UNIT - V BREACH OF CONTRACT AND ITS REMEDIES

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1 BREACH OF CONTRACT AND IT REMEDIE UNIT - V It is a common maxim of Tort "Ubi Jus ibi remedium" which means "where there is right, there is remedy". A right without remedy is nothing in itself. Hence whenever any right of a person is violated or infringed, the victim or aggrieved person is provided with remedies to redress his grievance. Whenever a contract is entered into between the parties, some contractual obligations arise for both the parties to the contract and those contractual obligations must be fulfilled by them. If any party to the contract does not perform his part of the contract or is do not willing to respect the contractual obligations of the contract, then the breach of the contract happens. If one of the parties to a contract breaks an obligation which the contract imposes it is known as breach of Contract. Breach during performance of contract: 1. Anticipatory Breach 2. Breach during performance of contract Anticipatory Breach: Anticipatory breach arises when one of the parties to a contrat repudiates the contract before the time of performance. In the case of Hochester vs. Dela Tour, (1853) 2 E & B 678, the plaintiff was engaged by the defendant to enter into his service as a courier and go along with him on a tour. The service of the plaintiff was to start on th 15t June. On 11 May he was informed by the defendant that his services were no longer required. The plaintiff brought an action even before the time of performance had arrived. It was held that the plaintiff was entitled to bring action even before the time of performance. ection 39 of Indian Contract,l\ct. contains this doctrine of anticipatory breach. According to ection 39 of Indian Contract Act "When a party of contract has refused to perform, or disabled himself from performing his promise in its entirely, the promisee may put an end to the contract. unless he has signified, by words or conduct. his acquiescence in its continuance. For example: (a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights'in every week during the next two months, and B engages to pay her R.100 for each night's performance. On the sixth night, A wilfully absents herself from the theatre. B is at liberty to put an end to the contract. (b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her R.1 00 for each night's performance. On the sixth night, A wilfully absents herself. With the assent of B, A sings on seventh night. B has signified his acquiescence of the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A's failure to sing on the sixth night. Breach During Performance of Contract: If one of the parties to a contract refuses to perform his part of the 43

2 contract during performance, the other party is discharged from any further performance of his obligations under the contract and may also bring an action for the breach. In the case of Frost vs. Knight, 41 L.J. Ex. 78, The court held that - "The promisee may treat the intention to renounce as inoperative and await the time when the contract is to be performed and then hold the other party responsible for all 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 his own 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 circumstances which would justify him in declining to complete it. Remedies for Breach of Contract: The following remedies are available to the party suffered by breach of contract: 1. Damages 2. pecific performance of Contract 3. Injunctions Damages: In order to make the erring party liable for damages, the plaintiff must establish that he has sustained the loss due to breach of contract and the defendant is liable for such losses which the plaintiff has suffered due to defendant's fault. But the defendant is not liable for all losses. He is liable for the loss as which are the direct consequences of breach. For the 'remote' losses, the plaintiff is not entitled to compensation. This theory is known as "theory of remoteness of damages". The law will not compel the defendant to pay damages which are remote. In Indian Contract Act, 1872, ec. 73 to ec. 75 relates with compensation or damages in case of breach of contract. According to ec. 73 Para (1) of I.C. Act, "When a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties known, when they made the contract to be likely to result from the breach of it. uch compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach". This section is based on the principle laid down in the case of Hadley vs. Baxendale (1854) 9 Exch In this case, the plaintiff delivered to the defendant, a carrier to deliver his broken crank shaft to the maker at Greenwich. The plaintiff's mill was stopped due to a breakage of the crankshaft. The delivery of the shaft was delayed due to negligence on the part of defendant. Consequently the mill could not start in time. The plaintiff filed this suit to recover loss of profit to the plaintiff which they would have earned. had the shaft been received in time. In this case the court of Exchequer held that there are two kinds of damages: Damages as fairly and reasonably be considered arising naturally which are generally known as "General damages". Damages as may reasonably be supposed to h1we been in contemplation of both parties, at the time they 44

