Consequences Of Breach Of Contract

By | August 18, 2019

Consequences Of Breach Of Contract | Overview

The article discusses the Consequences of Breach of Contract. A contractual agreement is the backbone of commerce & trade of any country. Any country which promotes commercial transactions has seen a multifold increase in the trade and thus increases in the GDP of the country. Contractual transactions work on the trust-i.e. there should be trust from both the parties that either of them shall fulfil the contractual obligations it seeks to accomplice.

Timely fulfilment of contractual agreement is an important part of any commercial transactions and if any party breaches the terms of the contract then the party not only loses the trust of the other party but it also has to pay a certain amount of money as a penalty for the breach of contract which is pre-decided during the drafting of the contract.

In the Indian Contract Act, from section 73-75 deals with the consequences for breach of contract. In sense, what shall be a liability and the course of action in case there is a breach of contract by either party.

Now, many a time it might happen that breach has taken place but it’s not because of the fault of either party but because of some external environment working which none of the parties has any control over it and or could have foreseen the happening of that event. In a scenario like these also, the law has provided certain direction as to what shall be the course of action if an event like these ever happens.

Furthermore, if any breach of contract happens then the affected party shall have the right to claim different types of damages like nominal damage, exemplary damage from the court and court shall award those as per the facts and circumstances of the case.

The following sections of the paper shall analyse each section of the Act in details to understand its impact in case of breach of contract.

I.  Section 73 of the act

The section 73 of the Act states that “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 knew, when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract: When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.”

This section states that when any party suffers because of the breach of obligation by other parties, then that party shall have the right to claim compensation for any damages that may cause to him because of the breach of contract. The caveat in this regard is the remoteness of the damage.

The affected party can claim damage for any loss which he may incur for the breach provided it may have arisen in the usual course of things, but he won’t be able to claim any losses which are the result of some indirect connections with the breach of contract.[1]

It may happen that because of the breach of contract, the affected party had to suffer losses for a long period of time and the losses he suffered may have indirect connection with the breach even then also he shall have the right to claim compensation for all the direct loss incurred for a particular period of time, not for indefinite period.

The principle is that the defendant cannot be made liable for all that follows from his breach. There must be a limit the liability of the defendant and beyond that liability even if the plaintiff suffers any harm then also he won’t be able to claim any compensation.[2]

a)  The “Hadley v Baxendale” rule

In the case of Hadley v Baxendale,[3] the facts of the case are as follows; the plaintiff operated a mill which had some defected crankshaft because of which it could to operate properly. So they contracted the manufacturer Joyce & Co, and they agreed to make a new shaft for the plaintiff.

So to the servant of the plaintiff went to the defendant (common carriers) to take the craft to Joyce & co. plaintiff servant went to their office and asked for the shaft on an urgent basis as it was to be sent on an immediate basis. But due to some neglect on the part of the defendant, the shaft couldn’t be sent on an immediate basis and as a result of which the plaintiff incurred huge losses.

The issue in the case was whether the defendant shall be liable for the damages incurred by the plaintiff or not.

The principle laid down, in this case, was that when two people enter into a contract and one of them breaches the contract, then the person who has suffered the loss shall have the right to receive compensation which should be fair and reasonable.

Now the caveat in that amount of compensation payable should arise out of a natural course of a transaction, which means that amount payable would arise out of the usual course of things from such breach of contract itself.

And the amount should be reasonable, which means the amount should be reasonably be supposed to have been in the contemplation of both parties at the time they made the contracts as the probable result of the breach of the contract.

Now based on the principle, the defendant was held not liable for the loss incurred by the plaintiff as it was held that in ordinary circumstances when the shaft is sent for repair, the mill is not usually stopped and the fact the mill was stopped in this particular case, makes it an exceptional one.

The fact that the mill was out of action for want of the shaft was a special circumstance affecting the plaintiff’s mill and the same should have been pointed out to the defendant in clear terms that plaintiff would suffer huge loss by the way of delay if the shaft is not delivered on time.

The principle derived in the above case can be further divided into two parts:-

  1. The claim should arise naturally- i.e. the claim should arise as per the usual course of action
  2. The claim should be reasonable, in the sense that both the parties reasonably supposed that certain act if occurred then it would probably result in the breach of the contract.

b) Loss of profit

It’s a special case which has separate principle to follow. In this case, loss of profit which has been incurred when the good has been resold can’t be recovered from the other party, unless it is communicated to the other party that the goods are for resale upon a special contract.

The same has been reiterated in the case of Karanda Thacker v Saran Engg Co,[4] where it was held that if the buyer was intending to re-sale the product to the third party then the seller should have the knowledge of it. If the seller didn’t know about the contract then he couldn’t have known about the likelihood of the loss suffered actually by the buyer.

But this has been differentiated with the scenario where the three was the loss of expected profit. If there was a loss of expected profit because of the breach of contract the same can be recovered by the affected party. This was held in the case of MSK Projects (I) (JV) Ltd v State of Rajasthan,[5] where the contract was given to a contractor for building a road and collect money from toll booths.

