Assessment Of Damages For Breach In Light Of Covid-19 Pandemic

Introduction

COVID-19, a force majeure event as declared by the Indian Government[1] is having a severe impact on the obligations of the parties under their respective contracts and under the law. Due to this sudden and unforeseen circumstance, it has become impossible for the parties to perform their contracts fully or partially.

This has resulted in invocation of the force majeure clause by the parties which has been dealt with in detail here or exploration of option of declaring the contract as frustrated. However, it is imperative to note that even if the force majeure clause is invoked or the contract stands frustrated in view of the COVID-19 pandemic, the parties would still not be absolved from their liability towards the breaches committed prior to the occurrence of this supervening event.

All the claims accrued before the occurrence of COVID-19 pandemic stand and can be successfully claimed by the parties.[2] This may not though allow the parties to claim all the losses flowing out of the said breach under Section 73 of the Indian Contract Act, 1872 (the Act). This is because certain kinds of losses may be too remote and may stand aggravated due to the unforeseen supervening event i.e., the government ordered lock down. In light of the same, this article seeks to analyse the impact of COVID-19 pandemic on the remoteness and assessment of such damages and its entitlement.

Common Law on Remoteness Of Damages

The law in relation to remoteness of damages was set out in the most celebrated judgment of Hadley v. Baxendale[3] and stands as a good law till date[4] (Hadley v. Baxendale rule). Every loss arising out of the breach of contract cannot be claimed. It is only the losses arising out of ‘usual or natural course of things’ or are ‘within the reasonable contemplation of the parties at the time of entering into contract’ can be claimed. Such kinds of losses are said to directly arise from the breach of contract and are not considered as remote. However, it is imperative to note the exception laid down to the said rule in the nature of ‘assumption of responsibility’ test. According to this test, if the party had not taken the responsibility of the any loss impliedly or expressly, no liability can be imposed in relation to the said loss even if the same is not remote.[5] However, this test is applied only in exceptional circumstances where the application of the Hadley v. Baxendale rule would cause unpredictable, unquantifiable and disproportionate results which are inconsistent with the market conditions and expectations.[6]

Indian Law On Remoteness Of Damages

The Indian law on remoteness of damages is governed by Section 73 of the Act. The law set out in relation to remoteness of damages in the Hadley v. Baxendale[7] has been legislatively incorporated in Section 73 and its illustrations[8]. Therefore, the two tests laid down therein i.e., ‘usual and natural course of things’ and ‘reasonable contemplation of the parties at the time of entering into contract’ form the foundation of Indian law of remoteness of damages. Any damages that are remote and indirect fall outside the ambit of Section 73 of the Act.[9] It is imperative to state that the said principle both under common law and Indian law is based on the compensatory/expectation principle. This principle states that a party should be compensated in a manner that it would be put in the same position i.e. neither better nor worse as it would have stood if the contract was performed.[10] Therefore, if the damages compensate the innocent party to the extent of putting it in the same position as if the contract stood performed, the damages would arise from ‘usual and natural course of things’.[11]

Assessment Of Damages – General Rule

This test of ‘usual and natural course of things’ or compensatory principle is generally said to satisfy when the damages are assessed on the date of breach of contract. This is on the presumption that a true and fair measure of damages would be represented by comparing the price in original contract with the price in the available market on the date of breach.[12] However, it is imperative to note that if the non-defaulting party does not incur any loss assessed on comparison with the price in the available market, it would be only entitled to nominal damages for the breach committed.[13]

There are certain exceptions laid down to the said breach date rule. This rule may not be applicable where it causes injustice or does not meet the contours of the compensatory principle. This may be due to various reasons like non-availability of market etc.[14] In such a case, a later date would be considered for assessment of damages[15]. It is however, imperative to note that assessment of price in the substitute market would be from the date when the product/service became available and not from the date when the product/service was actually purchased/availed by the non-defaulting party.[16]

Therefore, in ordinary circumstances the parties entered into an agreement for purchase of land on a particular date and the seller did not provide the said land thereby committing breach of the contract. There was no alternative land available on the date of breach but became available after 15 days of breach. In that event, the date to be considered for assessment of damages is the date when the alternative land became available i.e., 15 days from the said breach irrespective of whether the said land was actually purchased or not. The said rule is legislatively incorporated under illustration (e) Section 73 of the Act. A perusal of the said illustration makes it clear that assessment of damages based on the market price is not too remote and would satisfy the Hadley v. Baxendale rule.

Further, the non-defaulting party is under the duty to mitigate damages. If it fails to reasonably mitigate damages, it would not be entitled for losses due to its own failure to take steps to mitigate. This principle is clear from the explanation to Section 73 of the Act.[17] However, the exception of breach date rule is not squarely applicable in case of supervening events like COVID-19 pandemic which is set out herein below.

