Download Topic-Breach of Contract and its remedies

Topic-Breach of Contract and its remedies
We enter into contracts day after day. Taking a seat in a bus amounts to entering into a contract.
When you put a coin in the slot of a weighing machine, you have entered into a contract. You go
to a Dominos and have a pizza. You have entered into a contract. In such cases, we do not even
realize that we are making a contract. In the case of people engaged in trade, commerce and
industry, they carry on business by entering into contracts. The law relating to contracts is to be
found in the Indian Contract Act, 1872.
Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by
law. This implies that only those agreements which are enforceable at law are contracts. The
Contract Act is the law of those agreements which create obligations, and in case of a breach of a
promise by one party to the agreement, the other has a legal remedy. Thus, a contract consists of
two elements:
(i)
an agreement; and
(ii)
Legal obligation, i.e., it should be enforceable at law. However, there are some
agreements which are not enforceable in a law court. Such agreements do not give
rise to contractual obligations and are not contracts.
If you invite your friend for dinner at your house and he doesn’t turn up then you can’t sue him
for the breach of contract as the party didn’t intend to enter into a legally binding agreement it
was just a formal invitation. These agreements are social agreements which do not give rise to
legal consequences. This shows that an agreement is a broader term than a contract. And,
therefore, a contract is an agreement but an agreement is not necessarily a contract. Hence, we
say that all Contracts are agreements but all agreements are not Contracts.
If A agrees to sell his motorcycle to B for Rs5,000. The agreement gives rise to a legal obligation
on the part of A to deliver the motor bicycle to B and on the part of B to pay Rs. 5,000 to A. The
agreement is a contract. If A does not deliver the motor bicycle, then B can go to a court of law
and file a suit against A for non-performance of the promise on the part of A.
BREACH OF CONTRACT
Breach of contract is a legal cause of action in which a binding agreement is not followed by one
or more of the parties to the contract by non-performance or interference with the other party's
performance. If the party to a contract doesn’t fulfill their contractual promise, or has given
information to the other party that he will not perform his duty as mentioned in the contract or if
by their action and conduct they seem to be unable to perform the contract, then the party is said
to have breached the contract.
Therefore, a breach of contract occurs where a party to a contract fails to perform, precisely and
exactly, his obligations under the contract. This can take various forms for example, the failure to
supply goods or perform a service as agreed.
Breach of contract may be actual or anticipatory.
1) Actual Breach: It occurs where one party refuses to form his side of the bargain on the
due date or performs incompletely. Example: X agreed to sell his car to Y on 1st June.
But on 1st June X refused to sell the car to Y. On X’s refusal to sell the car, there
occurred a breach of the contract. And Y can hold X liable for the breach of contract.
2) Anticipatory Breach: It occurs when prior to the due date of performance, the promisor
absolutely refuses or disables himself from the performance of his obligations. In other
words, it is a declaration by one party of his intention not to perform his obligations
under the contract. Thus, the anticipatory breach is the premature destruction of the
contract, i.e., the repudiation of the contract before due date of performance.
Example: X contracted to supply to Y 100 pieces of spark plugs on 15th December 2005.
But before the due date of performance (i.e., 15th December), X informed Y that he is not
going to supply the spark plugs at all. On Xs refusal to supply the goods, the anticipatory
breach
of
the
contract
occurs.
And
Y
put
an
end
to
the
contract.
The doctrine of anticipatory breach is enshrined in Section 39 of the Indian Contract Act. 1
Section 39 reads: “Where a party to a contract has refused to perform or disabled himself
from .performing his promise in its entirety, the promisee may put an end to the contract,
unless he has signified, by words or by conduct, his acquiescence in its continuance.”
1
Bare Act Indian Contract Act, Allahabad Law Agency
Effects of Breach
A breach of contract, no matter what form it may take, always entitles the innocent party to
maintain an action for damages, but the rule established by a long line of authorities is that
the right of a party to treat a contract as discharged arises only in three situations.
1) Renunciation: It occurs where a party refuses to perform his obligations under the
contract. It may be either express or implied. Renunciation is implied where the
reasonable inference from the defendant’s conduct is that he no longer intends to perform
his side of the contract.
2) Breach of Condition: The second repudiatory breach occurs where the party in default
has committed a breach of condition. Thus, for example, in Poussard v Spiers the
employer had a right to terminate the soprano’s employment when she failed to arrive for
performances.
3) Fundamental Breach: The third repudiatory breach is where the party in breach has
committed a serious (or fundamental) breach of an innominate term or totally fails to
perform the contract. A repudiatory breach does not automatically bring the contract to an
end. The innocent party has two options:
a) He may treat the contract as discharged and bring an action for damages for breach of
contract immediately.
b) He may elect to treat the contract as still valid, complete his side of the bargain and
then sue for payment by the other side. For example, White and Carter Ltd v
McGregor.
REMEDIES
Damages is the basic remedy available for a breach of contract. It is a common law remedy that
can be claimed as of right by the innocent party. The object of damages is usually to put the
injured party into the same financial position he would have been in had the contract been
properly performed. Sometimes damages are not an adequate remedy and this is where the
equitable remedies (such as specific performance and injunction) may be awarded.
The major remedy available at common law for breach of contract is an award of damages. This
is a monetary sum fixed by the court to compensate the injured party. In order to recover
substantial damages the innocent party must show that he has suffered actual loss; if there is no
actual loss he will only be entitled to nominal damages in recognition of the fact that he has a
valid cause of action.
In making an award of damages, the court has two major considerations:

