RESTITUTIONARY DAMAGES VS. COMPENSATORY DAMAGES FOR BREACH OF CONTRACT – Arsh Kohli

ABSTRACT

Damages are a solution or cure for the wrong that has been done to the other party, and they are awarded as compensation for that wrong. Damages are given out in accordance with the Contract Act. Damages can be classified as either consequential or incidental, depending on the circumstances. According to the requirements of the law, the anticipated sum must be sufficient to compensate for any harm or possible loss suffered by either party. The term “damages” is not defined elsewhere in the Act. However, it can also be defined as a monetary award that is given by the Appellant to the non-defaulting party as reimbursement for any damage or injury that was sustained as a result of the defaulting party’s violation of the terms and conditions of the contract. This is the most common usage of this term. Damages in which money is awarded as a compensation for any loss or damage caused to the victim are referred to as compensatory damages. Through this research paper I will analyse basic concept of compensatory damages and its societal impacts. Damages which ensure equal justice to the victim or the injured party are referred to as restitutionary damages. Through this research paper I will also discuss about the various remedies available when a breach of contract takes place and under what circumstances does the Court reward compensatory and damages or restitutionary damages. Lastly, I will perform a comparative analysis between the two damages.

KEYWORDS – compensatory damages, restitutionary damages, breach of contract

INTRODUCTION

A legally binding agreement between two or more parties that results in the formation of legal obligations is called a contract. In the event that a contract is violated, the party that sustains damage is entitled to monetary compensation. These damages can be of a restitutionary or compensatory nature, depending on the circumstances. The compensatory damages are determined in relation to the plaintiff’s loss, whereas the restitutionary damages are determined in relation to the defendant’s gains. The goal of restitution is to prevent the defaulting party from enriching themselves at the expense of the injured party. Only reasonable losses resulting from the breach of contract are recoverable by the plaintiff. Such damages must be foreseeable and anticipated by the parties at the time of contract execution. Furthermore, the loss must be the direct and natural result of the violation of contract. Natural and proximate effects are those that a natural reasonable man can properly predict. The plaintiff cannot demand damages for a loss that is a distant result of the violation of contract.

The number of damages must be assessed on a case-by-case basis, with careful attention paid to the specifics of each instance’s facts and conditions. However, in some situations, simply awarding damages to compensate the plaintiff for his or her losses is insufficient. The advantages made by the defaulting party as a result of the breach of contract are taken into account by the courts in such circumstances. In rare cases, the plaintiff may be given the choice of choosing between compensatory damages and a profit account.

LITERATURE REVIEW

ARTICLES

1. The Legitimate Interest Test (UK) on the Enforceability of Liquidated Damages Clauses and its Implications for Indian Law, (2021) 2 SCC J-37

Provisions for compensation or forfeiture of stipulated sums, equations for determination, and orders for compulsory property transfer are all examples of liquidated damages clauses. These provisions are created by lawyers to meet contract-specific criteria. Damages determination is a natural sphere of judicial evaluation, as it is an issue that must be tried and determined based on the evidence presented. Allowing the contractual parties to agree on the contract’s damages suggests an intrusion into the judicial function in this perspective. As a result, common law states see liquidated losses as a justiciable problem, and contract freedom is far from absolute.

2. Damages for Breach of Jurisdiction Clauses, (2002) 14 SAcLJ 342

If damages are calculated solely on compensatory grounds, the defendant may be able to recover the entire amount awarded in foreign proceedings commenced in violation through his damages action.

3. Effectively Protecting Private Facts, (2012) 24 SAcLJ 223

The determination of compensatory damages in circumstances involving privacy. 33 Eady J correctly ruled that the damages may include grief, damaged feelings, and loss of dignity, given the nature of the action and Art. 8. 34 On the facts, the magnitude of the suffering and humiliation was described as “impossible to understand” and “unprecedented.” There was a reasonable idea of vindication to indicate the infringement of a right, it was said, and compensatory damages were not merely about grief and damaged sentiments. It supports the idea that a purely nominal damages award would be insufficient to compensate for the infringement of the right.

