LR 8 CP 131; Also see Gee v.. Lancashire & Yorkshire Rly (Mill remained closed on the delay in arrival of the consignment of cotton, carriers were held not liable for such special loss); British Columbia Saw Mill Co. Ltd v. Mettleship, (1 868) LR CP 499 (Parts of the Machinery Lost in Transit as consequence of which sawmill could not be erected. The defendant, being a mere carrier, was not familiar with the purpose of consignment and it could.not be made liable for such loss.

18 in the usual course of things and the same is recoverable. In the same way, if the goods are meant for exhibition at an agricultural show and the carrier is aware of the fact and is also informed that they "must be at New Castle by Monday certain", the carrier would be liable for the loss consequential O Q on the delayed delivery of such goods. The rules regarding damages for loss due to negligence towards the passengers are the same as for the carriage of goods. In Hobbs v. L. and S.W. Ry.^ due to the negligence of the carriers the plaintiff and his family were set down oh a wrong railway station. Neither any accommodation in a nearby hotel nor any transport was available to the family and they had to walk several miles in rain to reach their destination. The plaintiff was held entitled to damages for substantial inconvenience to the family.a claim for cold to the wife and consequential' medical expenses incurred on her treatment and loss of her services in the business was, however, disallowed, as the same was not considered to be justified.^ 37. Koufos v. Czarnikow, (1969) 1 AC Simpson v. London and North Western Railway Co, (1876) 1 QBD (1 875) LR 10 LR QB See Hamlin v. G.N., (1856) 1 H & N 408. (Claim for hotel charges and expenses incurred in alternative transport were allowed); Le Blanche v. L. and N. Ry (1 876) 1' CPD 286. (A claim for expenses by ordinary conveyance to a stranded passenger'allowed); Bright v. P and O Navigation Co., (1897) 2 Com Cas This aspect of the decision is not justified as such type of claim is the natural consequence of breach of contract. See McMahon v. Field (1881) 7 QBD 591 (An inn keeper was held liable for cold to. the horses due to exposure when promised stables were not provided).

19 144 Victoria Laundry v. Newman Industries Ltd., 42 is illustrative of the application of the principles laid down in l Hadley v. Baxendale,42 to the contract of sale of goods. In this case the defendants made a delay of 5 months in supplying a boiler to the plaintiffs, who were launderers and dyers, and who needed the same to expand their business and to attend to certain highly lucrative dyeing contracts. The defendants had the knowledge that plaintiffs were launderers and they needed the boiler immediately, but they did not know about the "highly lucrative contracts". Under the circumstances it was held that the defendants could be made liable only for the loss arising under the normal circumstances and not for the extra loss arising due to the highly lucrative contracts.44 (ii) Pre-contract Expenditure: In determining whether damages for a certain loss are payable or not the test. is what is the likely loss within the contemplation of the parties when the contract is made. If the likely loss is going waste of certain expenses the same is recoverable irrespective of the fact whether such expenses were 42. (1 949) 2 KB 528 CCA): (1 949) 1 All ER (1854) 2 KB 528 (CA)L (1949) 1 All ER In Union of India v. Kuthari Trading Co.AIR 1969 Assam 84, there was non-delivery of the coal by the carriers to the consignees, as a result of which the latter's rice mill remained stopped. The plaintiffs were held entitled to claim compensation only for the market value of the coal at the destination less freight and handling charges, but the claim for loss, due to the stoppage of the mill was disallowed on similar grounds as in Victoria Laundry's Case.

