Overview

Anticipatory Breach of Contract 

Ways of Anticipatory Breach: 

•  Expressly:  When one party clearly communicates their intention not to perform, either verbally or in writing.
•  Impliedly:  When one party's actions suggest they will not perform, even if they do not explicitly say so.

Examples: 

•  Example 1:  If A agrees to supply B with 10 bales of cotton on August 14, 2022, but informs B on July 30, 2022, that he cannot fulfill the contract, this is an anticipatory breach.
•  Example 2:  If A promises to sell his horse to B on August 10, 2022, but sells it to C on August 1, 2022, A has breached the contract anticipatorily through his actions.

Legal Provision: 

Section 39 of the Indian Contract Act addresses anticipatory breach, stating that when a party refuses or is unable to perform their promise, the other party may terminate the contract unless they indicate their acceptance of its continuation.

Effects of Anticipatory Breach: 

• The promisee is relieved from their obligation to perform.
• The promisee has the option to:
• Treat the contract as rescinded and sue for damages immediately, without waiting for the performance due date.
• Keep the contract in effect, wait for the performance date, and hold the other party accountable for non-performance. This allows the guilty party a chance to perform and potentially benefit from any unforeseen circumstances that may discharge the contract.

Actual Breach of Contract

Actual breach of contract refers to the situation where one party fails to perform their contractual obligations by the agreed-upon date. In a lawful contract, both parties are obligated to fulfill their respective promises. However, when one party refuses to do so, they commit a breach of contract, giving the other party the right to take legal action against them.

Actual Breach of Contract

• An actual breach of contract takes place when one party fails to fulfill their obligations as per the terms of the agreement. This can happen at the time when the performance is due or during the course of the contract.
• For instance, if A agrees to deliver 100 bags of sugar to B on a specific date and fails to do so, it constitutes an actual breach.
• Such a breach can occur through explicit or implicit actions where one party refuses or fails to perform their duties.

Remedies for Breach of Contract
Available Remedies: 

• Suit for Damages
• Rescission of Contract
• Suit for Specific Performance
• Suit for Injunction
• Suit upon Quantum Meruit

Suit For Damages

Section 73 of the Act outlines how to determine the amount of compensation for a breach of contract. When a contract is breached, the injured party is entitled to receive compensation from the party at fault for any loss or damage caused by the breach.

Compensation can be claimed for:

• Loss or damage that naturally occurs in the normal course of events.
• Loss or damage that the parties were aware would likely result from the breach at the time of entering the contract (special damage), but this requires prior notice.

The aggrieved party is obligated to take reasonable steps to minimize the loss. Remote or indirect losses are not compensable.

Types of Damages: 

• General/Ordinary Damages
• Special Damages
• Vindictive or Exemplary Damages
• Nominal Damages
• Damages for Deterioration Caused by Delay
• Pre-fixed Damages

(i) Ordinary Damages: 
When a contract is breached, the injured party is entitled to compensation for any loss or damage that naturally arises from the breach or that the parties anticipated would result from the breach at the time of making the contract. This compensation is not intended for remote or indirect losses or damages caused by the breach, as outlined in Section 73 of the Indian Contract Act and the precedent set in Hadley vs. Baxendale.

Hadley vs. Baxendale :

•  Hadley vs. Baxendale  is a legal case that deals with the concept of damages in contract law, particularly the distinction between ordinary and special damages.
• In this case, P (the mill owner) suffered a loss due to the delay caused by D (the common carrier) in delivering the broken crankshaft to the foundry.
• The court ruled that P was entitled only to ordinary damages because D was not made aware of the specific circumstances that would lead to a loss of profits.

(ii) Special Damages in Contract Law :

• Special damages are applicable when a party to a contract is informed of special circumstances that affect the contract. In such cases, the party breaching the contract is liable for both ordinary damages and special damages.
•  Example:  If a common carrier is informed that a machine is urgently needed to resume operations and that the delay will result in significant losses, the carrier could be held liable for special damages if they delay the delivery.

(iii) Vindictive or Exemplary Damages
These damages are applicable only in two specific situations:
(a) Breach of Promise to Marry:  When there is a breach of promise to marry, it is considered an injury to the feelings of the aggrieved party. In such cases, vindictive or exemplary damages may be awarded to compensate for the emotional distress caused.
(b) Wrongful Dishonour of Cheque by Banker:  Exemplary damages may be awarded in cases of wrongful dishonour of a customer's cheque by a banker. This is because such wrongful dishonour can cause significant injury, leading to a loss of credit and reputation for the cheque drawer. Even if a businessman does not suffer pecuniary loss, they may still be entitled to exemplary damages. However, a non-trader can only claim heavy damages in similar circumstances if they can prove special damages. This principle was established in the case of Gibbons v Westminster Bank.

(iv) Nominal Damages:  Nominal damages are granted when the plaintiff demonstrates that there has been a breach of contract, but no substantial harm has been suffered. These damages are awarded to affirm the right to seek a decree for the breach, and the amount may be more symbolic than a precise monetary figure.

(v) Damages for Deterioration Caused by Delay:  In instances where goods have deteriorated due to delay, carriers can be held liable for damages even without prior notice. Deterioration encompasses not only physical damage to the goods but also the loss of a special sales opportunity.

(vi) Pre-fixed Damages:  Parties to a contract may agree in advance on a specific amount to be paid as damages in the event of a breach. These amounts can be categorized as:

•  Liquidated Damages:  Reasonable estimates of potential losses in case of a breach.
•  Penalties:  Arbitrarily fixed amounts for damages.