4. Legal Requirement of Proving Actual Loss or Damage Under Section 74 of the Contract Act, 1872, (2018) PL March 84

In the event that a contract is broken, the innocent party has the right, as stated in Section 74, to receive from the party that broke the contract an amount that was previously agreed upon by the parties at the time the contract was signed. In the alternative, if the partners agreed to a penalty before signing the contract, then the penalty would need to be paid in the event that the contract was broken. The fact that the innocent party who will be receiving the agreed-upon payment does not have to demonstrate “real loss or damage” as a result of the infringement in order to be eligible for the payment stipulated in the agreement is the most significant aspect of this clause.

5. Damages For Breach Of Jurisdiction Clauses, (2002) 14 SAcLJ 342

Parties frequently stipulate in commercial contracts that disputes be resolved in a specific jurisdiction. Such agreements are not usually followed through on. 1 If a party wishes to breach his contract by filing a lawsuit elsewhere, the English and Singapore courts have repeatedly held that if his opponent objects, he must show good cause why this should be allowed – the would-be plaintiff bears the burden of demonstrating “strong cause” to justify the courts allowing him to do so.

BOOKS

1. Avtar Singh, Contract & Specific Relief Act 474 (EBC 2018)

When a contract is broken, the party who suffers as a result of the breach is entitled to compensation from the person who broke the contract for any loss or harm he suffered as a result of the breach, which naturally occurred in the normal run of things from such brief contract.

2. TT Arvind, Contract Law 470 (OXFORD UNIVERSITY PRESS 2019)

Compensatory damages are stated to reflect the notion of putting the honest party in the same position they would have been in if the breach had never occurred, with the law’s duty being to vindicate the innocent person’s contractual rights.

3. Pollock & Mulla, The Indian Contract & Specific Relief Acts 2165-2236 (LexisNexis 2017)

Damages for violation of contract serve a compensating rather than punitive purpose. Their purpose is to put the individual whose right has been infringed upon in the same situation as if there had been no violation, as far as money can go. In most contracts, there is just one measure of damages: the loss experienced by the promise. According to the Supreme Court, losses resulting from either a breach of contract or a tort of damages, which can be compensated by money, will provide the injured party with compensation for the wrongful act.

4. H.K. Saharay, Dutt on Contract 600 (EASTERN LAW HOUSE 2013)

Compensation for duties that have not been met under a contract. When a contract-like obligation is incurred and not discharged, every person affected as a result of the failure to discharge it has the same right to compensation from the defaulting party.

5. Volume 2 PC Markanda, The Law of Contract 1177 (LexisNexis 2018)

A party who has been the victim of a contract breach is allowed to claim for any loss or damage he has experienced as a result of the breach, which naturally flowed from the breach or which the parties were informed of when they signed the contract.

STATEMENT OF PROBLEM

There are several remedies available for contract violations, including fines, strict liability, rescission, and restitution. The primary purpose of a damages award is to put the aggrieved party in the same position as if the contract had not been broken. The purpose of this article is to assess what remedy the Court should grant in circumstances where a contract has been breached.

RATIONALE OF STUDY

The main purpose of choosing this research paper was to do an in-depth analysis to determine what are damages and what are compensatory damages. The second objective of me choosing this research paper was to study the aspects of restitutionary damages. The most important motive of performing a in depth analysis was to analyze the impacts of compensatory and restitutionary damages on the society. One of the motives was also to study the judicial stand of these damages.

RESEARCH OBJECTIVES

The purpose of this research is

• To understand the difference between different types of damages.
• To analyze situations in which the Court will grant compensatory damages and restitutionary damages.
• To understand the distinction between compensatory and punitive damages.
• To understand different remedies that can be provided when a contract has been breached.

RESEARCH QUESTIONS

Q1. What is the difference between damage and damages and what is breach of contract?

Q2. How are compensatory damages different from punitive damages?

Q3. What does a plaintiff need to prove to receive compensatory damages?

Q4. What is the role of restitutionary damages?

Q5. What are the different remedies provided by the Court in a breach of contract?

