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CMA Foundation · Fundamentals of Business Laws and Business Communication · Discharge of Contracts

Under the Indian Contract Act, 1872, when a contract has been broken, what loss is the injured party entitled to recover as compensation?

The injured party can recover loss that naturally arose in the usual course of things from the breach, or that the parties knew when contracting was likely to result. Remote and indirect loss cannot be recovered, as laid down in Section 73.

  1. AOnly loss which the parties knew, when contracting, to be likely to result, but never loss arising in the usual course of things
  2. BAny loss at all that follows from the breach, however remote or indirect
  3. CLoss which naturally arose in the usual course of things from the breach, or which the parties knew when contracting to be likely to result, but not remote and indirect lossCorrect
  4. DOnly the amount of the principal sum agreed in the contract, in every type of breach

Explanation

Section 73 allows compensation for loss naturally arising in the usual course of things or which the parties knew at the time of contracting to be likely to result. Remote and indirect loss is expressly excluded. Option A wrongly drops the 'usual course' limb, and option B ignores the exclusion of remote loss.

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