REMEDIES FOR BREACH OF CONTRACT

 

REMEDIES FOR BREACH OF CONTRACT

When one of the parties makes a breach of contract, the following remedies are available to the other party:

1. Damages: Remedy by way of damages is the most common remedy available to the injured party. This entitles the injured party to recover compensation for the loss suffered by him due to the breach of contract, from the party who causes the breach. Sections 73 to 75 incorporate the provisions in this regard.

2. Quantum Meruit: When the injured party has performed a part of his obligation under the contract before the breach of contract has occurred, he is entitled to recover the value of what he has done, under this remedy.

3. Specific Performance and injunction: Sometimes a party to the contract instead of recovering damages for the breach of contract may have recourse to the alternative remedy of specific performance of the contract, or an injunction restraining the other party from making a breach of the contract. Provisions regarding these remedies are contained in the Specific Relief Act, 1963.

 

The first two remedies stated above are being discussed in some detail,

1. DAMAGES

Section 73 of the Indian Contract Act, 1872, makes the following provision regarding the right of the injured party to recover compensation for the loss or damage which is caused to him by the breach of contract. 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, when they niade the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract. When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person has contracts to discharge it and had broken his contract. Explanation. In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account." The Section has been explained with the help of the following illustrations:

 

(a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 maunds of saltpetre of like quality at the time when the saltpetre ought to have been delivered.

 

(b) A hires B's ship to go to Bombay, and there take on board, on the first of January, a cargo which A is to provide and to bring it to Calcutta, the freight to be paid when earned. B's ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense.

(c) A contracts to buy from B, at a stated price, 50 maunds of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A by way of compensation, the amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs that he will not accept it.

 

1. Remoteness of Damage

The following statement of Alderson B, in the case of Hadley v. Baxendale' is considered to be the basis of the law to determine whether the damage is the proximate or the remote consequence of the breach of contract:

"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 be 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 the contemplation of both the parties, at the time they made the contract, as the probable result of the breach of it."

The provision contained in Section 73 (para 1) is similar to rule contained in the above stated judgment in Hadley v. Baxendale.

The rule in Hadley v. Baxendale consists of two parts. On the breach of a contract such damages can be recovered :-

(1) as may fairly and reasonably be considered arising naturally, i.e., according to the usual course of things from such breach; or,

(2) as may reasonably be supposed to have been in the contemplation of both the parties at the time they made the contract.

In either case, it is necessary that the resulting damage is the probable result of the breach of contract.

The principle stated in the two branches of the rule is virtually the rule of "reasonable foresight". The liability of the party making the breach of contract depends on the knowledge, imputed or actual, of the loss likely to arise in case of breach of contract: The first Enter branch of the rule allows damages for the loss arising naturally, i in the usual course of things from the breach. The parties are deemed know about the likelihood of such loss. The second branch of the rule deals with the recovery of more loss which results from the special circumstances of the case. Such loss is recoverable, if the possibility of the same was actually within the knowledge of the parties, particularly who makes a breach of the contract, at the time of making of the contract. (1) First branch of the rule in Hadley v. Baxendale: arising in the usual course of things Damage

 

Under this branch of the rule, compensation can be claimed for any loss or damage that arose in usual course of things from the breach of contract. If the loss is one which does not arise in the usual course of things but is special loss arising out of special circumstances, then the situation would be covered by the second branch of the rule. In that case the loss can be claimed if the same was in the contemplation of both the parties at the time of making of the contract.

 

In Hadley v. Baxendale,' the facts were as under: plaintiff's mill had been stopped due to the breakage of a crankshaft. The broken shaft had to be sent to the makers at Greenwich as a pattern for preparing the new one. The defendants, who were common carriers, agreed to carry the broken shaft to Greenwich. The only information given to the carriers was that the article to be carried was the broken shaft of a mill and the plaintiffs were the millers of that mill. Owing to the defendants' negligence, the delivery of the shaft was delayed. Due to this delay, the mill remained stopped for a longer time than it would have been, had the shaft been delivered at Greenwich without any delay. plaintiffs brought an action to recover damages for the loss of profits arising out of the delay.

It was held that it could not be contemplated that the mill would be stopped in the usual course of things, by sending the shaft, as the millers might have another shaft in reserve. Moreover, the special circumstances were not communicated by the plaintiffs to the defendants. The plaintiffs were, therefore, not entitled to recover the loss. It was observed;

It is obvious that, in great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstance, such consequences would not, in all probability, have occurred, and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profit here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances nor were the special circumstances, which perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants.

(2) Second branch of the rule in Hadley v. Baxendale : More loss arising from the special circumstances

 

If the loss on the breach of a contract does not arise naturally, i.e., according to the usual course of things but it arises due to some special circumstances, the person making the breach of contract can be made liable for the same provided that those special circumstances were brought to his knowledge at the time of making the contract. If he had no knowledge of the special circumstances which result in the particular loss, he cannot be made liable for the same.

 

2. Measure of Damages

After it has been established that a certain consequence of the breach of contract is proximate and not remote and the plaintiff deserves to be compensated for the same, the next question which arises is: What is the measure of damages, for the same, or in other words, the problem is of the assessment of compensation for the breach of contract.