MEANING, NATURE, AND SCOPE OF DAMAGES AND BREACH OF CONTRACT

The term ‘damage’ and ‘damages’ have a subtle distinction. The term ‘damages’ refers to the amount of money that is to be given as compensation for a person’s injury, whereas the term ‘damage’ refers to the loss or hurt that is caused to another person or to their property. It’s possible that we’ll find multiple categories of damages, including liquidation, nominal, compensatory, special, ordinary, and so on. Damages are designed to pay the party that was not at fault for the breach of contract for the damage that was experienced as a result of the breach, as well as to replace the loss that was created by the conduct.

BREACH OF CONTRACT AND ITS REMEDIES

When a party fails to perform any of its contractual responsibilities, it is considered a breach of contract. The degree of the breach of contract, as well as the damage caused to the other party, are the primary determinants of the remedy. If the loss was large and serious, the breaching party may be required to pay. “Damages” is a term used to describe monetary payments.

• The following are the basic remedies for a contract breach:

1. Damage
2. Specific Performance of a contract
3. Restitution

• The different types of damages

      Before we go into the law of damages, it’s important to grasp the two forms of damages:

1. Compensatory Damages – Compensation damages are monetary awards given to claimants to compensate them for losses sustained as a result of the contract. This does not have to be limited to contract-related losses; it could potentially include losses from subsequent contracts.
2. Damages that are not compensable – non-compensatory damages are monetary awards meant to compensate the claimant not only for legal losses, but also for the opposing party’s unlawful behaviour.

Some more types of damages are as follows: –

1. Punitive damages – Punitive damages are payments made by a party who has breached a contract in addition to the payment that would fully recompense the non-breaching party if the agreement had been violated. Punitive damages are rarely awarded in business contracts and are intended to punish a wrongdoer for extremely severe behaviour.
2. Nominal damages – Nominal damages are given when a breach occurs but no actual financial injury to the non-breaching party can be demonstrated.
3. Liquidated damages – In the event of a contract breach, liquidated damages are specified losses that were originally defined by the contracting parties. A realistic estimate of the actual damages that could be experienced as a result of a breach should be used to calculate liquidated damages.

DIFFERENCE BETWEEN COMPENSATORY DAMAGES AND PUNITIVE DAMAGES

Punitive damages are meant to discourage the claimant from repeating the actions that resulted in the loss or harm. Contrarily, compensatory damages are meant to cover more than just the loss or damage that has already occurred.

Money-related issues are a heated topic in the field of health insurance, with supporters of tort reform arguing that excessive fines were imposed over legitimate losses in order to drive up overall healthcare costs.

The purpose of compensatory damages is to make up for additional financial losses suffered by the plaintiff as a result of the defendant’s actions.

The fact that these two types of obligations are aimed at different entities in a legal action is the key distinction between them. To assist in covering accident-related costs, the plaintiff is given compensation damages. The defendant receives punitive damages as a measure of retribution. Punitive damages may be awarded in any kind of emotional injury lawsuit, although they are most frequently awarded in situations when the defendant has been determined to have been willfully or wantonly negligent.

Sometimes it can be difficult to calculate compensatory damage. For instance, a wealthy person’s worth of missed wages will be substantially more than a poor or retired persons.

What Is Restitution and How Does It Work?

In some circumstances, restitution is referred to as restitutionary damages. It’s a type of legal remedy that can be applied to both civil and criminal cases. Restitution is usually calculated using the defendant’s gains. Any ill-gotten gains must be returned to the plaintiff by the defendant. The goal is to return the aggrieved party to where they were before the defendant’s negligence caused the losses.

Restitution is frequently used: –

1. When a contract is considered void, it cannot be enforced.
2. In criminal sentencing, to ensure fairness in contract terms, to make a financial or timely reparation

The Different Types of Restitution Cases

Restitution is a legal remedy that can be used in a variety of situations.

1. Breach of Contract– The most typical sort of restitution lawsuit is a breach of contract. It happens when a party breaks a legally binding contract. The sum earned by the breach is used to compute restitution.
2. Personal Injury: In personal injury cases, restitution can be awarded to compensate medical expenditures, but not for emotional suffering and pain.
3. Criminal: Instead of paying legal fines to the government, the victim may be ordered to provide restitution.

