Breach Of Contract and its consequences

breach of contract and its consequences[i]

The ending of the contract can be categorized into two parts. First part is due performance of contract as promised. And the second is breach of promise or contract. The concept of breach of contract is the most important and comprehensive part of The Indian Contract Act, 1872. This concept can be better understood by acquainting with the whole procedure of the contract. It starts with the proposal. Section 2 clause (a) defines the term ‘proposal’. It states that when a person signifies to another his willingness to do or abstain from doing anything, he is said to make proposal. But the only condition is that the proposal should be made primarily with a view of obtaining the assent of the other person to such an act or abstinence. When that proposal is accepted, it becomes a promise as defined in Section 2(b) of the act. Another terminology is also used that is consideration. In simple words, it means something in return. It is given in sec. 2(d) of the act. Every promise and every set of promise forming the consideration for each other, is an agreement as given under section 2(e) of the act. Agreement could be of various types. One of those only which are enforceable in law are known as contract as provided under Section 2(h). Two clear-cut things have to be noted. First, the contract from the beginning till the end should be of commercial purpose. Second, it should be assumed that the contract is entered into between two parties. The contract can be enforced between n number of parties. Generally, from the context of the breach of contract it is presumed that there are two parties only. Finally, when any of the party fails to perform his part of duty/obligation. The other party suffers from the damages as a result of such failure to perform. Then the party who suffers, is entitled to receive compensation for any loss or damages caused to him.

When any of the parties fails to perform his/her part of promise under the contract, the contract is breached. The word ‘breach’ has various synonyms i.e., other words can also be used in place of breach, like broken, violation, infringement, dissolution, cancelled, contravention, etc. it is actually a legal cause of action in which a binding agreement is not followed by one or more parties, the result of which the non-performance of its promise by him renders impossible. And consequently that particular sufferers face the loss or damages.

Consequences of breach of contract

As mentioned earlier that breach of contract may result to the loss or damages of one party to the contract. After that, he/she can claim damages for the damages or loss suffered. The whole content of breach of contract and its consequence could be understood from the perusal of Chapter VI(Section 73 to 75) of the Indian Contract Act.(Bare Act of Indian Contract Act, 1872)

According to section 73 of the Indian Contract Act, 1872, when a contract has been broken or breached the party who suffers by such breach is entitled to receive compensation for any loss or damages caused by breach of contract from the party who has broken the contract (K. Narayana Kurup vs. Sankaranarayanan). The damages can naturally arose in the usual course of things from such breach or it can arose by the party making contract when they have knowledge that the danger is likely to result from the breach. There can be many reasons by which breach of contract arises. They are as follows:

a. The party cancelling the contract might got some efficient and efficacious offer after making the contract. For example: A contracts to deliver 50 maunds of saltpetre to B on 1st of January , at a certain price. B, afterwards, before the first of January, contracts to sell the saltpetre to C at a price higher than the market price of 1st of January. A breaks his promise. In estimating the compensation payable by A to B, the market price of first of January, and not the profit which would have arisen to B from the sale to C, is t be taken into account.

b. He/she can breach it so as to cause inconvenience to the party suffered the loss. For example: A contracts to buy B’s ship for Rs. 60,000, but breaks his promise. A must pay to B the excess, if any, of the contract price over the price, by way of compensation, which it can obtain for the ship at the time of breach of contract.

c. When no mode of conduct is mentioned and any of the party broke the contract, then he will not be liable for any compensation. For example: A contracts to sell and deliver 1,000 bales of cotton on a fixed day. A is not informed about B’s mode of conducting his business. Then, A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by closing of the mill.

d. When one party has not acted according to the contract. For example: A sells certain merchandise to B, warranting it to be of a particular quality. B, in reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way of compensation. B is entitled to be reimburse this sum from A.

e. When day is not specified by the party suffered. For example: A contracts to pay a sum of money on a specified day. A does not pay the money on that day. B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principle amount he contracted to pay along with interest up to the date of payment.

f. When unreasonable delay is made by either party to the contract. For example: A delivers to B, a common carrier, a machine, to be conveyed, without delay, to A’s mill, informing B that his mill is stopped for want of machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the government contract.

g. In other circumstances. For example:

· A, having contracted with B to supply B with 1,000 tons of iron at Rs. 100 a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron Rs. 80 a ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, who cannot procure other iron. B, in consequence, rescinds the contract. C must pay to A Rs. 20,000, being the profit which A would have made by the performance of his contract with B.