Remoteness – for what consequences of the breach is the defendant legally responsible?

The measure of damages – the principles upon which the loss or damage is evaluated or
quantified in monetary terms.
There are two kinds of damages awarded if breach of Contract claim is proved:
1) Compensatory Damages: Compensatory damages (also called “actual damages”) cover
the loss the non breaching party incurred as a result of the breach of contract. The amount
awarded is intended to make good or replace the loss caused by the breach.
There are two kinds of compensatory damages that the non breaching party may be
entitled to recover:

General Damages: General damages cover the loss directly and necessarily incurred
by the breach of contract. General damages are the most common type of damages
awarded for breaches of contract. Example: Company A delivered the wrong kind of
furniture to Company B. After discovering the mistake later in the day, Company B
insisted that Company A pick up the wrong furniture and deliver the right furniture.
Company A refused to pick up the furniture and said that it could not supply the right
furniture because it was not in stock. Company B successfully sued for breach of
contract. The general damages for this breach could include:

refund of any amount Company B had prepaid for the furniture; plus

reimbursement of any expense Company B incurred in sending the furniture back to
Company A; plus

Payment for any increase in the cost Company B incurred in buying the right
furniture, or its nearest equivalent, from another seller.

Special Damages: Special damages (also called “consequential damages”) cover any
loss incurred by the breach of contract because of special circumstances or conditions
that are not ordinarily predictable. These are actual losses caused by the breach, but
not in a direct and immediate way. To obtain damages for this type of loss, the non
breaching party must prove that the breaching party knew of the special
circumstances
or
requirements
at
the
time
the
contract
was
made.
Example: In the scenario above, if Company A knew that Company B needed the
new furniture on a particular day because its old furniture was going to be carted
away the night before, the damages for breach of contract could include all of the
damages awarded in the scenario above, plus payment for Company B’s expense in
renting furniture until the right furniture arrived.
2) Punitive Damages: Punitive damages (also called “exemplary damages”) are awarded to
punish or make an example of a wrongdoer who has acted willfully, maliciously or
fraudulently. Unlike compensatory damages that are intended to cover actual loss,
punitive damages are intended to punish the wrongdoer for egregious behavior and to
deter others from acting in a similar manner. Punitive damages are awarded in addition to
compensatory damages. Punitive damages are rarely awarded for breach of contract.
They arise more often in tort cases, to punish deliberate or reckless misconduct that
results in personal harm.