ICAI Notes- Unit 5: Breach of Contract and its Remedies - CA Foundation PDF Download

 Page 1


  BUSINESS LAWS 
2.122 
LEARNING OUTCOMES 
UNIT – 5: BREACH OF CONTRACT AND ITS 
REMEDIES 
 
After studying this Chapter, you will be able to understand: 
? Concept of breach of contract and various modes thereof. 
? How the damages are to be measured. 
 
We have so far seen how a contract is made, the essential of a 
valid contract and also how a contract is to be performed as well 
as how a contract may be put an end. We shall now discuss 
about the breach of contract and also the mode in which 
compensation for breach of contract is estimated. 
Breach of Contract
Anticipatory Breach of 
Contract
Actual Breach of 
Contract
Remedies for Breach of 
Contract
Suit for 
Damages
Ordinary 
Damage
Special 
Damages
Vindictive 
Damages
Nominal 
Damages
Prefixed 
Damages
Liquidated 
Damages
Penalty
Rescission of 
contract
Suit for Specific 
Performance
Suit for 
Injunction
Suit upon 
Quantum 
Meruit
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 2


  BUSINESS LAWS 
2.122 
LEARNING OUTCOMES 
UNIT – 5: BREACH OF CONTRACT AND ITS 
REMEDIES 
 
After studying this Chapter, you will be able to understand: 
? Concept of breach of contract and various modes thereof. 
? How the damages are to be measured. 
 
We have so far seen how a contract is made, the essential of a 
valid contract and also how a contract is to be performed as well 
as how a contract may be put an end. We shall now discuss 
about the breach of contract and also the mode in which 
compensation for breach of contract is estimated. 
Breach of Contract
Anticipatory Breach of 
Contract
Actual Breach of 
Contract
Remedies for Breach of 
Contract
Suit for 
Damages
Ordinary 
Damage
Special 
Damages
Vindictive 
Damages
Nominal 
Damages
Prefixed 
Damages
Liquidated 
Damages
Penalty
Rescission of 
contract
Suit for Specific 
Performance
Suit for 
Injunction
Suit upon 
Quantum 
Meruit
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.123
THE INDIAN CONTRACT ACT, 1872 
 
Breach means failure of a party to perform his or her obligation under a contract. Breach of 
contract may arise in two ways: 
(1) Actual breach of contract  
(2) Anticipatory breach of contract 
5.1 ANTICIPATORY BREACH OF CONTRACT 
An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
Anticipatory breach of a contract may take either of the following two ways: 
(a) Expressly by words spoken or written, and  
(b) Impliedly by the conduct of one of the parties.  
Example 1: Where A contracts with B on 15
th
 July, 2022 to supply 10 bales of cotton for a 
specified sum on 14
th
 August, 2022 and on 30
th
 July informs B, that he will not be able to 
supply the said cotton on 14
th
August, 2022, there is an express rejection of the contract. 
Example 2: Where A agrees to sell his white horse to B for ` 50,000/- on 10
th
 of August, 
2022, but he sells this horse to C on 1
st
 of August, 2022, the anticipatory breach has 
occurred by the conduct of the promisor.
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and 
provides as follows:  
“When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, 
but words or conduct, his acquiescence in its continuance.” 
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from 
breach of contract immediately without waiting until the due date of performance;  
 or 
(2) He may elect not to rescind but to treat the contract as still operative and wait for 
the time of performance and then hold the other party responsible for the 
© The Institute of Chartered Accountants of India
Page 3


  BUSINESS LAWS 
2.122 
LEARNING OUTCOMES 
UNIT – 5: BREACH OF CONTRACT AND ITS 
REMEDIES 
 
After studying this Chapter, you will be able to understand: 
? Concept of breach of contract and various modes thereof. 
? How the damages are to be measured. 
 
