Discharge of contract means termination of the contractual relationship between the parties. There are listed methods through which a contract can get discharged, and out of which discharge by breach of contract is an essential method. Breach means failure of a party to perform his or her obligation under a contract.
Discharge by breach of contract means when a party having a duty to perform a contract fails to do so or does an act which leads to the non-performance of the contract or refuses to perform the contract. There is said to be a breach of contract. While on the breach of contract by one party, the other party gets discharged from the obligation of his part in the contract.
The breach of contract may be either of the two types:
- Actual breach – i.e. non-performance of the contract on the due date of performance; or
- Anticipatory breach – i.e. before the due date of performance
For e.g. A has to supply certain goods to B on 1st January but does not do that on the date mentioned, here A had made an actual breach of contract. While, if A informs B on 1st December (i.e. prior to the performance date) that he will not perform the contract on 1st January, and then here A has made an anticipatory breach of contract.
Actual breach and Anticipatory breach
- Actual breach– unlike anticipatory breach, in it the parties who had to perform the contract does not perform his obligation at the time of performance of the contract. For e.g. A contracts with B the sale and purchase of motorcycle on 30th April 2018. On the date of the performance of contract A, the seller refuses to sell his motorcycle to the buyer B, this would be regarded as a breach of contract at the time of performance.
While in the situation the sufferer party has only remedy to file a suit for recovering compensation for the breach under section 73, 74 and 75 of the Indian Contract Act.
- Anticipatory breach– section 39 of the Indian Contract Act defines it as:
The repudiation of the contract by one party before its due date of performance has arrived. The breach could be made by the promisor; either by refusing to perform the contract, or disabling himself from performing his promise. While to act of the promisor the promise may put an end to the contract either signifying by words or conduct; or its acceptance in its confirmation.
Under this breach, there are 2 remedies available to the sufferer party-
- He can file a suit for compensation immediately after the breach of contract; or
- He may wait till the date of performance in anticipatory that the promisor will perform his promise on the time of performance.
For e.g. A contract was to perform on 30th April 2018, for sale of 10 tons of wheat for Rs 10,000. But on April 27th the promisor breaches his contract, and on the same day, a compensation suit gets filed against him by the promise. According to the market value, the rate of the market value was Rs 12,000 then the compensation paid would be Rs 2000. But, the compensation may exceed if the suit for the compensation would be filed after 30th April, as it might possible that the market rate of 10 tons of wheat would rise to Rs 14,000.
But waiting for the performance of the contract till the date of performance might cause loss to the sufferer party as it might be possible that during the period of waiting for certainly unavoidable impossibility event may occur which may frustrate the contract under section 56 of the Indian Contract Act.
Case laws –
For revocation of contract-
- Hochster v. De La Tour (1853) 2E and B. 678
Under this case, it was held that a party to an executory contract may make a breach of contract before the actual date of performance, and the plaintiff in such a case is entitled to put an end to the contract and can bring an action even before the actual date of performance has arrived.
- Frost v. Knight (1872) L.R. 7 Ex. 111
In this case, the defendant promised to marry the plaintiff on the father’s death. While the defendant father was still alive he broke off the engagement. Here the plaintiff didn’t wait for the defendant’s fathers death and immediately sued him for the breach, on which she was successful.
For keeping the contract alive-
- State of Kerala v. Cochin Chemical Refineries [A.I.R. 1968 S.C 1361 at p. 1364]
Under this case it was stated that breach of contract by one party does not automatically terminate the obligations under the contract, the injured party either has the option to treat the contract as alive; or regard it as discharged. If he accepts the discharge then the contract is at its end. While if he does not accept then he might insist on the performance of the contract.
Remedies for breach of contract
It is the most common remedy available to the injured party. Section 73 to 75 incorporates those provisions.
- Narayana Kurup v. Sankaranarayana [AIR 2000 Ker. 296]
Under this case, it was stated that when a contract has broken the party who suffers by such breach is entitled to receive compensation for any loss or damages caused to him from the party who has broken the contract.
Section 73 0f the contract act provides compensation for loss and damages caused by breach of contract. Under it, the party who suffered gets compensated by the party responsible. There are 2 to be considered here-
- Damages awarded as compensation for any loss or damage arising naturally in the usual courses of things from the breach of contract.[Karsandas H. Thacker v. Saran Engg. Co. Ltd., AIR 1965 SC 1981 ]
- The damages should be supposed to be in contemplation of both parties at the time they made the contract as the probable result of the breach of it. However, the damages cannot include compensation for any remote and indirect loss or damages sustained by the reason of the breach. [Hadley v. Baxendale, 9 Ex. 742]
For e.g. A sells certain merchandise to B, warranting it to be of a particular quality. And B in reliance upon this warranty sells it to C with a similar warranty. The goods proved not according to the warranty quality, and B becomes liable to pay C a sum of money by way of compensation. While B is entitled to reimbursed this sum by A.
Remoteness of Damage
How much compensation is to be paid for the same is a question. And this involves determining the quantum of compensation. The statement was given by Alderson B, in the case of Hadley v. Baxendale [(1854) 9 Ex. 341 at 354] is considered to be the basis of the law to determine whether the damage is the proximate or the remote consequences of the breach. And carries reasonableness arising out of probable consequences considered naturally by the parties to contract.
Measures of Damages
The object of awarding damages to the aggrieved party is to put him in the same position in which he would have been if the contract would have been performed. Through the following cases, we can determine how one can get compensated.
Actual re-sale by the seller –
In Jamal v. Moola Dawood Sons & Co. [I.L.R. (1916) 43 Cal. 493] the privy council has held that the proper measure of damages is the difference between the contract price and the market price on the date of the breach of the of the contract irrespective of the fact that the seller does not sell the goods on that day, but sells the same on a subsequent date and the actual loss to him is different from the difference in the prices on the date of the breach.
