This article is written by Shristi Roongta, a student from Amity Law School, Kolkata. This article discusses the case laws for breach of contract, along with the meaning of breach of contract, its types, and the compensation to be paid for the same.
It has been published by Rachit Garg.
Table of Contents
A contract is an agreement mutually entered into by two parties. A contract is an important legal document, especially in cases of trade and business, because such trade and business mainly depend on the contract. If either of the parties fails to fulfil the obligations of the contract, then it is a breach of contract. In this article, the main focus shall be on cases of breach of contract.
What is a breach of contract
A contract is said to be breached when one of the parties fails, denies, or refuses to perform his part as per the contract. Basically, when one of the parties to the contract fails to do the work for which the contract was entered into, such failure can be called a breach of contract. In these types of cases, the parties who breached the contract (“breaching party”) either pay compensation to the party who suffered a loss or fulfil the breached obligation as per the requirements of the party who suffered a loss, as such obligations are pre-listed while signing a contract. Section 73 of the Indian Contract Act, 1872 (“the Act”) deals with compensation for loss and damage caused by a breach of contract.
Let’s understand this with a simple example.
Example- ‘A’ and ‘B’ entered into a contract for the sale of pens. It was decided in the contract that ‘A’ will deliver 1000 pens to ‘B’ on March 31, 2021, for a sum of Rs. 10,000. Now, in this case, if A fails to sell either the pens or fails to sell them on March 31st, then it will be a breach of contract. On the other hand, if ‘B,’ after receiving his order, fails to pay the amount of Rs. 10,000, then there will also be a breach of contract.
In such cases, a suitable remedy is provided by the courts as per the requirements of the party or as the court thinks fit.
Legal provisions dealing with breach of contract
The Indian Contract Act of 1872 deals with the provisions of breach of contract. There are no specific provisions that clearly mention or define a breach. Although the following sections state about the breach of contract.
- Section 37 of the Act states that it is the obligation of the parties to the contract to either perform or must offer to perform their part of the obligation as per the contract they entered into. Only in cases where the performance is omitted or excused under the Act are they not obliged to perform the contract. It is further stated that the promises made by the parties to the contract bind their representatives in the event of their deaths.
- Section 39 of the Act describes the effect of the refusal of a party to perform their part of an obligation/promise completely. The Section states that when a party to the contract refuses to perform their part of the contract completely, the other party may end the contract unless the party refusing expresses their consent to the continuance of the contract.
- Section 73 to Section 75 of the Act deal with the consequences of breach of contract.
- Section 73 describes compensation for loss or damage caused by a breach of contract. According to this Section, in a case where a contract is broken or breached by a party (“breaching party”), the party who suffered loss or damage due to the breach is entitled to receive compensation for loss or damage from the breaching party.
The compensation shall be given in two circumstances:
- where the loss or damage from such a breach naturally arises in the usual course of things; or
- the loss or damage that the parties knew at the time they entered into the contract that such loss or damage was likely to cause from the breach of the contract.
Section 73 further states the compensation for failure to discharge obligations resembling those created by contract. It is stated that in cases where an obligation resembling those created by contract has not been discharged, the person who is injured because of this shall be entitled to receive damages from the party who broke such a contract.
Compensation shall not be given where there is a remote or indirect loss or damages suffered by the party because of a breach of contract.
- Section 74 of the Act describes the compensation for breach of contract where a penalty is stipulated for. According to this Section, when a contract is breached, the party who complains of such a breach is entitled to receive an amount mentioned in the contract or any other stipulation as a penalty. This can happen even if the actual damage or loss is not proven to have been caused. Therefore, under this Section, a party who complains of the breach is entitled to receive some compensation in any form, as mentioned earlier, from the breaching party.
However, if a person enters into a bail-bond or any such similar instrument under the provisions of law or under the orders of the government and gives the bond for the performance of a public duty or something that is in the interest of the public, then in these cases the person shall be liable for breach of contract and they have to pay the sum mentioned in the bond.
- Section 75 of the Act states that the party who rightfully rescinded the contract is entitled to compensation. According to this Section, a person who has rescinded or revoked a contract is rightfully entitled to receive compensation from the breaching party for the damage or loss that they have suffered due to the non-fulfilment of the contract.
