Breach of Contract (Section 73, 74 & 75) - Judiciary Exams PDF Download

What is a Contract?

Breach of Contract

In simple terms, a breach of contract occurs when one party fails to fulfill the obligations outlined in a contract without a valid legal excuse. This failure can manifest in various ways, such as not completing work as agreed, late payments, inadequate delivery of goods, substitution of inferior products, failure to provide required guarantees, unjustified delays, or any action indicating an unwillingness to fulfill contractual duties.

• Essential Elements of a Valid Contract

  A contract must contain all necessary elements for it to be legally enforceable. If any essential components are missing, the contract may not be considered valid, and a court may not intervene in case of a dispute.

• Violation of Contract Terms

  The claimant must demonstrate that the other party, the defendant, has breached the agreed-upon terms of the contract. This breach could involve non-performance, incomplete performance, or substandard performance.

• Fulfillment of Obligations

  The plaintiff must prove that they have fulfilled or attempted to fulfill their obligations as per the contract's terms. This includes meeting deadlines, delivering on promises, and following through on commitments.

• Notice of Violation

  Prior to taking legal action, the party claiming breach must give the other party a fair warning of the violation. Providing written notice is preferable to oral communication as it creates a formal record of the breach.

Table: The Conditions for a Breach of Contract

Remedies for Breach of a Contract

A breach of contract occurs when one party fails to fulfill its obligations under the contract, either by renouncing its responsibilities, making it difficult to meet obligations, or failing to fulfill them entirely or partially. This breach can be either Anticipatory or Present, leading to the violation of the non-breaching party's rights and causing losses to the breaching party.

Various remedies are available to the aggrieved party when a breach of contract occurs, based on the principle 'Ubi jus, ibi remedium' meaning 'where there is a right, there is a remedy.'

Understanding Remedies for Breach of a Contract

• Definition: A remedy in the context of a breach of contract refers to the way a court enforces or satisfies a right when a wrongful act causes damage or injury to a party.
• Types of Remedies: Remedies for breach of a contract can be categorized into the following areas:

1. Execution of Contracts

• These remedies focus on ensuring the execution of contracts as per the terms agreed upon.

2. Rectification of Wrongdoings

• Remedies aimed at rectifying any wrongdoings or accidents that have occurred during the contract period.

The specific type of remedy applied in a breach of contract situation is contingent upon the specific terms outlined in the contract.

Suit for Damages

• Definition of Damages

  Damages refer to the monetary compensation paid by the party at fault to the affected party for the loss suffered. It is a legal remedy where the aggrieved party can sue the breaching party for compensation.

• Purpose of Damages

  The primary aim of damages is to reimburse the injured party and restore them to the position they would have been in had the breach not occurred. It is about compensating for the harm suffered, not punishing the defaulting party.

• Legal Interpretation of Damages

  In the case of InCommon Cause v. Union of India, the Supreme Court defined damages as pecuniary compensation awarded in cases of tort or breach of contract. The compensation is usually a lump sum granted unconditionally.

Essentials of Damages

• Fundamental Elements of Claims for Damages:

  • detriment to one by the wrongdoing of another;
  • reparation awarded to the injured through legal remedies, and
  • its quantum being determined by the dual components of pecuniary compensation for the loss suffered and often, not always, a punitive addition as a deterrent-cum-denunciation by the law.

• Description of Damages:

  Damages refer to the harm suffered by an individual due to another person's wrongful act. 'Injuria' represents an injury that entitles the affected party to receive compensation. In the absence of statutory remedy, 'absque injuria' or damage occurs without the right to compensation. The statutory definition of 'damage' holds significant importance. The primary recourse for the aggrieved party is seeking damages, allowing them to claim compensation from the breaching party for the losses incurred due to the contract violation. The extent of damages depends on the severity of the breach.

Types of Damages

• Ordinary/ General Damages:

  Section 73 of the Indian Contract Act discusses general or direct damages. These damages arise naturally from a contract breach or were reasonably foreseeable by the parties at the contract's inception.

• Special Damages:

  Special damages are compensation for specific losses resulting from unique contract conditions. Parties must communicate these special circumstances before the contract is signed to hold the other party liable.

  • Example: In Simpson v. London & North Western Railway Company, the manufacturer sought damages for loss of income due to late delivery caused by the Railway Company's negligence.
  • Example: In Govind Rao v. Madras Railway Company, the tailor couldn't participate in a fair due to delayed delivery, but he couldn't recover as he didn't highlight special circumstances beforehand.
• Vindictive Damages:

  Vindictive damages go beyond monetary compensation to address emotional distress caused by a contract breach.

  • Example 1: Breach of a marital contract can lead to varying degrees of emotional harm, warranting different levels of compensation.
  • Example 2: If a banker dishonors a customer's check, causing reputational damage, vindictive damages could be sought.
• Nominal Damages:

  Nominal damages are awarded when a breach occurs without resulting in measurable financial loss. They acknowledge the right to seek damages but are of a minimal amount.

• Liquidated Damages and Penalty:

  Contracting parties can predefine an amount to be paid in case of a breach. Liquidated damages compensate for actual losses, while penalties serve as deterrents for breaches.

  English law distinguishes between liquidated damages and penalties, but Indian law treats them similarly, capping compensation at the predefined amount.

Section 74 of the Indian Contract Act limits compensation to a reasonable sum not exceeding the predefined amount in case of a breach.

