CLAIM FOR DAMAGES IS NOT A DEBT
Theme: Project Closure; Module: Claims & Disputes
Author: Ramasubramanian
Published Date: 12 Jan 2026
It is pertinent to understand that A contract is not a property. It is only a promise supported by some consideration upon which either the remedy of specific performance or that of damage is available.
The party who is injured by the breach of a contract may bring an action for the damages. The term ‘Damages´ means compensation in terms of money for the loss suffered by the injured party. Burden lies on the injured party to prove his loss.
A claim for damages arising out of breach of contract, whether for general or liquidated damages, remains only a claim till its adjudication by the court and become a debt only after court awards it. Till then and on the basis of the claim alone, the claimant is not entitled to present a winding up petition of the defendant company on the ground of its inability to pay debts.
Indian judiciary has time again reiterated the above stipulation that the Claim for damages is not a debt until it is adjudicated.
Distinction between debt and damages in terms of the Indian Contract Act, 1872
Concept of damages, liquidated and unliquidated, could be found in s.74 and s.73of the Indian Contract Act, 1872.
There have been multiple judgments on the subject matter. Madras High Court in the case of Newfinds India Ltd. versus Vorion Chemicals and Distilleries Ltd. held that the term “Debt” would refer to a definite sum and does not include any claim for unliquidated damages or for a sum of money which is capable of being ascertained.
The Supreme Court of India has dealt with the concept of debt versus damages, in the cases of Iron and Hardware (India) Company versus Firm Shamlal and Brothers and Union of India versus Raman Iron Foundry.
In the case of Greenhills Exports (Private) Limited versus Coffee Board, Bangalore, The Karnataka High Court summarized the principles from above referred and other decisions relating to debt and damages as under:-
“(i) A ‘debt’ is a sum of money which is now payable or will become payable in future by reason of a present obligation. The existing obligation to pay a sum of money is the sine qua nan of a debt.
“Damages” is money claimed by, or ordered to be paid to, a person as compensation for loss or injury. It merely remains as a claim till adjudication by a Court and becomes a ‘debt’ when a Court awards it.
(ii) In regard to a claim for damages (whether liquidated or unliquidated), there is no ‘existing obligation’ to pay any amount. No pecuniaiy liability in regard to a claim for damages, arises till a Court adjudicates upon the claim for damages and holds that the defendant has committed breach and has incurred a liability to compensate the plaintiff for the loss and then assesses the quantum of such liability. An alleged default or breach gives rise only to a right to sue for damages and not to claim any ‘debt’.
A claim for damages becomes a ‘debt due’, not when the loss is quantified by the party complaining of breach, but when a competent Court holds on enquiry, that the person against whom the claim for damages is made, has committed breach and incurred a pecuniary liability towards the party complaining of breach and assesses the quantum of loss and awards damages. Damages are payable on account of a fiat of the Court and not on account of quantification by the person alleging breach.
(iii) When the contract does not stipulate the quantum of damages, the Court will assess and award compensation in accordance with the principles laid down in Section 73. Where the contract stipulates the quantum of damages or amounts to be recovered as damages, then the party complaining of breach can recover reasonable compensation, the stipulated amount being merely the outside limit.
(iv) When a contract provides that on default by a buyer to pay for and take delivery of goods, the seller is entitled to recover the loss incurred on resale, interest on delayed recovery of the price, godown charges, insurance charges and other expenses incurred by the seller till resale, it cannot be said the buyer incurs the liability to pay those amounts automatically, when he fails to take delivery.
Failure to take delivery may be due to several valid or lawful reasons which may show that the failure to take delivery is not a ‘default’ or ‘breach’ in which event, no pecuniary liability may fasten on him.
(v) Even if the loss is ascertainable and the amount claimed as damages has been calculated and ascertained in the manner stipulated in the contract, by the party claiming damages, that will not convert a claim for damages into a claim for an ascertained sum due. Liability to pay damages arises only when a party is found to have committed breach. Ascertainment of the amount awardable as damages is only consequential.”
Concluding notes:
Primary obligation under the contract will give rise to ‘debt’ and the secondary obligation coming into existence in terms of contract provisions on breach of primary duty will give rise to ‘claim for damages’.