Breach of Contract: Claiming Damages and Liquidated Damages

What can you claim when the other side breaks a contract?

You can claim compensation that puts you, as far as money can, in the position you would have been in if the contract had been performed. That is the rule in section 73 of the Indian Contract Act. It is not about punishing the party in breach. A court will not award more because the breach was deliberate or rude, and it will not award anything for a breach that caused you no loss beyond nominal damages.

Section 73 covers two kinds of loss. The first is loss that arose naturally, in the usual course of things, from the breach. The second is loss that the parties knew, when they made the contract, was likely to result from it. Anything outside those two, called remote or indirect loss in the section, is not recoverable. This is the same idea English courts set out in Hadley v Baxendale in 1854, and Indian courts still use that case to explain the section.

Two further points shape almost every claim. The explanation to section 73 says that in estimating loss, the court takes into account the means that existed of remedying the inconvenience caused by the breach. That is the source of the duty to mitigate, which we come to below. And section 75 says that a party who rightly rescinds a contract because of the other side's breach is still entitled to compensation. Ending the contract does not mean giving up the claim.

The provisions that decide a damages claim

These are the sections you will see cited in almost every notice, plaint and arbitration statement of claim about breach of contract.

Has there actually been a breach, and what should you do about it?

A breach is a failure to perform what the contract requires, when it requires it. It can be an actual breach, such as goods not delivered on the delivery date, or an anticipatory breach, such as a supplier writing a month in advance that it will not deliver at the agreed price. The difference matters because an anticipatory breach gives you a choice that has to be made, and made in writing.

When the other side repudiates the contract, you can accept the repudiation and treat the contract as ended, then claim damages. Or you can refuse to accept it, keep the contract alive and insist on performance. What you cannot do is stay silent and keep your options open indefinitely. Courts look at what you wrote and did in the days after the breach to decide which route you took, and the measure of damages often depends on that date.

Be careful with the word termination. Many business contracts set out a termination procedure: a notice of breach, a cure period of 15 or 30 days, then a termination notice. If you skip the cure period, the other side will say that you, not they, wrongly ended the contract. Read the termination clause before you send anything, and if the breach is serious enough to end the contract, follow that clause step by step.

How do courts calculate damages under section 73?

The starting point is the difference between where you are and where you would have been. In a sale of goods, that is usually the difference between the contract price and the market price on the date of breach. If a supplier was to sell you steel at ₹55,000 a tonne and refuses, and the market price that day is ₹61,000, your loss is ₹6,000 a tonne, whether or not you actually bought elsewhere. If the market fell instead, your loss may be nil.

Loss of profit is recoverable when it is the natural result of the breach and is proved with reasonable certainty. A distributor who loses a confirmed resale contract because goods never arrived can claim the profit on that resale, especially if the supplier knew about it. A business that claims it would have earned a certain amount over five years, with no orders, no history and no accounts, usually gets nothing on that head. Courts want figures they can check.

Wasted expenditure is the alternative when profits are too uncertain. If you spent money preparing to perform, such as fitting out premises, hiring staff or buying tools for a project the other side then cancelled, you can claim that expenditure instead of lost profits. You cannot ordinarily claim both for the same loss. Where the other side can show you would have lost money on the contract anyway, the claim may be reduced.

Remoteness cuts down many claims. A transporter who delivers machinery late is liable for the ordinary loss of using that machinery, but not for a large export order you lost, unless you told the transporter about that order when the contract was made. This is why some careful businesses write the purpose of a contract and the consequences of delay into the recitals. It turns a remote loss into a contemplated one.

Heads of loss and whether they are usually recoverable

This table reflects how courts and arbitral tribunals in India usually treat common heads of claim in commercial contracts. Your contract and evidence can change the answer.

Do you have to reduce your loss after a breach?

Yes. You cannot sit back and let losses pile up and then send the bill to the party in breach. The explanation to section 73 requires the court to consider the means that existed to remedy the inconvenience, and the Supreme Court has long held that a claimant must take reasonable steps to mitigate. If a supplier fails to deliver and the goods are available elsewhere, you are expected to buy them, and you can claim the extra cost. If you wait three months while prices rise, the extra rise may be on you.

