The applicable law in awarding damages for loss or damage caused by breach of contract is provided for in Section 74 Contracts Act 1950 and it reads as follows :-
Section 74(1) Contracts Act 1950:
When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Section 74(2) Contracts Act 1950:
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach
The judicial interpretation of Section 74(1) Contracts Act 1950 can be found in the Federal Court decision of Toeh Kee Keong v Tambun Mining Company Ltd [1967] 1 LNS 197 where Azmi CJ have held as follows:
“Section 74(1) of the Contracts Ordinance, 1950, is a statutory enunciation of the rule in Hadlex v. Baxendale [1854], 9 Exch 341. This section reads:
When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, Then they made the contract, to be likely result from the breach of it.
The rule lays down the main principles as follows:-
Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.
In more compendious terms the rule has been restated by Asquith LJ in Victoria Laundry (Windsor) Ltd v. Newman Industries [1949] 2 KB 528, 539 in a passage which I shall quote in full:
It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position as far as money can do so, as if his rights had been observed: (Sally Wertheim v. Chicoutimi Pulp Co (1911] AC 301). This purpose, if relentlessly pursued, would provide him with a complete indemnity for all the loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognized as too harsh a rule. Hence.
In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach.
What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach.
For this purpose knowledge “possessed” is of two kinds; one imputed, the other actual. Everyone, as a reasonable person, is taken to know the “ordinary course of things” and consequently what loss is liable to result from the breach of contract in that ordinary course. This is the subject matter of the “first rule” in Hadley v. Baxendale, supra. But to this knowledge , which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses, of special circumstances outside the “ordinary course of things” of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the “second rule” so as to make additional loss also recoverable.
In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what loss is liable to result from a breach. As has often been pointed out, parties at the time of contracting contemplate not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man concluded that the loss in question was liable to result (see observations of Lord Du Parcq in the recent case of Monarch Steamship Co. Ltd v. Karlshamns Oljfaribker (A/B) [1949] AC 196).
Nor, finally to make a particular loss recoverable, need it be proved that upon a given state of knowledge that defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result. It is indeed enough to borrow from the language of Lord Du Parcq in the same ease, at p.158 if the loss(or some factor without which it would not have occurred is a ‘serious possibility” or a real danger. For short, we have used the word “liable to result. Possibly the colloquialism “on the cards” indicates the shade of meaning with some approach to accuracy”.
Based on the above it is clear that Section 74(1) Contracts Act 1950 is a statutory codification of the rule in Hadley v. Baxendale [1854], 9 Exch 341 and it provides for two limbs in
assessing damages for breach of contract and they are best summarized as follows:-
First Limb
Defendants are liable for loss or damage which naturally arose in the usual course of things from the breach i.e. foreseeable loss to be assessed objectively; and
Second Limb
Damages which the parties knew, when they made the contract, to be likely to result from the breach of it. Section 74(2) Contracts Act 1950 in turn provides that loss or damage that is too remote cannot be compensated.