The Indian Contract Act,

1872

CA. Manish Dafria

Chapter 1 Unit 5:

Breach Of Contract

IPCC Paper 2 Business Laws, Ethics & Communication

Learning Objective

What is Breach of Contract – Meaning and Types

Consequences of Breach

Remedies for Breach of Contract

Types of Damages

Calculation of Damages

Liquidated Damages and Penalty

Breach of Contract

Breach of Contract : Meaning

without lawful excuse does not fulfill his contractual obligation

or by his own act, makes it impossible that

he should perform his obligation under it.

A breach of contract occurs

when a party thereto

Types of Breach of Contract

Actual breach of contract, or

Anticipatory or Constructive breach of contract

Actual Breach of Contract and Its Consequences

• Actual Breach :

– Breach on the due date or during performance

• Other party to contract obtains a right of action against the one who breached the contract.

Anticipatory Breach of Contract and Its Consequences

• Anticipatory Breach :

– Where the promisor declares his intention of not performing the contract even before the time stipulated for performance of contract has arrived.

Other party may put an end to the contract immediately

It may wait till the due date of performance before putting an end to the contract.

Remedies For Breach Of A Contract

Remedies For Breach Of A Contract

Rescission Suit for damages

Suit for specific

performances

Suit for “Quantum

Meriut”

Remedies For Breach Of A Contract

n Rescission- • When one party breaches the contract, the other party can

treat it as rescinded. In this case the party is absolved of his obligation and is entitled to compensation for damages which he suffered.

Remedies For Breach Of A Contract

n Suit for damages - Ø Damages are monetary compensation allowed for loss

suffered by the aggrieved party due to breach of a contract. Ø Object is not to punish the party at default but to make

good the loss suffered by the aggrieved party due to breach of contract.

Remedies for breach of a contract

n Suit for specific performances –

Ø Specific performance means seeking an order from the court that the promise specified in the contract shall be carried out.

Ø When actual damages arising from breach are not measurable and monetary compensation is not an adequate remedy, then SP may be directed by the courts.

Remedies for breach of a contract

n Suit for Quantum Meriut – As much as is earned

Ø If a party prevents the other party from completing his obligation under the contract, the aggrieved party may claim payment of quantum meriut for the part of contract already performed by him.

A civil contractor, who has commenced the work and later on has to stop the work because other party has breached the contract, is entitled to receive the compensation on the principal of “quantum merit”.

Liability Of Damages

Damages

Party who breaches the promise …

…is liable to pay compensation …

…for damages suffered by other party.

Types of Damages

Ordinary Damages

Special Damages

Exemplary Damages

Nominal Damages

Types of Damages

Ordinary Damages •Damages that usually arise in the event of breach of contract.

Types of Damages

Special Damages •Damages which parties know

and anticipated at the time of entering into the contract.

•This kind of damages can be claimed only on previous notice.

Hadley vs. Baxendale. In this case, the mill of the plaintiff had to be stopped because of a broken crank shaft. The plaintiff sent the crank shaft to the manufacturer to manufacture a new one. Till the arrival of the new crank shaft, the mill could not be resumed. However this position was not properly conveyed to the defendant, the carrier. There was some day on the part of the defendant in delivering the crank shaft to the manufacturer which in turn delayed the reopening of the mill. As a result of this, there were losses to the mill. The plaintiff claimed compensation for loss in profit of the mill. However this was not accepted by the court on the ground the plaintiff did not explain to defendant that delay in delivering crank shaft would delay resumption of the mill and this would result in losses to the plaintiff.

Exemplary Damages

They are awarded mainly in 2 cases :

Breach of promise to marry

Wrongful dishonor of cheque

This type of damages are allowed to compensate for the humiliation or loss of

reputation suffered by aggrieved party.

Nominal Damages

Awarded in those cases where actual loss

suffered by the aggrieved party is

nil or very nominal.

Merely an acknowledgement

that aggrieved party has proved his case and won.

Calculation of Damages

Calculation of Damages

In case of Contract of Sale of goods, the damages would be the difference between contract price and market price as

on the date of breach.

If the seller retains the goods after the contract has been broken by the buyer, ….

He cannot recover from the buyer any further loss even

if the market falls.

He is also not liable to get the damages reduced if the

market rises.

Duty of the party suffered

• The aggrieved party has a duty to take all reasonable steps to minimise the losses.

Liquidated Damages and Penalty

Liquidated Damages and Penalty

Parties to a contract may stipulate in the

contract itself that on the breach of contract-

-a certain specified sum shall be payable

as damages.

Such sum may amount to -

Liquidated Damages Penalty

Liquidated Damages

• Liquidated damage is a genuine pre-estimate of compensation for damages for certain anticipated breach of contract.

• The estimate is agreed to between parties to avoid at a later date, detailed calculations and the necessity to convince outside parties.

Penalty

• Penalty on the other hand is an extravagant amount stipulated in the contract and has no comparison to the loss suffered by the parties.

Difference between Liquidated Damages and Penalty

Liquidated Damages

Liquidated Damages are imposed by way of compensation

Liquidated damages are assessed amount of loss based on actual or

probable calculation

Penalty

Penalty is imposed by way of punishment

Penalty is not based on actual or probables. It is imposed to prevent parties from committing the breach

Though English Law recognizes the difference between the two, Section 74 of the Indian contract act does not recognize any difference between the two.

Summary

A breach of contract may be actual breach of contract or anticipatory breach of contract.

Remedies for breach of a contract are :

• Rescission • Suit for damages • Suit for specific performances • Suit for “Quantum Meriut”

Summary

Damages payable for breach of contract may be in the nature of :

• Ordinary Damages • Special Damages • Exemplary Damages • Nominal Damages

A sum stipulated in the contract itself as payable in case of breach may be Liquidated Damages or it may be Penalty.

Thank you