Analysis: Damages for Breach of Contract

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A contract is an agreement enforceable by law.  In a general sense, a contract is a cluster of reciprocal promises, written or oral, between the two parties, binding them in a legal relationship. A contract is a legal obligation on the parties to that contract who have agreed to deal with each other.

For general comprehension, a breach is non-performance of an act required to be done for the fulfillment of a promise, agreement, or a contract. According to the Oxford dictionary, a breach is a failure to do something that must be done by law. Here, something means an action or inaction that breaks an agreement.

What is a breach of contract?

A breach of contract is the failure on part of either of the parties to perform their obligations specified under the contract. Such non-performance causes the other party to suffer a loss. According to Black’s law dictionary, breach of contract means “failure to live up to the terms of a contract”.

Since a contract is legally binding according to the Indian Contract Act, 1872, it follows that where there is a breach of contract, there is a violation of legal duty. In such a violation, one party refuses to fulfill the contract and the other has to terminate it. A breach of contract can be wholly or partly. The party who breaches the contract must give compensation only for the part he has not performed.

Nature of breach of contract

A breach of contract can be classified into four types:

  1. Actual breach of contract

An actual breach of contract is a state when a party either completely refuses to perform his part of the obligations by the due date or has performed such obligations improperly and incompletely. In an actual breach of contract, the party can allege damages or compensation as well as terminate the contract.

  • Anticipatory breach of contract     

An anticipatory breach is a breach of contract that has not yet occurred but might occur. The possibility of the occurrence of such a breach arises either from the express words of one of the parties or his actions that indicate a non-completion of his obligations. The refusal to perform obligations must be express or implied but must be clear enough to be reasonably comprehended by the other party. In case of an anticipatory breach, the aggrieved party can file a suit before the court (if he can prove himself). He can also terminate the contract and choose another alternative for the performance of the contract. Or he can wait till the due date and then file a suit for actual breach of contract.

  • Minor breach of contract

A minor breach of contract is also known as a partial breach of contract. This breach occurs when a party fails to perform a part of his obligations. In case of such a breach, the aggrieved party can sue only when they can prove that the breach led to a loss financially.

  • Material breach of contract

A material breach of contract results in substantial losses. Hence, for such a breach, compensation is generally granted to the aggrieved party for direct and indirect losses.

Relevant legal provisions   

  • Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by law.
  • Section 37 of the Indian Contract Act, 1872 emphasizes the obligation of parties to contract. This section lays down an obligation on the contracting parties to either perform or offer to perform their respective set of promises. The performance of these obligations is excused when specified to be so excused by the Contract Act or any other law.
  • Section 39 of the Indian Contract Act, 1872 deals with the effect of the refusal of a party to perform promise wholly. It states that when a party refuses or disables himself to avoid the performance of the terms of the contract, then the other party can put such a contract to an end unless specified otherwise in the contract. Such termination of a contract would amount to a breach of contract on the part of the party that refused to perform their obligations. This is known as repudiation.
  • Section 10 of the Specific Relief Act, 1963 lays down provisions for cases in which specific performance of a contract is enforceable.
  • Section 12 of the Specific Relief Act, 1963 states that the courts may grant specific performance of a part of the contract as per the provisions of this section only.

Who can sue for a breach of contract?

  • To be able to sue for a breach of contract, there must exist a valid contract.
  • The party who suffers a loss can claim damages by filing suit before the court under Section 9 of the Code of Civil Procedure, 1908.
  • According to the rule of Privity, third parties are not entitled to sue for a breach of contract but the third party to the consideration can sue for the same.

Legal remedies: Damages

A remedy is a legal way of repositioning the aggrieved party into the place they were before the breach of contract or in a place where they would be after the performance of the contract.

The main legal remedies for a breach of contract are as follows:

  • Claim for damages
  • Rescinding of a contract

Sue for specific performance

  • Injunction
  • Claim quantum meruit

But, in this article, the sole focus would be on damages as a legal remedy for breach of contract.

Meaning of damages

Damages are the most common legal remedy for a breach of contract. Damages are of many types including compensatory, punitive, nominal, and specific. In simple words, the term “damages” denotes the sum of money paid by the defaulter to the aggrieved party for the loss or injury suffered by them. The amount and type of damages to given is fixed by the Court. The damages awarded to the aggrieved party must be per the loss or injury suffered by the party. It must be in such a proportion that it puts the aggrieved party in the same position as they would have been in if the obligations were fulfilled.

Rule laid down in Hadley v Baxendale, (1854) 9 EX 341

We know that the Indian legal system takes inspiration from the Common Law system of England. They are, thus, very much similar concerning damages.