Remoteness of Damage

The concept of 'remoteness of damages' is a legal principle used to determine the type of loss that can be compensated through damages resulting from a contract breach. It distinguishes the idea of harm or quantification, which involves assessing compensation for a specific loss that is not too far removed.

Hadley v Baxendale Case

In the landmark case of Hadley v Baxendale, the Court of Exchequer established rules regarding the remoteness of damage. The plaintiff's mill ceased operations due to a broken crankshaft, which the defendant carrier failed to promptly deliver within the agreed timeline. As a result, there was a delay in restarting the mill, leading to financial losses for the plaintiff. However, the court dismissed the claim, stating that the delayed profits were not foreseeable consequences of the breach.

Principles of Remoteness

• The damages recoverable for a contractual breach should either arise naturally, in the ordinary course of events, or be reasonably contemplated by both parties at the time of contracting.
• According to Hadley v. Baxendale, damages must be:
• Those that can be considered to arise naturally from the breach in the ordinary course of things; or
• Those that could reasonably have been in the contemplation of both parties at the time of contracting.

These principles guide courts in determining the scope of compensable damages in contract disputes, ensuring that only losses that were foreseeable or within the parties' contemplation are recoverable.

Measure of Damages

When a breach of contract occurs, and it is determined to be a proximate consequence deserving compensation, the calculation of damages becomes crucial. The primary objective of awarding damages to the injured party is to restore them to the position they would have been in if the contract had been fulfilled.

In the case of a works contract breach, such as the State of Kerala v. K. Bhaskaran, where the contractor sought compensation for a 10% profit loss, it was established that the contractor could claim damages based on this loss. For a sale of goods contract, damages are typically computed as the variance between the contract price and the market price at the time of the breach.

• Buyer's Breach:

  If the buyer breaches the contract, the seller can claim damages based on the breach date without needing to resell the goods immediately.

• Seller's Breach:

  If it is the seller who breaches the contract, the buyer has the right to seek damages determined by the breach date, without having to repurchase the goods right away.

Suit for Quantum Merit

A suit for quantum merit is a legal remedy available to a party who has suffered a breach of contract by the other party. The term "quantum merit" essentially means "as much as is earned" or "in proportion to the work completed." This remedy is typically sought when there has been a breach of contract after some part of the contract has been performed, or when the contract is deemed invalid or void.

Key Points:

• Quantum merit is a remedy sought in cases of contract breaches.
• It allows the injured party to claim compensation for work done.
• It can be claimed with or without additional damages.

Explanation:

• When one party breaches a contract after some work has been performed, the other party can seek quantum merit.
• This remedy ensures that the party is compensated fairly for the work completed.
• The injured party can choose to claim only fair compensation for the work done or can also claim damages for the breach.

Example:

• For instance, if a contractor fails to complete a construction project as per the contract specifications, the client can sue for quantum merit to receive compensation for the work that was actually done.
• Similarly, if a service provider breaches a contract for services halfway through, the client can seek quantum merit to recover the value of the services already provided.

Quantum Merit Claim Overview

In a quantum meruit claim, the aggrieved party can seek reimbursement based on the value of work done or products supplied in specific circumstances:

Conditions for Quantum Merit Claim:

• Work performed due to a contract terminated by the defendant's default:
  • Example: A construction company completes 70% of a project before the client wrongfully terminates the contract.
• Work carried out in anticipation of a contract that is later found to be void, provided the contract is divisible or rendered void:
  • Example: An artist creates design prototypes for a client, but the contract is deemed void due to legal issues.
• Actions undertaken without the intent of providing services for free:
  • Example: A consultant offers advice to a company assuming payment would be made, but no agreement on fees was discussed.
• When a party breaches a contract and the conditions for a quantum merit claim are met:
  • Conditions: The contract must be divisible, and the benefiting party must have accepted the performed work even if they had the option to reject it.
    • Example: A software developer delivers a module ahead of schedule in a larger project. The client accepts and uses the module despite breaching the contract.

Summary of Contract Breach Remedies and Legal Interpretation

• Importance of Vigilance in Commercial Transactions

  Parties in commercial transactions are increasingly cautious due to technological advancements. They meticulously consider even minor details to safeguard their interests.

• Remedies for Breach of Contract

  Parties discuss and agree on remedies for breach of contract to protect their interests in case of violations. These remedies aim to mitigate and compensate for damages resulting from breaches.

• Judicial Interpretation in India

  Sections 73 and 74 of the contract law should be carefully interpreted by Indian courts to benefit the general public. The legislation is designed to support and not intimidate individuals, emphasizing the importance of proper usage.

References:

• LegalServicesIndia.com, http://www.legalservicesindia.com/article/411/Suit-For-Damages.html, last accessed on 31st January 2021.
• Common Cause v Union of India, 1999 (6) SCC 667.
• Indian Case Law, https://indiancaselaws.wordpress.com/2017/01/12/damages-under-indian-contract-act-1872/, last accessed on 31st January 2021.
• Organo Chemical Industries v Union of India, 1979 SC 0582 MANU.
• Simpson v London & North Western Railway Company [1876] 1 Q.B.D. 274.
• Govind Rao v Madras Railway Company ILR (1898) 21 Mad 172.
• State of Kerala v. K. Bhaskaran, AIR 1985 Ker 49.