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a.     Contract Rescinded: When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance.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 1^st Nov and B agrees to pay for the delivered sugar on 4^th 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d.    only a part of the contract is sought to be rescinded which cannot be severed from the rest of the contract.

b.    Restoration of Benefits: When a contract is rescinded, the party should restore the benefits received, if any, to the other party, and the aggrieved party is entitled to compensation for non-fulfillment of the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