Types of breach of contract
There are mainly four types of breach of contract:
When a party to the contract gets less advantage or a different result than what was stipulated in the contract, that is a material breach. Basically, a material breach of contract happens when the obligation mentioned in the contract is not carried out. This is a serious breach of contract.
In the case of National Power Plc v. United Gas Company Ltd (1998), the term “material breach” was analysed by the judge, and he referred to it as “a serious violation of any of the guilty party’s responsibilities”. The judge further held that if the remedy for material breach of contract was not initiated within seven days, then the contract would be terminated.
A minor breach or partial breach of contract happens when the party receives the obligations as stipulated in the contract. However, the breaching party did not complete or failed to fulfil some parts of the contract. A minor breach of contract is also known as an ‘immaterial breach.’ This generally happens when a major portion of the contract is fulfilled and only a minor portion has not been fulfilled by the breaching party.
In the case of Rice (t/a the Garden Guardian) v. Great Yarmouth Borough Council (2003), the UK Court of Appeal held that if there is a clause in a contract stating that the contract should not commit a breach of any of its obligations or else the contract would be terminated under the contract, the clause must not be taken exactly because it would be contrary to business sense to allow any breach irrespective of the fact that such a breach is a minor one.
An anticipatory breach is basically an anticipated breach of contract, meaning an expected breach. In this type of breach, one party anticipates that the other party will not fulfil their part of the obligation. In such cases, an actual breach has not happened yet. In anticipatory breach cases, the party’s intention to break or breach the contract is indicated. The contract can be terminated if such a breach happens. Under Section 39 of the Act, the party that suffered the loss can claim damages.
One of the most important cases of anticipatory breach is Hochster v. De La Tour (1853). It was held that “renunciation of a contract of future conduct by one party immediately dissolves the obligation of the other party to perform the contract. Thus, a breach of contract by renouncing the duty to perform the future obligation immediately renders the party liable to a suit of action for damages by the injured party.”
An actual breach of contract is a breach that has actually happened. In this case, the breaching party has either left the obligations unfulfilled, refused to fulfil them, or has not completed them on time. The party who suffered the loss shall be eligible to claim damages.
In the case of Bishamber Nath Agarwal v. Kishan Chand (1989), it was held by the Allahabad High Court that when a contract contains specific guidelines, actions must be taken accordingly and the obligations must be fulfilled accordingly. The party cannot do it according to their wishes or schedule.
Compensation for a breach of contract
Here, compensation means remedies available in case of a breach of contract. As the Latin maxim “Ubi jus ibi remedium” states, “where there is a wrong, there is a remedy.” Hence, when a contract is breached, it is considered wrong, and the following are the remedies:
- Damages: Damages mean compensation in monetary terms. Damages are paid to the party that has suffered a loss from the breaching party. The provisions for the same are laid down in Section 73 and Section 74 of the Indian Contract Act, 1872.
- Injunction: When someone is restricted from doing something. In cases of breach of contract, the party who breached the contract restrains the party who suffered the loss in the form of a court order.
- Specific performance: In specific performance, the courts direct a specific act that needs to be done in order to compensate for the loss. This condition arises when the compensation paid in monetary terms is not adequate and the dispute is not resolved. This remedy is provided under the Specific Relief Act, 1963.
- Quantum meruit: In quantum meruit cases, the party who is suffering the loss has done a part of the contract and wants to recover the value of the work done.
Remedies for breach of contract
The consequences of a breach of contract can be endless, and the defendant cannot be held liable for all the endless consequences arising out of the breach of contract. Therefore, there need to be certain limits drawn to limit the liabilities so that beyond such a limit, no liability arises. In this context, the question of the remoteness of damages and the measure of damages becomes crucial to be determined.
Damages are paid through compensation, not punishment. The object of granting damages is to reinstate the aggrieved party in the position in which he would have been had the contract been performed.
Section 73 lays down the law relating to compensation for loss caused by a breach of contract that is not pre-fixed by the parties.
This Section is based on the rule laid down in Hadley v. Baxendale. In this case, the plaintiff carried on a mill business. The mill was stopped due to a broken crankshaft. Defendants were the carriers who were engaged in the transportation of the part from one place to another. Defendants delayed the delivery of the shaft, and the plaintiff did not receive the shaft on time.
