Section 10 of the Indian Contract Act prescribes the essentials for the formation of a valid contract which includes free consent of the parties, competency of the parties, lawful consideration, lawful object and ultimately entering into agreements that are not expressly declared void by the Act.
After the abovementioned ingredients of a valid contract are fulfilled and the object of the contract is served, it is said that the contract is discharged. There are four distinct ways by which the contract may be discharged which are as
- Discharge by Performance
- Discharge by Impossibility
- Discharge by Agreement
- Discharge by Breach
The article in hand seeks to uncover the details for the discharge of a contract by the breach and elucidates the required remedies.
MEANING OF BREACH
Breach of a contract is said to occur when either of the party to the contract renounces his liability or contractual obligations under the terms and conditions of the contract or makes the total or partial performance of the contract impossible due to his own act/ failure. The breach of a contract can be of two types:
- Anticipatory Breach
- Present Breach
Section 39 of the Indian Contract Act deals with the doctrine of anticipatory breach. The anticipatory breach is basically said to occur when the promisor rejects to perform the contract by announcing his intention of not fulfilling the contract prior to the actual date of the performance of the contract or disables himself from the performance of the contract in part or in its entirety.
Anticipatory breach absolves the innocent party from the obligation to further perform the contract and brings an end to the obligations of the original contract.
Anticipatory breach further entitles the aggrieved party to either sue the defaulting party immediately for the breach of the contract or wait till the time when the act was supposed to be done. The above principle was famously laid down in the landmark case of Hochester v De La Tour1.
Further, anticipatory breach of a contingent contract i.e. performance of contracts on happening of any conditional event also gives a scope of action for damages.
If the defaulting party announces his intention of default and the aggrieved party decides to wait until the actual date of performance of contract so as to sue the promisor, then the contract is deemed to be alive, subject to the obligations of the contract, thereby implying that repudiation of the contract by the promisor has not been accepted by the promisee. In order to ascertain what constitutes repudiation, the entire conduct and the words of the party have to be objectively assessed on the anvil of refusal or abandonment to performance of the contract. The breach must strike the root of the contract. Silence of the aggrieved party does not lead to acceptance of repudiation.
Such condition of unaccepted repudiation enables the defaulting party either to complete the contract, thereby binding the promisee to accept the same, or else to take advantage of any supervening situation i.e. discharge by means other than repudiation. And if so happens that due to the supervening situation performance of the contract becomes impossible, then the defaulting party is absolved from his contractual obligations and stipulations.2
The date for assessment of the general damages in cases of anticipatory breach shall be the date on which the repudiation took place. If the aggrieved party does not accept the anticipatory breach of the contract, then the damages will be assessed from the date of the actual performance of the contract. In the meantime, the promise shall take all the reasonable steps to mitigate the losses to the minimum.3
It is to be noted that there lies a remedy of damages for the losses suffered due to non-performance of the contract even if the contract has been acquiesced by the promisee thereon (usually in the cases of anticipatory breach wherein the promisor is later allowed by the promisee to fulfill the contract).
Further, as per the mandate of Section 64 Indian Contract Act, the aggrieved party, on bringing an action for damages, shall be bound to restore the benefits or advantages that he might have received under the terms of the contract.
Present breach is said to occur when the defaulting party breaches the contract on the actual date of the performance of the subject matter of the contract. The aggrieved party, in such cases, shall be entitled to sue the defaulting party for the breach of the contract in a competent court of law and extract the requisite monetary damages.
DAMAGES FOR BREACH
Damages refer to the monetary compensation that is claimed by the injured or aggrieved party for the breach of contract. The burden of proof of the breach of contract lies upon the plaintiff. The action for damages is mainly assessed on the twin criterion of “remoteness of damages” and “measure of damages”.
The fundamental principle behind awarding damages is to place the plaintiff in the same position in which he would have been if the contract had been fulfilled or if the breach had not occurred. The damages are hence compensatory in nature and not penal. Motive and manner of a breach are not taken into account in order to ascertain the compensation.
