DISCHARGE OF CONTRACT

Transcription

1 DISCHARGE OF CONTRACT Last update: Lecture delivered A B C Dr. Md. Salim SLS-NOIDA

2 MODES OF DISCHARGE OF CONTRACT A contract may be discharged in the following modes: 1. By performance Section By impossibility of performance Section Discharge by agreement Section Discharge by breach Section 39 2

3 Discharge By performance Section Parties duty to perform or offer to perform: Obligation of Parties to Contract Section 37 Note: oral discussion with bare Act. 3

4 Assignment of Contract Section 37, enables parties to dispense with performance also enables them to assign their contractual obligations. Assignment means transfer of contractual rights or liability by a party to the contract to some other person who is not a party. Illustrations A, B. Assignment of Liabilities: Assignment of Rights: 4

5 Offer of performance: Effect of refusal to accept offer of performance S.38 Every such offer must fulfill the following conditions: 1. Offer must be unconditional: a tender becomes conditional when it is not in accordance with the terms of the contract, a tender of an amount less what is due under the contract is not an effective tender. 2. Proper time and place and liability to do the whole: the tender must be made at a proper time and place, and under such circumstances that the person to whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do. Startup v Macdonald: delivery of goods at 9 pm found appropriate though late. 5

6 By whom the contract should be performed: S.40 Person by whom promise is to be performed, S.41 Effect of accepting performance from third person, Note: oral discussion with bare Act. 6

7 Performance of Joint Promises Under the English Law, if one of the several joint promisors dies, the right and liabilities under the contract devolve upon the surviving joint promisors. S.42 Devolution of Joint Liabilities: S. 43 Anyone of Joint promisors may be compelled to perform; S. 44 Effect of release of one joint promisor; S. 45 Devolution of Joint Rights (Promisees): Devolution of joint rights is governed by almost the same kind of principles as the devolution of joint liabilities. 7

8 Time and place of performance: S ,55 Note: oral discussion with bare Act. 8

9 Time for performance: S. 55 Time is generally considered to be of the essence of the contract in the following cases; 1. where the parties have expressly agreed to treat it as of the essence of the contract, 2. where delay operates as an injury, 3. where the nature and necessity of the contract require it to be so construed, Budhra chand v Betts: capturing wild animals. 9

10 Performance of reciprocal promises: S , 57, 58 Bilateral; two-sided; mutual; interchanged. Reciprocal obligations are duties owed by one individual to another and vice-versa. A reciprocal contract is one in which the parties enter into mutual agreements. Note: oral discussion with bare Act. 10

11 IMPOSSIBILITY OF PERFORMANCE: SECTION-56 [FORCE MAJEURE] Last Update:

12 IMPOSSIBILITY OF PERFORMANCE APPLICABLE LAWS: ICA, S. 39, 56 SRA, IMPORTANT CASES Frost v. Knight, ( ) L.R. 7 Ex. 111 Taylor v. Caldwell, 122 ER 30 Satyabrata Ghosh v. Mugneeram Bangur, AIR 1954 SC 44 Naihati Jute Mills Ltd v Khyaliram Jagannath Shyam Biri Works Pvt. Ltd. v. UP Forest Corporation, AIT 1990 SC 205 Alopi Prasad & Sons v Union of India (1960) 12

13 Initial Impossibility S. 56 An agreement to do an act impossible in itself is void. Subsequent impossibility S. 56 Sometimes the performance of a contract is quite possible when it is made, but some event subsequently happens which renders its performance impossible or unlawful. In either of these cases, the contract becomes void. 13

14 Paradine v Jane (1647): subsequent happenings should not affect the contract already made. Defendant had taken an estate on lease from the plaintiff, later dispossessed by alien enemies for some time, refused to pay for the period, liable to pay in full. Taylor v Caldwell (1863): the concert hall destroyed by fire, physical impossibility. Krell v Henry (1903): money paid for a place hired to see the king s coronation procession which then cancelled on his illness, the remaining amount is not recoverable. Parshottam Das v Batala Municipal Comt. (1949): tonga stand leased by corporation not used by tonga drivers, doctrine of frustration applied with full force. 14