It was held by the court that when two parties enter into a contract and one of them breaks the contract, the loss that the other party has incurred should arise in the usual course of things. It was further held by the court that where special damages are required, a special loss must be shown to the other party.
This decision is based on the following rules for the calculation of damages:
- General damages: These damages arise naturally in the course of things from the breach itself. The defendant is liable for all consequences, which parties are generally aware of.
- Special damages: These damages arise on account of special or unusual circumstances. They are not natural consequences of breach.
In a claim for general damages, the plaintiff has to prove that he suffered some loss, but if he has to claim special damages, he has to prove that he has suffered a special loss.
In Madras Railway Company v. Govind Rao, the plaintiff delivered a sewing machine cloth to the railway company. They were to be sent to a place where the plaintiff is expected to carry on his business with special profits. However, due to the fault of the company, the goods were delayed, and they reached their destination when the festival was over. The plaintiff claimed a loss of profits.
The court held that damages for loss of profits were too remote to be compensated. It is because the special purpose was not known to the company.
Duty to mitigate loss
The explanation of Section 73 lays out that in estimating the loss or damages arising from breach of contract, the means that existed for remedying the inconvenience must be taken into account.
In other words, in the event of a breach, the aggrieved party should adopt all means to reduce the extent of the loss.
If the parties to the contract at the time of making the contract agree to the compensation payable in the event of such a breach, then it is either liquidated damages or a penalty.
The question to be asked is if the amount of damages is fixed, is it recoverable as a whole or to what extent?
If the sum pre-fixed is a genuine pre-estimate of prospective damages, then it is known as liquidated damages. If the sum is highly disproportionate, then it is called a penalty.
In Dunlop Pneumatic Tyre Co. v. New Garage and Motor Company Ltd., the court laid down that it is the duty of the court to find out whether the payment stipulated is a penalty or liquidated damages; the expression of the party is not conclusive. If the sum named is in the nature of liquidated damages, then the whole sum is recoverable, but if it is in the nature of a penalty, the court will grant reasonable compensation calculated on ordinary principles.
Indian law relating to liquidated damages and penalties is given under Section 74 of the Act. Following are the essential elements of Section 74:
- There must be a breach of contract.
- The sum must be mentioned in the contract. It may be either penalty or liquidated damages.
- Proof of actual loss is not necessary.
- The party complaining of the breach is entitled to receive reasonable compensation from the other party.
- The compensation must not exceed the amount named or the penalty.
Indian law has dispensed with the necessity of determining whether the sum named is a penalty or liquidated damages. This distinction has been abolished in India.
Case laws on breach of contract
M/S Murlidhar Chiranjilal vs. M/S Harishchandra Dwarkadas & Anr (1961)
This is one of the oldest cases in India dealing with a breach of contract. This case was brought before the Supreme Court as an appeal by special leave from the judgement and decree order of the High Court of Judicature, Madhya Bharat, Indore.
Appellant- M/s Murlidhar Chiranjilal
Respondent- M/s Harishchandra Dwarkadas
Facts of the case
- The appellant and the respondent had entered into a contract for the sale of canvas at Re 1 per yard.
- The delivery of the canvas was to be made by the railway receipt from Kanpur to Calcutta, and the charges for the same, along with labour charges, were to be borne by the respondent.
- The railway receipt was agreed to be delivered on 5th August, 1947. However, the appellant failed to deliver the receipt.
- On 8th August, 1947 the appellant intimated to the respondent that since the booking from Kanpur to Calcutta was closed, the contract could not be performed, and it had become impossible for the appellant to perform the said contract.
- The appellant then closed the contract and returned the advance taken from the respondent.
- However, the respondent did not accept the impossibility of the performance of the contract by the appellant. The respondent informed the appellant that they had committed a breach of contract and were liable to pay damages.
- The trial court in this matter held that the contract had become impossible to perform, and the respondent was held responsible where the appellant had failed to perform the contract. The trial court also held that since the respondent could not prove the rate that was prevailing on the date of the breach of contract, as claimed by the respondent. Hence, the respondent was not entitled to damages.
- The respondent appealed in the High Court, and the Court held that the contract had not become impossible to perform.
- The High Court further held that the respondent was entitled to damages as per the rate prevailing in Calcutta on 5th August 1947 i.e., the date of the breach of contract.
