This article has been authored by Ritesha Das, pursuing BBA LLB from Symbiosis Law School Hyderabad. It outlines the essential remedies for the breach of contract under the Indian Contract Act, 1872.
It’s rightly said that there is a remedy of everything except death. The remedies for breach of contract are elucidated under section 73-75 of the Indian Contract Act of 1872. A breach of contract simply means that the defaulting party either fully suspends its obligations and liabilities under the contract or performs partly or simply refuses to meet such obligations in full or in part or renders the failure of performing its obligations through its own actions. Breach of the contract amounts to infringement of the rights and interests of the aggrieved party and the call for alternatives or remedies for the restoration of these infringed rights and interests is one of the essential elements of the Indian Contract Act. The Indian Contract Act lay down 5 remedies for the breach of contract: Suit for damages, Restitution, Specific Performance, Quantum merit and injunction. Under the category of remedies, damages are the primary remedy, while other remedies are discretionary remedies at Equity and are only granted where damages are not an adequate remedy.
SUIT FOR DAMAGES
The provisions relating to damages are defined under Section 73 of the Indian Contract Act of 1872 [i]according to which the defaulting party breaching the contract is liable to pay for the injuries or losses incurred by such breach of the contract to the aggrieved party.
The essential elements of awarding damage under this section are: The damage should be a natural ramification of such breach of contract and such damage or injury must be reasonably anticipated by the parties to arise from such breach of contract. The burden of proof rests with the aggrieved party throughout the provision.
This section outlines that damages under this section are compensatory in nature and the parties suffering remote or indirect damages are not entitled for compensation. In addition, this section also specifies that, in calculating the injury or loss arising from the breach of contract, the actual costs of mitigating the inconvenience must be taken into consideration.
The principle concerning the remoteness of the damage were identified in Hadley vs. Bexendale
- According to the first principle, money has the power to compensate the damages suffered hence the compensation must put the aggrieved party in the same position as would have been if the contract had been performed.
- The second principle imposes a duty on the defaulting party to take appropriate action to alleviate the repercussions arising from the breach of contract.
The exceptional circumstances that are completely unknown to the party breaching the contract, the defaulting party can only be supposed to have had in his contemplation the amount of injury which would arise generally and in a great multitude of cases not affected by any special circumstances from such breach of contract.[ii]
In the case of Union of India vs. Raman Iron Foundry[iii], it was held that the damages are compensation which the aggrieved party may be entitled to obtain at the court of law, but it does not seek them by virtue of any contractual responsibility or liability on the part of the party, in breach of the contract, who has no monetary duty until the court has decided the infringement and the value of the settlement. The court will not ascertain any pre-existing liability. Furthermore, because the breach of the contract does not give rise to any existing duty or obligation on the defaulting party, the right to seek damages is not an actionable claim and cannot be granted.
Types of damages
- Ordinary damages
The damages emerging from the ordinary, natural and foreseeable sequences of actions resulting in the breach of contract are known as ordinary damages. For example, W agreed to sell bags of rice at Rs 40 per bag to X, on the basis of payment on delivery but by the time of delivery, the market suddenly price spiked to Rs 50 per bag and as a result, W refused to sell it less than Rs 50 per bag. In this case, X can then claim damages of Rs 10 per bag.
- Liquidation damages
Liquidation damages are penalties which are specified explicitly in the contract agreed upon both the parties. They are generally specified in those contracts where the anticipation and estimates of the damages are difficult to foresee. However, the courts have the discretion to minimize the amount of penalty if an excessive amount is stipulated.
For instance, W contracts X to build a new house by a certain date mentioning a clause where he is entitled to claim Rs 2000 per day if the house is not built by the stipulated date. In such a case, W will be entitled to claim Rs 2000 per day if X fails to build the house as per the due date of the contract.
Section-74 of the Act concerns the scenario where the contracting parties agree to the imposition of penalty (liquidation damage) for the breach of the contract. The main principle underpinning this section is the assurance of certainty in commercial contracts. Section-74 stipulates that, in breach of the contract, the amount of damage granted to the aggrieved party can’t exceed the amount stipulated as the penalty in the contract and such damage shall be awarded regardless of the proof of damage or loss by the aggrieved party. Drawing distinction between the estimated damages and penalty is a significant element while interpreting both section-73 and -74 of the Indian Contract Act, 1872. The former doesn’t have any pre stipulated amount as ‘penalty’ to be awarded to the aggrieved party in case of breach of contract. In the latter, the courts have the discretion to minimize the amount of penalty if an excessive amount is stipulated. Nevertheless, it is important to note that no lawsuits for liquidated losses will be made until the contract has been proven to have suffered a loss due to the defaulting party.
- Punitive damages
Punitive damages generally aim to punish and deter the defaulting parties from committing wrongs. They are rarely awarded for contract breaches however; they may be awarded in some tort or fraud cases that overlap contract cases.