20 145 incurred, before or after making the contract. Action for precontract expenditure, ; which had been wasted as a consequence of breach of contract, was allowed in Anglia Television Ltd. v. Reed.45 In this case, the plaintiff television company wanted to make a film of a play for television. The defendant, Robert Reed, who promised to play the leading role, made a breach of contract, as a consequence of which the proposed film could not be produced. The plaintiff company had not only incurred certain expenses after the contract with Robert Reed was made,,but before that also, before making the said contract the plaintiff had incurred expenditure by arranging the place where the play was to be filmed, and had also engaged a director, a designer and a stage manager. The plaintiff's action was not one for loss of profits, but it was for waste expenditure to the extent of 2,750. This sum included both pre-contract and post-contract expenditure incurred by the plaintiff, which had gone waste as a consequence of breach of contract by the defendant. The whole of the sum was allowed, because the wastage of such expenditure was deemed to be within the contemplation of the parties. Permitting such an action Lord Denning M.R. observed:45 It seems to me that a plaintiff in such a case as this has an election: he can either claim for loss of profits, or for his wasted expenditure. But he must elect between them. He cannot claim both. If he has not suffered any loss of profits or if he cannot prove 45. (1972) 1 QB 60; Also see Lloyd v. Stanbury, (1971) 1 WLR 535; Cullinane v. British "Rema" Manufacturing Ltd.,. (1954.) 1 QB (1 972) QB 60 at 63 64, For comment on1 the case see AI Ogus (1972) 35 MLR 423.

21 146 what his profits would have been- he can claim in the alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach. If the plaintiff claims the wasted expenditure, he is not limited to the expenditure incurred after the contract was concluded.. He can claim also the expenditure incurred before the contract provided that it was such as would reasonably be in the contemplation of the parties as likely to be wasted if the contract was broken. Ordinarily the award of damages puts the party suffering in the position in which he would have been at the time of making the contract, but by allowing pre-contract expenses the party is restored to the position before the contract was made. This is welcome approach because the aggrieved party is not made to suffer unnecessarily merely on the ground that the loss suffered by him was in respect of the expenses incurred before the contract was entered into. It may be noted that although pre-contract expenditure is allowed, expenses incurred in the process of making an agreement cannot be recovered, if the process does not materialize into a contract. For instance, in Harris v. Nickerson, the defendant advertised a sale by auction. The plaintiff traveled to the place of auction on the appointed day and found that the auction sale had been cancelled. His action to recover the expenses of travel was rejected on the ground that till then no contractual relationship between the parties had been created. Such an approach creates lot of hardship for one party and absolves the other party from responsibility to pay for the loss, which may

22 147 have occurred due to his fault. Here it may be mentioned that there are already compensation provisions in case of void agreements, and voidable contracts which are rescinded. The law has now recognised liability for negligent mis-statements also.4^ The liability for fraudulent statements has existed since long^. Such liability has existed irrespective of the fact of existence of any contract between the parties. Recently, in England the liability for innocent misrepresentation has also been recognised. ^ Apart from that the law also imposes a duty to communicate the correction of the statement, if after making the statement due to change of the facts so represented, the same do not hold true any" more. The breach of the duty amounts to fraud.50 It will be in the fitness of. things that there should be a legal duty even in the matter of communications made prior to the entering into the contract. In some cases where any party thereto is found in fault as a consequence of which the other person suffers, as happened in Harris v. Nickerson, he should be required to compensate the other party for the damage.suffered by the latter due to such fault. (iii) American Law on problem of Remoteness: The doctrine of Hadley v. Baxendale51 pertaining to recovery 47. See Hedley Byrne & Co.v. Heller and Partners; (1964) AC See Pasley v Freeman, (1789) 3 TR Section 2 of (English) Misrepresentation Act, With v. 0'Flangam, (1936) Ch. 575, (1936) All. ER Exch 341 (1 854).

23 148 of compensatory damages direct and consequential, which are limited have been uniformly followed by American courts. In the Bates Case,52 unless the promisor (seller or carrier) is informed that the plaintiff's factory is shut down waiting delivery of the machine or part sold and to be shipped he will not be liable for loss of profits due to negligent duty. In the Glove Case it was pointed that one who has committed a breach of contract is bound to pay damages only for such injury as he had reason to foresee when he made the contract. S4 McCormick enunciated the rule thus: Where the party has broken his contract the damages which the other party may recover are: (1) Such as may fairly and reasonably be considered to arise naturally i.e. according to the usual course of things from such breach or such as may reasonably be considered to have been in contemplation of both parties at the time they made the contract as the probable result of its breach; (2) That, if the damages arose out of special circumstances, communicated and so known to both parties when the contract was made, the damages which the parties would reasonably contemplate would be the amount of injury which would ordinarily follow from the breach of a contract under those 52. Bates Machine Co. v. Norton Iron Works, 1 13 Ky Glove Ref. Co. v. Landa Cotton Oil, 190 US 540 at 545' Minn L Rev. 497, "The Contemplated Rule as a Limitation on Damages".