Assessment Of Damages – Supervening Events

In case of occurrence of supervening events like COVID-19 pandemic, the assessment of damages is governed by the following rules:

a. Continuing contract:

If a term of continuing contract stands breached and thereafter, a supervening event occurs which would have anyways made the subsequent performance of the contract impossible, the damages during the period of supervening event would stand excluded. This is because if the contract were to stand, it would not have been possible to perform the contract during the supervening event and enjoy the benefit.[18] This is based on the compensatory principle which bars a party from being placed in a better position than if the contract was actually performed. Thus, for example, if the parties enter into a long term contract of 5 years to supply oil. The supplier stops supplying oil before the occurrence of COVID-19 pandemic thereby committing breach of the contract and resultantly, the other party repudiating the contract. Subsequently, due to national and global shutdown in view of COVID-19 pandemic, it has become impossible for the party to supply for a period of one year. The assessment of damages for breach shall exclude the period of one year as in any case even if the contract stood during the COVID-19 pandemic, it would not have been possible for the parties to supply oil in view of the government ordered lock down.

b. Single-sale contract:

The aforesaid principle of exclusion of damages suffered during the supervening event has been extended to single-sale contracts as well.[19] These are contracts that stand performed on supply or provision of one time goods or services. In case of breach of such contracts before the supervening event, the damages during the supervening event may stand excluded if there is no substitute market available for availing the said goods or services. This is also based on the compensatory principle Therefore, for example if a single-sale contract for sale of television stood breached just before the government ordered shutdown in view of COVID-19 pandemic, the damages incurred during this supervening event in form of successive rise in prices etc., cannot be claimed.

However, if during the supervening event, there exist a substitute market, the party would be compensated to the extent it is worse off under the substituted contract.[20] Therefore, for example, if a party subscribed for TV cable but the same was not delivered at all before the pandemic of COVID-19 and subsequently, due to the COVID-19 pandemic, there was a hike in prices of alternative TV cables. In such an event, the non-defaulting party would be entitled to the extra costs incurred due to rise in prices in view of COVID-19 pandemic.

Conclusion

In light of above, it is clear that the remoteness and assessment of damages in view of this supervening event i.e. pandemic of COVID-19 may depend on various factors namely:

a. Nature of contract – Depending on whether the contract is a continuing or single-stop sale contract, the tests for assessment of damages would differ

b. Subject matter of performance – Depending on the subject matter of performance i.e. whether it is fully or partially prohibited by the government, the existence of alternative market would depend.

c. Substitute market – Defining of substitute market may depend on facts and circumstances.

d. Mitigation measures – The sufficiency of mitigation measures may also depend on the facts and circumstances of the case.

Therefore, it is pertinent to note that all the parties having claims in relation to breaches before the supervening event should undertake a holistic study of their facts and circumstances in order to determine their entitlement.

The authors are Ramkishore Karanam and Akash Santosh Loya, Senior Associate and Associate respectively at AK Law Chambers.

[1] Office Memorandum No. F. 18/4/2020-PPD dated 19.02.2020, Ministry of Finance, Government of India.

[2] Damodar Valley Corporation v. KK Kar, (1974)1 S.C.C.141,¶9; Court of Wards Dada Siba Estate v. Raja Dharan Dev Chand, A.I.R.1961P&H 143,¶6.

[3] Hadley v. Baxendale, (1854)156E.R.145.

[4] Shwetadari Speciality Papers v. National Research Development Corporation, (2019) SCCOnlineDel.945, ¶¶19 and 20; ABS Marine Products v. Indian Bank, (2015)2 Cal.L.J.93,p. 6.

[5] Transfield Inc v. Mercator Shipping Inc (The Achilleas), [2009]1A.C.61,¶21.

[6] Slyvia Shipping Co. v. Progress Bulk Carriers, (2010)1C.L.C.470,¶40.

[7] Titanium Tantalum Products v. Shriram Alkali and Chemicals, (2006)2Arb.L.R.366 (Del.),¶18; State of Kerala v. K. Bhaskaran, A.I.R.1985Ker.49,¶11.

[8] See illustrations (i),(j),(k) of Section 73 of the Indian Contract Act, 1872.

[9] Karsandas Thacker v. Saran Engineering and Co., A.I.R.1965S.C.1981,¶13.

[10] Fortune Infrastructure v. Trevor D’ Lima, (2018)5S.C.C.442,¶11; Johnson v. Agnew, (1980)A.C.367,400.

[11] Dampskibsselskabet Norden A/S v. Andre & Cie SA [2003]1Lloyd'sRep.287, ¶¶41,42.

[12] Kochi Marine Inc v. d’Amica Societa di Navigazione arl (The Elena d’Amico),(1980)1Lloyds Rep.75; M/s. Sarah Distellery v. Union of India, A.I.R.1984Del.360, ¶¶8 and 9; See also: illustration (e) of Section 73 of the Indian Contract Act,1872.

[13] Union of India v. Commercial Metal Corporation, A.I.R.1982Del.267; ¶8.

[14] Hooper v. Oates, (2013)E.W.C.A. Civ.91,¶38.

[15] Fortune Infrastructure, at ¶¶20-24.

[16] Commercial Metal Corporation, at ¶7.

[17] Thawardas Pherumal v. Union of India,A.I.R.1955S.C.468,¶11; M. Lachia Shetty v. Coffee Board, Banglore, (1980)4S.C.C.636, ¶14; Muralidhar Chiranjilal v. Harishchandra Dwarkadas, A.I.R.1962S.C.366,¶9; Reliance Media Works v. B.R. Films,(2018)SCCOnlineBom.1469,¶127; British Westinghouse Electric and Manufacturing Co. Ltd v Underground Electric Railways Co. of London Ltd.,(1912)A.C.673,689.

[18] Golden Strait Corpn. v. Nippon Yusen Kubishika Kaisha,(2007)2A.C.353,¶¶35,36.

[19] Bunge SA v. Nideria BV, (2015)U.K.S.C.43,¶22.

[20] Bunge SA, at ¶¶79,83,84.