In the judgment as passed by the Supreme Court in Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd. [AIR2003SC2629] dated 17.04.2003 the Court dealt with the issue relating to determination of compensation for loss and damage caused due breach of contract vis-à-vis scope of Sections 73 and 74 of the Indian Contract Act
In the judgment as passed by the Supreme Court in Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd. [AIR2003SC2629] dated 17.04.2003 the Court dealt with the issue relating to determination of compensation for loss and damage caused due breach of contract vis-à-vis scope of Sections 73 and 74 of the Indian Contract Act . The holding arrived at in this matter can certainly be considered as timeless ratio and worth including in this category. What Sections 73 and 74 of Contract Act contemplates: • When a contract is, the party who suffers by such breach is entitled to receive compensation for any loss which naturally arises in the usual course of things from such breach. • If parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation. • In such a case, there may not be any necessity of leading evidence for proving damages, unless the Court arrives at the conclusion that no loss is likely to occur because of such breach. • Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. • Where Court concludes that the term contemplating damages is by way of penalty, the Court may grant reasonable compensation not exceeding the amount mentioned in the contract on proof of damages. • Section 74 deals with the measure of damages in two clauses of cases (i) where the contract names a sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty. • Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable • The aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of “actual loss or damages”; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach. • Section 74 of the Indian Contract Act eliminates the somewhat elaborate refinements made under the English common law in distinguishing between stipulates providing for payment of liquidated damages and stipulations in the nature of penalty.