This rule for damages was first adopted in the case of Hadley v. Baxendale. The rule states that where two parties have made a contract with each other and one of them breaches it, then the damages to be received by the aggrieved party must be fair and reasonable whether the breach arose naturally or by the contemplation of both the parties. “Naturally” here means arising out of an ordinary course of things from such breach itself.

In this case, the plaintiff’s mill got shut due to the breakage of the crankshaft. To get a new part, this broken crankshaft was to be sent to Greenwich. The defendants were the carriers and they promised to take it to Greenwich. They were asked to do so immediately as the mill has stopped. Due to certain circumstances, the delivery got delayed and the plaintiff’s mill could not run for a longer period. The plaintiff brought an action against the defendants.

Alderson, B. J. stated:

Now, if the special circumstances under which the contract was made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage, it would be very unjust to deprive them.”

Applying this rule, the Court held that the defendants were not liable because they could not have contemplated that the mill would get stopped. The true circumstances were not properly conveyed to the defendants and thus, the loss cannot be said to flow as a consequence of a fair and reasonable contemplation.

Relevant legal provisions

Chapter VI of the Indian Contract Act, 1872 deals with the consequences of a breach of contract.

  • Section 73 lays down provisions regarding the compensation for loss or damage caused by the breach of contract. It talks about the right of the party who suffers from the breach of a contract. Such a party can claim compensation from the party who did not perform his obligations under the contract. The loss caused to the party must arise naturally i.e. in the usual course of things or must be known to the parties, while contracting, to occur in case of a breach. This section further states that the compensation would not be provided for remote or indirect loss suffered by such breach of contract.

The second part of this section talks about compensation for failure to discharge obligation resembling those created by contract. New obligations might occur and resemble the existing obligations under the contract. These new obligations must be discharged. If not, then the party injured from the failure to discharge such obligations is entitled to receive compensation. It is claimed from the party who failed to fulfill their obligations under the contract.

  • Section 74 deals with a situation where the parties have already specified the penalty for breach of contract. In this case, the party alleging breach is entitled to receive the same amount of compensation as stated in the contract. If the contract specifies any other penalty, then such a penalty must be imposed. The aggrieved party will receive compensation whether actual damage or loss has been proved to occur or not, irrespective of the fact that the actual damage or loss is proved or not.
  • Section 75 states that a party who has rightfully rescinded a contract is entitled to receive compensation.

These sections make it clear that the damages can be claimed only by a party who has performed the obligations under the contract, or is willing to do the same. It is not for the defaulting parties.

Critical analysis

  • Applicability of traditional laws to E-contracts: The provisions under the Indian Contract Act, 1872 for breach of contract and damages apply to the traditional form of contract as well as e-contracts. The concept of “online contracts” is, however, very vast and hence, requires specific laws to regulate it. An amendment adding provisions specifically for e-contracts are necessary.
  • Judicial interpretation: The concept of “damages” has been interpreted by the courts in different ways. It has thus created a blurred vision in the minds of people. The view in the case of Hadley v. Baxendale got adopted in a lot of cases. This view was later reformulated by Asquith, J. in the case of Victoria Laundry (Windsor) Ltd. v Newman Industries Ltd. and further approved in the upcoming cases.
  • Recommendations by Law Commission: The Law Commission in its 199th report of 2006 criticized the traditional view taken in contracts. It stated the position of substantive and procedural unfairness and suggested a list of the remedies which can be granted to relieve parties from procedural and substantive unfairness. The recommendations are yet to be adopted.
  • Remedies (the distinction between legal remedies and equitable remedies): There is a need to differentiate between legal remedies and equitable remedies. Most of the people are not able to comprehend this concept. The object of legal remedies is to provide pecuniary compensation to the aggrieved party for the losses or damage suffered. On the other hand, the purpose of equitable remedies is to give the aggrieved party a non-monetary compensation which would be just, fair and reasonable to him. Equitable remedies can be granted in the form of specific performance of the contract.
  • Common law-based systems: We all know that India follows the common law system. The precedents of the UK are not binding on Indian courts but it acts as guidance in similarly placed situations. The Indian system relies heavily on the common law system. Instead, it should render its legislation because of the difference in circumstances.

Conclusion

A contract is an essential part of transactions. It would be rendered useless in the absence of legal provisions for its enforcement. Breach of contract is a common phenomenon and is mainly of four types. It leaves one party aggrieved due to the action or inaction on the part of the other party to the contract. The rights and interests of the parties aggrieved by a breach of contract are well protected under the Indian Contract Act and similar laws. Chapter VI of this Act deals with the consequences of a breach of contract. It entitles the aggrieved party to claim compensation for the losses suffered from the defaulter party. These provisions, however, are still in a need for improvement on many fronts.

Author: Gurpreet Kaur from Amity University Chhattisgarh, Raipur.

Editor: Shalu Bhati  from Campus Law Centre, Faculty of Law, University of Delhi.

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