· A contracts to repair B’s House in a certain manner. He receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract.

Now, if the question arises that when does a breach of contract arises. On the basis of this question, there are two types of breach which are discussed below:

Two types of breach of contract:

1. Actual Breach of contract

This breach arises when the promiser refuses to perform his part of promise on the due date or during the course of performance. For example: on 1st January 2019, a gives a contract to B to construct a house. B is supposed to construct a house. The construction is going to start on 10th January, 2019 (due date). It will take almost 3 months to complete the construction works. So, it’ll be completed at 12th April,2019. On 10th January, if A denies to perform his part of performance. This would be said as actual breach of contract by A because A denies to perform on the due date. Now, in the second case if the A denies on 1st April, 2019, then it is said to be breach of contract during the course of performance. An important point to be noted is that In actual breach of contract, the promiser can break the contract anytime during the course of performance. From the above example, it can be said that A can deny anytime after 10th January,2019 to 10th April,2019. In either cases, it will be called as ‘Actual Breach of contract’.

2. Anticipatory breach of contract

the word ‘Anticipating’ means ‘expecting’ or ‘predicting’. Before the contract becomes due, if the promiser breach the contract, it is the case other than Actual Breach of Contract. It is the case of Anticipatory Breach of Contract. From the above example it is clear that A can refuse anytime before the due date i.e., 10th January, 2019. This is anticipatory breach of Contract. This situation may arise when the promiser anticipates or foresees that he will not be able to perform his/her part of contract so that the promisee can make some other arrangements before performing his/her part of duty which cannot allow much of the damages or delays. But, compensation can only be claimed in case the party who has suffered, incurred a loss. This breach of contract helps one to minimise the loss because the promisee gets some time to arrange something to reduce the loss. The promiser now, in the case of anticipatory breach of contract, has two options. He/she can either file a suit against the promisee or wait till the due date making the contract alive. In the first case, the promiser can treat the contract as breached and can claim compensation for the damages suffered. In the second case, it can be possible that the promiser is optimistic about the contract and giving some time to the promisee to think about the contract again.

Remedies for breach of contract

1. Rescission of contract – discharge of promise

Section 37 of the contract act talks about the obligation of the party to perform his/her part of promise. The parties to the contract are under an obligation to perform or order to perform his/her part of promise under the contract, unless such performance is dispensed with or excused under the provisions of the Indian Contract Act or of any other Law. The excuse may be given in some exceptional cases. The recent situation is a example of the exception. Some contract are entered into by the parties to the contract on the day say 24.03.2020. On the very day, Lockdown is imposed as a result of which the parties could not perform their part of promise. In this example it cannot be said that the contract had been broken or breached.

Refusal or impossibility of a party to perform his/her part of promise under the contract

Section 39 talks about the cases in which the party refused to perform or disabled himself of performing, his promise in its entirely, the other party may put an end to the contract, unless that other party has expressly or impliedly signified its consent for the continuance of contract. The contract will be broken or treated as breach of contract, if the other party puts an end to the contract. This is called repudiation or cancellation. This cancellation can occur when the either party refuses to perform his/her part or makes it impossible for him /her to perform his/her part of contract in each of the cases so as to show an intention not to fulfil his part of the contract.

2. Damages and types of Damages:

Damages, in case of breach of contract, means the right to claim compensation for the loss suffered. This damages may be of various kinds of damages.

1. Those damages which are ascertained during the contract are called Liquidating damages. In Case of breach of contract, the loss which are expected or estimated to the either party is ascertained with the contract itself, are liquidated damages. The party breaching the contract, will be liable for liquidating damages.

2. The actual loss which the aggrieved party has incurred in the normal course of business are called Ordinary Damages. It is not expected or estimated, but is actually incurred damages. The court will award the actual loss suffered by the aggrieved party.

