This article on breach of contract is written by Noel Satish Konwar, aspiring litigator and a student pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS in Kolkata.
FIRST OF ALL LET US UNDERSTAND WHAT IS A CONTRACT
In general, the term contract means legally binding agreement reached between two partners and it should contain terms over which courts have the authority and obligation to enforce.
According to Indian Contract Act, 1872 Section 2(h), A contract is an agreement enforceable by law.
An agreement becomes a “contract” only when it is intended to meet its legal obligation. Prepared on the basis of equality and mutual benefit be in line with the applicable law.
“EACH CONTRACT IS UNIQUE, TO FEEL THAT WE ARE WITHIN CONTRACT WE MUST BE SURE THAT WE HAVE UNDERSTOOD THE CONTRACT”
BREACH OF CONTRACT
A contract is breached or broken when any of the parties fails or refuses to perform its promise under the contract.Breach of contract is a legal cause of action in which a binding agreement is not honored by one or more parties by non-performance of its promise by him renders impossible.
Section 37 of the Indian Contract Act,1872 provides that the parties to the contract are under obligation to perform or offer to perform, their respective promises under the contract, unless such performance is dispensed with or excused under the provisions of the Indian Contract Act or of any other law.
According to Section 39, where the party has refused to perform or disabled himself from performing, his promise in its entirely, the other party may put an end to the contract, , unless that other party has expressly or impliedly signified its consent for the continuance of contract. If the other party chooses to put an end to the contract, the contract is said to be broken and amounts to breach of contract by the party not performing or refusing to perform its promise under the contract. This is called repudiation. Thus repudiation can occur when either party refuses to perform his part or makes it impossible for him to perform his part of contract in each of the cases in such a manner as to show an intention not to fulfil his part of the contract.
CONSEQUENCES OF BREACH OF CONTRACT
Chapter VI (Section 73 to 75) of the Indian Contract Act,1872 deals with the consequences of breach of the contract.
SECTION 73 1ST PARAGRAPH DEALS WITH COMPENSATION FOR LOSS OR DAMAGE CAUSED BY BREACH OF CONTRACT
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 ,which naturally arose in the natural 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.
No compensation shall be given to any remote and indirect loss or damage sustained by reason of breach.
COMPENSATION IN REGARD TO FAILURE TO DISCHARGE OBLIGATION WHICH RESEMBLES THOSE CREATED BY THE CONTRACT
An obligation resembling those created by contract has been incurred and has not been discharged, any person affected 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.
COMPENSATION FOR LOSS OR DAMAGE WHICH NATURALLY AROSE IN THE USUAL COURSE OF THINGS FROM SUCH BREACH
Compensations to be recovered for loss or damage which the parties knew or which would have naturally arisen in the usual course, to be likely to result from the breach of it.
SECTION 73 2nd PARAGRAPH DEALS WITH REMOTE AND INDIRECT LOSS OR DAMAGE
It states that no compensation is payable for remote and indirect loss or damage arising out on account of breach of contract. The indirect loss cannot be said to arise on usual course of things. The aggrieved party can claim compensation for indirect loss or loss of profit, only where it is expressly made known to the other party or contemplated by contract that breach of non-performance of the contract would result in some indirect loss or loss of profit to the paparty.e term remoteness of damage refers to the legal test used for deciding which type of loss caused by the breach of contract may be compensated by the award of damage.
SECTION 73 3rd PARAGRAPH DEALS WITH BREACH OF RESEMBLING CONTRACT
It confers a statutory right upon a party to get compensation from a party who has incurred a statutory obligation to pay compensation in case default even though there may be no contract to pay compensation .The party in default is under obligation to pay compensation to injured party as if there was contract and has broken such contract.
SECTION 73 4th PARAGRAPH DEALS WITH: MITIGATION OF LOSSES
It explains that the means which existed of remedying the inconvenience caused by the non performance of the contract must be considered while calculating the damage or loss for breach of the contract. [M.Lachia Setty & Sons Ltd v. Coffee Board Bangalore, AIR 1981 SC 162, 168]
SECTION 74 PENALTIES IN REGARD TO BREACH OF CONTRACT
The party to the contract may agree at the time of contracting that , in the occurrence of breach,the party in default have to pay a stipulated sum of money to the other, or may agree that in the event of breach by one party any amount paid by him shall be forfeited. If this sum is genuine pre-estimate of damage likely to flow from the breach is called ‘liquidated damages’ .If it is not genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be called as ‘penalty’.
