1. In case of breach of contract by one party, the other party need not perform his part of the contract and is entitled to compensation for the loss occurred to him.
2. Damages for breach of contract must be such loss or damage as naturally arise, in the usual course of things or which had been reasonably supposed to have been in contemplation of the parties when they made the contract, as the probable result of the breach.
3. Any other damages are said to be remote or indirect damages, hence, cannot be claimed.
TEST YOUR KNOWLEDGE
Multiple Choice Questions
Question 1. When prior to the due date of performance, the promisor absolutely refuses to perform the contract, it is known as
(a) abandonment of contract
(b) remission of contract
(c) actual breach of contract
(d) anticipatory breach of contract
Question 2. In case of anticipatory breach, the aggrieved party may treat the contract
(a) as discharged and bring an immediate action for damages
(b) as operative and wait till the time for performance arrives
(c) exercise option either (a) or (b)
(d) only option (a) is available
Question 3. In case of breach of contract, which of the following remedy is available to the aggrieved party?
(a) Suit for rescission
(b) Suit for damages
(c) Suit for specific performance
(d) All of these
Question 4. Sometimes, a party is entitled to claim compensation in proportion to the work done by him. It is possible by a suit for
(c) quantum meruit
(d) none of these
Question 5. Generally, the following damages are not recoverable?
(a) Ordinary damages
(b) Special damages
(c) Remote damages
(d) Nominal damages
Answers to MCQs
Question 1: “An anticipatory breach of contract is a breachof contract occurring before the time fixed for performance has arrived.” Discuss stating also the Effect of anticipatory breach on contracts.
Question 2: “When a contract has been broken, the party who suffers by such a breach is entitled to receive compensation for any loss or damage caused to him”. Discuss.
Question 3: “Liquidated damage is a genuine pre-estimate of compensation of damages for certain anticipated breach of contract whereas Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable and has no comparison to the loss suffered by the parties”. Explain.
Answer of Theoretical Questions
1. An anticipatory breach of contract is a breachof 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. The law in this regard has very well summed up in Frost v. Knight and Hochster v. DelaTour:
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 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.
2. Compensation for loss or damage caused by breach of contract (Section 73)
When a contract has been broken, the party who suffers by such a 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 made the contract, to be likely to result from the breachof it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
In view of above, the statement given in the question seems to be incorrect.
3. Liquidated damage is a genuine pre-estimate of compensation of damages for certain anticipated breach of contract. This estimate is agreed to between parties to avoid at a later date detailed calculations and the necessity to convince outside parties.
Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable and has no comparison to the loss suffered by the parties.
In terms of Section 74 of the Act “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 damages or loss is proved to have been caused thereby, to receive from the other party who has broken the contract, a reasonable compensation not exceeding the amount so named, or as the case may be the penalty stipulated for.
Explanation to Section 74
A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
In terms of Section 74, courts are empowered to reduce the sum payable on breach whether it is ‘penalty’ or “liquidated damages” provided the sum appears to be unreasonably high.
Sri ChunniLal vs. Mehta & Sons Ltd (Supreme Court)
Supreme Court laid down the ratio that the aggrieved party should not be allowed to claim a sum greater than what is specific in the written agreement. But even then the court has powers to reduce the amount if it considers it reasonable to reduce.