Remedies for Breach of Contract | Business Law - B Com PDF Download

What is a contract?

According to Section 2(h) of the Indian Contract Act, 1872, a contract is simply defined as "an agreement which is enforceable by law." In essence, a contract is an agreement aimed at creating an obligation. When an agreement empowers one person to compel another to do something or refrain from doing something, it becomes a contract.

What is a breach of contract?

A breach of contract occurs when one party fails or refuses to fulfill their obligations or promises outlined in the contract. Essentially, when a binding agreement is not honored by one or more parties through non-performance of their promises, it is considered breached.

Parties involved in a contract are legally expected to uphold their respective obligations, and the law views breaches unfavorably. When one party commits a breach, the law provides the non-breaching party with three remedies:

1. Damages: Compensation for the loss suffered.
2. Specific Performance:. court order requiring the breaching party to fulfill their obligations.
3. Injunction:. court order preventing the breaching party from certain actions.

Governing Laws: Damages: Governed by the Indian Contract Act. Injunctions and Specific Performance: Governed by the Specific Relief Act, 1963.

Section 73 of the Indian Contract Act 1872 outlines four key rules for measuring damages in case of a breach:

First Rule: Section 73(1)

• When a contract is breached, the aggrieved party is entitled to compensation for any loss or damage caused by the breach.
• The loss must either arise naturally from the breach or be something the parties contemplated as a likely result of the breach when they made the contract.
• This rule is based on the legal principle established in the case of Hadley v. Baxendale (1854), which emphasizes that damages should be those that naturally arise from the breach or were within the parties' contemplation at the time of contracting.

Second Rule: Section 73(3)

• This rule addresses the concept of remoteness in damages. It states that compensation should not be awarded for remote and indirect losses or damages resulting from the breach.
• Damages should be measured by the actual loss suffered by the party, which must either arise naturally from the breach or be something the parties knew was likely to result from the breach at the time of contracting.
• Essentially, a party is not liable for losses that are too remote or not the natural or probable consequence of the breach.

Third Rule: Explanation to Section 73

• The third rule, found in the Explanation to Section 73, emphasizes that when estimating the loss or damage resulting from a breach of contract, the means of remedying the inconvenience caused by the non-performance should be considered.
• For example, if a railway company fails to transport a passenger to a specific station as agreed, the passenger is entitled to damages for the inconvenience, including reasonable expenses incurred, such as staying at a motel or arranging alternative transportation. However, unreasonable expenses, like chartering a special train, would not be justified.

Fourth Rule: Section 73

• It is important to note that the damages applicable for the breach of a quasi-contract are the same as those for any other contract.
• In other words, the rules governing damages in cases of quasi-contracts are identical to those in regular contracts.

It's important to understand that when there is no actual loss resulting from a breach of contract, only nominal damages are awarded. Damages are meant to compensate for the actual loss suffered by the aggrieved party and are not intended as a form of punishment.

A decree for Specific Performance

Section 10 of the Specific Relief Act, 1963 outlines seven scenarios in which a court may allow specific performance of a contract.

1. Absence of Standard for Damage Assessment

• When it is difficult to quantify the actual damage caused by the non-performance of a contract, the court may exercise its discretion to grant a decree for Specific Performance.

Example: Duke of Somerset v. Cookson, 1935

• Certain items like art, paintings, antiques, or family heirlooms may hold immense sentimental value to one party, even if they lack significant monetary worth.
• For instance, a family heirloom idol passed down through generations holds great value to the family, and no amount of monetary compensation can replace it.
• In such cases, the court may order the specific delivery of the item rather than awarding damages.
• In cases involving unique items like manganese and iron ore, which are not common commodities, specific performance may be granted for contracts involving their sale.

2. Inadequacy of Monetary Compensation
Specific performance may be granted when monetary compensation would not provide adequate relief for the non-performance of a contract.

