05 August, 2014

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Remedies for breach of lease terms - "Damages"

The remedies available, in law, for breach of the terms of a lease would generally be the
   a)      Award of damages;
   b)      The grant (temporary, mandatory or permanent);
   c)       Grant of interest on delay in refunding the security deposit or
   d)      For delay in payment of rent; and
   e)      specific performance.

In this article, we will discuss damages as one of the remedies for breach of contract.
Damages are generally compensation for a legal injury. The general principle that damages ought to be commensurate injuries sustained was settled as early as 1882 in the matter of Nait Ram versus Shib Dutt by the Allahabad High Court. This is still good law. It is a fundamental principle that damages can be awarded for breach of contract to place the injured party position in which he would have been had he not sustained the injury complained of.

The same principle of damages applies equally to contracts relating to immovable property, including leases. In a lease, damages could arise on several counts such as breach of the terms of the lease agreement by either the lessor or lessee; loss to landlord on account of unauthorized occupation of the premises beyond the lease period; for damage caused to the demised premises, including on account of neglect by the lessee beyond what is considered reasonable wear and tear.

If either party, i.e. landlord or tenant, breaches any of the covenants of the lease, such breaching party shall be liable to pay damages to the other party, in terms of Section 73 of the Indian Contract Act, 1872. The wronged party shall be entitled to compensation which would have naturally arisen in the usual course of things from such breach or within the reasonable contemplation of the parties at the time of making the contract of lease. 

Damage and compensation is, therefore, not given for any remote or indirect loss.

Damages must be for foreseeable loss. Unforeseeable damages for breach of contract, such as compensation for distress and vexation are rarely awarded. Punitive damages are equally rare. In 1958, the Andhra Pradesh High Court in the matter Namayya versus Union of India held that the function of damages for breach of contract is compensatory, and not punitive. Nor can damages be retributive.

The lessor and lessee are free to provide for quantum of damages for breach, in the lease. If such measure is provided, it would be known as liquidated damages. Where such liquidated damages are provided, the party seeking damages must prove actual loss and in no circumstances would the damages exceed the quantum of liquidated damages. In a sense, therefore, liquidated damages are a ceiling. It is a settled principle of law that the question of breach must be adjudicated and it must be proved. This would apply even in instances where the contract provides for liquidated damages.

A party can, however, claim damages for losses arising after breach. For instance, liability to pay a third party arising directly as a result of breach of contract between the lessor and lessee; cost of engaging third parties to complete outstanding performance for instance, repairing damaged premises which may have been the obligation of the lessor; cost of buying a substitute article; cost incurred for prosecuting or defending legal proceedings etc.

Further, damages from the same cause of action must be assessed and sought once and for all. A second action cannot be brought and would be barred by the principle of res judicata (a matter already judged by a competent court). In certain circumstances, interests on damages have been awarded to preserve the real value of damages on account of inflation, but this is more an exception rather than a rule. Ordinarily, interest is not allowed on damages arising out of breach of contract.

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