24 149 special circumstances so known and communicated; but (3) If the special circumstances were wholly known to the party breaking the contract, he at the most could only be supposed to have had in his contemplation the amount of injury which would arise generally and in the great multitude of cases 55 not affected by any.such special circumstances.. As to certainty of damages, Simpson56 says in Section 150: "Damages must be proved with reasonable ' certainty or only a judgement for nominal damages will be rendered. But where it is shown that substantial and foreseeable loss resulted from the breach, great latitude is permitted to the jury in estimating its amount from any reasonable basis. Profits prevented are recoverable where the business or employment interrupted is an established one, and if not, a substitute measure such as the rental value of the property or interest on its value is adopted. In Addition to profits prevented, plaintiff's expenditures in past performance are recoverable items of damage. In aleatory contracts, damages are measured by the value of plaintiff's conditional right rather than the net value of defendant's performance". Damages may soirtetimes be the value of the contract right. If A as a contestant for prized offered in a newspaper 55. See Bates Case Supra n.52; 113 KY Also see Pender Lumber Co. v. Wilmington, 130 NC Simpson on Contract, at p. 530.

25 subscription contest has secured many subscribers and the publisher wrongfully withdraws the contest when A has had by then a good lead, it was held A was entitled to damages measured not by the amount of any particular prize but by the value of his contract right that his chance of winning be not destroyed. In Chaplin v. Hacks, the plaintiff was one of fifty women selected by popular vote out of which number the defendant had promised to give jobs to twelve on the basis of personal interview. The defendant failed to notify plaintiff to appear. It was held that the plaintiff could recover the value of her chance. If there is foreseeable injury consequent on any special circumstances know to the party committing the breach he cannot escape being answerable for the loss said Mr. Justice Holmes "It is true that as people, when contracting contemplate performance not breach, may commonly say little or nothing as to what shall happen in the latter event, and the common rules have been worked out by common sense, which has established what the parties probably would have said if they had spoken about the matter. But a man can never be absolutely certain of performing any contract when the time of performance arrives, and in many cases, he is obviously taking the risk of an event which is wholly, or to an appreciable extent beyond his control. The 57. Wachtel, National Alfalfa Journal, 190 Lowa (1 911 ) 2 KB Globe Refining co. v. Lands Cotton Oil' Co, 190 US Led

26 extent of liability, in such cases is likely to be within his contemplation, and whether it is or is 'not should be worked out on terms which it may fairly be presumed he would have assented to if they had been presented to his mind.". The above statement make it clear that even where circumstances make damages probable, the defendant will be liable apart from the fact whether they are the natural and proximate consequence of the breach. This appears to be in accord with the dictum of Asquith, L.J., in the Victoria Laundry Case.60 Where he laid down six propositions. Here propositions (3) to (6) are relevant and given as under: (3) What was at the time reasonably foreseeable depends on the knowledge then possessed by the parties, or at' all events by the party who later commits the breach. (4) For this purpose knowledge 'possessed1 is of two kinds - one imputed and the other actual. Every one as a reasonable person is taken to know 'the ordinary course of things' and consequently what loss is liable to result from a breach of that ordinary course. This is the subject-matter of the ft 1 first rule in Hadley v. Baxendale, but to this knowledge which a contract-breaker is assumed to possess whether he actually possessed it or not, there may have to be added in 60. Victoria Laundry (Windsor Ltd.) v. Newman Industries Ltd. {1949) 1 All Er Exch 341 (1 854).