1. Remoteness of Damages:
It was in the landmark case of Hadley v. Baxendale, that the first acceptable criteria for assessing the quantum of damages were evolved. As per it, only such damages should be considered for the purpose of computing compensation as may be fairly or reasonably be considered as arising from the natural or the usual course of actions or such as may be reasonably in contemplation of both parties while entering into a contract. The given case laid down two distinct rules for the purpose of computing damages.
- General Damages: These damages are awarded in such cases of a breach that may arise naturally due to the usual course of things.
- Special Damages: These arise on account of unusual or special circumstances on the part of the plaintiff and in order to recover these damages, the special circumstances should be brought to the notice of the defendant. The knowledge of special circumstances should be within the contemplation of both parties.
Provisions in Indian Contract Act:
Section 73 of the Indian Contract Act deals with monetary compensation or damages to be awarded in cases of breach of contract. The underlying principle behind the concept of damages is that the party breaching the contract must compensate the aggrieved party in respect of the direct, reasonable consequences, flowing from the breach of contract.
Section 73 of the Act underscores the twin principle laid down in the case of Hadley v Baxendale, i.e. losses that arise in the natural course of things and the losses that are within the contemplation of the parties thereto. Any such losses sustained due to remote or indirect causes shall not fall within the scope of the claim for compensation under Section 73.
It is to be noted that Section 73 casts a duty to mitigate the losses which might accrue due to the breach of the contract. The aggrieved party is expected to undertake reasonable efforts to avoid the losses and keep them to the minimum. Any unreasonable conduct on the part of the plaintiff that leads to an aggravation of the losses shall disentitle him from such aggravated losses.4
In the case of Madras Railway Co. v Govind Rao5, the court held that extent of liability in ordinary cases is what may have been foreseen by the spectrum of a reasonable man.
2. The measure of Damages:
A. Pecuniary Losses
After the determination of the general or special nature of damages, comes the next step of monetary evaluation of damages. As far as the mantra for calculating or measuring damages is concerned, the difference between the contract price and the market price forms the base for the award of damages (usually in sales transactions). For the loss of profits that may accrue upon resale, the court held that such loss was a special loss that was not recoverable unless it was communicated to the other party.6
The court may award nominal damages so as to recognize the rights of the plaintiff even if he suffered no losses. Besides this, the pre-contractual expenditure may also be recovered as damages if it was within the contemplation of the parties.
B. Non Pecuniary Losses
Initially the Victorian and the Indian courts were hesitant in awarding damages for non-pecuniary losses, but however slowly and gradually, it became a cult practice for the courts to award such damages. In the case of Farley v Skinner7, the House of Lords pointed out there was no such absolute reason as to why the non-pecuniary damages shall not be awarded. The Indian courts too made a popular practice to award damages for non-pecuniary losses such as distress and mental trauma.
Section 74 stipulates that if the number of liquidated damages to be paid in case of breach is stated in the contract, then the aggrieved party is entitled to such compensation even if the actual loss or damage is proved or not. The party claiming compensation shall not be entitled to receive any greater amount than such stated in the contract. The compensation so awarded by the court shall be a reasonable one. In Maula Bux v Union of India8, SC affirmed the words of Section 74 by stating that the section dispenses the proof of actual loss or damage. However, the presence of loss or legal injury remains necessary so as to claim the monetary damages.
Section 75 further reinstates the mandate of Sections 39, 73, and 74 by elucidating that the aggrieved party who rightfully rescinds the contract is entitled to compensation that is sustained due to the non-fulfillment of the contract.
The Indian Contract Act systematically lays down the detailed provisions for addressing the ensuing nuances of monetary compensation out of the contractual relationship. Section 39, 73, 74, and 75 provide the in-hand remedy to address the aspect of anticipatory breach, remoteness of damage, and measure of compensation.
- Court of Queen’s Bench, (1853) 2 Ellis and Blackburn 678
- Avery v Bowden (1855)
- Heyman v Darwins Ltd 1942 AC 356, 361
- Derbishire v Warran 1963 1 WLR 1067
- ILR 1898 21 Mad 172
- Karandas H Thacker v Saran Engg Co Ltd AIR 1965 SC 1981
- 2001 4 UKHL 49 HL
- 1969 2 SCC 554
This article is written by Riya Ganguly, 2 nd year BBA LLB student at Bharati Vidyapeeth New Law College, Pune.