Section 73 of the Indian Contract Act, 1872 stipulates that in order for a party to be entitled to damages arising from a breach of a contract, the resultant loss/damage ought to have arisen in the usual course of things from such a breach; or in a circumstance where the contracting parties were aware (when they were entering into the contract) that such a loss/damage could subsequently arise from a breach thereof. This line of reasoning dates back to certain foundational principles of English common law and serves as a mechanism of checks and balances to ensure that the liability of contracting parties does not fall outside of what was originally agreed upon.
The standard used to determine what the parties could reasonably foresee is an objective standard—that of a “reasonable man”. Essentially, this means that the standard would exist irrespective of the characteristics unique to the parties involved in any given dispute.
In the words of the famous American legal philosopher, Peter Westen: “[R]easonableness is not an empirical or statistical measure of how average members of the public think, feel, or behave…Rather, reasonableness is a normative measure of ways in which it is right for persons to think, feel, or behave—or, at the very least, ways in which it is not wrong for them to do so.1” Akin to many other foundational principles of justice, the ideal of a “reasonable person” has moral origins.
However, certain considerations are taken with regard to the category of persons involved in the said dispute. For instance, the expertise of an individual in a certain trade would likely go on to guide the court’s determination of what ought to be foreseeable to such an individual (in line with what would be foreseeable for other individuals having similar expertise in that trade).
Accordingly, the foreseeability of the harm caused is closely linked to the concept of “remoteness of damages”. Although this principle was laid down in the Hadley v. Baxendale2, certain principles relating to foreseeability were laid down in Victoria Laundry v. Newman Industries Ltd.3.
In Hadley v. Baxendale, the owner of a mill with a broken crankshaft hired the defendant to transport the crankshaft to a location where it would be repaired and then bring it back. The defendant’s delay in returning the crankshaft to the mill caused the mill to remain out of operation until it was brought back. The owner of the mill sought to recover the profits lost due to this unplanned closure and the defendant claimed that he had no knowledge of the harm that would be caused due to this delay. The court ruled in favour of the defendant, holding that a party could only succeed in a claim for losses caused due to a breach if such a loss could reasonable be deemed to have resulted naturally from the breach; or where such loss would result from a breach which ought to have been within the reasonable contemplation of the parties at the time of entering into the contract.
Later, in Victoria Laundry v. Newman Industries Ltd., a large boiler was ordered from Newman Industries after Victoria Laundry had secured certain dyeing contracts. The former, despite being aware of the exigency in relation to the boiler, delayed the delivery of the same by five months. Victoria Laundry, claiming damages for the profits lost due to this delay, contended that actual knowledge of the precise degree of the loss is no prerequisite in this scenario as the counterparty was well aware of the boiler being required as soon as possible by Victoria Laundry. The court did indeed permit Victoria Laundry to recover the lost profits as a specific delivery date had been agreed upon between the parties at the time of entering into the contract. It further held that there was no requirement for Newman to know about the quantum of loss that the laundry would suffer due to its delay.
This broad concept of remoteness is applicable in India as well, with the Indian Supreme Court holding that remote and indirect loss/damage sustained by reason of breach will not entitle a party to compensation, in Karsandas H. Thacker v. The Saran Engineering Co. Ltd.4
The aforesaid principles culminate in the succinct holding of the Kerala High Court in State of Kerala v. K. Bhaskaran5, “The defendant is liable only for natural and proximate consequences of a breach or those consequences which were in the parties’ contemplation at the time of contract… the party guilty of breach of contract is liable only for reasonably foreseeable losses – those that a normally prudent person, standing in his place possessing his information when contracting, would have had reason to foresee as probable consequences of future breach.”
“Common law” is the part of English law that is derived from custom and judicial precedent rather than statutes themselves. This is one of the many circumstances in which the statutes developed around the judicial precedents (as opposed to the other way round). These foundational principles of contract law have not only shaped the way contract law (and the countless other arenas of law that it influences) has/have developed; but have also greatly contributed to contracts being drafted with greater specificity—intended to prevent both arbitrary claims and deviations from contractual obligations.
2 (1854) 9 EX 341.
3  2 KB 528.
4 AIR 1965 SC 1981.
5 AIR 1985 Ker 49.