3 made the contract, as the probable result of the breach of it, which are generally known as "pecial damages". The court held that the plaintiff in this case, is entitled to recover only the general damages. Another leading case on this point is Horne vs Midland Railways Co. (1873) L.R. 8 C.P. 131, special damages may be successfully claimed only when they may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. The leading cases on this point are impson vs. London and North Railway Co. (1876) 1 O.B.D. 274 and Victoria Laundry Ltd. vs. Newman Industries Ltd. (1949) 2 KB 548. As in England, In India for special damages to be awarded it must be proved that the defendant had the knowledge of the special circumstances involved in the case. In the case of Dominion of India vs. AIR Ltd. AIR 1952 Nag. 32, three volumes of the books were lost by the Railway. The court held that Railways were liable for the loss of three volumes only as they had no notice about the fact that the loss of the volumes in question would render the whole set useless. It is necessary to claim compensation under ection 73 that the contract must be valid and binding. The remedies provided under section 73 are not available in the cases of invalid or void contract. It is well settled law that the court for the first instance must decide whether the defendant is liable and then it is to proceed to assess that liability. Whenever a suit for damages is filed based on contract the court first evaluate it in terms of money. There are two principles for determination of amount of damages- 1. Compensatory nature of damages, and 2. Duty to mitigate the damages suffered Compensatory Nature of Damages Damages for breach of contract are given by way of compensation for loss suffered, and not by way of punishment for wrong inflicted. In fact, the object of awarding damages for breach of contract is to put the injured party into the position in which he would have been had the contract been performed. In Devender ingh vs. tate of U.P. AIR 1987 All. 306, The Allahabad High Court observed -"The measure of damages in contract is compensation for the consequence which flows as a natural and capable consequence of the breach or, in other words, which could be forseen." Duty to Mitigate Damages uffered According to the explanation appended to ection 73 of I.e. Act, 1872: "In estimating the loss or damage arising from a breach of contract, the means which existed or remedying the inconvenience caused by the non-performance of the contract must be taken into account." The plaintiff who sues for damages owes the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and cannot claim as damages any sum which is due to his own neglect. But the loss to be ascertained is the loss at the date of the breach. If at the date of the breach, the plaintiff could 45

4 do something or did something which mitigated the damage, the defendant is entitled to the benefit of it." In India, the upreme Court has given the following principles in its various judgment regarding construction of ection 73 read with explanation thereon- a. As far as possible a party who has proved a breach of contract is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. b. A statutory duty is cast on the plaintiff who has proved the breach of the contract of taking all reasonable steps to mitigate the loss consequent on the breach of the contract. c. If the plaintiff, who proves the breach of the contract but fails to prove that he took all reasonable steps to mitigate the loss consequent on the breach of the contract, he will be debarred from claiming damages to the extent he could have mitigated the same by taking such steps. The Karnataka High Court in M. Nagappa vs. M. P. Muthuswamy, AI R 1975 Karnataka 146, held that "One of the fundamental principles of law of damages is that the person entitled to claim damages must do all that is within his power to mitigate damage. In the case of Mis. Bismi Abdullah and ons Merchants and Commission Agents vs. The Regional Manager, FCI, Trivandrum, AIR 1987, Kerala 56. The Kerala High Court held that the measure of damages must be with reference to the date of the breach of contract. More, so in the case here because time was the essence of the contract. Therefore the plaintiff can claim only nominal damages on account of the breach committed by the defendant. In the case of M. Lachia etty and ons Ltd. vs. The Coffee Board, Bangalore, AIR 1981 C 162, the upreme Court observed "At the outset it must be observed that the principle of mitigation of loss does not give any right to the party who is in breach of the contract but it is concept that has to be borne in mind by the court while awarding damages." Liquidated Damages and Penalty According to ection 74 of I.C. Act 1872 : "When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be, the penalty stipulated for." Thus, "The parties to a contract may agree beforehand what sum shall be payable by way of damages in the event of breach." The essential elements of ection 74 of I.C. Act, When a contract has been broken. 2. If a sum is named in the contract payable on breach or any other stipulation by way of penalty. 3. Whether or not the actual loss is proved to have been caused thereby. 46

