Restitutionary damages v compensatory damages: An Analysis
Updated: Sep 3
A contract is a legally binding agreement between two or more parties that creates legal responsibilities. When a contract is broken, the injured party is entitled to compensation. These damages might be either restitutionary or compensatory in nature.
Restitutionary damages are damages intended to deprive a wrongdoer of benefits gained as a result of committing a wrong or violating a contract. The advantage received by the perpetrator may outweigh the harm or loss suffered by the victim. It's prevalent in tort claims for trespass or interference with property, but it's only given in unusual cases for breach of contract. Compensatory Damages are funds given to a plaintiff to compensate for losses such as damages, injuries, or other losses. In civil court situations where a loss has happened as a result of another party's carelessness or criminal activity, compensatory damages are given.
The plaintiff must show that a loss happened and that it was caused by the defendant in order to claim compensatory damages. In the perspective of the jury or judge, the plaintiff must also be able to quantify the amount of loss.
Section 39 of the Indian Contract Act of 1872 deals with contract breaches. A breach of contract occurs when one of the parties refuses or fails to fulfil his or her contractual duties. According to Section 39 of the Indian Contract Act, when a party rejects or disables itself from keeping its commitment, it is considered a breach of contract, unless the party demonstrates his assent in its continuation by behaviour or words. When a contract is broken, the person who has been wronged is entitled to several remedies. The offended person might seek a number of different sorts of redress.
To begin, the aggrieved party may be granted damages to compensate for their losses. Liquidated or unliquidated damages may be claimed by the injured party. Liquidated damages are the sums agreed upon by the parties to be paid in the case of a contract violation. The contract itself specifies this amount. The phrase "unliquidated damages" refers to damages that are assessed by a court. Second, the injured party may ask for the contract's particular performance. The Court may use this remedy to compel the defaulting party to fulfil its contractual commitments. Finally, the offended party may seek an injunction to prevent the opposing party from undertaking a specific act. The Court issues an injunction preventing the defendant from doing what he pledged he would not do. Fourth, the party who has been wronged may sue for quantum meruit. A reasonable payment provided to the aggrieved party for the part of the contract that is completed by the aggrieved party is referred to as quantum meruit.
Section 73 of the indian contract act, 1872 of the indian contract act is the principal legislation in india that governs commercial responsibilities, contract breaches, and their repercussions, among other things. Nominal damages, compensatory damages, special damages, and other forms of damages exist. Damages are granted under section 73 of the Indian contract act. Section 73 stipulates damages that are compensatory in nature. The section does not provide a provision for punitive damages.
A party is entitled to damages that emerge in the natural run of things as a result of a breach of contract and that may have been reasonably anticipated by the parties at the time of contracting under Section 73. Furthermore, the aggrieved party's loss must be a direct, rather than indirect, result of the breach of contract. When determining the amount of damages under this section, the Court must additionally consider the inconvenience caused to the aggrieved party as a result of the contract's non-performance. Such inconvenient circumstances must likewise be addressed under Section 73.
In Mahanagar Telephone Nigam Ltd. v. TATA Communications Ltd., the Supreme Court decided that damages resulting from contract breaches should be handled separately from damages deriving from duties similar to those generated by the contract.
Section 74 of the Indian Contract Act deals with liquidated damages. If the contract stipulates that the defaulting party must pay a fixed money or penalty to the other party in the case of a breach, the defaulting party will be obliged to pay the penalty or sum to the other party regardless of whether the aggrieved party has experienced any real loss. In Kailash Nath Associates v. DDA, the Supreme Court declared that harm of loss is a need for Section 74 of the Indian Contract Act to apply.
The Court further defined the phrase "whether or not real damage or loss is proven to have been caused thus," stating that it means "whether or not actual damage or loss is proven to have been caused by." "that where actual damage or loss may be demonstrated, such proof is not required. The liquidated amount mentioned in the contract, if a legitimate pre-estimate of damage or loss, can only be given in instances where damage or loss is difficult or impossible to show ".
Sections 73 and 74 of the Indian Contract Act provide for a monetary remedy in the case of a contract breach. The amount of damages, however, is at the discretion of the Courts. Furthermore, under Section 75 a party that legally rescinds a contract is entitled to damages incurred as a result of the contract's non-fulfilment.
RECENT DISCUSSION PROPUNDED OF HON’BLE MADRAS HIGH COURT
In a recent decision involving a breach of contract, the Madras High Court clarified the difference between restitutionary and compensatory damages. The Court further defined the conditions under which a party may be granted restitutionary damages.
In E-merge Tech Global Services P Ltd. v. Mr M.R.Vindhyasagar & Anr., the plaintiff company sued its former employee for breaching non-disclosure and non-compete agreements in the High Court. The employee had broken the agreement's non-disclosure restrictions, according to the Court. Even if an employee's job is ended, the secrecy agreements bind him or her, according to the Court. In terms of non-compete agreements, the Court ruled that they could not be enforced against an employee after he had left the company.
The goal of compensatory damages, according to the Court, is to make up for the loss sustained by the aggrieved party. Restitutionary damages, on the other hand, are intended to ensure that the defendant's gains obtained at the cost of the aggrieved party are distributed fairly. The Court stated that compensatory damages can only be given if the damages can be identified in the usual course of events. The Court went on to say that calculating the appropriate amount of compensatory damages is always challenging.
When the Court is unable to compute compensatory damages in a way that puts the aggrieved party in the same situation as if the contract had not been violated, the Court may award restitutionary damages to the plaintiff. The Madras High Court cited the English case of One Step (Support) Limited v Morris-Garner (2018), in which the Supreme Court of England stated that compensatory damages must be granted if the financial loss can be assessed using regular and ordinary techniques. As a result, the High Court decided that restitutionary damages are unnecessary if losses may be determined in a regular manner.
In addition, the Court cited State of Kerala v. K. Bhaskaran, which concluded that responsibility under Section 73 of the Indian Constitution is limited to reasonable expenditures. The High Court concluded that, in most cases, damages should be calculated based on the loss sustained by the aggrieved party rather than the benefits earned by the breaching party. Only in extraordinary circumstances, the Court will award restitutionary damages, according to the Court. When calculating restitutionary damages, an account of earnings is kept, followed by disgorgement of the gains in question. As a result, the focus of restitutionary damages transfers from the aggrieved party's losses to the other party's gains as a result of the claimed breach.
The Court decided that while there was a reasonable basis for determining the amount of losses in the current instance, there was no need to award restitutionary damages. Finally, the court determined that restitutionary and compensatory damages are interchangeable, and that the plaintiff can get either compensatory or restitutionary damages.
Damages are primarily intended to repair the aggrieved party's grievances by placing him in the same position as he was previous to the contract. The Court is correct in holding that if compensatory losses may be established in the ordinary course of business, restitutionary damages are unnecessary. Furthermore, the party who has been wronged cannot seek both restitution and compensatory damages. If both damages are given to the aggrieved party, the consequence will be arbitrary damages. Hence, the Madras court observed that restitutionary and compensatory damages are interchangeable, and that the plaintiff can get either compensatory or restitutionary damages.
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