Breach of Contract (Ss. 73, 74 & 75) | Law Optional Notes for UPSC PDF Download

What Constitutes a Contract?

• A contract signifies a legally binding agreement between two or more parties.
• It must contain terms and conditions that are enforceable by the courts.
• For instance, when you sign a lease agreement to rent an apartment, you enter into a contract with the landlord.
• Another example is when you purchase goods online, you agree to a contract with the seller regarding the terms of the sale.

Breach of Contract

• Definition: Breach of contract refers to a failure to fulfill the terms of a contract without a legal justification. It occurs when one party does not meet their obligations as outlined in the agreement, whether written or oral.
• Examples: Examples of breach of contract include not completing a job as specified, failing to make full or timely payments, delivering inferior quality goods, or not fulfilling any other agreed-upon terms.
• Legal Action: When a breach of contract occurs, the affected party may file a lawsuit seeking damages or specific performance in court. Specific performance means requiring the breaching party to fulfill their obligations as outlined in the contract.
• Conditions for Breach: In order for a case of breach of contract to be supported by the court, several conditions must be met:
  • The contract must be valid, containing all essential elements required for legal recognition.
  • The claimant needs to demonstrate that the defendant has indeed violated the terms of the contract.
  • The plaintiff must have made all reasonable efforts to fulfill their obligations under the contract.
  • The complainant must have provided the defendant with fair notice of the breach, preferably in writing.

Remedies for Breach of a Contract

• A breach of contract occurs when one party fails to fulfill its obligations, either by renouncing responsibilities, making it difficult to meet obligations, or not fully satisfying them. This breach can be Anticipatory or Present.
• When a breach of contract happens, it violates the rights of the non-breaching party, leading to losses for the breaching party. As a result, the aggrieved party is entitled to seek remedies to restore their rights and receive compensation.
• Remedies for breach of a contract are designed based on the principle 'Ubi jus, ibi remedium,' which means 'where there is a right, there is a remedy.'
• Remedies for breach of contract are legal solutions provided to the aggrieved party to address the breach and compensate for the harm caused.
• These remedies can be applied in scenarios related to the execution of contracts and rectification of wrongdoings or accidents.
• The court intervenes to enforce the terms of the contract and provide appropriate remedies based on the specific terms of the agreement.

Suit for Damages

• Damages refer to the monetary compensation paid by the defaulting party to the aggrieved party for the loss suffered.
• The aggrieved party can take legal action for damages against the party responsible for breaching the contract.
• The purpose of damages is primarily to compensate the aggrieved party and restore them to the position they would have been in if the breach had not occurred.
• Damages are intended to provide compensation for the harm suffered by the complainant, not as a penalty for the defaulting party.

Definition of Damages:

• Damages are the monetary compensation awarded as a result of a successful legal action for a wrong, which could be a tort or a breach of contract.
• Compensation is typically provided in the form of a lump sum payment that is awarded unconditionally.

Legal Precedent:

• In the case of InCommon Cause v. Union of India, the Supreme Court interpreted damages according to McGregor's definition, stating that damages are pecuniary compensation granted for a tort or breach of contract.

Essentials of Damages

• When someone is harmed by another person's actions, they have a right to seek damages.
• Legal remedies are provided to compensate the injured party, with the amount determined by both the financial losses incurred and, at times, an additional punitive sum as a deterrent.

Understanding Damages

Damages refer to the harm experienced by an individual due to the misconduct of another party. For instance, 'injuria' signifies a legally recognized injury that warrants compensation. Without statutory provisions for redress, 'absque injuria' occurs, where damage happens without the right to compensation.

Significance of Damage Definition

• The definition of 'damage' in a legal context holds immense importance. It primarily enables the injured party to claim compensation from the party breaching a contract. The extent of damages is gauged based on the severity of the breach.
• One common recourse for the harmed party is to seek damages, which allow them to recover losses resulting from the contract infringement.

Types of Damages

• Ordinary/ General Damages: These damages arise naturally from the breach of contract or were foreseeable at the time the contract was formed. Section 73 of the Indian Contract Act addresses general damages, which are the direct consequences of the breach that parties could reasonably anticipate. For example, if a manufacturer's samples are delayed in transit and arrive after an exhibition ends, resulting in a loss of income from missed opportunities, the manufacturer may seek compensation for this loss as ordinary/general damages.
• Special Damages: Special damages refer to losses that arise from specific circumstances or conditions outlined in the contract. These damages are recoverable only if they were communicated to the breaching party at the time of entering into the contract and were within the contemplation of both parties. In Simpson v. London & North Western Railway Company, the court held the railway company liable for special damages because the manufacturer had explicitly communicated the importance of timely delivery of the samples for an exhibition. However, in Govind Rao v. Madras Railway Company, special damages were not awarded because the tailor failed to bring the specific circumstances of his participation in the fair to the attention of the railway company.
• Vindictive Damages: In cases of contract breach, the aggrieved party may suffer not only financial loss but also emotional distress and disappointment. In such situations, monetary compensation alone may not suffice to address the injured party's suffering. Therefore, vindictive damages, which are not governed by contractual laws but borrowed from English legislation, may be awarded. Indian courts recognize two scenarios where vindictive damages may be applicable: breach of a marital contract, where the extent of damages depends on the emotional distress experienced by the injured party, and situations such as when a banker dishonors a customer's cheque, leading to a loss of prestige.
• Nominal Damages: Sometimes, despite proving a breach of contract, the injured party fails to demonstrate any actual damage. This could be due to difficulties in calculating damages or the requirement for damages to be foreseeable and certain. In such instances, nominal damages are awarded as a recognition of the injured party's right to seek damages, albeit in a limited amount.
• Liquidated Damages and Penalty: In cases of contract violation, parties may specify an amount of money to be paid as compensation. Depending on the intention behind setting this amount, it may be termed as 'liquidated damages' or 'penalty'. Liquidated damages aim to compensate the injured party for the loss resulting from the breach in a rational manner, representing a pre-estimated loss due to non-performance. On the other hand, penalties are included in contracts to deter parties from breaching them and impose a punitive measure if the breach occurs. Penalties are often disproportionate to the actual damages likely to be incurred.