15 Commercial hardship: the circumstances must be such as to upset the purpose of the contract. Commercial hardship cannot be equated with impossibility. Sachinder Nath v Gopal Chandra (1949): property lent for a restaurant on high rate on the expectation of stationing of British troops which later declared out of bounds, not a case of frustration. Harnandrai Fulchand v Pragdas (1922): failing to deliver the dhotis of an specified quality is not frustration but breach of contract. Ganga Saran v Ramchander Ram Gopal (1952): the failure to supply the New Victoria Mills manufactured cloths is breach of contract. 15

16 This is shown by the decision of the Supreme Court in Satyabrata Ghose v Mugneeran Bangur &. Co. The defendant company started a scheme for the development of a tract of land into a housing colony. The plaintiff was granted a plot on payment of earnest money. The company undertook to construct the roads and drains necessary for making the lands suitable for building and residential purposes and as soon as they were completed, the purchaser was to be called upon to complete the conveyance by payment of the balance of the purchase money. But before anything could be done, a considerable portion of the land was requisitioned by the State during the Second World War for military purposes. MUKHERJEA J. held that the contract was not frustrated. He said : "Undoubtedly the commencement of the work was delayed but was the delay going to be so great and of such a character that it would totally upset the basis of the bargain and commercial objects which the parties had in view? The requisition orders, it must be remembered, were, by their very nature, of a temporary character..." The court relied upon the fact that there was no time-limit agreed to by the parties within which the construction work was to be finished. The effect of an administrative intervention has to be viewed in the light of the terms of the contract, and, if the terms show that the parties have undertaken an absolute obligation regardless of administrative changes, they cannot claim to be discharged. 16

17 This has been so held by the Supreme Court in Naihati Jute Mills Ltd v Khyaliram Jagannath. There was an agreement to purchase raw jute to be imported from East Pakistan (now Bangladesh). The buyer was to supply the import licence within November, failing which it was to be supplied within December at the pain of a little more price and if he failed in December he was to pay the difference between the contract and market prices. The buyer applied for a licence which was refused because he had stock in his mill sufficient for two months. He applied again. He was advised this time that the rules have been changed and to obtain a license he must show that he has used an equal quantity of Indian jute. Thus the buyer failed to supply the license and was sued for breach. He pleaded frustration caused by the change in Government policy. But he was held liable. SHELAT J. pointed out that if the Government had completely forbidden imports, Section 56 would have applied. But the Government policy only was that the licensing authority would scrutinize the case of each applicant on its own merit. Where the intervention makes the performance unlawful, the courts will have no choice but to put an end to the contract. This kind of situation was before the Supreme Court in Boothalinga Agencies v V T C Poriaswami Nadar. The defendant had a license to import chicory for manufacturing coffee powder. The licence was subject to the condition that he would use it only in his factory. He agreed to sell the whole shipload. Before the arrival of the ship, the sale of such imported goods was banned. The contract was accordingly held to have become void. 17

18 Contracting party must not be in default 1. Held in Taylor v. Caldwell, 122 ER 30: In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility arising from the perishing of the person or thing shall excuse performance. 2. Held in Satyabrata Ghosh v. Mugneeram Bangur, AIR 1954 SC 44: It is not permissible for the courts to travel outside the provisions of the section and import the principles of English law dehors the statutory provisions. 3. Held in Shyam Biri Works Pvt. Ltd. v. UP Forest Corporation, AIT 1990 SC 205: S.56 lays a positive rule relating to frustration. There can be no agreement on altered circumstances and it has also been held that if a consideration of the terms of the contract in the light of the circumstances when it was made shows that the parties never agreed to be bound in a fundamentally different situation which unexpectedly arises, the contract ceases to bind at that point, not because the court in its discretion considers it just but on true construction it does not apply in that situation. 18

19 Doctrine of Frustration Frustration signifies a certain set of circumstances arising after the formation of the contract, the occurrence of which is due to no fault of either party and which render performance of the contract by one or both parties physically or commercially impossible. The court regards these set of circumstances as releasing the parties from any further obligations. Where the entire performance of a contract becomes substantially impossible without any fault on either side, the contract is prima facie dissolved by the doctrine of frustration. 19

