Remedies for breach of contract — Damages — Measure/quantification of damages — Contract Act 1872, sections 73 and 74.

The Public Works Department of the State of Rajasthan (‘PWD’) decided in September 1997 to construct the Bharatpur bye-pass for the road from Bharatpur to Mathura, which passed through a busy market of the city of Bharatpur. After having pre-bid conference/meeting and completing the required formalities, it was agreed between the tenderers and PWD that compensation would be worked out on the basis of investment made by the concerned entrepreneur. Concession agreement dated 19-8-1998 was entered into between the parties authorising collection of toll fee by MSK-Appellant. According to this agreement, period of concession had been 111 months including the period of construction. The said period was to end on 6-4-2008. The State issued Notification preventing the entry of vehicles into Bharatpur city stipulating its operation with effect from 1-10-2000. MSK-Appellant invoked arbitration clause raising the dispute with respect to delay in issuance of notification.

The Arbitral Award was made in favour of MSKAppellant, according to which there had been delay on the part of the State of Rajasthan in issuing the Notification and the State failed to implement the same and the contractor was entitled to collect toll fee even from the vehicles using Bharatpur-Deeg part of the road. The State of Rajasthan was directed to pay a sum of Rs. 990.52 lac to appellant as loss due up to 31-12- 2003 with 18% interest from 31-12-2003 onwards.

The District Judge set aside the award and held that appellant MSK was not entitled to any monetary compensation. The appeal was allowed by the Rajasthan High Court. The issue arose for consideration before the Supreme Court as to measure/quantification of damages. Damages was claimed for loss of expected profit. The Court observed that in common parlance, ‘reimbursement’ means and implies restoration of an equivalent for something paid or expended. Similarly, ‘compensation’ means anything given to make the equivalent.

 The Court further observed that while interpreting the provisions of section 73 of the Indian Contract Act, 1872, the Courts have held that damages can be claimed by a contractor where the government is proved to have committed breach by improperly rescinding the contract and for estimating the amount of damages, the Court should make a broad evaluation instead of going into minute details. It was specifically held that where in the works contract, the party entrusting the work committed breach of contract, the contractor is entitled to claim the damages for loss of profit which he expected to earn by undertaking the works contract. Claim of expected profits is legally admissible on proof of the breach of contract by the erring party. But that there shall be a reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract. Section 74 emphasises that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation, whether or not actual loss is proved to have been caused by such breach.