Damages are compensatory in nature. The object of awarding damages to the aggrieved party is to put him in the same position in which he would have been if the contract had been performed. are, therefore, assessed on that basis. If a party takes security deposit from the other for the due performance of the contract, he is not entitled to forfeit the deposit on the ground of default, when no harm is caused to him on account of such default.

Liquidated damages and penalty

 

Sometimes, the parties to a contract, at the time of making the contract agree to the amount of compensation payable in the event of the breach of contract. The amount of compensation payable, which has been agreed beforehand, may be either liquidated damages or penalty. If the compensation to be paid on the breach of contract is the genuine pre-estimate of the prospective damages, it is known as liquidated damages If the compensation agreed to be paid in the event of breach of contract is excessive and highly disproportionate to the likely loss, viz., the amount is fixed in terrorem, with a view to discouraging breach of contract, it is known as penal Whether a stipulation was penalty or, liquidated damages depended on the construction of contract to be judged as at the time it was made, and mere description as penalty or liquidated damages though relevant was not decisive.

 

The distinction between penalty and liquidated damages was thus explained by Lopes, J in Law v. Redditch Local Board²: The distinction between penalties and liquidated damages depends on the intention of the parties be gathered from the whole of the contract. If the intention is to secure performance of the contract by the imposition of a fine or penalty, then the sum specified is penalty; but if, on the other hand, the intention is to assess the damages for breach of the contract, it is liquidated damages.

 

According to English law) if the amount of compensation agreed to by the parties is by way of liquidated damages, the plaintiff will be entitled to recover the agreed amount of compensation, neither more nor less than that, without the plaintiff having to prove the exact amount of loss suffered by him by the breach of contract. On the other hand, if the compensation agreed upon is in the nature of penalty, the plaintiff will be indemnified to the extent of the actual loss suffered by him. The fixed by way of penalty is the maximum limit damages, rather than making a pre-estimate of cases without proof of actual loss.

 

In the instant case, the defendant called upon the plaintiff to execute some work but the plaintiff was not allowed to execute the work by the Executive Engineer. To the claim of Rs. 50,500/- as damages, made by the plaintiff, the Hon'ble High Court awarded Rs. 25,000/- as the plaintiff could not produce sufficient evidence to ascertain his actual

Holt C.J in Ashby v. White, observed: Every injury imports a damage though it does not cost the party one far thing Taking support from the above famous dictum of Holt, C.J., the High Court said that nominal damages might be awarded where the fact of the loss was shown but the necessary evidence as to its amount was not given.

 

Entitlement of compensation for breach of contract

Section 74 of the Indian Contract Act, 1872 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of the loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss likely to occur by such breach.

 

When the parties agree to the amount of compensation payable in the event of the breach of contract, the position in India is governed by the following provision contained in Section 74 of the Indian Contract Act: "74. Compensation for breach of contract where penalty stipulated for.-Where a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract, reasonable compensation not exceeding the amount so named or, as the ce may be, the stipulated for. Explanation-A stipulation for increased interest from the date o default may be a stipulation by way of penalty. Exception. When any person enters into any bail bond recognizance or other instrument of the same nature or, under the provisions of any law, or under the orders of the Central Government or any State Government, gives any bond for the performance of any public duty or act in which the public interested, he shall be liable, upon breach of the condition of such instrument, to pay the whole sum mentioned therein.

 

Explanation-A person who enters into a contract with the Government does not necessarily thereby undertake any public duty, or to do an act in which the public are interested. The rule contained in Section 74 provides that when the parties have mentioned in the agreement the amount of compensation to be paid in the event of breach, the injured party is entitled to receive the party who has broken the contract reasonable compensation not exceeding the amount named in the contract. This is the rule regardless of the fact whether the sum agreed to be paid is by way of liquidated damages or penalty. It means that the amount of compensation, if pre-determined by the parties, is the maximum which the injured party can receive. Mention of specific amount of compensation does not necessarily entitle the plaintiff to claim that sum, but the actual amount is to be determined by the Court. The Court, however, cannot award higher damages than agreed upon. For example, A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent at the end of six months, with a stipulation that, in case of default, interest shall be payable at the rate of 75 per cent from the date of default. This is a stipulation by way of penalty, and B is only to recover from A such compensation as the Court considers reasonable.2

2. QUANTUM MERUIT

 

Ordinarily, if a person, having agreed to do some work or render some services, has done only a part of what he was required to do, he cannot claim anything for what he has done. When a person agrees to complete some work for a lump sum, non-completion of the work does not entitle him to any remuneration even for the part of the work done. But the law recognizes an important exception to this rule by way of an action for 'Quantum Under this action, if A and B have entered into a contract, and A, who has already performed a part of the contract, is then prevented by B from performing the rest of his obligation under the A can recover from B reasonable remuneration for whatever he has already done.

The essentials of an action of quantum meruit are as follows:

1. One of the parties makes a breach of contract, or prevents the performance of it by the other side.

 

2. The party injured by the breach of the contract, who has already performed a part of it, elects to be discharged from further performance of the contract and brings an action for recompense for the value of the work he has already done.

 

For instance, if A agrees to deliver B 500 bags of wheat and when A has already delivered 100 bags, B refuses to accept any further supply, A can recover from B the value of wheat which he has already delivered.