We have so far seen how a contract is made, the essential of a 
valid contract and also how a contract is to be performed as well 
as how a contract may be put an end. We shall now discuss 
about the breach of contract and also the mode in which 
compensation for breach of contract is estimated. 
Breach of Contract
Anticipatory Breach of 
Contract
Actual Breach of 
Contract
Remedies for Breach of 
Contract
Suit for 
Damages
Ordinary 
Damage
Special 
Damages
Vindictive 
Damages
Nominal 
Damages
Prefixed 
Damages
Liquidated 
Damages
Penalty
Rescission of 
contract
Suit for Specific 
Performance
Suit for 
Injunction
Suit upon 
Quantum 
Meruit
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.123
THE INDIAN CONTRACT ACT, 1872 
 
Breach means failure of a party to perform his or her obligation under a contract. Breach of 
contract may arise in two ways: 
(1) Actual breach of contract  
(2) Anticipatory breach of contract 
5.1 ANTICIPATORY BREACH OF CONTRACT 
An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
Anticipatory breach of a contract may take either of the following two ways: 
(a) Expressly by words spoken or written, and  
(b) Impliedly by the conduct of one of the parties.  
Example 1: Where A contracts with B on 15
th
 July, 2022 to supply 10 bales of cotton for a 
specified sum on 14
th
 August, 2022 and on 30
th
 July informs B, that he will not be able to 
supply the said cotton on 14
th
August, 2022, there is an express rejection of the contract. 
Example 2: Where A agrees to sell his white horse to B for ` 50,000/- on 10
th
 of August, 
2022, but he sells this horse to C on 1
st
 of August, 2022, the anticipatory breach has 
occurred by the conduct of the promisor.
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and 
provides as follows:  
“When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, 
but words or conduct, his acquiescence in its continuance.” 
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from 
breach of contract immediately without waiting until the due date of performance;  
 or 
(2) He may elect not to rescind but to treat the contract as still operative and wait for 
the time of performance and then hold the other party responsible for the 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
2.124 
consequences of non-performance. But in this case, he will keep the contract alive for 
the benefit of the other party as well as his own, and the guilty party, if he so decides 
on re-consideration, may still perform his part of the contract and can also take 
advantage of any supervening impossibility which may have the effect of discharging 
the contract.  
5.2 ACTUAL BREACH OF CONTRACT 
In contrast to anticipatory breach, it is a case of refusal to perform the promise on the 
scheduled date. The parties to a lawful contract are bound to perform their respective 
promises. But when one of the parties breaks the contract by refusing to perform his 
promise, he is said to have committed a breach. In that case, the other party to the contract 
obtains a right of action against the one who has refused to perform his promise. 
Actual breach of contract may be committed- 
(a) At the time when the performance of the contract is due. 
Example 3: A agrees to deliver 100 bags of sugar to B on 1st February 2022. On the 
said day, he failed to supply 100 bags of sugar to B. This is actual breach of contract. 
The breach has been committed by A at the time when the performance becomes 
due. 
(b) During the performance of the contract: Actual breach of contract also occurs 
when during the performance of the contract, one party fails or refuses to perform 
his obligation under it by express or implied act. 
Remedies for Breach of Contract 
 
 
 
 
 
 
 
Remedies Available
Suit for Damages
Rescission of Contract
Suit for specific 
performance
Suit for Injunction
Suit upon quantum 
meruit
© The Institute of Chartered Accountants of India
Page 4


  BUSINESS LAWS 
2.122 
LEARNING OUTCOMES 
UNIT – 5: BREACH OF CONTRACT AND ITS 
REMEDIES 
 
After studying this Chapter, you will be able to understand: 
? Concept of breach of contract and various modes thereof. 
? How the damages are to be measured. 
 
We have so far seen how a contract is made, the essential of a 
valid contract and also how a contract is to be performed as well 
as how a contract may be put an end. We shall now discuss 
about the breach of contract and also the mode in which 
compensation for breach of contract is estimated. 
Breach of Contract
Anticipatory Breach of 
Contract
Actual Breach of 
Contract
Remedies for Breach of 
Contract
Suit for 
Damages
Ordinary 
Damage
Special 
Damages
Vindictive 
Damages
Nominal 
Damages
Prefixed 
Damages
Liquidated 
Damages
Penalty
Rescission of 
contract
Suit for Specific 
Performance
Suit for 
Injunction
Suit upon 
Quantum 
Meruit
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.123
THE INDIAN CONTRACT ACT, 1872 
 
