ICAI Notes 1.4 - Breach of Contract CA Foundation Notes | EduRev

Mercantile Law for CA CPT

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CA Foundation : ICAI Notes 1.4 - Breach of Contract CA Foundation Notes | EduRev

The document ICAI Notes 1.4 - Breach of Contract CA Foundation Notes | EduRev is a part of the CA Foundation Course Mercantile Law for CA CPT.
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Learning objectives

  • Understand the concept of breach of contract and various modes thereof.
  • Be clear about how the damages are to be measured.
  • Note the circumstances when vindictive damages are awarded.

1.38 ANTICIPATORY BREACH OF CONTRACT 
It is an important concept under the law of contractual relationship. 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. A promisee, instead of putting an end to the contract forthwith may keep the contract alive upto the time when the contract is to be executed. But the amount of damages in one case may be different from that in the other. We shall now explain this difference in the amount of damages by means of an illustration. X agrees to sell to Y a certain quantity of say, wheat at Rs. 100/- per quintal to be delivered, say, on the 3rd March. On the 2nd February, X gives notice expressing his unwillingness to sell wheat; and the price of wheat on the date is Rs. 110/- per quintal. If Y repudiates the contract forthwith (which he is entitled to do at his option), he would be able to recover damages @ Rs. 10/- per quintal, being the difference between market price on the 2nd February and the contract price. If instead of taking the action forthwith, he keeps the contract alive till the 3rd March and in the mean time, the price increases to Rs. 125/- per quintal on the date. Y would be able or recover damages @25/- per quintal. If, on the other hand, during the intervening period between 2nd February and 3rd March, private sale of wheat is prohibited by the Government, the contract would become void, and Y would not be able to recover any damages whatever. Thus you observe that if the promisee keeps the contract alive, he does so not only for his own benefit but also for the benefit of the promisor.

1.39 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. 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. 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. And no compensation is payable for any remote or indirect loss.

1.40 LIABILITY FOR DAMAGES 
(a) Liability for 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.
(b) Liability to pay vindictive or exemplary damages : These damages may be awarded only in two cases, viz. (i) for breach of promise to marry; and (ii) wrongful dishonour by a banker of his customer’s cheque. In a breach of promise to marry, exemplary damages may be awarded to the other party taking into consideration the injury caused to his or her feelings. The amount of damages recoverable by the drawer of cheque from his banker in case of wrongful dishonour of his cheque may be quite heavy, depending upon the loss of credit and reputation suffered on that account.
(c) Liability to pay 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. Now you may ask why such damages are at all awarded. The answer is simple. 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.
(d) Damages for deterioration caused by delay : In the case of deterioration caused to goods by delay, damages can be recovered from carrier even without notice. The word ‘deterioration’ not only implies physical damages to the goods but it may also mean loss of special opportunity for sale.

1.41 HOW TO CALCULATE THE DAMAGE ?
Under a contract for the sale of goods, the measure of damages, when the buyer breaks the contract, is the difference between the contract price and the market price at the date of breach. If the contract is broken by the seller, the buyer is entitled to recover from the seller the difference between the market price and the contract price at the date of breach.
Duty to mitigate the loss. You will perhaps recollect that the party who suffers in consequence of the breach of contract must take all reasonable steps to mitigate the loss from such a breach; he cannot claim as damages any loss which he has suffered due to his own negligence.
Besides claiming damages as a remedy for the breach of contract, the following remedies are also available :
(i) Rescission of contract : When a contract is broken by one party, the other party may treat the contract as rescinded. In such a case he is absolved of all his obligations under the contract and is entitled to compensation for any damages that he might have suffered.
(ii) Suit upon Quantum Meruit : The phrase ‘quantum meruit’ literally means “as much as is earned” or “according to the quantity of work done”. When a person has begun the work and before he could complete it, the other party terminates the contract or does something which make it impossible for the other party to complete the contract, he can claim for the work done under the contract. He may also recover the value of the work done where the further performance of the contract becomes impossible. The claim on quantum meruit must be brought by a party who is not at default. However, in certain cases, the party in default may also sue for the work done if the contract is divisible.
Following are the cases in which a claim on quantum meruit may arise :
(a) Where the work has been done and accepted under a contract which is subsequently discovered to be void, in such a case, the person who has performed the part of the contract is entitled to recover the amount for the work done and the party, who receives and accepts the benefit under such contract, must make compensation to the other party.
(b) Where a person does some act or delivers something to another person with the intention of receiving payments for the same (i.e. non-gratuitous act), in such a case, the other person is bound to make payment if he accepts such services or goods, or enjoys their benefit.
(c) The compensation for the work done may be recovered on the basis of quantum meruit. Where the contract is divisible and a party performs part of the contract and refuses to perform the remaining part, in such a case, the party in default may sue the other party who has enjoyed the benefits of the part performance.
(iii) Suit for specific performance : Where damages are not an adequate remedy in the case of breach of contract, the court may in its discretion on a suit for specific performance direct party in breach, to carry out his promise according to the terms of the contract.
(iv) Suit for injunction : Where a party to a contract is negativating the terms of a contract, the court may by issuing an ‘injunction order’ restrain him from doing what he promised not to do.

1.42 SUMMARY
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. Damages for breach of contract must be such loss or damage as naturally arises, 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. Any other damages are said to be remote or indirect damages, hence, cannot be claimed.

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