- Compensatory damages
Compensatory damages are the monetary damages that are awarded with the purpose of reimbursing the aggrieved party for the injuries incurred as a result of the breach of contract. The primary aim of awarding compensatory damage is to put the aggrieved party in the same position as would have been if the contract had been performed.
The spectrum of compensatory damages is further divided into two categories:
- Expectation damages: These are intended to cover whatever the aggrieved party would expect from the contract calculated on the basis of terms of contract or market value.
- Consequential damages. They are intended to reimburse the aggrieved party for any indirect damages other than those covered by the contract. For example, a loss of company profits resulting from an undelivered piece of machinery. In order to receive consequential damages, the injury must arise either to a direct consequence of a breach of contract or to have been reasonably anticipated by both parties at the time of the contract.
In the case of Murlidhar v. Harishchandra[iv], the Apex Court 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.
- Nominal damages
Nominal damages are the damages that are awarded if a legal right has been infringed even if there is no actual damage. If the defaulting is held liable for breach of contract, the plaintiff is entitled to claim nominal damages even though no real injury is proved. Nominal damages were described as an amount of money that can be spoken of but that does not exist in quantity terms as the degree of injury is very minimal.
In the following circumstances, nominal damages are awarded to the plaintiff:
- The aggrieved party did not wish to carry out the contract himself due to a minor technical fault committed by the defaulting party.
- The aggrieved party fails to establish the damage or loss incurred as a result of the breach of contract.
- The real injury sustained by the aggrieved party was not because of the wrongful act of the defendant but because of his own actions or any outside event.
SPECIFIC PERFORMANCE OF THE CONTRACT
Specific performance is an equitable remedy, provided by the court to impose the duties and obligations on the defaulting party to perform its promises under the contract. The remedy of specific performance is totally in contrary to the remedy of damages as it includes pecuniary redress for the breach of the contract, whereas, in specific performance, no such monetary compensation is awarded. The aggrieved party while seeking this remedy must convince the court that awarding usual remedy of damages is insufficient to compensate the degree of injury especially in the cases of contracts for the transfer of immovable property; awarding damages would not be adequate. Even after the continuous pleas before the court, specific performance is not always provided as it is a discretionary remedy. The relief has to be claimed specifically. If the plaintiff argues specific performance of any particular clause in the contract or any agreement, the lawsuit could be asserted for specific performance of only that clause or agreement.
The period of limitation for a suit of specific performance is three years from the date fixed for performance, or in absence of any date, the period when the aggrieved party noticed that performance has been refused.
Contracts exempted from specific enforcement
According to Section 14 of the Specific Relief Act 1963[v], there are certain cases where contracts are exempted from specific enforcement:
- Pecuniary or monetary compensation is an adequate relief: Under this exception, the court does not grant specific performance of a contract as it is presumed that the aggrieved party relies upon the standard recourse for infringement of contract i.e. remedy of compensation. For example contract of mortgage of immovable property, contract of sale of goods, contract of repair of premises etc. In the case of Adcon Electronics Pvt. Ltd vs Daulat And Anr,[vi] the court held that in case of breach of contract to transfer immovable property, the court would presume, unless the contrary is proved, that such breach cannot be adequately relieved by monetary compensation, whereas the principle is quite opposite for movable property (except with two exceptions carved out in Explanation-(ii) of Section 10) that the court is to presume, unless the contrary is proved, that the breach of contract to transfer movable property can be relieved by monetary compensation.
Unless the contradiction is proven, the court shall assume:
- The infringement or breach of a contract for the transfer of immovable property cannot be sufficiently relieved by awarding pecuniary compensation.
- The breach of a contract for the transfer of movable property may be presumed to be relieved, except in the following cases:
- If the property is not an ordinary item of trade or is of exceptional interest or consists of goods which are not easily accessible in the market;
- If the property is owned by the defendant as the agent or trustee of the aggrieved party.
- Contracts stemming from the element of personal skills: This exception encompasses the contracts that stem on the personal competence or skills of any party. The court cannot impose specific performance of the contract if the defaulting party or the promisor or any third party possessing that skill suffers ailment or death or any other serious issues. In the case of Robinson Davison, it was established by the court that the arrangement to play in concert relies upon the personal skill of defendant’s wife, and the contract cannot be specifically imposed owing to her sickness.
- Determinable Contracts: Determinable contract means a contract that can be determined or revoked or terminated by a party to the contract. For example: In the case of a partnership business, each partner may withdraw by giving written notice to other partners and may dissolve the firm.
- Contracts involving the performance of continuous duty which cannot be supervised by the court: Earlier under the Specific Relief Act, 1877, a continuous duty which cannot be supervised by the court shall be considered for a period of 3 years which has been omitted under the Specific Relief Act, 1963. The Specific Relief Act, 1963 is not refrained by any time limit for the execution of a continuous duty. Contract of execution of a sale deed is an example of the contract involving the performance of continuous duty.
