Contracts
Section 73 limits recoverable damages to losses that naturally flow from a breach or were foreseen by the parties, excluding remote or indirect losses and reducing awards where the injured party failed to mitigate.
Check your DPDP readiness — free More on the blogWhen a contract is broken, Indian law permits the injured party to claim compensation only for loss that arises naturally in the ordinary course of events. This means the damage must be a direct consequence of the breach, not a distant or speculative outcome. The principle keeps awards tied to the actual economic impact of non‑performance, preventing exaggerated claims that have little connection to the contract itself.
The statute recognises two categories of recoverable loss. First, loss that naturally follows the breach without any special circumstances – the kind of damage any reasonable person would expect. Second, loss that both parties knew at the time of contracting was likely to occur if the agreement failed. Both categories are treated equally, but any loss outside these bounds is excluded from compensation. Losses that are remote, indirect, or merely consequential fall outside the scope of Section 73. For example, a supplier’s failure to deliver raw material may cause the buyer to lose a future sale, but if that future sale was not reasonably foreseeable at the time of the contract, the buyer cannot recover that loss. The law draws a clear line between direct damage and distant repercussions.
The explanation to Section 73 imposes a duty on the injured party to take reasonable steps to reduce the loss. Any effort that could have lessened the damage – such as finding an alternative supplier or rescheduling production – will be considered when the court calculates compensation. Failure to mitigate does not eliminate the claim, but it reduces the amount awarded, reflecting the unavoidably preventable portion of the loss.
Small enterprises often overlook the need for evidence. Courts require a clear link between the breach and the loss claimed, supported by invoices, bank statements or expert estimates. Without such proof, the claim may be dismissed or reduced to the amount that can be substantiated, leaving the business with a smaller recovery than expected. Another frequent error is treating a liquidated damages clause as a guaranteed payment. Section 74 allows the stipulated sum to serve as a ceiling, not a certainty. The court will still apply the Section 73 test of natural and known loss, and may award less than the clause’s figure if the actual damage is lower. Recording the parties' expectations at the contract stage is crucial. If a particular loss was foreseeable – for instance, a loss of market share due to delayed launch – noting this in the agreement strengthens the claim. When such foresight is documented, the loss falls within the recoverable category under Section 73. In practice, businesses should maintain a loss diary after a breach, noting every step taken to mitigate and the associated costs. This contemporaneous record simplifies the evidentiary burden and demonstrates good faith, which courts view favourably when assessing the quantum of compensation. Overall, Section 73 aims to balance fairness with practicality. It rewards genuine loss while discouraging speculative or punitive claims. Understanding its limits helps businesses set realistic expectations for recovery and avoid costly litigation over unrecoverable damages.
You can claim loss that naturally follows the breach or loss that both parties knew was likely when the contract was formed. Remote, indirect or speculative losses are excluded.
Yes, the law expects you to take reasonable steps to mitigate. Any effort that could have lessened the damage will be considered, and failure to mitigate will lower the compensation awarded.
No. A penalty clause is not automatic payment. Section 74 treats the stipulated sum as a ceiling, and the court will still apply Section 73 to award only the loss that is natural and known.
Document any special circumstances at the time of contracting that make the loss foreseeable. Written notes, annexures or emails showing both parties recognised the risk will help the loss fall within the recoverable category.
Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this