Breach means failure of a party to perform his or her obligation under a contract. Breach of 
contract may arise in two ways: 
(1) Actual breach of contract  
(2) Anticipatory breach of contract 
5.1 ANTICIPATORY BREACH OF CONTRACT 
An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
Anticipatory breach of a contract may take either of the following two ways: 
(a) Expressly by words spoken or written, and  
(b) Impliedly by the conduct of one of the parties.  
Example 1: Where A contracts with B on 15
th
 July, 2022 to supply 10 bales of cotton for a 
specified sum on 14
th
 August, 2022 and on 30
th
 July informs B, that he will not be able to 
supply the said cotton on 14
th
August, 2022, there is an express rejection of the contract. 
Example 2: Where A agrees to sell his white horse to B for ` 50,000/- on 10
th
 of August, 
2022, but he sells this horse to C on 1
st
 of August, 2022, the anticipatory breach has 
occurred by the conduct of the promisor.
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and 
provides as follows:  
“When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, 
but words or conduct, his acquiescence in its continuance.” 
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from 
breach of contract immediately without waiting until the due date of performance;  
 or 
(2) He may elect not to rescind but to treat the contract as still operative and wait for 
the time of performance and then hold the other party responsible for the 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
2.124 
consequences of non-performance. But in this case, he will keep the contract alive for 
the benefit of the other party as well as his own, and the guilty party, if he so decides 
on re-consideration, may still perform his part of the contract and can also take 
advantage of any supervening impossibility which may have the effect of discharging 
the contract.  
5.2 ACTUAL BREACH OF CONTRACT 
In contrast to anticipatory breach, it is a case of refusal to perform the promise on the 
scheduled date. The parties to a lawful contract are bound to perform their respective 
promises. But when one of the parties breaks the contract by refusing to perform his 
promise, he is said to have committed a breach. In that case, the other party to the contract 
obtains a right of action against the one who has refused to perform his promise. 
Actual breach of contract may be committed- 
(a) At the time when the performance of the contract is due. 
Example 3: A agrees to deliver 100 bags of sugar to B on 1st February 2022. On the 
said day, he failed to supply 100 bags of sugar to B. This is actual breach of contract. 
The breach has been committed by A at the time when the performance becomes 
due. 
(b) During the performance of the contract: Actual breach of contract also occurs 
when during the performance of the contract, one party fails or refuses to perform 
his obligation under it by express or implied act. 
Remedies for Breach of Contract 
 
 
 
 
 
 
 
Remedies Available
Suit for Damages
Rescission of Contract
Suit for specific 
performance
Suit for Injunction
Suit upon quantum 
meruit
© The Institute of Chartered Accountants of India
2.125
THE INDIAN CONTRACT ACT, 1872 
5.3  SUIT FOR DAMAGES 
The Act in Section 73, has laid down the rules as to how the amount of compensation is to 
be determined. On the breach of the contract, the party who suffers from such a breach is 
entitled to receive, from the party who has broken the contract, compensation for any loss 
or damage caused to him by breach.  
Compensation can be claimed for any loss or damage which naturally arises in the usual 
course of events. 
A compensation can also be claimed for any loss or damage which the party knew when 
they entered into the contract, as likely to result from the breach.  
That is to say, special damage can be claimed only on a previous notice. But the party 
suffering from the breach is bound to take reasonable steps to minimise the loss.  
No compensation is payable for any remote or indirect loss. 
 
 
(i) Ordinary damages: 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 cause to him thereby, which naturally arose in 
the usual course of things from such breach, or which the parties know, when they 
made 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 reasons of the breach. (Section 73 of the Contract Act and the rule in 
Hadley vs. Baxendale). 
 HADLEY vs. BAXENDALE- Facts 
 The crankshaft of P’s flour mill had broken. He gives it to D, a common carrier who 
promised to deliver it to the foundry in 2 days where the new shaft was to be made. 
The mill stopped working, D delayed the delivery of the crankshaft so the mill 
remained idle for another 5 days. P received the repaired crankshaft 7 days later than 
he would have otherwise received. Consequently, P sued D for damages not only for 
Damages
General/
Ordinary
Special
Vindictive or 
Exemplary
Nominal
Damages for 
deterioration 
caused by 
delay
Pre-fixed 
damages
© The Institute of Chartered Accountants of India
Page 5


  BUSINESS LAWS 
2.122 
LEARNING OUTCOMES 
UNIT – 5: BREACH OF CONTRACT AND ITS 
REMEDIES 
 
After studying this Chapter, you will be able to understand: 
? Concept of breach of contract and various modes thereof. 
? How the damages are to be measured. 
 