20 Specific grounds of frustration 1. Destruction of Subject matter: where the actual and specific subject matter of the contract has ceased to exist. Taylor v Caldwell: the concert hall destroyed by fire, physical impossibility. 2. Change of circumstances: a contract will frustrate where circumstances arise which make the performance of the contract impossible in the manner and at the time contemplated. Alopi Prasad & Sons v Union of India (1960): Supply of Ghee to the GOI at a peace price during war conditions, amount irredeemable. Escalation: Law has to adapt to economic changes. Tarapore & Co. v Cochin Shipyard Ltd. (1984): the cost of machines predicted became too high now. 20

21 3. Non-occurrence of contemplated event: Sometimes the performance of a contract remains entirely possible, but owing to the non-occurrence of an event contemplated by both parties as the reason for the contract, the value of the performance is destroyed. Krell v Henry (1903): King s coronation case. Herne Bay Steam Boat Co. v Hutton (1903): the Royal Naval Review postponed, the defendant chartered a steam boat for two days for the purpose of reviewing, held liable to pay the unpaid balance of the ship. 4. Death or incapacity of party: a party to a contract is excused from performance if it depends upon the existence of a given person, if that person perishes or becomes too ill to perform. 21

22 5. Government or legislative intervention: a contract will be dissolved when legislative or administrative intervention has so directly operated upon the fulfillment of the contract for a specific work as to transform the contemplated conditions of performance. Satyabrata Ghosh v Mungneeram Bangur & Co.: housing work stalled due to the WW-II. 6. Intervention of War: intervention of War or Warlike conditions in the performance of a contract has often created difficulties. If the intervention of war is due to the delay caused by the negligence of a party, the principle of frustration cannot be relied upon. If there are more than one way of performing a contract and the war cuts off only one of them, the party is still bound to perform by the other way, however inconvenient or expensive. 22

23 7. Application to Leases: In India irrespective of England, S. 108[B(e)] of Transfer of Property Act, 1882 deals in the affairs of immovable property so is lease. Section 56 is generally not applicable in these situations. 23

24 Effects of Frustration It is a settled law that if and when there is frustration the dissolution of the contract occurs automatically. 1. Frustration should not be self-induced: it should not be due to the act or election of the parties, but should arise without blame or fault on either side. 2. Frustration operates automatically: to discharge the contract irrespective of the individual concerned, their temperaments and the failings, their interest and circumstances. The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event. 3. Adjustment of Rights (Restitution) S. 65: 24

25 THANKS 25

26 Appropriation of Payments: S Appropriation by Debtor S Appropriation by Creditor S Appropriation by Law S. 61 Devaynes v. Noble (1816) 35 ER 781, known as Clayton's case, Note: oral discussion with bare Act. 26

27 Discharge by Agreement: S. 62 Novation: 1. Change of Parties: 2. Substitution of New Agreement: Note: oral discussion with bare Act. 27

28 Facilities for Performance Effect of neglect of promisee to afford promisor reasonable facilities for performance: S. 67 Interdependent Promises: where promises are interdependent so that one party cannot perform without cooperation of the other, if the later does not reasonable facilities for performance, the former is excused from his obligation to perform. Rescission and Restoration: the section also permits the parties to rescind the contract. Remission of Performance: S. 63 allows a party to the contract to dispense with the performance of the contract by the other party, or to extend the time for performance or to accept any other satisfaction instead of performance. Acceptance of less sum: the acceptance of a less sum of money where more is due is a good discharge of the whole liability. 28

29 Waiver: to dispense with means that the party entitled to claim performance may waive it. Extension of Time: S. 63 also permits a party to extend time for performance. Accord and Satisfaction: the accord is an agreement made after breach where by some consideration other than his legal remedy is to be accepted by the party not in fault, followed by performance of the substituted consideration. The liability arising out of breach of contract may be discharged by accord and satisfaction. The validity of accord and satisfaction must be judged by the general law of contract quite apart from the provisions of section 62 and

30 Estoppel, Acceptance of Final Bill: where contractor accepted the final bill without any objection and under the terms of the contract such act had binding efficacy against him, it was held that claim of the contractor for additional payments and damages raised two years after acceptance of the final bill was barred by estoppel. Abandonment: where the parties have ignored the contract for a long time, it may give rise to an inference of abandonment. Material Alteration: where a contract is embodied in a deed and the party who has the custody of the deed alters it without the consent of the other in a material particulars, the effect would exactly be the same as that of cancelling the deed. Both parties will be discharged from their respective obligations. 30