LEGISLATIVE FRAMEWORK, AMENDMENTS

The rules of the Doctrine of Restitution are defined in Section 65 of the Indian Contract Act of 1872. It is concerned with the responsibility of a person who has benefited from a void agreement or contract. So according to Section 65 of The Indian Contract Act, 1872  “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it or to make compensation for it to the person from whom he received it”

Section 73 of The Indian Contract Act, 1872  provides that “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 of damage sustained by reason of the breach”. The measures of remedying the difficulties caused by non-performance of the obligation must be taken into account when estimating the loss or damage arising from a breach of contract.

The Court will not allow more if the parties repair the damage under Section 74 of The Indian Contract Act of 1872 . However, depending on the circumstances, it may award a smaller sum. As a result, the suffering party obtains reasonable compensation but no punishment. There is an exception to Section 74, which provides that if a party enters into a contract with the Central or State Government to perform an act in the public interest, a breach of that contract renders the party liable for the whole amount stipulated in the contract.

Section 75 of the Indian Contract Act of 1872  states that if a party correctly rescinds a contract, it may be entitled to reimbursement for any losses or damages incurred as a result of the failure to comply.

JUDICIAL PRECEDENTS

1. The Himalaya Drug Company vs Sumit (2006)

FACTS – Drug Company was founded in the year 1930 and specializes in the manufacture and distribution of Ayurvedic medicinal remedies. Recognizing the Internet’s potential, the plaintiff registered the domain name www.thehimalayadrugco.com’ on 10.6.1998 and created a website with that name. The website’s most essential element is the “HIMALAYAS HERBS” section. This information is not only comprehensive, but it is also presented in an aesthetically beautiful and understandable manner. It was evident that Himalaya had put a lot of time, effort, talent, and money into putting together this database of Ayurvedic herbs that can be found on its website.

ISSUES – Whether Sumit has infringed the copyright of Himalaya and if so, what damages is Himalaya entitled to?

JUDGEMENT – Sumit had misappropriated the effort, talent, and expenditure that had gone into the building of Himalaya’s website, according to the Court. As a result, Sumit had duplicated the plaintiff’s full herbal database, infringing on Himalaya’s copyright. The decision is notable because it employs a novel method of calculating damages and awards both compensatory and punitive damages.

2. Johnson v Agnew (1980)

FACTS – Johnson agreed to sell the property to Agnew after going into default on his mortgage. He was able to pay off his mortgage and purchase a new home with the agreed-upon sum. Agnew was unable to complete the deal, thus Johnson was given a summary order for outstanding performance. The injunction was disregarded, and the mortgagees used their legal right to sell assets for less than the debt was worth, in violation of the law. Johnson sued Agnew in an effort to recover financial losses.

ISSUES – Agnew maintained that because Johnson chose to pursue the contract through specific performance, the court lacked the authority to dismiss the judgement for specific performance and instead award damages. The rights under the contract, which had been intertwined with the request for specific performance, could no longer be utilized to support a claim for damages.

JUDGEMENT – Johnson’s assertion was validated. He was free to select specific performance, and the agreement was still in effect until that request was satisfied. He was permitted to seek the court to dissolve the contract and obtain damages equal to the violation as a result of his failure to follow the order.

3. Attorney-General v Blake (2001)

FACTS – Blake was a British M16 who had signed an agreement not to reveal his secrets as part of his work contract. In 1951, he joined the Soviet Union as a double agent. He fled to the Soviet Union after escaping prison and authored a memoir. Blake was paid a particular quantity first-up and was supposed to receive extra after the book was published. The Crown filed a claim for restitution.

JUDGEMENT – If the standard remedy is insufficient and the facts of the case warrant it, the court may require the defendant to account for all gains. Since it is in the general interest to maintain the information of the secret agency, this case was unique. “Restitution for breach of the contract must be taken in some cases,” Lord Nicholls famously. These instances may never be as extraordinary as the one we’re dealing with today, but the court has no choice but to reach this determination.

