by Asok Nadhani
Breach
of Contract
9.1 Remedial
measures for Breach of Contract
A contract
gives rise to rights and obligations. When a contract is broken, the law gives
some rights to the injured to take recourse to the following remedial action:
i. Rescind
contract.
ii. Sue
for Damages (and Interest).
iii. Sue upon
quantum meruit.
iv. Sue for
specific performance of the contract.
v. Sue for
injunction.
9.2 Rescission
of Contract (Sec. 39)
a. Contract Rescinded: When
a contract is broken by one party, the other party may sue to treat the
contract as rescinded and refuse further performance.
i. The
Court may grant rescission where the contract is voidable by the plaintiff or where
the contract is unlawful. He is then absolved of all his obligations under the
contract.
Ex. A contracts with B to deliver 100 bags of sugar on 1st
Nov and B agrees to pay for the delivered sugar on 4th Nov. A does
not supply. B is discharged from paying the price.
ii. However,
court may refuse to rescind the contract where :
a. plaintiff
has ratified the contract,
b. owing
to the change of circumstances (not caused by the defendant), the parties
cannot be restored to their original positions,
c. third
parties have acquired rights in good faith and for value,
d. only
a part of the contract is sought to be rescinded which cannot be severed from
the rest of the contract.
b. Restoration of Benefits: When
a contract is rescinded, the party should restore the benefits received, if
any, to the other party, and the aggrieved party is entitled to compensation
for non-fulfillment of the contract by the other Party (Sec. 65).
c. Claim of compensation: A
person rightfully rescinding a contract may claim for compensation for loss
suffered due to non-performance (Sec. 75).
9.3 Damages
a. Damages means monetary compensation
allowed to the injured party by the Court for the loss suffered by him for
breach of a contract.
b.
Rules
as to Damages (Sec. 73):
The aggrieved party may claim monetary compensation for the loss caused due to
non-performance of promise as follows:
i. Compensation for direct loss or damage due
to breach: When a Contract
is broken, the party suffering loss or damage that arose naturally from the
breach is entitled to receive compensation for loss suffered by him from the
party at fault.
ii. No compensation for remote loss: Compensation shall not be given for any remote
and indirect loss or damage sustained by reason of breach.
iii. Compensation for failure to discharge a
quasi-contract: When an
obligation under a quasi contract had not been discharged, the person injured
by the failure to discharge is entitled to receive the same compensation from
the party in default as if such person has contracted to discharge it and
broken his contract.
iv. Estimation of loss: While estimating the loss or damage
arising from the breach, the available means to get over the inconvenience caused by
non-performance of the contract shall be taken into an account.
c.
When a contract is breached, the
injured party is entitled to (as applicable):
i. Ordinary Damages
naturally arising in the usual course of breach.
ii. Special Damages
likely to arise due to breach (but not arising out of indirect loss or damage
sustained by reason of the breach).
iii. Vindictive or Exemplary Damage as compensation
for loss suffered (e.g. for breach of a promise to marry, wrongful dishonour of
cheque by banker).
iv. Nominal Damage as
small compensation for minor fault just to acknowledge that the plaintiff has
proved his case.
v. Damage for inconvenience or
discomfort.
vi. Liquidated damages or
Penalty.
vii. Interest.
d.
The injured party must take necessary
steps to mitigate the loss caused by the breach and cannot claim compensation
which he could have avoided. The aggrieved party may also claim the cost of
getting the decree for damages.
9.3.1
Kinds of Damages
i.
Ordinary Damages: The
injured Party may recover natural & direct damages suffered arising out of
breach (but not for any remote or indirect loss (sec.73)).
Ex. A contracts to sell and
deliver 500 quintals of Wheat to B at Rs.1,200 per quintal on a certain date.
The price of wheat then rises to Rs.1,400 per quintal and A refuses to
sell the wheat. B can claim damages at the rate of Rs.200 per quintal.
Ex. A contracts
to buy wheat from B at Rs.1,200 per quintal of rice. On the due date of
delivery, the market price falls to Rs.1,100 per quintal and A refuses to take
delivery and pay. B is entitled to receive compensation from A
@ Rs.100 per quintal.
Ex. A contracts
to pay a sum of money to B on a specified day, but fails to pay the
specified money to B on that day. B, due to non receipt of money,
suffers loss on another deal. B can claim principal sum and interest up to the
day of payment but nothing on account of any other loss suffered.
ii.
Special Damages: Sometimes,
damages other than directly for breach of contract, which may be reasonably
attributed to the contract, may be claimed in special circumstances.