Mitigation is judged by what was reasonable at the time, not with hindsight. You are not expected to take big risks, buy from a doubtful source or spend money you do not have. A landlord whose tenant walks out in the middle of a lock-in period is expected to try to re-let, but need not accept a tenant at half the rent. Keep a record of what you did: emails to alternative suppliers, quotations obtained, advertisements placed. That record often decides how much of the claim survives cross-examination.

What are liquidated damages, and do you still have to prove loss?

Liquidated damages are a sum the contract fixes in advance as payable on a particular breach, such as 0.5% of the contract value for each week of delay, capped at 10%. In England, courts separate a genuine pre-estimate of loss, which is enforced, from a penalty, which is not. Section 74 removes that distinction. Whether the clause is called liquidated damages or penalty, you get reasonable compensation, and never more than the amount named. The Supreme Court said this as early as Fateh Chand v Balkishan Das in 1963.

The harder question is proof. Section 74 says compensation is payable whether or not actual damage or loss is proved. In ONGC v Saw Pipes (2003), the Supreme Court held that where loss is difficult to prove, the pre-agreed sum can be awarded as reasonable compensation without strict proof, provided it is a genuine pre-estimate and not a penalty. In Kailash Nath Associates v DDA (2015), the Court clarified the other side of it: damage or loss is still essential, and where loss can be proved, it must be proved. The phrase about proof only dispenses with it where loss exists but is hard to quantify.

In practice, this means a liquidated damages clause is a cap and a strong starting point, not an automatic cheque. In a delay case in a construction or supply contract, where the loss from delay is genuinely hard to measure, tribunals often award the agreed rate. In a case where the innocent party plainly suffered no loss, or where loss is easy to show and much smaller, the court will award what was actually lost. A point Advocate B.K. Singh often makes when advising on these clauses is that the file should still show why the rate was chosen, because that note becomes evidence that the figure was a pre-estimate.

Can the other side deduct liquidated damages from your bills or invoke the bank guarantee?

Often they try. Many contracts let the employer or buyer deduct liquidated damages from running bills, retention money or the final bill, and some let it invoke a performance bank guarantee. A contractual right to deduct is generally enforced as written, but whether liquidated damages were actually due, and in what amount, remains open to challenge. If the delay was caused by the employer, such as late drawings, late site handover or late payments, the levy can be wrong in whole or part.

A claim for damages for breach is not a sum already due. Until a court or tribunal decides it, it is a claim, not a debt. That is why a bare damages claim cannot be recovered through a summary suit under Order 37, and why tribunals look closely at unilateral deductions made without any assessment of loss. If deductions have been made from your bills, keep them separate in your accounts and protest in writing at the time, not two years later in the statement of claim.

Bank guarantees are harder to stop. An unconditional bank guarantee is an independent contract between the bank and the beneficiary, and courts restrain its invocation only in narrow cases, mainly established fraud or special equities that would cause irretrievable injustice. A dispute over whether liquidated damages are payable is usually not enough to stop the bank from paying. If invocation is threatened, the time to act is before the bank pays, by an application for interim relief, and even then the chances depend on the guarantee's exact wording.

Exclusion clauses, liability caps and indemnities

Commercial contracts frequently cap total liability at the contract value or the fees paid in the last twelve months, and exclude indirect or consequential loss and loss of profit. Indian courts generally enforce such clauses between businesses of comparable standing who negotiated them, although a clause that is unconscionable or against public policy can be refused. Before you work out your claim, find the cap and the exclusions, because they may cut the claim in half before you start.

Watch the drafting. Exclusion of consequential loss does not always exclude loss of profit that flows directly from the breach, and courts read exclusion clauses strictly against the party relying on them. Many caps also carve out fraud, wilful misconduct, breach of confidentiality and indemnity claims. Those carve-outs are often where the real money is.