Now there was a delay from the government side in releasing notification that the contractor was to collect the tool amount. This resulted in the loss of the expected profit of the company and the claim was allowed against the company.

II. Section74 of the act

The above-mentioned section of the Act states that “When a contract has been broken, if a sum is named in the contract as the amount be paid in case of such breach, or if 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 or 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.”

The section basically talks about the liquidated damage that the affected party is entitled to. This section states that if there is any clause in the contract which states that in case of breach by either party the defendant shall be liable to pay the certain specified amount then the plaintiff can claim the amount if there is a breach in contract.

It means that the plaintiff can claim the amount mentioned in the contract (also called liquidated amount) from the defendant in case there is a breach of contract. It can be further deduced that amount stipulated in the contract can be claimed even if the actual loss or the damage was proved by him or not.

The caveat as per this rule is that the amount stipulated in the contract is the maximum amount that the plaintiff can claim. Cases may arise that court can award compensation less than the stipulated amount if it appears reasonable as per the circumstance of the case,[6] but the no case the amount awarded by the court should be more than the stipulated amount.[7]

English law regarding the liquidated damage and penalty is somewhat different from what has been followed in India:

  1. Firstly, as per English law, there is a differentiation between the liquidated damage and the penalty, whereas as per the Indian law, section 74 has dispensed with the need of providing separate provision for penalty and liquidated damage
  2. Secondly, as per English law, the court must either accept the liquidated amount in full or reject in toto, but as per Indian law, the court either accept the full amount or can reduce the amount to what appears reasonable as per the situation.

In the case of Fateh Chand,[8] the court has explicitly said that the section 74 of the Act is an attempt to reduce all the refinements of the English Law by eliminating the difference between liquidated damage and penalty.

III. Section 75 of the act

The above-mentioned states that “A person who rightfully rescinds a contract is entitled to consideration for any damage which he has sustained through the no fulfilment of the contract.”

This section states that in case if one of the parties cancels the contract, in that case, the party cancelling the contract have to pay certain compensation to the other party even if there is no completion of the contract.

The other party has the right to claim compensation for any damage that he had to incur because of the cancellation of the contract. It has to keep in mind that the question of claiming damage in case of rescinding contract comes only if the contract has been rescinded under section 39, 53 54 & 55 of the Contract Act.[9]

IV. Types of damages

There may be situations that there is no clause in the contracts specifying the liquidated compensation to be paid in case of breach of contract, in that case, the court shall decide the amount(Unliquidated compensation) to be given as compensation based on the following types of damages:-

  • Nominal Damages: – these are the small amount of money give to the plaintiff when he has suffered no significant losses or injury caused to the plaintiff. These are given when there has been a breach but the party fails to prove the actual loss resulting from the breach of contract.[10]
  • Substantial Damages: – this compensation is given where though the extent of the breach of contract is proved but there are uncertainties regarding the calculation of the amount.
  • Aggravated Damages: – in this case, the damage ascertained previously exceeds because of the malafide conduct of the defendant. Here the damage caused to the plaintiff is aggravated due to the conduct or manner in which the injury has been inflicted to the plaintiff.
  • Exemplary Damages: – these are the damages which are awarded to set an example in the society that such crimes won’t be tolerated at any cost. The idea behind this damage is to punish the defendant not to derive any benefit out of him.
  • General Damages: – damages which arise out of the normal course of action. It’s the damage which arises in the normal course of events. Once the damage is proven general damage can be claimed by the affected party.
  • Special Damages: – these are the damage which arises out of the circumstances which were reasonably anticipated by the parties at the time of entering into the contract. The proof of damage is not enough but the special proof of such damage is required to claim special damage.

V. Conclusion

After thoroughly analysing all the sections pertinent to the breach of contract it can be said that Indian Contract Act has provided for both the liquidated damage and unliquidated damage in the Act. The former is applicable when any amount is specified in the contract form the beginning and the later when no amount is specified and the court awards a certain amount after analysing the facts and circumstances of the case.

Further, when deciding the unliquidated damage the court has to take into consideration under which type of damage the act of the defendant can be classified into and on the basis of which the compensation amount can be ascertained.

Provisions for the penalty for breach of contract are necessary as it serves as a deterrent for both the parties in leaving the contract mid-way which may be detrimental to both the parties.

[1] Ram Kumar Agarwal v Lakshmi Narayan Agarwal AIR 1947 Cal 157

[2] Transworth, ‘legal Remedies for Breach of Contract’ 70 Colum LR 1145

[3] Hadley v Baxendale (1854) 9 Exch 341

[4] Karandas Thacker v Saran Engg Co AIR 1965 SC 1981

[5] MSK Projects (I) (JV) Ltd v State of Rajasthan (2011) 10 SCC 573

[6] State of Gujarat v MK Patel & Co AIR 1985 Guj 179

[7] Pushpendra Motilal Singh v Commercial Automobiles (1992) 2 MPLJ 319

[8] Fateh Chand v Balkishan Dass AIR 1963 SC 1405

[9] Mirza Javed Murtaza v UP Financial Corporation, Kanpur AIR 1983 All 235

[10] Weld & Co. v  Har Charn Das AIR 1921 Lah 316

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