27 a particular case, knowledge which he actually possesses of special circumstances outside 'the ordinary course of thing' of such a kind that a breach in those special circumstances would be liable to more loss. Such a case attracts the operation of the second rule so as to make additional loss also recoverable. (5) In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself as to what loss is liable to result from a breach. As has often been pointed out, parties, at the time of contracting contemplate not the breach of the contract but the performance. It suffices that if he had considered the question, he had considered the question, he would, as a reasonable man, have concluded that the loss in question was liable to result. (6) Nor finally to make a particular loss recoverable, need it be proved that on a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result. fi 9 As Williston put it, where consequential damage is in question it will be very relevant to consider "whether the mere fact of such consequences being communicated to the other party will be sufficient, without going as to show that he was told that he would be answerable for them and consented to undertake such a liability." 62. On Contract, 1410 at 1411.

28 153 Willies, J. stated in British Colombia Saw Mill Co. v. Nettleship:63 "Though he knows from the shippers the use they intended to make of the articles it could not be contended that the mere fact of knowledge, without more would be a reason for imposing upon him a greater degree of liability than would otherwise have been cast upon him. As to avoidable harm (Section 336 of American Restatement) one instance^ will serve the prupose. A sells to B a quantity of Pork packed in barrels of brine with a warranty that the barrels will not leak. B finds that some of the barrels are leaky but does not repack the pork in good barrels. B can get damage for t only the damage for only the cost or repacking in good barrels and not the value of the pork spoiled after his discovery of the defects. (iv) Damage on Anticipatory Breach of Contract: According to Section 39 of the Indian Contract Act: When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract unless he has signified, by words or conduct, his acquiescence in its continuance. 63. Lr 3 CP 499 (508). 64. The American Restatement of Contracts, p. 538.

29 On the anticipatory breach of contract the aggrieved party has two options: (i) to put an immediate end to the contract, i.e., even before the due date of performance of the contract has not yet arrived, or (ii) to keep the contract alive and subsisting until the date of actual performance contemplated by the parties to the contract. In case the promisee adopts the first alternative, the date of breach is considered to be such date on which the promisee treats the contract as rescinded. For instance, in Hochster v. De La Tour,65 the plaintiff had been engaged as a courier by the defendant to accompany the latter to a tour of Europe from 1st June, 1852 on a monthly salary of 10. On 11th May, 1852 the defendant informed the plaintiff that his services were not needed. The plaintiff brought an action on 22nd May, 1852 i.e., before the day of actual performance had arrived, and the action was successful. If the promisee prefers to adopt the second alternative then the contract is deemed to be still subsisting, irrespective Of the previous repudiation of the same by the promisor. If, in the meanwhile some event happens, whereby the performance of the contract is excused, the promisor cannot be made liable for the same.66 The damages in such a case are, therefore, determined on the date fixed for the performance of the contract. 65. (1853( 2 E & B 678: 95 RR 747; Also see Frost v. Knight, (1 872) LR 7 Ex 111; Motilal v. The Netha Cooperative Spining Mills, AIR 1975 AP 169; Chaudhry Ram Babu Singh v. Dalip Kumar, AIR 1981 MP See Avery, v. Bowden (1 885) 5 E & B 714.

30 In some cases pertaining to the sale of goods, when there has been anticipatory, breach of contract by the seller by his indication to the buyer before the date fixed for performance has arrived, the courts have ignored the date on which the buyer has treated it as a breach of contract and have determined damages on the basis of the date fixed for the performance of the contract. Such was the decision in Garnac Grain Co. v. Faure and Fairolough^ and Malalchrino v. Nickoll. Similar situation has been found when there is anticipatory breach of contract by the buyer. The date for determining his liability is not the date when the seller treats it as a breach of contract, but the date when the contract was originally agreed to be performed. ^ It has been submitted that since in the anticipatory breach of contract, the date when the repudiation of breach of contract is accepted is the real date of breach of contract, the damage ought to be determined on that day.^ (v) Mitigation of Loss: According to Explanation to Section 73 of the contract Act, "in estimating the loss or damage arising from a breach of 67. (1968) AC (1 920) 1 KB 693; Also see Millatt v. Van Beak & Co. (1921) 2 KB 369; Hing Mill v. Kamsing Factory, (1979) AC 69. Roth v. Taysen, (1896) 12 TLR 211 (CA). 70. See chapter on "Damages in a contract of sale of goods". The position has been discussed is more detail under the headings: Non-delivery, Anticipatory Breach of Contract', Non-acceptance.

