BL 7 Breach of contract-Payment of Damages.

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Breach of contract-Payment of Damages:

Breach of contract-Payment of Damages Breach means failure of a party to perform his or her obligation under a contract. It confers a right of action for damages on the injured party. Breach of contract may be of two types: 1. Actual Breach 2. Anticipatory Breach 1


Contd.. Actual Breach: Actual breach means breach committed either (i) at the time when the performance of the contract is due, or (ii) during the performance of the contract. Examples: (i) A agrees to supply to B on 1 st February, 1998, 1,000 bags of sugar. On 1 st February, 1998 he fails to supply. This is actual breach of contract. The breach has been committed by A at the time when the performance is due. (ii) If on 1 st Feb., 1998 A is prepared to supply the required number of bags of sugar and B without any valid reason refuses to accept them , B is guilty of breach of contract. 2


Contd.. (iii) C contracted with a railway company to supply it with 3,900 railway chairs. After 1,787 chairs had been delivered, the company told C that no more chairs would be required. This is a breach of contract committed during the performance of the contract. Responsibility of Parties to provide reasonable Facilities for the Performance of the Contract: Section 67 of the Contract Act lays this responsibility on each party to provide reasonable facilities to the other party for the performance of his promise. “If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby’. 3


Contd.. Example: A contracts with C to repair his house. C neglects or refuses to point out A the places in which his house requires repair. A is excused from the non-performance of the contract, if it caused by such neglect or refusal. Anticipatory Breach: It occurs, when a party repudiates it before the time fixed for performance has arrived or when a party by his own act disables himself from performing the contract. Anticipatory or constructive breach of contract may take place because of any of the two causes: (a) express repudiation of the contract by any party before the date of its performance, or (b) the act of any party making the performance of the contract impossible. 4


Contd.. Examples: (i) A agrees to employ B from 1 st of March. On 1 st February, he writes to B that he need not join the service. The contract has been expressly repudiated by A before the date of its performance. (ii) A agrees to marry B. But before the agreed date A marries C. The contract has been repudiated by A by his conduct before the due date of its performance. The rights of the promisee (the party not in breach or the aggrieved party) in case of anticipatory breach are as follows: (1) He can treat the contract as discharged so that he is absolved of the performance of his part of the promise. (2) He can immediately take a legal action for breach of contract or wait till the time the act was to be done. 5

Remedies for Breach of Contract:

Remedies for Breach of Contract A remedy is the means given by law for the enforcement of a right. When a contract is broken, the injured party (i.e., the party who is not in breach) has one or more of the following remedies: 1. Rescission of the Contract. 2. Suit for damages. 3. Suit upon quantum meruit. 4. Suit for specific performance of the contract. 5. Suit for injunction. 6

1. Rescission of the Contract:

1. Rescission of the Contract When a breach of Contract is committed by one party, the other party may sue to treat the contract as rescinded. In such a case, the aggrieved party is freed from all his obligations under the contract. Example: A promises B to supply 10 bags of cement on a certain day. B agrees to pay the price after the receipt of the same. A does not supply the 10 bags of cement. B is discharged from liability to pay the price. When a party treats the contract as rescinded, he makes himself liable to restore any benefits he has received under the contract to the party from whom such benefits were received. But if a person rightfully rescinds a contract he is entitled to compensation for any damage which he has sustained through non-fulfillment of the contract by the other party. 7


2. DAMAGES Damages are a monetary compensation allowed to the injured party by the court for the loss or injury suffered by him by the breach of a contract. The object of awarding damages for the breach of a contract is to put the injured party in the same position, so far as money can do it, as if he had not been injured, i.e., in the position in which he would have been had there been performance and not breach. This is called the doctrine of restitution. The fundamental basis of awarding damages is compensation for the pecuniary loss which naturally flows from the breach. The foundation of modern law of damages, both in India and England, is to be found in the judgment in the case of Hadley V Baxendale. 8