31 Quasi Contracts Certain relations resembling those created by contract: There are many situations in which law as well as justice require that a certain person be required to conform to an obligation, although he has neither broken any contract nor committed any tort. Moses v Macferlan (1760): Jacob issues four promissory notes to Moses who later endorsed them to Macferlan excluding his personal liability by a written agreement, the parties are liable thereupon. 31

32 1. Supply of necessaries S. 68: Note: oral discussion with bare Act. 2. Payment by interested person S. 69: i. Payer must be interested in making payment, and is legally recognizable, ii. But should not be bound to pay, iii. Defendant should be under legal obligation to pay, iv. Payment by one to another, 32

33 3. Liability to pay for non-gratuitous acts S. 70: Three conditions must be satisfied before invoking this section; 1. A person should lawfully do something for another person or deliver something to him, 2. In doing the said thing or delivering the said thing he must not intend to act gratuitously, 3. The other person for whom something is done or to whom something is delivered must enjoy the benefit thereof, A. Not intending to act gratuitously, B. Service should have been rendered without request, C. Lawfully does, D. Non-gratuitous Acts, E. Payment for work already done, F. Enjoy the benefits 33

34 4. Finder of the goods S. 71: Note: oral discussion with bare Act. 5. Mistake or Coercion S. 72: 1. Mistake of Fact or Law, 2. Mistaken payment of taxes, 3. Change of position by payee on reliance on payment, 4. Coercion, - in general sense and not under S.15, 34

35 DISCHARGE BY BREACH Last Update:

36 DISCHARGE BY BREACH APPLICABLE LAWS: ICA, S. 39, 56, 73, 74 SRA, 10, 33 IMPORTANT CASES Frost v. Knight, ( ) L.R. 7 Ex. 111 Sooltan Chund v. Schiller, 1878 Satyabrata Ghosh v. Mugneeram Bangur, AIR 1954 SC 44 Jones v Barkley (1781) 2 Doug. 684 Hochster v. De La Tour, 1853 Avery v. Bowden (1856) 5 E & B

37 Discharge by Breach Section 39: Failure to perform promise wholly: A breach of contract occurs when a party thereto renounces his liability under it, or by his own act makes it impossible that he should perform his obligation under it or totally or partially fails to perform such obligations. The failure to perform may take place when the time for performance has arrived or even before that. Breach is of two kinds: 1. Anticipatory breach. 2. Present breach. 37

38 Sooltan Chund v. Schiller, 1878 The defendant agreed to deliver the plaintiffs 200 tones of linseed at a certain price in April and May, the terms as to payment being cash on delivery. Certain deliveries were made by the defendants between the 1 st and 8 th May, and a sum of Rs. 1000/- was paid on account by the plaintiffs, which left a large balance due to the defendants in respect of linseed already delivered. This balance was not paid, and the defendants thereupon wrote to the plaintiffs cancelling the contract and refusing to make further deliveries under it. The plaintiffs answered expressing their willingness to pay on adjustment of a sum which they claimed for excess refraction (i.e. excess of impurities and an allowance for some empty bags). The defendants stated that they would make no further delivery, and the plaintiffs thereupon bought in other linseed and sued the defendants for damages for non-delivery of the remaining linseed. Held that, there was no refusal on the part of the plaintiffs to pay for the linseed delivered to them as they were willing to pay the sum due as soon as their cross-claims were adjusted. 38

39 Rush Behary Shaha v. Nrittya Gopal Nandy, 1906 The principle set forth above were applied by Calcutta HC here, where the plaintiff had agreed to purchase from the defendant 300 tones of sugar, the shipment to be made during September and October next in lots of about 75 tones in a shipment, the terms as to payment being cash before delivery. Notice of arrival of the Sept. shipment was given to the plaintiff, and he was called upon to pay before delivery. The plaintiff, was unable to pay, and asked for time, but the defendant declined and ultimately wrote to the plaintiff stating that he had cancelled the contract. On the arrival of Oct. shipment the plaintiff tendered payment for the same, but the defendant refused to accept the money, saying that the contract had been cancelled. The plaintiff thereupon sued the defendant for damages for refusing to deliver the Oct. shipment. Held that mere failure on the part of the plaintiff to pay for and take delivery of the Sept. shipment did not amount to a refusal to perform the contract u/s 39 so as to entitle the defendant to rescind the contract, and that it did not exonerate him from delivering the Oct. shipment. Here the plaintiff s failure to pay before delivery cannot be construed as his refusal to perform the contract in its entirety. 39