We have so far seen how a contract is made, the essential of a 
valid contract and also how a contract is to be performed as well 
as how a contract may be put an end. We shall now discuss 
about the breach of contract and also the mode in which 
compensation for breach of contract is estimated. 
Breach of Contract
Anticipatory Breach of 
Contract
Actual Breach of 
Contract
Remedies for Breach of 
Contract
Suit for 
Damages
Ordinary 
Damage
Special 
Damages
Vindictive 
Damages
Nominal 
Damages
Prefixed 
Damages
Liquidated 
Damages
Penalty
Rescission of 
contract
Suit for Specific 
Performance
Suit for 
Injunction
Suit upon 
Quantum 
Meruit
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
2.123
THE INDIAN CONTRACT ACT, 1872 
 
Breach means failure of a party to perform his or her obligation under a contract. Breach of 
contract may arise in two ways: 
(1) Actual breach of contract  
(2) Anticipatory breach of contract 
5.1 ANTICIPATORY BREACH OF CONTRACT 
An anticipatory breach of contract is a breach of contract occurring before the time fixed for 
performance has arrived. When the promisor refuses altogether to perform his promise and 
signifies his unwillingness even before the time for performance has arrived, it is called 
Anticipatory Breach.  
Anticipatory breach of a contract may take either of the following two ways: 
(a) Expressly by words spoken or written, and  
(b) Impliedly by the conduct of one of the parties.  
Example 1: Where A contracts with B on 15
th
 July, 2022 to supply 10 bales of cotton for a 
specified sum on 14
th
 August, 2022 and on 30
th
 July informs B, that he will not be able to 
supply the said cotton on 14
th
August, 2022, there is an express rejection of the contract. 
Example 2: Where A agrees to sell his white horse to B for ` 50,000/- on 10
th
 of August, 
2022, but he sells this horse to C on 1
st
 of August, 2022, the anticipatory breach has 
occurred by the conduct of the promisor.
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and 
provides as follows:  
“When a party to a contract has refused to perform or disable himself from performing, his 
promise in its entirety, the promisee may put an end to the contract, unless he has signified, 
but words or conduct, his acquiescence in its continuance.” 
Effect of anticipatory breach: The promisee is excused from performance or from further 
performance. Further he gets an option:  
(1) To either treat the contract as “rescinded and sue the other party for damages from 
breach of contract immediately without waiting until the due date of performance;  
 or 
(2) He may elect not to rescind but to treat the contract as still operative and wait for 
the time of performance and then hold the other party responsible for the 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
2.124 
consequences of non-performance. But in this case, he will keep the contract alive for 
the benefit of the other party as well as his own, and the guilty party, if he so decides 
on re-consideration, may still perform his part of the contract and can also take 
advantage of any supervening impossibility which may have the effect of discharging 
the contract.  
5.2 ACTUAL BREACH OF CONTRACT 
In contrast to anticipatory breach, it is a case of refusal to perform the promise on the 
scheduled date. The parties to a lawful contract are bound to perform their respective 
promises. But when one of the parties breaks the contract by refusing to perform his 
promise, he is said to have committed a breach. In that case, the other party to the contract 
obtains a right of action against the one who has refused to perform his promise. 
Actual breach of contract may be committed- 
(a) At the time when the performance of the contract is due. 
Example 3: A agrees to deliver 100 bags of sugar to B on 1st February 2022. On the 
said day, he failed to supply 100 bags of sugar to B. This is actual breach of contract. 
The breach has been committed by A at the time when the performance becomes 
due. 
(b) During the performance of the contract: Actual breach of contract also occurs 
when during the performance of the contract, one party fails or refuses to perform 
his obligation under it by express or implied act. 
Remedies for Breach of Contract 
 
 
 
 
 
