In an important judgment by the Madras High Court delivered on December 15, 2021, the Court explained the circumstances under which an aggrieved party is entitled to compensatory damages and restitutionary damages, respectively.
A contract is a legally enforceable agreement executed between two or more parties creating legal obligations. When there is any breach of contract, one of the remedies is the aggrieved party’s entitlement to damages. The Indian Contract Act, 1872 (“Act“) entails the contractual obligations, breach of contracts, and its consequences and remedies. Section 73 of the Act deals with grant of damages. Under Section 73 of the Act, a party is entitled to such damages which arise in the natural course due to breach and which could be contemplated at the time of entering into the contract.
Liquidated damages are dealt with under Section 74 of the Act. Where the concerned contract provides that in the event of any breach, a predetermined sum or penalty will have to be paid by the defaulting party to the other party, then the defaulting party will be liable to pay such penalty or sum to the other party irrespective of whether any actual loss is suffered by the aggrieved party or not.
Section 73 and 74 of the Act provide the remedy of damages in the event of any breach of contract. However, the quantum of damages depends on the discretion of the Courts. Furthermore, under Section 75 of the Act, a party that rightfully rescinds a contract is entitled to damages that may have been borne by the party due to non-fulfilment of the contract.
The appropriate damages have to be decided on a case-to case-basis in accordance with the facts and circumstances of the case. However, in certain cases, merely awarding damages to cover the loss suffered by the plaintiff is not considered sufficient. In such cases, the Courts take into consideration the gains made by the defaulting party due to the breach of contract. In some instances, the plaintiff may even be given an option to choose between the compensatory damages or an account of profits. Section 65 of the Act stipulates the doctrine of restitution. Section 65 comes into play only when a contract is rendered void at a subsequent stage.
In the case of E-merge Tech Global Services P Ltd. v. Mr M.R. Vindhyasagar & Anr.1, the plaintiff company had moved the High Court against its former employee for violation of certain non-disclosure and non-compete agreements.
While the court accepted the plaintiff’s submission that the confidentiality and non-solicitation clauses in the letter of appointment binds the first defendant, there were certain reservations made about the applicability of the non-compete clause. Insofar as the non-compete clause is concerned, the same cannot be made enforceable after the first Defendant has left the employment, the Court said, relying on the Madras High Court judgment in FL Smidth (P) Ltd. v. Secan Invescast (India) (P) Ltd2.
The Court also explained that the objective of compensatory damages is to redress the loss suffered by the aggrieved party. Restitutionary damages, on the other hand, are aimed at ensuring fair distribution of the gains made by the defaulting party at the expense of the aggrieved party. The Court pointed out that compensatory damages can be awarded only when the damages are identifiable in the normal process.
While examining the plea for damages, the Court observed that the first defendant had caused a computable loss of Rs. 96 lakhs to the plaintiff by soliciting one of its primary clients, PI Holdings.
The Madras High Court relied on the English Case of One Step (Support) Limited v Morris-Garner3, where the Supreme Court of England had held that where the pecuniary loss can be identified by the normal and conventional methods, compensatory damages must be awarded. Thus, the High Court held that where the damages can be ascertained in the normal way, there is no need to award restitutionary damages.
Since the plaintiff had sought both compensatory damages as well as an account of profits, the Court made it clear that restitution by way of an account of profits and compensatory damages are inconsistent with each other, while at the same time, alternative to each other. It relied on the case of J.C. Eno. Ltd. v. Vishnu Chemical Co.4 wherein the Bombay High Court held that the plaintiff can opt for an account of profits or an assessment of damages.
The Court also observed that the primary objective of awarding damages is not to penalise the defaulting party, but to redress the grievances of the aggrieved party by putting that party in the same position as prior to such default. Therefore, the Court has held that where compensatory damages can be ascertained in the ordinary course, there is no need to award restitutionary damages.
1 C.S.No.258 of 202
2 2013 (1) CTC 886
3 2018 2 WLR 1353
4 AIR 1941 Bom 3