Section 74 provides for the measure of damages in two classes: (a) where the contract names a sum to be paid in case of breach; and (b) where the contract contains any other stipulation by way of penalty(Fateh Chand v. Balkrishna Das, 1 SCR 515).
ESSENCE OF PENALTY AND LIQUIDATED DAMAGE:
Penalty is a payment of money to non –defaulting party, which put the other party in fear and enforces the other party to perform its promise under the contract .The penalty is deterrent in nature .
A liquidated damage is a genuine and reasonable pre-estimate of damage. Liquidated damages means it shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage.
SECTION 75. COMPENSATION TO THE PARTY RIGHTFULLY RESCIDING THE CONTRACT
A person who rightfully resides the contract is entitled to compensation for any damage which he has sustained through non fulfillment of the contract .A party to a contract is entitled to rescind the contract in circumstances given in Section 39, 53, 55, 64 and 65 of the Contract Act .The claim for compensation under Section 75 is maintainable when the right of repudiation of the contract has been exercised either of the Section 39, 53, 54 and 55 of the Contract Act.( Mirza Javed Murtaza v. UP Financial Corpn), Kanpur, AIR 1983 Alld. 235.)
DAMAGE CAN BE CLAIMED BY :
Only those parties can claim damages for breach of contract who have performed or is willing to perform his part of the obligations arising under the contract. Section 73 and 74 are for the benefit of a party willing to perform the contract and not for defaulting party .Loss which is caused by the party’s failure to fulfill his duty is not recoverable from the other party. A party to a Contract cannot be in better position by reason of his own default, than if he had fulfilled his obligations .A person, who is not a party to the contract, cannot claim damages.
CAN DAMAGE OR LOSS SUFFERED BY THIRD PARTY BE CLAIMED?
A party claiming the damage need not necessarily suffer any loss from breach of contract. When it is contemplated by the contract. When it is contemplated by the contract that breach by any of the parties to the contract is likely to cause loss to an identified or identifiable stranger to the contract, rather than to the contracting party, a party not in default can claim damages for the loss caused to an identified or identifiable stranger to the contract. Thus the party may recover substantial damages even though it does not personally bear the cost of correcting the defects or personally suffers the diminution in the value ;provided this was intended or was within the contemplation of the parties ;and if such intention or contemplation is shown it is immaterial that the true prayer or suffered is stranger to the contract. (Alfred McAlpine Constn Ltd v. Panatown Ltd., (2001) AII ER (D)41 (Apr)).
CAN INTEREST BE CLAIMED AS DAMAGE?
Interest would be refused if the party fails to show that interest is being claimed under a contract or on account of usage or customs. The Supreme Court in Mahavir Prasad Rungta v. Durga Dutta,1961 AIR 990 has ruled that interest can be claimed only if it is payable by custom or there is express or implied provision in the agreement for payment of interest or under provisions of substantive law plaintiff is entitled to recover the interest.
NATURE OF REMEDY OF DAMAGE
The principle behind awarding damage for breach of contract to the party, who has suffered the loss, is to place that party in the same position in which it would have been, had that contract not broken. The damages must commensurate with the loss suffered .Where the contract is broken by one party, contract is discharged, and the obligations under the contract ,comes to end ;a new obligation arises for the payment of damages.
A contract is the fountainhead of a correlative set of rights and obligation of the parties and would be of no value if there is no statutory provision for compensation for damage or loss caused to the aggrieved party. Chapter VI of the Indian Contract Act ,1872 provides for the remedy to the non-defaulting party to contract by way of compensation for damage or loss caused due to breach of contract by the other party. Section 73 provides for compensation for actual damage or loss from the party in breach of the contract Reasonable liquidated damages are payable without proof of loss . Section 74 provides that contracting parties in the event of breach, may agree that the defaulted party shall pay a stipulated amount to the other ,or may agree that in the event of breach by one party any amount paid to him shall be forfeited. If it is not genuine pre-estimate of the loss ,but an amount intended to secure performance of the contract ,it may be called ‘penalty’. However mere stipulation does not give right for compensation by way of penalty. Prove has to be established for loss or damages caused by breach of contract.
Reference . Indian Contract Act,1872