5 4. The party complaining the breach is entitled to receive reasonable compensation from the party who has broken the contract: and 5. The compensation should not exceed the amount named or the penalty stipulated for. The distinction between the English law and Indian Law regarding liquidated damages and penalty is considered by the upreme Court in Fateh Chand vs. Balkishan Das, AI R 1963 C The upreme Court observed that under the Common Law a genuine pre-estimate of damage by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties. The Indian Legislature has sought to cut across the web of rules and presumptions under the English Common Law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach and stipulations by way of penalty. The measure of damages in the case of breach of stipulation by way of penalty is by ection 74 reasonable compensation not exceeding the penalty stipulated for. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon the courts by ection 74. "In all cases, therefore, where there is stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the Court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture." The Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. In the case of Maula Bux vs. Union of India, AIR 1970 C 1955, the upreme Court held that under ection 74 only reasonable amount can be forfeited if a contract is not performed. This principle was re-affirmed in Union of India vs. Rampur Distillery and Chemicals Ltd., AIR 1973 C 1098, where upreme Court held that the party taking security deposit is not entitled to forfeit the security deposit on the ground of default, when no loss is caused to him in consequence of such default. ection 74 of I.C. Act, 1872, contemplates a valid and binding agreement between the parties. ince the stipulation for forfeiture of the earnest money is part of the contract, it is necessary for the enforcement of that stipulation, that the contract between the parties is valid. If the forfeiture clause is contained in an agreement which is void, it can not be enforced. Compensation of Rightful Rescission of the Contract According to ection 75 of I.C. Act, 1872, "A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract. The Principle of Quantum Meruit: The Principle of Quantum Meruit is a very famous principle of English Law according to which if a person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract." Anson has defined the term 'Quantum Meruit' in the following words: "If the injured party, when the breach occurs, has already done, part, though not all, of what he was bound to 47

6 do under the contract, he may be entitled to claim the value of what he has done. In that case he has to sue upon a Quantum Meruit", He however, adds, "Quantum Meruit is still a remedy which is alternative to rather than a form of damages. Conditions Required to Claim Quantum Meruit: If a person wants to claim the compensation on the basis of this principle he must fulfill the following conditions: a. It is available only "if the original contract has been discharged" b. The claim must be brought by the party not in default. In the case of Alopi Prasad & ons Ltd. vs. Union of India, AIR 1960, C 588, the Hon'ble upreme Court of India held that - "Compensation quantum meruit is awarded for work done or services rendered when the price thereof is not fixed by a contract. For work done or services rendered pursuant to the contract compensation quantum meruit cannot be awarded where the contract provides for consideration payable in that behalf." The rule laid down by the upreme Court in this case is followed and applied by the Rajasthan High Court in the case of tate of Rajasthan vs. Motiram, AIR 1973, Raj In this case the defendant claimed payment on the basis of quantum meruit. The court held that even if the work was materially changed outside the contemplation of the parties due to alterations or subsequent change of circumstances, the payment on the basis of quantum meruit cannot be claimed for the obvious reason that the express terms of the contract cannot be ignored. Payment on the basis of quantum meruit can be claimed only when the contract has been frustrated. IMPOIBILITY OF PERFORMANCE - PECIFIC GROUND OF FRUTRATION 1. Destruction of the subject-matter of the Contract: Where the performance of the contract becomes impossible by the destruction of the subject matter of the contract as in the case of Taylor vs. Caldwell (1863) 122 E.R. 309 (where music hall was destroyed by fire the contract is discharged. 2. Non-occurrence or Postponement of a particular state of things: When a particular event which is essential for the performance of the contract is postponed or not occured as in the case of Krell vs Henry, (1903) 2 K. B., 740, the contract is treated as discharged. 3. Death or Incapacity of the party: Where the performance of a contract depends upon the personal services of a party, the death or incapacity of such a party may be treated to be a valid ground for frustration of contract. In the case of Robinson vs. Davison (1871) L.R. 6 Ed The defendant's wife was a famous pianist (piano-player). he contracted for performing a concert but could not fulfill her promise because of a serious illness. The court held that her serious illness was a valid ground on the basis of which she was discharged from her obligation under the contract. 4. Change of Circumstances: If the change of circumstances make the performance of the contract impossible, the contract will frustrate and parties will be discharged from their obligations under the contract. If, however, despite the change of circumstances, the performance is still possible, the contract will not be deemed to have been discharged. 48