- Thereafter, an application for special leave was granted by the Supreme Court.
The issue related to the breach of contract that arose before the Hon’ble Supreme Court was whether the respondent was entitled to the damages at the rate at which they claimed them.
Judgement of the Court
The Supreme Court held that there was a breach of contract as the contract was required to be performed on August 5, 1947, by delivery of a railway receipt. However, the delivery was not done on the said date. The Court further addressed the question of whether the respondent was entitled to damages or not. The Court observed that the case involved the purchase of goods for resale, and the appellant and respondent were not aware that the contract would result in a breach. Therefore, the respondent had to prove the rate prevailing in Kanpur to calculate the amount of damage that would arise naturally in the usual course of things from such a breach. However, the respondent failed to prove the rate, therefore, they were not entitled to damages.
The Supreme Court set aside the High Court’s decree and restored the trial court’s order.
Karsandas H. Thacker vs. The Saran Engineering Co. Ltd. (1965)
In this case, the Supreme Court of India opined that when there is any remote and indirect loss or damage sustained because of the breach of contract, compensation in such a scenario will not be provided under Section 73 of the Act.
Appellant – Karsandas H. Thacker
Respondent – Saran Engineering Co. Ltd.
Facts of the case
- The appellant had sued the respondent for breach of contract and recovery of damages amounting to Rs. 20,700.
- In July 1952, he and the respondent entered into a contract for the supply of 200 tonnes of scrap iron.
- The respondent failed to comply with the contract and did not deliver the scrap iron, and the respondent expressed their inability to fulfil the contract in a letter dated 30th January, 1953.
- Meanwhile, the appellant had entered into a contract with another company in Calcutta for the supply of 200 tonnes of scrap iron.
- Due to the breach of contract by the respondent, the appellant could not fulfil the contract made between him and the company for the supply of scrap iron.
- Because of this, the company had to purchase the necessary scrap iron from the open market.
- The company had acquired the difference amount of scrap iron from the appellant. The difference amount is the amount that the company had paid for the purchase of scrap iron and the amount they had previously paid to the appellant.
- On the other hand, the respondents stated that there was no contract between them and the appellant and that the appellant did not suffer any damages.
- They also stated that the controlled price of scrap iron was the same in July 1952 and January 1953, the days when they entered into the contract and the days when the respondent intimated the desirability of discontinuation, respectively.
- The respondent also contended that they were not liable to pay the amount that the appellant paid to the company in Calcutta because the appellant had not informed the respondent about their intention of purchasing the scrap iron for the company or for the purpose of export.
- The trial court was in favour of the plaintiff, it was held by the trial court that the appellant was entitled to damages because the respondent breached the contract.
- However, the High Court reversed the decree of the trial court.
In this case, the main issue that arose was whether there was a breach of contract or not.
Judgement of the Court
The Supreme Court held that the respondents did not know that the appellant was purchasing the scrap iron for export, as concluded by the High Court. Therefore, as provided under Section 73 of the Act, the appellant was entitled to receive compensation for the breach of contract by the respondent, as the Section states that compensation is to be paid for the breach of contract when a loss is caused to the appellant in the usual course of business. However, under the Section, in the event of any remote or indirect loss or damage suffered by the appellant, compensation shall not be given.
In the present case, the loss suffered by the appellant from the breach of contract by the respondent would be nil, and hence, no loss was suffered by the appellant on account of the breach of contract.
Fateh Chand vs. Balkishan Das (1963)
This is another case of breach of contract, as held by the Supreme Court. The following are the details:
Petitioner – Fateh Chand
Respondent- Balkishan Das
Facts of the case
- The petitioner entered into a contract with the respondent on 21st March 1949, to sell leasehold rights in a piece of land and in the building constructed thereon to the respondent.
- Under the contract, the petitioner received a sum of Rs. 25,000, and he delivered the possession of the building and the land to the respondent. However, the sale was completed after the expiration of the time period mentioned in the contract, and for this reason, both parties blamed each other.
- The petitioner initiated a suit in the court of a subordinate judge and claimed to forfeit the amount of Rs. 25,000 received by him. He also prayed for a decree to have possession of the building and land along with compensation for the use and occupation of the building from the date of delivery of the building and the land.
