Indian Contract Act – Breach of Contract

Breach of Contract

A  Contract gives rise to rights and obligations to the Parties to Contract.  Sometimes, a Party fails to perform his obligations under the Contract, causing Breach of Contract.  In such case, the injured Party gets some rights to take remedial measures.

Remedial action for Breach of Contract

The injured party has the option to following remedial measures :

  • Rescission Contract
  • Sue for Damages.
  • Sue upon quantum meruit.
  • Sue for specific performance of the contract.
  • Sue for injunction.

Click Here to Play the Video

Rescission of Contract

Rescission of contract means cancellation of a contract. A rescinded contract is terminated from the beginning, as if the contract never existed, and the parties be brought back to the position they were in before entering into the contract. This means any benefit received as part of the contract, such as money, must be returned.

Rescission (except by mutual consent or by order of court), is the right of one party, arising upon conduct by the other, by which he intimates his intention to no longer abide by the contract. It is a right to treat contract as at end, if he chooses, and to claim damages for its total breach.

When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse further performance (s.39)

Rules of Rescission of Contract

  • Grant of Rescission of Contract by Court : The Court may grant rescission where the contract is voidable by the plaintiff, or Contract is unlawful.

On granting Rescission by the court, the Party 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.

  • Refusal by Court to Grant Rescission of Contract : However, court may refuse to rescind the contract where :
  • plaintiff has ratified the contract,
  • owing to the change of circumstances (not caused by the defendant), the parties cannot be restored to their original positions,
  • third parties have acquired rights in good faith and for value,
  • only a part of the contract is sought to be rescinded which cannot be severed from the rest of the contract.
  • Restoration of Benefits received under Contract: When a contract is rescinded, the party should restore the benefits received, if any, to the other party, and the aggrieved party is entitled to compensation for non-fulfillment of the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 (s. 65). 
  • Claim of compensation for Loss suffered: A person rightfully rescinding a contract may claim for compensation for loss suffered due to non-performance (s. 75).

Click Here to Play the Video

Damages for Breach of Contract

Damages means monetary compensation allowed to the injured party by the Court for the loss suffered by him for breach of a contract.

  • Rules as to Damages for Breach of Contract (s. 73): The aggrieved party may claim monetary compensation for the loss caused due to non-performance of promise as follows:

Compensation for Breach of Contract: When a Contract is breached, 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.

No compensation for remote loss: Compensation shall not be given for any remote and indirect loss or damage sustained by reason of breach.

  • Compensation in 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.
  • Mitigation of Loss for Breach of Contract  : The injured party must take necessary steps to mitigate the loss caused by the breach and cannot claim compensation which he could have avoided.
  • Estimation of Loss Breach of Contract: 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.

Click Here to Play the Video

Kinds of Damages for Breach of Contract

When a contract is breached, the injured party is entitled to following kinds of damages, as applicable:

  • Ordinary Damages: Natural & direct damages suffered by injured Party arising out of breach (but not for any remote or indirect loss (s.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.

  • Special Damages: Damages other than directly for breach of contract, reasonably attributed to the contract, 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.

  • Nominal Damages: 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.
  • Vindictive Damages: Damage for Loss of Reputation (also knows as exemplary damages)

Ex. 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.

Ex. A agrees to marry B. B denies to marry A. A may be allowed vindictive damage for losses of reputation.

  • Damages for Inconvenience and Discomfort: Damages for physical inconvenience and discomfort suffered by the Injured Party.

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.

  • Liquidated Damages and Penalty: Damages for Breach of Contract , when such  stipulation is contained in the Contract (liquidated means pre-ascertained).

Liquidated Damages and Penalty

Sometimes, a contract contains stipulation by way of liquidated (pre-ascertained) damages / penalty for failure to perform the obligations.

  • 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.
  • Liquidated Penalty: Sometimes, a Penalty clause, which may be disproportionate to the damage likely to accrue as a result of the breach, is stipulated in the Contract, with a view to secure contract (and frighten or intimidate the breach). Penalty out of any stipulation in the contract, which is unreasonable compared to the maximum loss that could have occurred from the breach, is normally not allowed by court.

Guidelines / Principles of Liquidated Damage

  • The injury is either “uncertain” or “difficult to quantify”
  • The amount is reasonable and considers the actual or anticipated harm caused by the contract breach
  • The loss is difficult to prove
  • There isn’t really a better alternative remedy another
  • The damages are structured to function as damages, not as a penalty.