Contd.. Hadley V Baxendale X’s mill was stopped by the breakdown of a shaft. He delivered the shaft to Y, a common carrier, to be taken to a manufacturer to copy it and make a new one. X did not make known to Y that delay would result in loss of profits. By some neglect on the part of Y the delivery of the shaft was delayed in transit beyond a reasonable time (so that the mill was idle for a longer period than otherwise would have been the case had there been no breach of the contract of carriage). Held, Y was not liable for loss of profits during the period of delay as the circumstances communicated to Y did not show that a delay in the delivery of the shaft would entail loss of profits to the mill. 9


Contd.. Ordinary Damages: When a contract has been broken, the injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach. This means that the damages must be the proximate consequence of the breach of contract. These damages are known as ordinary damages. Examples: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs.475 per quintal, the price to be paid at the time of delivery. The price of wheat rises to Rs.500 per quintal and A refuses to sell the wheat. B can claim damages at the rate of Rs.25 per quintal. 10


Contd.. A contracts to buy of B at Rs.950 per quintal of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. The market price of rice on that day is Rs.930 per quintal. B is entitled to receive from A compensation at the rate of Rs.20 per quintal. Ordinary damages shall be available for any loss or damage which arises naturally in the usual course of things from the breach and as such compensation cannot be claimed for any remote or indirect loss or damage by reason of the breach. 11


Contd.. Special Damages: These damages result from the breach of the contract under special circumstances. They constitute the indirect loss suffered by the aggrieved party on account of breach of the contract. They can be recovered only when the special circumstances, responsible for the special losses were made known to the party at the time of making of the contract. Examples: S sent some specimens of goods for exhibition at an agricultural show. After the show he entrusted some of his samples to an agent of a railway company for carriage to another show ground at New Castle. On the consignment note he wrote “ Must be at New Castle Monday certain”. Owing to a default on the part of the railway company , the samples arrived late for the show. Held, S could claim damages for the loss of profit at the show . 12


Contd.. The communication of the special circumstances is a pre-requisite to the claim for special damages. In Hadley V Baxendale, y was not liable for loss of profits during the period of delay as the circumstances communicated to Y did not show that a delay in the delivery of shaft would entail loss of profits to the mill. 13


Contd.. Vindictive or exemplary damages: They are quite heavy in amount and are awarded by way of punishment only in the following cases: (i) Breach of a contract to marry (ii) Dishonor of a customer’s cheque by the bank without any proper reason. These damages are awarded with the intention of punishing the defaulting party. They are of a deterrent nature and their object is to prevent the parties from committing breach. In the case of a breach of a contract to marry, damages will include compensation for the loss of the feelings and the reputation of the aggrieved party. In the case of a dishonor of cheque damages are awarded taking into consideration the loss to the prestige and goodwill of the customer and the general rule is that the smaller the cheque the greater is the amount of damages. 14


Contd.. Nominal damages: Nominal damages are awarded in cases of breach of contract where there is only a technical violation of the legal right, but no substantial loss is caused thereby. The damages granted in such cases are called nominal because they are very small. Example: A firm consisting of four partners employed B for a period of two years. After six months two partners retired, the business being carried on by the other two. B declined to be employed under the continuing partners. Held, he was only entitled to nominal damages as he had suffered no loss. 15

Specific Performance:

Specific Performance Where damages are not an adequate remedy, the court may direct the party in breach to carry out his promise according to the terms of the contract. This is called ‘specific performance' of the contract. Some of the instances where court may direct specific performance are: a contract for the sale of a particular house or any other thing for which monetary compensation is not enough because the injured party will not be able to get an exact substitute in the market. Specific performance will not be granted where: (a) Monetary compensation is an adequate relief; (b) The contract is of a personal nature, e.g., a contract to marry. (c) Where it is not possible for the Court to supervise the performance of the contract, e.g., a building contract (d) The contract is made by a company beyond its objects as laid down in its Memorandum of Association. 16