31 contract, the means which existed, of remedying the inconvenience caused by the non.-per formance of the contract must be taken into I account". It means that the plaintiff "owes the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and can't claim as damages any sum which is due to his own neglect".71 If the plaintiff by taking certain steps can limit the loss, but fails to do so, "he is debarred from claiming any part of the damage which is due to his neglect to take such steps".72 Whether the plaintiff has failed to take reasonable steps to mitigate the loss or not, is a question of fact, and the burden of proof about such failure on the part of the plaintiff, is on the defendant.73 The question of mitigation has frequently arisen in cases of wrongful dismissal from service. In M.Nanjappa v. N.P. Muthuswamy,7^ the plaintiff, who had been employed as ao salesman with the defendant for selling silk fabrics and garments for five years was discharged from the employment after 2 years. The plaintiff brought an action to recover compensation for the salary for the whole of remaining period of about three years for which he would have continued in service. It was held that he could secure similar employment within three months, and if he failed to do so it was his fault, 71. Jamal v. Moola Dawood Sons & Co., (1916) 43 1A 6 at Murlidhar v. Harishchandra, A.I.R SC 366 at 369, British Westinghouse Electric and Manufacturing Co. v. Underground Electric Rlys. Co. of London, (1912) AC 673 at Payzu Ltd. v. Saunders, (1919) 2 KB A.I.R Knt 146. For similar English decisions, see Brance v. Csoder, (1 875) 2 QB 253; Shindler v. Northern Raincoat Co Ltd. (1960) 2 All ER 239; Yetton v. Eastwoods- Froy Ltd., (1967) 1 WLR 1 04, 239, Lavarack v. Woods of Colchester Ltd., (1967) 1 QB 278.

32 1 57 and therefore, the damages awarded to him were equivalent to the 7 5 loss of salary for three months only. Malimath J., Observed: I In this evidence he (the plaintiff) has stated that he has not at all made any effort to seek similar appointment as salesman. As the plaintiff did not take any steps to secure similar employment, it has to be held that he has failed to discharge the statutory duty cast upon him of taking all reasonable steps to mitigate the loss consequent upon the breach of the contract of service. He has, by his own neglect, dis-entitled himself from claiming by way of damages, the remuneration which he would have got for the entire unexpired contractual period..i have, therefore, to estimate the damages, if any, which the plaintiff would be entitled to had he taken reasonable' steps to mitigate the damages consequent on the breach of the contract of service.. In the normal course, having regard to the nature of the employment which the plaintiff held and the emoluments that were attached to the said post, it would not be unreasonable to hold that it would have taken about three months' time for the plaintiff to secure similar employment in the city of Bangalore. The plaintiff would therefore, be entitled to damages equivalent to the salary for a period of three months. (b) Assessment of Damages by the Parties: While making an agreement the parties are free to assess the damages which may be payable on the breach of contract by one party or the other, and to incorporate terms to that effect in 75. A.I-.R Knt. at 1 49, 1 50.

33 their contract. How far such terms are binding on the parties is discussed hereunder. I (1) Position under English Law: The damages assessed by the parties, according to English law, may be either liquidated damages or penalty. If the damages fixed by the parties is the genuine pre-estimate of the loss which will be caused on the breach of the contract that is called liquidated damages. If, on the other hand, compensation agreed to be paid in the event of breach is excessive and highly disproportionate to the likely loss, i.e., the amount is fixed in terrarium, by way of security to the promisee so that the contract is performed, that is known as penalty. The distinction was explained by Lopes, J., In Law. v. Redditch Local Board^ as follows The distinction between penalties and liquidated damages depends on the intention of the parties to be gathered from the whole of the contract. If the intention is to secure performance of the contract by the imposition of a fine or penalty, then the sum specified is penalty: but if, on the other hand, the intention is to assess the damages for breach of the contract, it is liquidated damages. Liquidated damages being considered as genuine pre-estimate 76. (1 892) '1 QB Ibid. at 132.