Click Here to Play the Video

Liquidated Damages vs Penalty

Liquidated DamagesPenalty
Pre Estimated : It represents a fair pre-estimated sum fixed or ascertained by the parties for loss that may arise due to breach of contract.Stipulated : It is the sum stipulated in the contract (usually high disproportionate to the loss that might arise as a result of breach).
Compensation of Loss : The intention for liquidated damages is to make good the loss that might arise due to breach.Enforcement : The intention for penalty is to enforce and ensure performance of a contract, acting as a deterrent to avoid performance.
Based on Loss Suffered : 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 Rs 10,000 per month, for the period of delay. This is an example of Liquidated Damages and may be allowed by court.Vindictive : Penalty is not related to actual loss. Its object is coercing the offending party to perform the contract. Ex. P contracts to deliver 5 pumps to Q on a stipulated day, failing which he shall pay Rs.1 Lakh. The amount of Rs.1 Lakh is arbitrary and not based on the amount of loss incurred by Q due to non-delivery. This is an example of Penalty and will not be allowed by court.

Click Here to Play the Video

Ordinary and  Liquidated Damages

Ordinary DamagesLiquidated Damages
Actual : It represents reasonable and fair damages arising naturally from the breach of contract.Pre- Estimate : It represents a fair and genuine pre-estimate of the probable loss arising from the breach of contract.
Determined by Court  : The amount of damages is determined by court.  Determined by the parties : The amounts of compensation are determined by the parties to the contract.
Not Stipulated in Contract : The amount of compensation is not mentioned in the contract.Stipulated in Contract : The amount is pre-estimated and specified in the contract.
Compensation of Loss : Awarded to compensate the loss caused to the aggrieved party.Avoidance of Loss : Specified in the contract so as to avoid Loss due to uncertainty and additional expenses

Click Here to Play the Video

Interest Payment on Breach of Contract

Sometimes, Payment of interest is allowed on breach of contract., if so stipulated in the Contract

Rules of Payment of Interest on breach of contract.

  • Reasonable Rate : Payment of interest is permissible when the rate is reasonable. If the contract stipulates increased rate  after certain period, court may award reasonable compensation only.
  • Compound Interest : Payment of compound interest , at the same rate as simple interest granted may be granted. In case of stipulation of higher rate of compound interest, reasonable compensation is only allowed.

Click Here to Play the Video

Specific Performance of Contract by Order of Court

In Breach of Contract, often court allows other remedies (e.g damages in terms of money). However, in certain cases of breach of contract, the court may think that damages are not an adequate remedy, an may direct the offending party to perform contract.

  • Factors of consideration for specific performance : The court takes into certain Factors into consideration for specific performance
  • Compensation not Adequate relief : When compensation in money for its non-performance is not an adequate relief (like Transfer of immovable property like Land / Building).
  • Standard method not available : When no standard method is available for ascertaining the damage in terms of money.
  • Substitute Method not available :  There is no exact substitute or alternative to the subject matter of the contract  than specific performance (e.g. sale of a particular house, rare article).
  • Instances where Specific performance not granted
  • Damages are an adequate remedy;
  • the contract is not certain, or is inequitable to either party;
  • the contract is of a revocable nature;
  • the contract is made by trustees in breach of their trust;
  • the contract is made by a company in excess of its powers;
  • the contract is of personal nature;
  • the Court cannot supervise its carrying out;
  • personal quality of a person is the subject matter of contract;
  • the contract is dependent upon personal volition of the parties;
  • specific performance is demanded against a minor.

Click Here to Play the Video

Injunction by Court on Breach of Contract

Injunction means a Judicial order restraining (or Directing) a Party from beginning or continuing an action. In simple words, Injunction is a court order directing a person, to do, or cease doing, a specific action.

  • Rules of Injunction: 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. Injunction is normally temporary, but may be permanent. It is sometimes awarded in case of anticipatory breach of contract.

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 from A, and may also restrain A if he sells his produce to anyone other than G, without supplying him first.

  • Situations for Restoration of Injunction : The court may order Restoration of injunction in following situations
  • the contract is voidable,
  • the contract becomes void,
  • on discovering the contract as void.

Click Here to Play the Video

Rectification or Cancellation on Breach of Contract

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.

Click Here to Play the Video

Click here to see PDF file