 
 
Remedies Available
Suit for Damages
Rescission of Contract
Suit for specific 
performance
Suit for Injunction
Suit upon quantum 
meruit
© The Institute of Chartered Accountants of India
2.125
THE INDIAN CONTRACT ACT, 1872 
5.3  SUIT FOR DAMAGES 
The Act in Section 73, has laid down the rules as to how the amount of compensation is to 
be determined. On the breach of the contract, the party who suffers from such a breach is 
entitled to receive, from the party who has broken the contract, compensation for any loss 
or damage caused to him by breach.  
Compensation can be claimed for any loss or damage which naturally arises in the usual 
course of events. 
A compensation can also be claimed for any loss or damage which the party knew when 
they entered into the contract, as likely to result from the breach.  
That is to say, special damage can be claimed only on a previous notice. But the party 
suffering from the breach is bound to take reasonable steps to minimise the loss.  
No compensation is payable for any remote or indirect loss. 
 
 
(i) Ordinary damages: 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 cause to him thereby, which naturally arose in 
the usual course of things from such breach, or which the parties know, when they 
made 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 reasons of the breach. (Section 73 of the Contract Act and the rule in 
Hadley vs. Baxendale). 
 HADLEY vs. BAXENDALE- Facts 
 The crankshaft of P’s flour mill had broken. He gives it to D, a common carrier who 
promised to deliver it to the foundry in 2 days where the new shaft was to be made. 
The mill stopped working, D delayed the delivery of the crankshaft so the mill 
remained idle for another 5 days. P received the repaired crankshaft 7 days later than 
he would have otherwise received. Consequently, P sued D for damages not only for 
Damages
General/
Ordinary
Special
Vindictive or 
Exemplary
Nominal
Damages for 
deterioration 
caused by 
delay
Pre-fixed 
damages
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
2.126 
the delay in the delivering the broken part but also for loss of profits suffered by the 
mill for not having been worked.  The count held that P was entitled only to ordinary 
damages and D was not liable for the loss of profits because the only information 
given by P to D was that the article to be carried was the broken shaft of a mill and it 
was not made known to them that the delay would result in loss of profits. 
Example 4: A agrees to sell to B bags of rice at 
`
5,000 per bag, delivery to be given 
after two months. On the date of delivery, the price of rice goes up to 
`
 5,500 per 
bag. A refuse to deliver the bags to B. B can claim from A 
`
 500 as ordinary damages 
arising directly from the breach.
(ii) Special damages: Where a party to a contract receives a notice of special 
circumstances affecting the contract, he will be liable not only for damages arising 
naturally and directly from the breach but also for special damages. 
Example 5: ‘A’ delivered a machine to ‘B’, a common carrier, to be conveyed to ‘A’s 
mill without delay. ‘A’ also informed ‘B’ that his mill was stopped for want of the 
machine. ‘B’ unreasonably delayed the delivery of the machine, and in consequence 
‘A’ lost a profitable contract with the Government. In this case, ‘A’ is entitled to 
receive from ‘B’, by way of compensation, the average amount of profit, which would 
have been made by running the mill during the period of delay. But he cannot 
recover the loss sustained due to the loss of the Government contract, as ‘A’s 
contract with the Government was not brought to the notice of ‘B’. 
(iii) Vindictive or Exemplary damages
 These damages may be awarded only in two cases - 
 (a) for breach of promise to marry because it causes injury to his or her feelings; 
and 
 (b) for wrongful dishonour by a banker of his customer’s cheque because in this 
case the injury due to wrongful dishonour to the drawer of cheque is so heavy 
that it causes loss of credit and reputation to him. A business man whose 
credit has suffered will get exemplary damages even if he has sustained no 
pecuniary loss. But a non-trader cannot get heavy damages in the like 
circumstances, unless the damages are alleged and proved as special 
damages. (Gibbons v West Minister Bank) 
(iv) Nominal damages: Nominal damages are awarded where the plaintiff has proved 
that there has been a breach of contract but he has not in fact suffered any real 
damage. It is awarded just to establish the right to decree for the breach of contract. 
The amount may be a rupee or even 10 paise. 
© The Institute of Chartered Accountants of India