An indemnity under section 124 of the Contract Act is different from damages. It is a promise to save the other party from loss, usually caused by a third party claim or a specified event, and it may be payable without the remoteness and mitigation limits that apply to damages, depending on how it is written. If your contract has both an indemnity and a damages regime, frame the claim under each, as alternatives. Our post on non-disclosure agreements covers how indemnity and damages work together when confidential information leaks.

Evidence you need to prove the breach and the loss

Damages claims fail on evidence far more often than on law. Collect these early, before people leave and email accounts are closed.

When Advocate B.K. Singh is asked whether a damages claim is worth pursuing, the first thing he looks for is not the contract but the mitigation trail: what the client did in the first fortnight after the breach. A clean contract with no proof of loss is a weak claim. A loosely drafted contract with good contemporaneous records is often a strong one.

How to claim damages for breach of contract, step by step

This is the usual sequence in a business dispute in Delhi NCR. Arbitration clauses change steps 4 to 6.

1. Fix the date of breach

   Work out exactly when the breach happened, or when you accepted a repudiation. That date starts the three-year limitation period and usually fixes the market price used to measure loss. Write it down with the documents that prove it.

2. Read the dispute and damages clauses

   Check the liquidated damages clause, the liability cap, the exclusion of consequential loss, any notice requirements and the dispute resolution clause. A notice that a contract requires as a condition of claiming must be given within the time it allows.

3. Send a notice that states the claim

   Send a notice setting out the contract, the breach, the loss with a breakdown, the interest claimed and a time to pay. Keep it factual; you will be held to the figures. Our post on sending a legal notice before a suit explains what to include and what to leave out.

4. Go through pre-institution mediation

   If the claim is a commercial dispute of ₹3 lakh or more and no urgent interim relief is needed, section 12A of the Commercial Courts Act requires mediation before a suit, through the legal services authority. The process is time-bound and the limitation clock is paused while it runs. See pre-institution mediation in commercial suits.

5. File the suit or invoke arbitration

   File the plaint in the commercial court with a statement of truth and all documents in your power, or send a notice invoking arbitration under the clause. Pay ad valorem court fee on the amount claimed in a suit. In arbitration, the tribunal is formed by agreement or by the High Court under section 11.

6. Pleadings, evidence and argument

   The defendant files a written statement, with a 120-day outer limit in commercial suits. Both sides file affidavits of evidence and are cross-examined on them. This is where your loss figures are tested line by line.

7. Decree or award, then enforcement

   A decree is executed through the execution court. An arbitral award can be challenged under section 34 within three months plus up to 30 days, and once that time passes or the challenge fails, it is enforced as a decree.

Which forum: commercial court, civil court or arbitration?

If the contract has an arbitration clause, the dispute goes to arbitration, and a court will refer the parties there under section 8 of the Arbitration and Conciliation Act if one side files a suit anyway. A well-drafted clause also fixes the seat, which decides which High Court supervises the arbitration. If you are still at the drafting stage, our post on drafting an arbitration clause that works covers the choices.

Without an arbitration clause, a claim arising from an ordinary commercial transaction, such as supply, distribution, construction, services, franchising or licensing, is a commercial dispute. If its value is ₹3 lakh or more, it goes to a commercial court. In Delhi, claims above ₹2 crore go to the Commercial Division of the Delhi High Court, and smaller ones to the commercial courts in the district complexes at Saket, Tis Hazari, Karkardooma, Rohini, Dwarka and Patiala House, depending on territorial jurisdiction. In Noida and Ghaziabad, commercial courts sit at the district courts.

Commercial courts run on a tighter schedule. There is a case management hearing, a fixed timetable, a 120-day outer limit for the written statement and the power to give summary judgment under Order XIIIA where the defence has no real prospect of success. Claims below ₹3 lakh, and non-commercial contracts, go to the ordinary civil court. Court fee in Delhi is ad valorem and is a real cost on a large damages claim; our post on court fee and suit valuation in Delhi explains how it is worked out.

Can you claim interest and costs on top of damages?

Yes. If the contract fixes an interest rate for late payment, you can usually claim it. If not, a court can award interest under section 34 of the Code of Civil Procedure from the date of suit to the date of decree and beyond, and the Interest Act 1978 allows interest for the period before the suit in some cases, such as where a written demand was made. In arbitration, section 31(7) gives the tribunal wide power to award pre-award and post-award interest, and if the award is silent on post-award interest, a statutory rate applies.