Restitution is a category of remedy available in both several civil and criminal cases in which the evaluation of remedy is done on the basis of the defendant’s benefits or profits, rather than losses suffered by the aggrieved party. Restitution drives the defendant to surrender the benefits that they have unlawfully gained from the aggrieved party. The remedy of restitution is mostly used under the contract law. Restitution in contract law is structured to revert to the same position as the injured person before sustaining damages prior to the existence of the contract. The aggrieved party must make this claim in the initial lawsuit in order to seek restitution.
A party breaching a valid contract may be required to pay restitution. The amount should be determined on the basis of the value have been earned from the violation, which is generally the sum specified in the contract. In addition, restitution may not be granted if the amount cannot be computed with certainty. Parties seeking to restitution may not claim the loss of profits or revenues incurred by the breach. In the event of a breach of contract, restitution damages are limited to the amount specified in the contract. For example, W offers a contract to sell his bike only to X for Rs 40000. If W sells the bike to another entity, he will be obliged to pay the restitution for a sum of Rs 40000 to X as this was the price specified in the contract. Thus, even if the bike was sold for more than Rs 40000, X can only collect on the contract price of Rs 40000.
The remedy of restitution under Contract law is mainly granted for two primary reasons:
- Mould the victim as a whole and reinstate them to their financial status before the event of a breach.
- To prevent the unjust enrichment of the defendant.
The distinction between restitution and compensation is drawn on the manner of computation of the monetary reward. In the former, the amount of reward is computed on the basis of the unjust enrichment of the defendant, whereas in the latter, the amount is evaluated on the basis of the monetary loss suffered by the plaintiff.
Injunction can be defined as an equitable remedy under which the court either orders or restricts the parties to perform certain actions. There are mainly three kinds of injunctions granted as a remedy for breach of contract: Interlocutory injunction, Mandatory injunction and Prohibitory injunction. The aim of the interlocutory injunction is to preserve the status quo of something in an ongoing suit. In simple words, the interlocutory injunction means stopping the occurrence of any action. Interlocutory injunction is applied in before the beginning of something, or stops something from being continued. For example, an interlocutory injunction can be applied in the case where two people are fighting over the ownership of a land.
Mandatory injunction refers to the enforcement of some action by the court. In other words, if the defaulting party back off from fulfilling his promises set out in the contract, the aggrieved party can claim the remedy of the mandatory injunction on the defaulting party before the court to perform the promised action. For example, if the contractor fails to end the construction of a new property by the due date, the court may impose a mandatory injunction for finishing the work.
The term prohibitory injunction means to prohibit conducting some particular act. If two parties had been in a contractual relationship and one of them had decided to sign the same contract with any third party, the court may impose a prohibitory injunction to refrain the defaulting party signing the same contract with the third party.
Quantum meruit is a legal recourse based on fair compensation. It is a potential alternative redress for the partial execution of the contract. A claim can at reasonably be defined as residual equity in quantum meruit. Quantum meruit is the name of a legal action brought against the accomplishment of work and performance of labour without an agreement on price. The concept of quantum merit is outlined as the legal formula of appropriate compensation and restitution. It must be noted that this remedy is only available for the part of the accomplished work by any third party other than the defaulting party making a breach of contract. While, if the defaulting party breaching the contract has done the part of the work, the aggrieved party cannot claim anything in respect of it.
In the case of Parshad and Sons Ltd. v. Union of India, [vii] Supreme Court held that Compensation under quantum meruit shall be granted for work performed or services rendered, if the price of such work is fixed by contract. In the case of work performed or services rendered in accordance with the provisions to the terms of the contract, compensation for quantum meruit may not be granted where the contract provides for consideration payable in that behalf.
A contract is the source of a specific compendium of rights and duties of the parties that would be of no benefit if there is no contractual provision for redress for damages or injuries suffered by the aggrieved party. Chapter VI of the Indian Contract Act, 1872 allows for the recourse to be rendered to the aggrieved party by means of restitution for damages or injuries suffered by the breach of the contract by the other party. It also allows for compensation for actual damages or injuries suffered by the party in infringement of the contract. Reasonable liquidated damages shall be compensated without evidence of loss. It also provides that in the event of a breach, the contracting parties must agree that the defaulting party shall pay the agreed amount to the other party or may agree that, in the event of a breach by one party, any sum paid to that party shall be relinquished. If it is not a valid pre-estimation of the loss, but a sum expected to ensure the execution of the contract can be considered ‘penalty.’ However, the simple stipulation does not grant the right to compensate through penalty, evidence must be provided for injuries or damages incurred by a breach of contract. Apart from damages, there are several other equitable remedies available in case of breach of a contract but these involve overcoming an abundance of challenges and rebuttals to prove a case of breach of contract.
- [i] S. 73, Indian Contract Act of 1872
- [ii] (1854) 9 Exch 341
- [iii] 1974 (2) SC 231
- [iv] A.I.R. 1962 S.C. 366
- [v] S.14, Specific Relief Act 1963
- [vi] (2001) 7 SCC 698
- [vii] 1960 AIR (SC) 588