7 5. Building Contracts: Where the execution of the contract is delayed or otherwise becomes impossible by the happening of an external event, the contract is discharged. But much will depend upon the facts and circumstances and each case has to be judged on its own merits. In the case of Metropolitan Water Board vs. Dick, Kerr & Co. Ltd., (1919) A.C. 119, the defendants contracted with the plaintiffs to construct a reservoir within a period of six years. After the lapse of two years, the Minister of Munitions, while exercising his statutory powers, ordered them to stop work and remove their plant. The House of Lords held that the contract was discharged having been frustrated by the said order. 6. Change in Law: The performance of a contract may also become legally impossible by the change in law. If the performance becomes legally impossible, the contract will be discharged. But as pointed out in Anson's Law of Contract 'The change in the law must be such as to strike at the root of the agreement and not merely to suspend or hinder its operation in part." Legislative or Government Intervention: Yet another ground for frustration of contract is legislative or government intervention. The case of Metropolitan Water Board vs. Dick Kers Co. Ltd., (1918), A.C. 119 referred to above is a good illustration of frustration of contract by government or administration intervention. In India, the courts are governed by the provisions of ection 32 and ection 56 of the Contract Act, ection 32 of the Act is under Chapter!II relating to contingent contracts and lays down that a contingent contract to do or not to do anything if an uncertain future event happens, becomes void if the event becomes impossible. But the main doctrine is contained in ection 56 of the Contract Act. "The doctrine of frustration is part of the law of discharge of contract by reasons of supervening impossibility or illegality of the act agreed to be done. According to ec. 56 (1) of I.C. Act: "An agreement to do an act impossible is in itself void." Illustration: A agrees with B to discover treasure by magic. The agreement is void. o if the act is in itself impossible the agreement will be void. Part 2 of ection 56(2) deals with contracts to do an act which afterwards becomes impossible or unlawful. According to ec. 56(2) of I.C. Act - "A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful" Illustration: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. A contract to take in cargo for B at a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. Under English law, change in law is one of the grounds for frustration of contract. But the change in law must 49

8 be such as to strike at the root of the agreement and not merely to suspend its operation. Under Indian law also the position is same. When the powers of contract fulfill their obligations arising out of contract, it is called performance of contract, it is the best way of discharge of contract. A contract may be discharged on the basis of impossibility of its performance. In England, it is popularly known as the 'Doctrine of Frustration' where, subsequent to its formation, a change of circumstances renders the contract legally or physically impossible to perform. In atyabrana vs. Mugneeram, in fact impossibility of performance and frustration are often used as interchangeable expressions. The changed circumstances, it is said, make the performance of the contract impossible and parties are absolved from the further performance of it as they did not promise to perform an impossibility. In the case of Taylor vs. Caldwell, in the instant case, the defendants agreed to let the plaintiff have the use of their gardens and music Hall for four days on payment of $100 for each day. After the making of the agreement the hall was destroyed by fire without the fault of either party. The court held "The parties contracted on the basis of the continued existence of the music hall at the time when the concerts were to be given; that being essential for their performance", "both the parties are excused." IMPORTANT QUETION Q.1. Q.2. Q.3. Q.4. Q.5. Q.6. What do you mean by the "Doctrine of frustration" of Contract? Explain its essentials and specific grounds with reference to the decided cases. Explain the rules regarding the measure of damages in case of breach of a contract with reference to Hadleyvs. Baxendale. Discuss with illustrations the principles governing compensation for loss or damages caused by breach of contract. Explain briefly the Principles for the assessment of damages for breach of contract. Discuss the remedies available to the injured party in case of breach of contract. What do you understand by damages? What are the various kinds of damages? How do damages differ from compensation? Q.7. Distinguish between the liquidated damages and penalty. Does Indian law recognize this distinction? 50

9 UGGETED READING a. Mulla D.F., Indian Contract Act b. Dr. Avtar ingh, Indian Contract Act c..k. Kapoor, Contract-I a. V. D. Kulshrestha, Law of Contract b. Anson, Principles of the English Law of Contract c. R.K. Bangia, Indian Contract Act d. Cheshire & Fifoot, Law of Contract e. Bare Act, Indian Contract Act,

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