40 1. Anticipatory breach: It is an announcement by the contracting party of his intention not to fulfill the contract and that he will no longer bound by it. This kind of anticipatory renunciation has certain effects upon the rights of the parties. 1. Acceptance of repudiation by aggrieved party: 1. The other party is excused from further performance or from performance. 2. It entitles the injured party to an option to sue immediately or to wait till the time the act was to be done. The seeds of the doctrine of accepted anticipatory breach can be found in Jones v Barkley (1781) 2 Doug. 684 where Lord Mansfield said, at p. 694: One need only state what the agreement, tender, and discharge were, as set forth in the declaration. It charges, that the plaintiffs offered to assign, and to execute and deliver a general release, and tendered a draft of an assignment and release, and offered to execute and deliver such assignment, but the defendant absolutely discharged them from executing the same, or any assignment and release whatsoever. The defendant pleads, that the plaintiff did not actually execute an assignment and release; and the question is, whether there was a sufficient performance. Take it on the reason of the thing. The party must show he was ready; but, if the other stops him on the ground of an intention not to perform his part, it is not necessary for the first to go farther, and do a nugatory act. 40

41 Hochster v. De La Tour, 1853 Facts: Plaintiff was a courier who agreed to accompany Defendant on a three-month tour scheduled to begin on June 1. On May 11, Defendant wrote to Plaintiff that he had changed his mind, and did not need his services. Defendant refused to pay Plaintiff any of the promised wages. On May 22, Plaintiff sued for breach of the contract. Shortly after, Plaintiff found another position, scheduled to begin July 4. Defendant asserted that it was not possible for the contract to be breached before June 1. The court disagreed and held for the Plaintiff. Issue: Whether a party who is ready and able to perform an agreement may recover damages for breach before performance is due, when the other party renounces the agreement before performance is due? Rule of Law: A party who receives clear notice of repudiation of a contract before performance is due may bring suit immediately, before the performance is due. Lord Campbell, C.J. ruled in favor of the Plaintiff. Held: Yes. When parties enter into a contract for future performance, a relationship is established when there is an implied promise that both parties will act consistent with their contract and not interfere with its future performance. In this case, Defendant clearly repudiated his agreement with the Plaintiff, and it is wasteful to require Plaintiff to wait and make preparation for an event that will not occur. Upon receiving clear and firm notice of renunciation, Plaintiff was absolved from his obligation on the contract. The injured party retains the option to sue immediately or to wait until the date performance is due before bringing an action for breach. 41

42 Frost v Knight (1872) Cockburn CJ held Breach of Promise of Marriage Breach of Contract by refusal to perform, the Time for Performance not having arrived. The defendant promised to marry the plaintiff as his (defendant's) father dies. During the father's lifetime the defendant refused absolutely to marry the plaintiff. The plaintiff sued for breach of the promise. The law with reference to a contract to be performed at a future time, where the party bound to performance announces prior to the time his intention not to perform it, may be thus stated. The promisee, if he pleases, may treat the notice of intention as inoperative, and await the time when the contract is to be executed, and then hold the other party responsible for all the consequences of non-performance: but in that case he keeps the contract alive for the benefit of the other party as well as his own; he remains subject to all the obligations and liabilities under it, and enables the other party not only to complete the contract, if so advised, notwithstanding his previous repudiation of it, but also to take advantage of any supervening circumstance which would justify him in declining to complete it. On the other hand, the promisee may, if he thinks proper, treat the repudiation of the other party as a wrongful putting an end to the contract, and may at once bring his action as on a breach of it; and in such action he will be entitled to such damages as would have arisen from non-performance of the contract at the appointed time, subject, however, to abatement in respect of any circumstances which may have afforded him the means of mitigating his loss. 42

