No Compensation U/S 73, 74 Contract Act For Mere Breach Of Contract Without Actual Loss/ Damage : Kerala High Court

The Kerala High Court has recently ruled that in the case of a breach of contract, no compensation can be granted under Sections 73 and 74 of the Indian Contract Act unless such breach resulted in an actual loss or damage to the opposite party. 

A Division Bench of Justice P.B. Suresh Kumar and Justice C.S. Sudha opined that the words 'loss or damage' would necessarily indicate that the party who complains of breach must have really suffered some loss or damage apart from being faced with the mere act of breach of contract since every breach of every contract need not necessarily result in actual loss or damage.

"Compensation payable under Section 73, 74 as also under Section 75 is only for loss or damage caused by the breach and not account of the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, he cannot claim compensation."

The Court also observed although it is not necessary for the party claiming compensation to prove that actual damage has been caused, what the party faced with the breach gets is only reasonable compensation under Section 74, subject to the limit of the amount stipulated in the contract itself.

"Section 74 dispenses with proof of the extent of real or actual or factual loss or damage, but provides for grant of reasonable compensation, subject to the condition that it shall not exceed the sum stipulated as penalty in the contract. The proof of the extent of loss or damage suffered in fact, i.e., proof of the extent of actual damage or loss suffered is dispensed with in Section 74. This would not mean that there need not be any loss or damage. What is meant is only that proof of actual damage or loss is not necessary."

The respondent awarded certain railway work between Shornur and Mangalore and between Kottikulam and Kasaragod stations to the appellant (a contractor) in 2000 for almost ₹1.20 crores to be completed within nine months.

Alleging breach on the appellant's part, the respondent terminated the contract before expiry of the completion period. As disputes arose between them, arbitration proceedings were initiated.

Around ₹ 3 lakhs was deposited as a security deposit and ₹46,959/- was deducted towards advertisement charges by the respondent from the final bill as the amount towards risk liability.

The appellant was the claimant before the Arbitral Tribunal which passed an award disallowing their claims except claim 1 for release of ₹ 3,46,959/-, the risk liability amount. This claim was partly allowed to the tune of ₹ 46,959/-. All the other claims were rejected. However, it was established that the breach had caused no actual loss or damage to the respondent. 

Aggrieved by this, the appellant approached the District Court which was also dismissed. Challenging this order of the District Court, the appellant moved the High Court.

According to the Tribunal, since the breach of the contract had been committed by the appellant, the security deposit of ₹ 3 lakhs is liable to be forfeited and therefore, only an amount of ₹ 46,959/- was allowed.

However, in the award itself, it was stated that no loss/damage had been caused to the respondent. Therefore, Advocates Santha Varghese, Ranjith Varghese and Rahul Varghese appearing for the appellants submitted that the forfeiture of ₹3 lakhs was patently wrong, illegal and perverse.

Standing Counsel S. Ananthakrishnan for Railways appeared for the respondents in the case.

The Court noted that the parties had never made a genuine pre-estimate of the amount to be paid n the event of any damage or loss likely to be caused by the breach or that there is any clause relating to liquidated damages in the contract. 

Further, the compensation payable under Sections 73, 74 and 75 is only for loss or damage caused by the breach and not account for the mere act of breach. If in any case the breach has not resulted in or caused any loss or damage to a party, he cannot claim compensation, it was noted.

The Court observed that when no loss or damage has been caused to the respondent, neither the provisions of Sections 73, 74 or 75 could have been invoked nor are they applicable in this case.

As such, the Court held that the Tribunal was wrong in rejecting the appellant's claim for release of the amount of security deposit. This finding was held to be in violation of Sections 73 to 75, and in contravention of the fundamental policy of Indian Law as contemplated in Section 34(2)(b)(ii).

Also Read: Breach Of Contract | Can't Forfeit Security Deposit Towards Risk Liability In Absence Of Loss/Damage: Kerala High Court