Injunction Where a party is in breach of a negative term of a contract (i.e., where he is doing something which he promised not to do), the Court may, by issuing an order, restrain him from doing what he promised not to do. Such an order of the Court is known as an ‘injunction’. Examples: G agreed to buy the whole of the electric energy required for his house from a certain company. He was, therefore, restrained by an injunction from buying electricity from any other person. Urmila , a film star, agreed to act exclusively for Ram Gopal Verma Films for a period of three years. During same period she contracted to act for some other producer. Held, she could be restrained by an injunction. 17


QUANTUM MERUIT The phrase “quantum meruit” means ‘as much as earned. The general rule of law is that unless a person has performed his obligations in full, he cannot claim performance from the other. But in certain cases, when a person has done some work under a contract, and the other party repudiated the contract, or some event happens which makes the further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work he has already done. The right to claim quantum meruit does not arise out of the contract as the right to damages does; it is a claim on the quasi-contractual obligation which the law implies in the circumstances. 18


Contd.. The claim on ‘quantum meruit' arises in the following cases; 1. When a contract is discovered to be unenforceable Examples: (a) A pays B Rs.1000 in consideration of B’s promising to marry C, A’s daughter C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees. (b) A contracts with B to deliver to him 250 kilos of rice before the first of May. A delivers 130 kilos only before that day and none after. B retains the 130 kilos after the first of May. He is bound to pay A for them. 19


Contd.. 2. When one party abandons or refuses to perform the contract: Example: C, an owner of a magazine, engaged P to write a book to be published by installments in his magazine. After a few installments were published, the magazine was abandoned. Held, P could claim payment on quantum meruit for the part already published. 3. When a Contract is divisible, and the party not in default, has enjoyed the benefit of the part performance, the party in default may sue on quantum meruit. 4. When an indivisible contract is completely performed but badly: Example: A agreed to decorate B’s flat for lump sum of Rs.10,000. A did the work but B complained for faulty workmanship. It cost B Rs.2,500 to remedy the defect. Held, A could recover from B Rs10,000 less Rs.2500/-. 20


Illustrations 1. A , a merchant of Agra, made a contract to dispatch 100 quintals of soya to B at Delhi at a certain price and B paid Rs.500 as earnest money. None of the parties knew that the Government had, sometime previously, passed a law prohibiting transport of soya from one State to another. A was unable, by reason of this law, to send the soya. B claims damages for non-performance as well as refund of the earnest money. Is he entitled to these remedies? 2. X, having contracted with Y to supply him 1,000 tons of iron at Rs.12,000 a ton, to be delivered in a stated time, contracts with Z, for the purchase of 1,000 tons of iron at Rs.11,000 a ton. X does not tell Z of the sale to Y. Z fails to perform the contract with X who cannot procure other iron, and Y, in consequence rescinds the contract. What damages can X claim from Z? 21


Illustrations 3. A agreed to erect a plant for B by 31 st January, 1991. The contract provided that B should pay Rs.500 per month for every month that A took beyond the agreed date. A was late by six months. B sued A for Rs.6,500 the actual loss caused to him as a result of the delay. To what damages , if any, is B entitled? 4. A hired B’s room for a series of lectures. B discovered that the lectures would be of a seditious nature and refused to allow A to use the rooms. A sued B. Advise B. 5. M, a retailer of milk, supplied C with milk which was consumed by C and his family. The milk contained typhoid germs and C’s daughter was infected thereby and died. Discuss the legal position of the parties. 22


Answers 1. The agreement is void abinitio. B can claim refund of the earnest money but not damages. 2. X can claim the difference between the contract price and the market price at the date of the breach. 3. He can claim Rs.3,000 4. The object of the agreement in this case is unlawful and hence A will not succeed. 5. C can recover damages from M 23

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