To understand the influence of English law in this regard, it's essential to highlight the distinction between 'liquidated damages' and 'penalty'. In English law, 'liquidated damages' are accepted as valid compensation, irrespective of whether the specified amount is greater or less than the actual damages incurred. However, English law does not uphold amounts designated as 'penalty', reasoning that reasonable remedies for breach of contract should be determined by the government, not private individuals.

Indian Contract Law takes a different stance on this issue. It does not differentiate between 'liquidated damages' and 'penalty', nor does it allow sums fixed by parties as damages. Instead, it states that the injured party is entitled to reasonable compensation in case of breach, up to the maximum amount specified as 'liquidated damages' or 'penalty' in the contract.

Section 74 of the Indian Contract Act, 1872, elaborates on this, indicating that when a contract is breached and a sum is mentioned as the amount to be paid in such a situation, or if the contract includes any other provision as a penalty, the aggrieved party is entitled to reasonable compensation, regardless of whether actual damage is proven, up to the specified amount or penalty.

Therefore, in India, the amount stated in the contract is not automatically awarded as compensation. Instead, the court assesses the actual loss or fair compensation and grants an amount not exceeding what is specified in the contract.

Remoteness of Damage

• The concept of "remoteness of damages" involves determining what types of losses can be compensated through damages resulting from a breach of contract. It focuses on whether the loss is too far-fetched or not directly linked to the breach.
• In the case of Hadley v. Baxendale, the Court of Exchequer established the rules regarding the remoteness of damage, which have been further explained in subsequent legal cases.
• An example from Hadley v. Baxendale involves a broken crankshaft that caused a mill to stop working. The defendant's failure to deliver the replacement crankshaft on time led to a delay in restarting the mill. The plaintiff's claim for lost profits due to the delay was dismissed by the court.
• Damages that a party can recover for a contractual breach should either arise naturally from the breach in the ordinary course of events or be reasonably contemplated by both parties when they entered into the contract. 

Measure of Damages

• Damages in a contract case aim to offset losses and place the aggrieved party in the position they would have been in if the contract had been fulfilled.
• In a works contract case like the State of Kerala v. K. Bhaskaran, where a breach occurred, damages can be calculated based on aspects of the contract, such as a 10% profit margin.
• For contracts involving the sale of goods, damages are typically calculated as the difference between the contract price and the market price at the time of the breach. 
• Calculating Damages in Breach Scenarios
  • Buyer's Breach: If the buyer breaches the contract, the seller can seek damages based on the breach date without needing to resell the products immediately. 
  • Seller's Breach: - Conversely, if the seller breaches the contract, the buyer has the right to claim damages based on the breach date without having to repurchase the goods immediately.

Understanding the measure of damages in contract law is crucial. By considering specific scenarios like breaches by buyers or sellers, parties involved can seek compensation that aligns with the impact of the contractual violation.

Suit for Quantum Merit

• Quantum Merit as Legal Recourse:
  • Quantum merit serves as a legal remedy for breaches of contract.
• Definition and Origin:
  • Quantum merit translates to "as much as is earned" or "in proportion to the job done."
• Instances of Application:
  • It is typically invoked when a contract is breached after partial performance by one party.
  • It can also be relevant if a contract is deemed invalid or void.
• Remedial Actions:
  • Quantum merit can be pursued without seeking damages, aiming for fair compensation for work completed.
  • Alternatively, it can be sought alongside damages, aiming for reasonable compensation for completed work and damages for the unperformed portion.

Quantum Merit Claim Overview

• Quantum Meruit Lawsuit: In cases of breach of contract or where no contract exists, reimbursement can be demanded for work done or products supplied.
• Defaulted Contract: Reimbursement is applicable when work has been initiated due to the defendant's failure to fulfill a contract.
• Void Contract: If work is performed in pursuit of a contract later found void or divisible, reimbursement may be sought.
• Implicit Agreement: When work is done without the explicit intention of doing it for free, reimbursement under quantum meruit can be claimed.
• Violation of Contract: A party breaching a divisible contract and benefiting from the performed section may be sued under quantum meruit.

Conclusion

• Parties involved in commercial transactions are becoming more cautious due to the rapid advancements in technology. They now meticulously consider even the smallest details to safeguard their interests.
• In the event of a contract breach, parties often discuss and agree on remedies to protect their respective interests. These remedies aim to mitigate and compensate for any damages resulting from the breach.
• It is crucial for Indian courts to interpret legal sections like sections 73 and 74 carefully. Clear interpretation helps ensure these concepts benefit the general population.
• Legislation is designed to encourage and support individuals, not to create fear or intimidation. These values should be utilized appropriately to serve their intended purpose.