Commercial courts must consider costs seriously. Section 35 of the CPC, as amended for commercial disputes, lets the court award the actual reasonable costs of the litigation, including lawyers' fees and expenses, and to take conduct into account, such as frivolous claims or refusal of a reasonable settlement offer. Keep your fee receipts and expense records; you may need to file a statement of costs at the end.

Mistakes that reduce or sink damages claims

• Accepting late performance without protest. Under section 55, if you accept late delivery without giving notice that you will claim compensation, you lose the claim for that delay. One line in an email at the time protects it.
• Terminating without following the clause. Skipping a cure period or sending the notice to the wrong address can turn you into the party in breach.
• Claiming every possible loss. Inflated claims for reputation, mental agony and five years of profit make a tribunal doubt the genuine heads. Claim what you can prove.
• No market price evidence. Without quotations or invoices for the date of breach, the core measure of loss cannot be calculated.
• Waiting too long. The three-year limit runs from the breach, not from the last reminder you sent. Our post on limitation periods for civil suits covers how reminders and acknowledgments affect it.
• Treating liquidated damages as automatic. Where loss can be proved and is small, the court awards the small figure.
• Ignoring your own delays. If your late approvals, payments or instructions contributed to the delay, the other side will prove it, and the claim will shrink accordingly.

If you are the one accused of breach

Start by asking whether there was a breach at all. Many claims rest on a reading of the contract that does not survive a careful look at the specifications, the time for performance or the order of obligations. If the other side was required to do something first, such as pay an advance, hand over a site or approve drawings, and did not, your obligation may not have arisen.

Then test the loss. Ask for the market price evidence, the replacement invoices and the accounts. Check whether the claimant mitigated. Check whether the claim includes heads excluded by the contract or barred by the cap. Check limitation, because claims for breaches more than three years old are often bundled with recent ones.

Do not ignore deductions or a bank guarantee threat. Write back promptly, dispute the levy with reasons, and if your own claim for unpaid bills is larger, consider making it a counterclaim. A party that stays silent through months of notices often finds that silence quoted against it as an admission.

Should you ask for performance instead of money?

Sometimes money is the wrong remedy. Since the 2018 amendment to the Specific Relief Act, courts must enforce a contract by specific performance unless one of the statutory bars applies, such as a contract that is determinable by its nature or one that needs continuous supervision. Contracts for unique goods, immovable property and certain project agreements are typical candidates.

The 2018 amendment also added substituted performance under section 20. If a contractor walks off a job, you can give it at least 30 days' written notice, get the work completed by another contractor and recover the cost. The trade-off is that once you choose substituted performance, you cannot also ask for specific performance of the same obligation, though you can still claim compensation. For many businesses this is quicker and more practical than waiting years for a decree.

What to do this week if a contract has been broken

• Write down the date of breach and the documents that prove it
• Read the termination, liquidated damages, liability cap, notice and dispute resolution clauses
• If you are still accepting performance, send a short written reservation of your right to claim compensation
• Collect market price evidence for the date of breach
• Start and record your mitigation steps
• Separate deductions or disputed amounts in your accounts
• Check whether a bank guarantee is at risk and when it expires
• Diarise the three-year limitation date, and any shorter contractual notice period
• Have the contract and your loss calculation read by an advocate before you send a notice

Getting the claim assessed before you commit to it

A damages claim is worth what you can prove, less what the contract excludes, less what you failed to mitigate. That arithmetic is best done before the notice goes out, because a notice that overstates the claim is hard to walk back. If the dispute is with a supplier who is also small, it may also be worth looking at the MSME Facilitation Council route for the payment side of it.

If you would like an advocate to read the contract and your figures before you decide, the team of Advocate B.K. Singh at B.K. Singh & Associates can look at the papers and tell you the deadline and the realistic range. You can send the documents through our online enquiry page, or read more about our arbitration and conciliation practice.