4. Hadley v. Baxendale (1854)

FACTS – Plaintiffs owned and operated a mill that had to shut down as a result of a cracked crank shaft in their steam engine. They got in touch with W. Joyce & Co. (Joyce), the company that made the engine, and Joyce agreed to make a new shaft based on the design of the old one. As a result, a servant of the plaintiffs requested that Joyce receive the crank shaft from the office of the defendants, common carriers. Plaintiffs’ servant was informed that the shaft would be delivered the following day if it was provided to them by 12 p.m. on any given day. Before midday the following day, plaintiffs gave defendants the run-around. Due to defendants’ negligence, the delivery to Joyce was delayed, and plaintiffs did not get the fresh shafts until many days after defendants had received them.

ISSUES – Is Defendant responsible to Plaintiffs for damages incurred as a result of lost profits?

JUDGEMENT – The nonbreaching party may seek damages that naturally result from the breach or those that were reasonably anticipated by the parties at the time of the agreement. For a number of reasons, a miller might deliver a crank shaft to a different party. The defendants had no way of knowing that their breach would prolong the mill’s outage and cause them to lose money. Additionally, defendants were not aware of the unique circumstances, and plaintiffs never told them of them.

CRITICAL ANALYSIS

The Madras High Court explained the difference between restitutionary and compensatory damages in a recent decision involving a breach of contract. The Court further specified the circumstances under which restitutionary damages may be granted to a party. According to the Court, compensatory damages are intended to make up for the loss incurred by the harmed party. On the other hand, restitutionary damages are meant to make sure that the gains made by the defendant at the cost of the harmed party are equitably dispersed. According to the court, only if the damages may be recognized in the normal course of events can compensatory damages be awarded. The Court continued by stating that it is never easy to determine the proper number of compensatory damages.

Restitutionary damages may be awarded to the plaintiffs when the Court is unable to determine compensatory damages in a way that puts the aggrieved party in the same position as if the contract had not been broken. In addition, the Court cited State of Kerala v. K. Bhaskaran , which came to the conclusion that Section 73 of the Indian Constitution only permits accountability for reasonable expenses. According to the High Court, damages should often be assessed using the loss incurred by the person who was wronged rather than the benefits received by the party who broke the law.

Restitution is not always an option as a remedy, and the amount of restitution awarded is sometimes limited. The following are some of the most prevalent restrictions:

         When the amount of damages cannot be determined, restitution is not an option.

         Unless the defendant got a profit in excess of the contract’s original amount, restitution is restricted to the contract’s original amount.

         The maximum amount of restitution can be set by the state and jurisdiction.

         If the contract provisions were fulfilled, restitution may not be recoverable.

When a contract has been broken, compensating damages are intended to put the injured party in the position it would’ve been in if the contract had not been broken. Damages for ‘expectation’ or ‘benefit of the agreement’ are commonly used terms. In most countries, this means that the aggrieved party can seek compensation for direct losses caused by the contract’s breach. Lost profits may be recovered as compensatory damages in a commercial contract situation, however establishing lost earnings with the required degree of certainty can be challenging, and jurisdictions differ on the possibility of an award of lost profits.

Commentators in Australia, a common law jurisdiction, have carefully pointed out that “the same scenario” does not always imply “as good a financial position.” Given that the violation may have caused the aggrieved party’s assets to lose value and that the injured person has a duty to reduce damages, a monetary replacement for performance may not be as lucrative as genuine execution of the contract.

In Brazil, a civil law jurisdiction, compensatory damages for breach of contract account for both immediate and future lost wages. In Russia, another civil law nation, direct losses and lost wages are recoverable, but lost gains have proven extremely difficult to prove. Furthermore, Russian courts have the right to reduce the scope of damages if the aggrieved party increased the number of damages or failed to take reasonable steps to reduce it.

In the United Kingdom, compensating damages for a contract breach are measured in ‘expectation damages,’ which are calculated by subtracting any benefits derived from the breach from the losses incurred by the breach.

Such losses include expenses involved as a result of a breach, as well as earnings that the claimant would’ve have made if not for the beach. When it is impossible to prove lost earnings, the aggrieved party is entitled to a rebuttable presumption that the business would have been profitable.