Ex. A sent some
specimens through a carrier for a trade show to be delivered on next day at
specified place. The carrier knew the importance of the time of delivery. But
the samples were delivered after 3 days. Held, A was entitled to claim damages
for loss suffered due to non display of specimens in the trade show.
Ex. A, a builder, contracts with B, to construct a house
within a specific time, to be put on lucrative rent to C in the ensuing great
festive season. The house turns out be defective and had to be re-built. B can
claim compensation from A, not only for the cost of rebuilding the house, but
also for the loss of rent.
Ex. A bought some
cattle feed from B and then sold to various dealers, who in turn sold to others.
Later on, the cattle feed was found to be poisonous and many cattle died or
took ill. Buyers claimed on their respective vendors. A made claim on B. Held,
B was liable to pay the price of cattle feed and also damages for loss suffered
due to death & illness of the cattle.
iii.
Nominal Damages: Sometimes,
the court may award token damages (e.g., a fine of small amount), where the
party has not suffered major loss but is just an acknowledgement that he has
won the case.
iv. Vindictive Damages: When
a banker wrongfully dishonours a cheque of tradesman, he can recover damages in
respect of any loss to his trade reputation by the breach (smaller the amount, larger
the amount of damages). But if the customer is not a tradesman, he can recover
only nominal damages.
v.
Damages for Inconvenience and
Discomfort: Sometimes, Damages can be recovered for physical
inconvenience and discomfort.
Ex. A was
wrongfully dismissed in a harsh and humiliating manner by his employer B. Held, A could recover from B wages
for the period of notice (but cannot claim for his injured feelings).
Ex. A, with his wife & little children, took a bus for a
certain destination, but the Bus transported them to a wrong place and left
them at a drizzling night. Held, the bus owner must compensate A for the
expenses incurred by A for coming back to home but nothing for the medical
expenses for treatment of his wife and children as that was too remote.
vi.
Damages
from Carriers: Damages can be claimed from the carriers without giving
notice for deterioration of goods due to delay in transit.
vii. Damages for Breach of Service Contracts:
Damages for breach of service contracts by the employers are
determined with reference to the usual terms of employment contracted for and
at the time that would be lost before similar employment is obtained.
viii. Liquidated
Damages and Penalty: When the contract contains any
stipulation by way of liquidated damages / penalty for failure to perform the
obligations, the aggrieved party is entitled to receive from the party who
caused the breach of Contract, a reasonable compensation (Sec.74) not exceeding
the amount specified. Damages are restricted to reasonable compensation, not
exceeding the amount specified in contract, by whatever name (liquidated
damages or penalty) called. Any clause stipulating for forfeiture of security
deposit is not valid.
a. Liquidated Damages: It
represents an amount of compensation, which is a fair and genuine
pre-estimate of the probable loss arising from the breach, specified by the
parties in the contract. This is
normally imposed by way of compensation to the aggrieved Party.
b. Penalty: A
Penalty may be disproportionate to the damage likely to accrue as a
result of the breach, fixed up with a view to secure contract (and frighten or
intimidate the breach). Any stipulation in the contract which is unreasonable
compared to the maximum loss that could have occurred from the breach, is
treated as penalty and normally not allowed by court.
c. Rules
determining Liquidated Damages and Penalty
Rules for determining whether a stipulation is by way
of ‘liquidated damages’ or by way of ‘penalty’ are as follows:
i.
It
is immaterial whether the words ‘liquidated damages’ or ‘penalty’ are used and
the court will not be bound by it. If the court considers it as ‘penalty’, it
can relieve the parties from payment of such penalty. On the other hand, if
court considers the sum as pre-estimate of loss, it will be considered as
‘Liquidated Damages’ and the aggrieved party will be entitled to it.
ii.
The
essence of penalty is to compel the performance of the contract by providing
punishment, if the contract is not performed. On the other hand, the essence of
liquidated damages is the pre-estimation of loss due to non-performance of
contract.
iii.
On
the basis of terms and circumstances of the contract at the time of its
formation, the sum is decided as ‘liquidated damages’ or ‘penalty’.
iv.
A
part of a single sum may be considered as ‘liquidated damages’ and the other as
‘penalty’.
v.
Penalty
may be stipulated for a sum more than the actual loss and when the breach is
for not paying on the time fixed.