3. Those damages which occurs in some special circumstances are called Special Damages. Special circumstances may be anything like riots in the city, lockdown, natural calamities, etc. The court will become more investigative and will try to find out the real issues. If the cause of damages are directly related to breach, the court might award special damages. Otherwise, getting the special damages is not exclusive right for the aggrieved parties. Special damages cannot be claimed in all the cases.

4. The kinds of damages that sets example or punishes the person breached the contract is known as exemplary damages or vindictive damages. The spirit of the damages is to punish the party in default so that other people do not break or breach the contract. It is punitive or exemplary in nature. This type of damages are available only in two conditions: 1. When the contract is breached and 2. When the cheque is dishonoured. The contract of marrying is not a business matters. When it is not a business contract, then how does the question of incurring a loss arises? But this damages are awarded so that the people could not vaguely make a contract. Similar case is with preparing the cheques. People should not make cheques if they do not have balance in their account. Many a times, people draws cheque knowing that they do not have sufficient balance in their accounts.

5. Damages in which there is no real loss incurred by the aggrieved party are called Nominal Damages. For example: A makes a contract with B to sell 100 Kg of rice @ Rs. 20 per kg. At the due date A refuses to sell the rice. B has to buy it from Market. The market rate was the same. There is no loss at all. This is called Nominal Damages. But this will lead to the indiscipline among the business. The law wants the smooth functioning of the business. As the damages are very small, the party won’t mind paying such damages. But it is treated as a punishment or penalty.

6. When the contract entered by the parties is for the perishable goods it is called the damages due to delay. for example: Fresh fruits and vegetables.

How the damages are calulated:

· Market price = contract price

It is necessary to know how the damages are calculated. There is a general principal that the market price and the current price are same. Let’s say A supplies to B cotton @ Rs. 10 per cotton bag. The contract price Rs. 10 per cotton bag. Now, if the contract is breached, B will get Rs.15 per bag from the market. The amount of damages to be claimed is Rs.5 per bag.

· Duty to mitigate the losses

When loss is incurred, the thing to be remembered is that the parties who is breaching the contract is always at the liability to meet the loss. However, if the loss was met due to aggrieved party’s own negligence or he was not proactive, then the party is not liable to compensate the loss or damages. For example, A supplied oranges to B in delay. The delay was two days. The quality of oranges was deterioted because of delay. If it would have been sold, then A can get rs. 5 per oranges. After the two days delay also, they can get Rs. 3 per oranges. But then also, A didn’t sold it. He/she kept the oranges with him/her. This amounts to negligence on the part of A. B can compensate rs. 2 per orange but not the whole amount.

· No compensation for remote or indirect loss or damage

If the loss is not related to the cause of the breach of contract, the promisee will not be liable for the compensation. For example: A enters a contract with B to sell 100 cotton bales for Rs.10 per bale. A breached the contract on his part. B bought it from the market @ rs. 15 per bale. The cotton bales got damaged in transit. In this case, A is not liable for any compensation as because the loss and the breach are not related. There should be a nexus between breach of contract and the loss.

Suit of Quantum Merit in Breach of contract

In simple words, Quantum merit means “as much as is earned” or “according to the quantity of work done”. It is the measure of damages where an express contract is mutually modified by the implied agreement of the parties, or not completed. There is often confusion between the concept of quantum merit and that of "unjust enrichment" of one party at the expense of another. The two concepts are distinct.

The concept of quantum merit may be applied in the following set of situations:

When a person hires another to do work, an impeding act fall short of vitiating frustration/repudiation has occurred. such as access or intervening act of God, the worker may sue (or counter-sue) for the value of the improvements made/services rendered. The law implies equality of the work done. A promise should been made from the employer to the worker that they will pay them for their services, as much as they may deserve or merit.

When there is an express contract for a stipulated amount and mode of compensation for services, the plaintiff cannot breach the contract. He have to resort to an action for a quantum merit on an implied assumption. In case, if there is absence of any promised consideration, the plaintiff (such as hirer) has a right to elect to repudiate the contract. Failing a valid frustration, innocent mistake reason or similar defence, has the right to compensation from the defendant on a quantum merit basis.

Example:

A contractor is contracted to work on a building. He does some work. But then he quits (breach of contract). He is entitled to be paid for the services he has already provided for the building on the basis of quantum merit .