Section 74 of the Indian Contract Act stipulates that if a sum is specified in a contract as the amount to be paid in case of a breach, the aggrieved party is entitled to receive reasonable compensation not exceeding the specified amount.

Example 6:  If a contract specifies a penalty of ₹ 1,00,000 for a breach, but the actual loss suffered is ₹ 70,000, only ₹ 70,000 can be claimed as damages. Conversely, if the loss is ₹ 1,50,000, only ₹ 1,00,000 can be recovered.
Example 7:  If X promises to pay ₹ 10,000 to Y, a priest, as charity, and Y incurs expenses of ₹ 7,500 for repairing a temple based on X's promise, Y can claim ₹ 7,500 from X.

Penalty and Liquidated Damages (Section 74) 

The parties to a contract may specify in advance the amount of compensation that will be payable in the event of a failure to perform the contract. This raises the question of whether the courts will accept this figure as the measure of damages.

English Law:  In English law, the fixed sum in a contract can be seen either as liquidated damages or as a penalty.

•  Liquidated Damages:  If the fixed sum reflects a genuine pre-estimate of the loss expected from a future breach, it is considered liquidated damages. This means the parties believe this amount will fairly compensate for the breach. Such clauses are deemed valid, allowing the recovery of the specified amount.
•  Penalty:  If the fixed sum is unreasonable and aims to intimidate the other party into compliance, it is a penalty. In this case, the clause is ignored, and the injured party cannot claim more than the actual loss.

Indian Law:  Indian law does not differentiate between "penalty" and "liquidated damages." Courts in India award only reasonable compensation not exceeding the specified sum in the contract.

• Section 74 of the Contract Act states that if parties have determined the damages, the court will not allow more than that amount. However, the court may award a lesser sum.
• A decree can only be issued for reasonable compensation not exceeding the agreed-upon sum, ensuring that the complaining party receives compensation limited to what was agreed and not a penalty.

Exception:  In cases where a person gives a bond to the Central or State government for the performance of a public duty or act in the public interest, breaching any conditions of such an instrument can lead to liability for the entire specified amount.

Examples 

•  Example 8:  A contracts with B that if A practices as a surgeon in Kolkata, he will pay B ₹ 50,000. If A practices as a surgeon in Kolkata, B is entitled to such compensation not exceeding ₹ 50,000 as the court considers reasonable.
•  Example 9:  A borrows ₹ 10,000 from B and gives him a bond for ₹ 20,000 payable by five yearly instalments of ₹ 4,000 with a stipulation that in default of payment, the whole shall become due. This is a stipulation by way of penalty.
•  Example 10:  A undertakes to repay B a loan of ₹ 10,000 by five equal monthly instalments with a stipulation that in default of payment of any instalment, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms.

Difference Between Liquidated Damages and Penalty

Liquidated damages and penalties are both types of compensation that are payable when a contract is breached. However, there are key differences between the two.

1. Definition: 

•  Liquidated Damages:  These are pre-determined amounts that represent a genuine estimate of the damages that would occur in the event of a breach.
•  Penalty:  This involves a payment meant to deter the offending party from breaching the contract, and is usually set at an amount far exceeding the probable damages.

2. Key Distinctions: 

•  Excessive Amount:  If the sum payable is significantly higher than the likely damages, it is considered a penalty.
•  Default Payments:  If a sum is due on a specific date and a larger sum is due in case of default, the latter is a penalty since mere delay in payment is not likely to cause substantial damage.
•  Court's Assessment:  The terminology used by the parties is not conclusive. The court will determine whether the sum fixed in the contract is genuinely a penalty or liquidated damages. If the sum is extravagant, it will be regarded as a penalty, even if labeled as liquidated damages.
•  Purpose:  The core of a penalty is to deter, while liquidated damages aim to reflect a genuine pre-estimate of loss.

3. Legal Perspectives: 

•  English Law:  English law clearly distinguishes between liquidated damages and penalties.
•  Indian Law:  Indian law also recognizes these concepts but interprets them differently. Indian courts focus on ascertaining the actual loss and awarding reasonable compensation that does not exceed the fixed sum in the contract, rather than making a strict distinction between the two.

Other Remedies for Breach of Contract 

•  Rescission of Contract:  When one party breaches a contract, the other party has the option to treat the contract as rescinded. This means they are released from all obligations under the contract and can seek compensation for any damages suffered.
  Example:  If A promises to deliver 50 bags of cement to B on a specific day, and B agrees to pay upon receipt, B's obligations may change depending on the contract's terms if A fails to deliver.
•  Quantum Meruit:  This principle applies when one person provides a service to another with the understanding that it will be paid for, even if no specific payment amount has been agreed upon. Quantum Meruit, meaning "as much as deserved," is used when the injured party has completed part of the work required under the contract and seeks compensation for the value of the work done.
• For Quantum Meruit to apply, two conditions must be met:
• The original contract must be discharged.
• The claim must be brought by a party not in default.
• The purpose of Quantum Meruit is to compensate the party for the value of work done, whereas damages are compensatory in nature. Quantum Meruit is restitutory, providing reasonable compensation based on the implication of a contract to pay for services rendered.
  Example:  If a person orders 12 bottles of whiskey from a wine merchant but receives 2 bottles of brandy as well, and accepts them, the purchaser must pay a reasonable price for the brandy.