9.3.2
Distinction between Liquidated Damages and Penalty
|
Liquidated
Damages
|
Penalty
|
|
It
represents a fair pre-estimated sum fixed or ascertained by the parties for
loss that may arise due to breach of contract.
|
It
is the sum stipulated in the contract (usually high disproportionate to the
loss that might arise as a result of breach).
|
|
The
intention for liquidated damages is to make good the loss that might arise
due to breach.
|
The
intention for penalty is to enforce and ensure performance of a contract,
acting as a deterrent to avoid performance.
|
|
Liquidated
damages is the amount of genuine pre-estimate of loss that might happen on
breach of contract.
Ex. M contracts with N to deliver possession
of a house under construction within 12 months. He would pay the rent for the
period of delay. This is an example of Liquidated Damages.
|
Penalty
is not related to actual loss. Its object is coercing the offending party to
perform the contract.
Ex.
P contracts to deliver
75 pumps to Q on a stipulated day, failing which he shall pay Rs.1 Lakh. The
amount of Rs.1 Lakh is arbitary and not based on the amount of loss incurred
by Q due to non-delivery. This is an example of Penalty.
|
9.3.3 Distinction between Ordinary
& Liquidated Damages
The distinction
between ordinary damages and Liquidated damages are given below:
|
Ordinary Damages
|
Liquidated Damages
|
|
It represents
reasonable and fair damages arising naturally from the breach of contract.
|
It represents
a fair and genuine pre-estimate of the probable loss arising from the breach
of contract.
|
|
The amount of
damages is determined by court.
|
The amounts of
compensation are determined by the parties to the contract.
|
|
The amount of
compensation is not mentioned in the contract.
|
The amount is
pre-estimated and specified in the contract.
|
|
Awarded to
compensate the loss caused to the aggrieved party.
|
Specified in
the contract so as to avoid uncertainty and expenses of proving damages in
the court.
|
|
Ordinary
damages are allowed as compensation against actual loss.
|
This acts as a
wiling for the aggrieved party.
|
9.4 Interest
i. Sometimes,
Payment of interest is allowed on breach of contract. The rules of Payment of
Interest may be summarized as follows:
-
Payment of interest is permissible when
the rate is reasonable.
-
If the contract stipulates increased
interest from the date of the bond (and not from the date of default), court
may award reasonable compensation only.
ii. Payment
of compound interest on failure to pay, at the same rate as simple interest is
normally granted. In case of stipulation of higher rate of compound interest,
reasonable compensation is only allowed.
9.5 Specific
Performance
In
certain cases of breach, where the court thinks that damages are not an
adequate remedy, it may direct the party in breach to perform contract.
i. Normally
court considers the following factors in its order for specific performance :
a. When
compensation in money for its non-performance is not an adequate relief.
b. When
no standard method is available for ascertaining the damage in terms of money.
c. There is no exact substitute or alternative
to the subject matter of the contract (e.g. sale of a particular house, rare
article).
ii. Specific
performance is not granted where
a. Damages
are an adequate remedy;
b. the
contract is not certain, or is inequitable to either party;
c. the
contract is of a revocable nature;
d. the
contract is made by trustees in breach of their trust;
e. the
contract is made by a company in excess of its powers;
f. the
contract is of personal nature;
g. the
Court cannot supervise its carrying out;
h. personal
quality of a person is the subject matter of contract;
i. the
contract is dependent upon personal volition of the parties;
j. specific
performance is demanded against a minor.
9.6 Injunction
(a)
Where a party is in breach of a negative
term of a contract (i.e., where he is doing something which he promised
not to do), the court may, by issuing an order (known as Injunction),
restrain him from doing what he promised not to do.
Ex. A, a singer, contracted with B to
sing exclusively at B’s theatre for a specified period and not in any other
public performance. Afterwards, A made
contract with C to sing at another theatre. Held, A could be restrained by injunction from singing for C.
Ex. G and A mutually
agreed that G would exclusively purchase the Items produced by A in his factory
and G would not purchase same item from anyone else. A is also to supply all
his produce of the Item in the factory to G, as required. Court may restrain G if he purchases the Item other
than A, and may also restrain A if he sells his produce to anyone other than G,
without supplying him first.
(b)
The
restoration of injunction can be ordered by the court if:
i.
the
contract is voidable,
ii.
the
contract becomes void,
iii.
on
discovering the contract as void.
9.7 Rectification
or Cancellation
When
through fraud or a mutual mistake of the parties, a contract or other
instrument does not express their real intention, either of the party may apply
for rectification (or cancellation) of the contract. Court, on ascertaining the
real intention of the parties, may, in its discretion, allow rectification (or
cancellation) of the contract.
Ex. A, owner
of a ship, fraudulently representing the ship to be seaworthy, induces B, an
underwriter, to insure the ship. B may obtain the cancellation of the policy.
For more details, refer to
Mercantile law, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com