Suit for Specific Performance

Specific performance means performing a promise/complete performance made under a contract as agreed. A suit for specific performance can be filed by any party. It is the last stage of remedy and can be filed in a court of competent jurisdiction, who has suffered loss due to non-performance of contract on part of the other party to the contract. Remedy of specific performance which is affected in case of breach of contracts is provided by the equity courts and the party who had refused to perform it will compulsorily perform it. However, this cannot be asked for as a right because it is provided on the satisfactory discretion of the court. It is an alternative to awarding damages. It is classified as an equitable remedy commonly used in the form of injunctive relief concerning confidential information or real property. The compensation may not be appropriate remedy for every case. Section 16(c) of the Specific Relief act put the onus of proof on the plaintiff to prove by way of evidence that he had performed his part of contract or was willing to perform his part of contract. The phrase ‘readiness and willing’ comes within the Ambit of clause(c). It is the most important condition on the part of the plaintiff to file a suit for specific performance. This clause provides that the person seeking specific performance must prove that he has performed or has been ready and willing to perform the essential terms of the contract.

The Supreme Court has held that under Section 19(a) and (b) of the Specific Relief Act, 1963, specific performance of a contract can be enforced against either party thereto and any person claiming under him by a title arising subsequent to the contract, except a transferee for value, who has paid his money in good faith and without notice of the original contract.

The courts grants the relief of specific performance in the following situations-

· If the compensation to be awarded cannot be determined, Remedy of specific performance is awarded.

· It is awarded when there is no substitute or alternate for the subject matter of the contract.

· It is awarded in case of goods, the value of which cannot be easily ascertained and the goods have a unique character. For example, buildings, land or goods having importance for the plaintiff.

· It is awarded at the sole discretion of the court.

Suit for Injunction in Breach of contract

Injunction means to stop, to restrict or to sustain somebody from doing anything. It is a very common and effective remedy given by the court against any mischief played by a third-party. All the civil courts are empowered to issue injunctions misdemeanours are supposed to follow it. An injunction may be issued for and against individuals, public bodies or even State and it depends upon the discretion of the court. Disobedience of injunction is punishable as it is a contempt of court. In simple words, civil suit is an effective legal remedy by any person against the other seeking a Leif of restraint under the facts when the person approaching the court is aggrieved by any mischief of the other person. They may be stated as below:

An injunction will not be issued (i) where damages are the appropriate remedy, (ii) where an injunction is not the appropriate relief, (iii) where the plaintiff is not entitled to an injunction on account of his conduct, (iv) where the contract cannot be specifically enforced, (v) where the injunction would operate inequitably.

Conclusion:

When the parties entered into the contract, the rights and liabilities are created by them. Once the contract is made, the parties to the contract are under an obligation to perform his/her part of performance. But there may be some circumstances when any of the parties to the contract is unable to perform his/her part of performance. This results in rescission of contract. The party who is affected, suffers some damages/losses due to such rescission. The damages are also of different kinds which are mentioned above. He/she can claim compensation of damages from the party who broke the contract. He /she can file a suit for either specific performance or for injunction. In addition to this, there may be some unavoidable circumstances when the parties is not bound to compensate. For instance, In present scenerio, after a sudden lockdown if any contract made before such situation is rescinded automatically

References: 1. Bare Act of Indian Contract Act,1872 Lexis nexis 2. Article from Team legal helpline available at https://www.legalhelplineindia.com/what-is-a-suit-for-injunction/#:~:text=Injunction%20to%20restrain%20repetition%20or,and%20either%20before%20or%20after 3. K. Narayana Kurup vs. Sankaranarayanan (AIR 2000 Ker 296) 4. Article of specific performance in case of breach of contract from Team legal helpline available at http://www.helplinelaw.com/business-law/SUITFSP/suit-for-specific-performance-of-contracts.html#:~:text=Specific%20performance%20means%20fulfilling%20a%20promise%20made%20under%20a%20contract%20as%20agreed.&text=Remedy%20of%20specific%20performance%20which,satisfactory%20discretion%20of%20the%20court. 5. Anticipatory and actual breach of contract available at https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-ii/anticipatory-and-actual-breach-of-contract/ 6. Concept of damages available at https://www.legalmatch.com/law-library/article/types-of-damages-available-for-breach-of-contract.html