43 2. Consequences of not accepting repudiation: If the aggrieved party does not accept the repudiation and leaves the contract alive, the consequences will be: 1. The party repudiating the contract may nevertheless chose to perform when the time comes and the promisee will be bound to accept the same. 2. If while the contract is lying open, some event happens which discharges the contract otherwise than by repudiation, by supervening impossibility or frustration, the promisor would also be entitled to take the advantage of the changed circumstances. Avery v Bowden (1856) 5 E & B 714: By contract the claimant was to carry cargo for the defendant. The claimant arrived early to collect the cargo and the defendant told them to sale on as they did not have any cargo for them to carry and would not have by the agreed date. The claimant decided to wait around in the hope that the defendant would be able to supply some cargo. However, before the date the cargo was supposed to be shipped the Crimean war broke out which meant the contract became frustrated. The claimant therefore lost their right to sue for breach. Had they brought their action immediately they would have had a valid claim. 43

44 3. In case the anticipatory repudiation is accepted, damages for breach would be assessed at the time when repudiation takes place. Where, the promisee does not accept repudiation, damages will be assessed at the time fixed for performance and the promisee takes the risk of market rate falling and, in the meantime, he will have to take all the reasonable steps to keep his loss to the minimum. Breach of contract is a legal concept in which a binding agreement or negotiated for exchange is not respected by one or more of the parties to the contract by nonperformance or interference with the other party's performance. Measure of damages the measure of damages for anticipatory breach is not necessarily the same as it would be for a failure or refusal occurring at the time when the performance was due. The plaintiff is entitled to measure his damages as they stand at the date of repudiation. 44

45 DAMAGES FOR BREACH Last update:

46 DAMAGES FOR BREACH APPLICABLE LAWS: ICA, S. 39, 56, 73 SRA, IMPORTANT CASES Hadley v. Baxendale (1854) 46

47 Damages for Breach According to Oxford dictionary the term damages are defined as financial compensation for loss or injury. In law, damages are money claimed by, or ordered to be paid to, a person as compensation for loss orinjury Black s Law Dictionary. In context of the Indian Contract Act, 1872 damages are referred in context to breach of contract i.e. a party's failure to perform some contracted-for or agreed upon act, or his failure to comply with a duty imposed by law which is owed to another or to society. Breach of contract is a legal concept in which a binding agreement or negotiated for exchange is not respected by one or more of the parties to the contract by non-performance or interference with the other party's performance. On a breach of contract by a defendant, a court generally awards the sum that would restore the injured party to the economic position they expected from performance of the promise or promises. When it is either not possible or not desirable to award damages measured in that way, a court may award money / damages designed to restore the injured party to the economic position they occupied at the time the contract was entered, or designed to prevent the breaching party from being unjustly enriched. 47

48 Damages for Breach A contract is a promise supported by some consideration upon which either the remedy of specific performance or that of damage is available. The party who is injured by the breach of contract may bring an action for damages i.e. monetary compensation for the loss caused to the injured party. Damages raises two issues: 1. Remoteness of damages, 2. Measure of damages, 48

49 1. Remoteness of damages A person contracts to supply to a shopkeeper pure mustard oil, but he sends impure stuff, which is a breach. The oil is seized by an inspector and destroyed. The shopkeeper is arrested, prosecuted and convicted. He suffers the loss of oil, the loss of profits to be gained on selling it, the loss of social prestige and of business reputation, not to speak of the time and money and energy wasted on defence and mental agony and torture of prosecution. Every breach of contract upsets many settled expectation of the injured party. He may feel the consequences for a long time and in variety of ways. The defendant cannot be held liable for all that follows from his breach. There must be limit to liability and beyond that limit the consequences are too remote. The problem is where to draw the line. 49