Damages when goods have a fixed market price –
Sometimes the market price for certain goods may be fixed one and not subject to any fluctuation, and there may be no difference between the contract price and the market price.
In case of W.L Thompson Ltd. v. Robinson (Gunmakers) Ltd. [1955 Ch. 177], the plaintiffs were the dealer in Vanguard cars and were instructed by the manufactures to sell the car at the certain fixed price. One car was sold to the defendant, but on the due date, he refused to accept that. Even though there was no difference between the contract and market price the sellers were held entitled to recover compensation equivalent they would have made if the buyer would have purchased it. To this it was held that the rule of compensation on the basis of the difference was only a prima facie rule, the same being applied here. The supply of Vanguard cars being more than the demand, the seller had been able to sell one car less due to the breach by the buyer. Thus, they were recovering the loss of profit on the account.
While in the case of Charter v. Sullivan [ (1957) 2 Q.B. 117.] it has been held that the position would be different if the demand of the cars is more than the supply. Then by the refusal of the buyer, the seller would be able to dispose the same within 10 days of the breach of the contract. Here, the seller could not recover any loss of profit but he could simply claim nominal damages.
Loss of profit on a sub-contract-
When the seller does not supply the goods to the buyer, and he is not able to earn a certain amount of profits which he could have made by supplying the goods further on a sub-contract. Here, the buyer is not entitled to recover the loss of expected profit, but his right is only to recover the difference between the contract and market price only.
For e.g. A contracts to deliver 50 maunds of saltpetre to B on 1st January, at a certain price. B prior to the date of delivery contracts to sale the saltpetre to C at a higher price than the market on 1st January. But, A breaks his promise. In estimating the compensation payable by A to B as per market price on 1st January would be considered and not the profit which B was about to gain from C.
But if the fact of sub-contract has been brought to the knowledge of the other party, then the loss arising out of the non-performance of the sub-contract consequent on the breach by the promisor can be claimed.
Damages in case of delivery by instalments-
Brown v. Muller (1872) L.R. Ex. 319
It was held that when the goods are to be delivered by instalments, the measure of damages is the difference between the contract and market price of a particular instalment, on the final date of the performance of that instalment.
Duty to mitigate the loss-
Murlidhar v. Harishchandra, [A.I.R. 1962 S.C. 366, at p. 369]
Under this case, it was stated that the party suffering from the breach of contract should take reasonable steps to mitigate the extent of damage caused by the breach. If, he fails to take such step then, he won’t be held entitled to claim compensation for such loss which could have been mitigated. While he could also get debarred from claiming any part of the damage which is due to his neglect to take such steps.
Liquidated damages and penalty-
Law v. Redditch Local Board [(1892) 1 C.B. 127, at 132.]
Under this case, Lopes.J. distinguished between penalties and liquidated damages stating that it depends on the intention of the parties to be gathered from the whole of the contract. If the intention is to secure the performance of the contract by the imposition of a fine or penalty, then the sum specified would be a penalty; but if the intention is to assess the damages for breach of the contract, it is liquidated damages.
In the absence of any concrete material to show the extent of damages suffered by the plaintiff, the resort will have to be on it.
The Karnataka High Court in M/s Vikas Electricity Service v. Karnataka Electricity Board [A.I.R. 2008 Kar. 88.] stated that merely because the plaintiff failed to produce evidence sufficient to ascertain the extent of the damage he suffered, he could not be denied damages. Technically the law requires not damage but, an injuria or a wrong upon which the case is based, and even without any evidence, he would be entertained.
Apart from it section 74 of the Indian Contract Act emphasizes that when the parties have mentioned in the agreement the amount of compensation to be paid in the event of a breach, that the injured party is entitled to receive from the party who has broken the contract reasonable compensation not exceeding the amount mentioned in the contract.
For e.g. A contracts with B to pay Rs 1000, if he fails to pay B Rs 500 on a given day. A fails to pay B Rs 500 on that given day, thus B is entitled to recover from A such compensation not exceeding Rs 1000, as the court considers reasonable.
Section 74 0f the Indian Contract Act draws an exception to the measures of damages. Here, it connotes that when any person enters into any bail bond, recognizance; or other instruments of the same nature; or, under the provisions of any law; or under the order of Central government; or any state government, gives any bond for the performance of any public duty or act in which the public are interested. He shall be liable upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
When a person agrees to complete some work for a lump sum, non-completion of the work does not entitle him to any remuneration even for the part of work done. But, the law recognizes an important exception to this rule by way of action in it. And it must be noted that this remedy is only available for the part of the work done by the party other than making a breach of contract. While, if the party making a breach of contract has done a part of the work in connection with it, he cannot claim anything in respect of it.
Comparison between section 73, 74 & 75-
In the case of B.N. Mathur And Anr. v. The Union of India (5th July 1973) the difference has been stated-
As section 73 talks of compensation for any loss or damage caused to a party to the contract by the breach of contract committed by the other party. While under section 75 a person will be entitled to recover compensation for any damage which he has sustained through the non-fulfilment of the contract.
Consequently, both under section 73 & 75 a person will be entitled to recover compensation only if he has sustained loss or damage, and the amount would be payable according to the extent of loss or damage caused.
While section 74 uses the term ‘reasonable compensation’ which is irrespective of the fact whether actual loss or damage is proved to have been caused to the injured or not. However, this section would get applied only when in the contract a sum has been named as the amount to be paid in case of breach of contract; or if the contract contains any other stipulation by way of penalty.
By – Twinkle Rani
(Chotanagpur Law College, Ranchi)
- Law of Contract, RK Bangia
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