• Breach of Contract for Immovable Property: It is generally presumed that the breach of a contract to transfer immovable property cannot be adequately compensated by monetary payment.
• Breach of Contract for Movable Property:In cases involving movable property, monetary compensation is usually adequate, except in specific situations:
  • When the property is of special value or interest to the plaintiff, and is not an ordinary article of commerce.
  • When the property consists of goods that are not easily obtainable in the market.
  • When the property is held by the defendant as an agent or trustee of the plaintiff.
• Rebuttable Presumptions: The presumptions regarding adequacy of relief in cases of breach of contract are rebuttable.
• Bank of India v. Chinoy, AIR 1949 PC 90: This case illustrates that specific performance may not be granted if the shares involved are readily available in the market. Conversely, if the shares are not easily obtainable, specific performance may be ordered.

3. Contracts for Mortgage and Security

• Specific performance may be allowed in suits for the enforcement of contracts to execute a mortgage or provide other security for a loan repayment, provided certain conditions are met.
• If only part of the loan has been advanced by the lender, they must be willing to advance the full loan amount for specific performance to be considered.

4. Contracts for Debenture Purchase

• Specific performance may be granted in suits for the purchase of debentures issued by a company, depending on the circumstances of the case.

5. Suits for Formal Partnership Deeds

• Specific performance may be sought in suits for the execution of formal partnership deeds, subject to the discretion of the court.

6. Suits for Purchase of Partner's Share

• Specific performance may be pursued in suits for the purchase of a partner's share in a partnership, based on the specific circumstances of the case.

7. Suits for Building Construction Contracts
Specific performance may be granted in suits for the enforcement of building construction contracts or similar work on land, provided the following conditions are met:

• The contract describes the building or work with reasonable precision, allowing the court to determine its exact nature.
• The plaintiff has a substantial interest in the contract's performance, and financial compensation would not be adequate for non-performance.
• The defendant has obtained possession of the entire or part of the land in question after the contract was made.
• Equitable Nature of Specific Performance: Specific performance is an equitable remedy, meaning its granting is at the discretion of the court rather than being an automatic legal right.

Injunctions

As per Section 36 of the Specific Relief Act, 1963, an injunction is described as an order issued by a competent court that:

• Prohibits the commission of a threatened wrong,
• Prohibits the continuation of an ongoing wrong, or
• Directs the restoration of the status quo, which refers to the previous state of affairs.

Clauses i and ii pertain to preventive relief, while clause iii refers to a mandatory injunction aimed at rectifying the defendant's misconduct rather than preventing it.

Types of Injunctions under the Specific Relief Act 1963

1. Temporary or Interim Injunctions.

• Governed by Order 39 of the Civil Procedure Code 1908.
• These injunctions remain in force for a specified period, such as 15 days, or until the next hearing.
• Can be granted at any stage of the suit.

2. Permanent or Perpetual Injunctions.

• Governed by Sections 38 to 42 of the Specific Relief Act 1963.
• Issued by the Court after a full hearing of the case.
• Permanently prohibits the defendant from committing acts that infringe upon the plaintiff's rights.

Granting of Perpetual Injunctions

Perpetual injunctions are granted under Section 38 of the Specific Relief Act 1963 in the following scenarios:

• When the defendant invades or threatens to invade the plaintiff's right to property or enjoyment of property.
• When there is no standard for quantifying the actual damages caused by the invasion of the plaintiff's rights.
• When monetary compensation would be inadequate relief for the invasion of the plaintiff's rights.
• When the defendant is a trustee of the property for the plaintiff.
• When the injunction is necessary to prevent multiple judicial proceedings.

Mandatory Injunctions

• Mandatory injunctions are issued to compel the performance of certain acts to prevent non-performance of an obligation. These injunctions can be either permanent or temporary, although temporary mandatory injunctions are rare. The Court has the discretion to grant such injunctions to ensure the performance of required acts.

Damages Instead of or In Addition to Injunction

• According to Section 40 of the Specific Relief Act 1963, a plaintiff may claim damages in addition to or instead of suing for a perpetual or mandatory injunction. The Court may grant such damages at its discretion. It is important to note that damages and injunctions are not alternate remedies and both may be allowed at the Court's discretion. However, damages cannot be granted unless the plaintiff has claimed damages in the plaint. If the plaintiff has not claimed damages, they should be allowed to amend the plaint at any stage of the proceedings.

Conclusion

In cases of breach of contract, there are various remedies available, each with its own complexities and challenges. Proving a case of breach of contract requires overcoming numerous rebuttals and providing substantial evidence.