50 Rule of Hadley v Baxendale (1854): Millers crankshaft case. 50

51 Hadley v Baxendale (1854): Facts. Plaintiffs operated a mill, which they were forced to shut down when the crank shaft of their steam engine broke. They contacted the manufacturer of the engine, W. Joyce & Co. (Joyce), and Joyce agreed to make a new shaft from the pattern of the old one. Therefore, a servant of Plaintiffs went to the office of Defendants, common carriers, to have the crank shaft taken to Joyce. Plaintiffs servant told Defendants clerk that the mill was shut down and the shaft must be sent immediately. The clerk informed Plaintiffs servant that if the shaft were given to them by twelve o clock any day, it would be delivered by the next day. Plaintiffs took the shaft to Defendants the next day before noon. Due to Defendants neglect, the delivery to Joyce was delayed, and Plaintiffs did not receive the new shaft for several days after they should have received it. Issue. Are Defendants liable to Plaintiffs for damages suffered by Plaintiffs due to lost profits? Rule of Law. The damages to which a non-breaching party is entitled are those arising naturally from the breach itself or those that are in the reasonable contemplation of the parties at the time of contracting. Held. No. A non-breaching party is entitled damages arising naturally from the breach itself or those that are in the reasonable contemplation of the parties at the time of contracting. Here, while the breach by Defendants was the actual cause of the lost profits of Plaintiffs, it cannot be said that under ordinary circumstances such loss arises naturally from this type of breach. There is a multitude of reasons for a miller to send a crank shaft to a third party. Defendants had no way of knowing that their breach would cause a longer shutdown of the mill, resulting in lost profits. Further, Plaintiffs never communicated the special circumstances to Defendants, nor did Defendants know of the special circumstances. 51

52 Rule of Hadley v Baxendale (1854): Millers crankshaft case. the decision has laid down two rule; 1. General Damages: for the loss which arises naturally in the usual course of things form the breach itself i.e. defendant is liable for all the reasonably foreseeable consequences of his breach. 2. Special Damages: For the loss which arises on account of the unusual circumstances affecting the plaintiff. These special circumstances must be brought to the knowledge of the defendant so as to be in contemplation of the parties. 52

53 Section 73 is declaratory of the rule of Hadley v Baxendale in India. 1. arising naturally in the usual course of things from the breach, or 2. which the parties knew at the time of the contract as likely to result from the breach, Madras Railway Co. v Govinda Rau (1898): A delivers to B (a railway courier) a machine to be delivered overnight toa s factory. B does not deliver the machine on time, 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 factory during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract. 53

54 Measure of Damages Once the extent of recoverable loss is determined, it has to be evaluated in terms of money. The problem of measure or calculation of damages is governed by the forthcoming principles: 1. Damages are compensatory not penal, i. Inconvenience caused by breach, ii. Loss caused by misrepresentation, iii. Nominal damages, no loss situation, 54

55 2. Mental Pain and suffering: 1. Photographer s failure to appear at wedding, 2. Holiday cases, 3. Solicitor s failure to take appropriate steps to protect client s interest, 4. Loss of pets due to carrier s negligence, 5. Demotion of employee without reasonable cause, 6. Mental distress caused by negligent professional advice, 7. Contracts for providing peace of mind or preventing mental distress, 8. Failure by band to attend wedding reception, 9. Refusal to provide motel booked for wedding reception, 10. Damages for breach of confidence, 55

56 Injunction for restraining breach of contract, Writ remedy against termination of dealership, Withdrawal of letter of intent and writ remedy, Duty to mitigate: Explanation to S. 73. Aggrieved party increasing loss by unreasonable conduct, Duty of mitigation in auction sales, Contract of employment, 56

57 Liquidated damages and Penalty S. 74 The parties to a contract may determine beforehand the amount of compensation payable in the event of breach. A sum so fixed may fall in any of the following two categories; 1. Liquidated damages, 2. Penalty, If the sum fixed represents a genuine pre-estimate of the probable damage that is likely to result from the breach it is liquidated damages. A sum less than the amount of probable damage is also regarded as liquidated damages. The whole of such sum is recoverable. Dunlop Pneumatic Tyre Co. Ltd. v. Garage and Motor Co. Ltd. (1915): Liquidated damages and not penalty of $ 5 would be payable for every tyre sold in breach of the agreement not to sell below the listed price. H.L. held Liquidated damages. 57

58 Court s power to reduce specified amount, Application to hire purchase transactions, Heavy amount as Evidence of penalty, Fixed figure constitutes ceiling, 58

59 The rule is that where a sum is named in a contract as the amount to be paid in case of breach, regardless of whether it is a penalty or not, the party suffering from breach is entitled to receive reasonable compensation not exceeding the amount so named which determines the maximum limit of liability that even court cannot go beyond but can reduce. 59

60 Thank You All For Your Continuous serious Cooperation 60