Spain has recently adopted a common law approach to compensatory damages, despite being a civil law country. As a result, if a contract is broken, the claimant may be entitled to compensation for the costs and expenses paid as a result of the violation, as well as lost profits.

CONCLUSION AND SUGGESTIONS

Damages are generally meant to make up for the wronged party’s complaints by putting him in the same situation as before the contract. Restitutionary damages are not required in cases where compensatory damages can be determined through normal business operations, as the Court rightly holds. In addition, the party who was wronged cannot ask for both restitution and compensation. Arbitrary damages will result if both damages are awarded to the party who was wronged.

Restitutionary damages will only be granted by the Court under unusual circumstances, according to the Court. An account of profits is kept for determining restitutionary damages, then the gains in question are disgorged. Restitutionary damages are therefore centered on the other party’s benefits as a result of the alleged breach rather than the aggrieved party’s losses. The Court held that there was no need to grant restitutionary damages because the number of losses in the present case could be calculated on a reasonable basis. Last but not least, the court found that restitutionary and compensatory damages are equivalent, and that the plaintiff may get either type of damages.

According to my analysis both compensatory and restitutionary damages are important and while providing damages the Court should provide a mix of both the damages.

In some cases, only restitutionary damages are enough to provide the injured party they are entitled to. For example, if someone has suffered a loss of Rs.5000 then if he receives the amount which is equal to the loss suffered then the aggrieved party comes back to the position where he originally was. But there are cases where loss cannot be measured, like if someone looses one of their body parts then in such cases restitution is not enough and then the Court has to move to compensatory damages.

The laws for compensatory damages in India are not fixed, so amendments should be made which would help in determining the exact amount the injured party is entitled to in case of a breach of contract.

• BIBLIOGRAPHY

   ARTICLES

• The Legitimate Interest Test (UK) on the Enforceability of Liquidated Damages Clauses and its Implications for Indian Law, (2021) 2 SCC J-37 (Shiralkar, 2021)
• Damages for Breach of Jurisdiction Clauses, (2002) 14 SAcLJ 342 (Tan, 2002)
• Effectively Protecting Private Facts, (2012) 24 SAcLJ 223 (Confidentiality, 2012)
• Legal Requirement of Proving Actual Loss or Damage Under Section 74 of the Contract Act, 1872, (2018) PL March 84 (Subash, 2018)
• Damages For Breach Of Jurisdiction Clauses, (2002) 14 SAcLJ 342 (Tan, 2002)

   BOOKS

• Avtar Singh, Contract & Specific Relief Act 474 (EBC 2018) (singh, 2018)
• TT Arvind, Contract Law 470 (OXFORD UNIVERSITY PRESS 2019 (Arvind, 2019)
• Pollock & Mulla, The Indian Contract & Specific Relief Acts 2165-2236 (LexisNexis 2017) (POLLOCK & MULLA, 2017)
• H.K. Saharay, Dutt on Contract 600 (EASTERN LAW HOUSE 2013) (Saharay, 2013)
• Volume 2 PC Markanda, The Law of Contract 1177 (LexisNexis 2018) (Markanda, 2018)

   CASE LAWS

• The Himalaya Drug Company vs Sumit 2006
• Johnson v Agnew [1980] AC 367
• Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518
• Attorney-General l v Blake [2001] 1 AC 268
• Hadley v. Baxendale (1854) 9Exch 341
• State of Kerala v. K. Bhaskaran, AIR 1985 Ker 49

   WEBSITES DATABASES

• www.scconline.com
• www.jstor.com
• www.heinonline.com
• www.manupatra.com

   SECTION/ARTICLE

• the Indian Contract Act, 1872, §65, No. 10, Acts of Parliament, 1872 (India).
• the Indian Contract Act, 1872, §73, No. 10, Acts of Parliament, 1872 (India).
• the Indian Contract Act, 1872, §74, No. 10, Acts of Parliament, 1872 (India).
• the Indian Contract Act, 1872, §75, No. 10, Acts of Parliament, 1872 (India).