- On the other hand, the respondent contended that the petitioner has breached the contract, therefore, he cannot forfeit the amount of Rs. 25,000 received by him and that the petitioner cannot claim any compensation.
- It was held by the trial judge that the petitioner had failed to put the respondent in possession of the property, and therefore he must deposit the amount of Rs. 25,000.
- However, the Punjab High Court (Circuit Bench) in Delhi modified the decree passed by the trial court and held that the petitioner was entitled to retain Rs. 25,000 paid by the respondent under the sale agreement and also directed that the respondent pay compensation for using the property to the petitioner.
- An appeal was filed against the order passed by the Punjab High Court (Circuit Bench) in Delhi before the Supreme Court.
There were mainly two issues involved with respect to the breach of contract:
- Which party committed the breach of contract?
- Whether a clause of liquidated damages can be interpreted as a penalty clause
Judgement of the Court
The Supreme Court was in favour of the High Court, which found the respondent had committed a breach of contract and referred to Section 74 of the Act. The Court interpreted Section 74 of the Act, which states that “the contract contains any other stipulation by way of penalty”. The Court viewed that this clause of the Section was applicable to every contract that contains a penalty and was also applicable in cases of payment on breach of contract for money or delivery of property in the future or in cases of forfeiture of rights to money for other property that has already been delivered. The Court further viewed that under this Section, there is an imposition on the courts not to enforce the penalty clause but only to award reasonable compensation.
Maula Baux vs. Union of India (1969)
In this case, the Supreme Court of India found the plaintiff guilty of breach of contract. Let’s understand the case in detail:
Appellant/Plaintiff- Maula Baux
Respondent- Union of India
Facts of the case
- The appellant and the respondent entered into a contract for the supply of some goods. An amount was deposited by the appellant as security for the due performance of the contract.
- It was laid down in the contract that if the appellant fails to perform the contract, then the contract shall be rescinded by the respondent and the security deposit shall be forfeited.
- Thereafter, the appellant failed to perform their part of the contract, i.e., by not supplying the goods to the respondent. The respondent cancelled the contract and also forfeited the deposited amount.
- The appellant then filed a suit for recovery of the deposited amount along with interest.
- The Court of Civil Judges, Lucknow, passed a decree holding the respondent justified in cancelling the contract. However, it was also held by the Court that the respondent cannot forfeit the amount deposited as security because they did not suffer any loss because of the non-fulfilment of the contract by the appellant.
- However, the High Court at Lucknow modified the decree passed by the trial court. The revised decree awarded the respondent a huge portion of the deposited amount as damages. The Court also observed that the forfeiture of the deposited amount was not unreasonable because the amount was deposited for the due performance of the contract and the amount was deposited as a security.
- The High Court at Lucknow further observed that Section 74 of the Act does not apply in that scenario and that the deposited amount could be considered “earnest money.’ Earnest money basically means an amount paid in order to confirm a contract.
Judgement of the Court
The Supreme Court (“SC”) observed that the High Court at Lucknow made an error by disallowing the appellant’s claim. The SC set aside the decree by the High Court and made some substitutions to the decree. The SC held that the Union of India, i.e., the respondent, must pay the appellant the sum specified by the SC, along with interest from the date of the suit until the payment is made. It was also held that the appellant was guilty of breach of contract and that an inconvenience was caused to the respondent because of the failure on the part of the appellant.
Therefore, the SC held that in order to give a fair order, both parties to the contract must bear their own costs.
M/s Construction and Design Services vs. Delhi Development Authority (2015)
This is an appeal case before the Supreme Court. The following are the details of the case:
Appellant – M/s Construction and Design Services
Respondent – Delhi Development Authority
Facts of the case
- The respondent was awarded a contract by the appellant for the construction of a sewerage pumping station at the CGHS area in Delhi.
- As per the contract, the contractor, i.e., the appellant, shall follow the time period provided in the contract, and in case the appellant does not follow the prescribed condition, they shall be liable to pay compensation, which shall be “an amount equal to one percent or such smaller amount as the Superintending Engineer Delhi Development Authority may decide on the estimated cost of the whole work for everyday that the due quality of work remains incomplete”.
- Due to the slow pace of work, the appellant could not complete the work within the time period, and the contract was terminated.
- As mentioned in the contract, now the superintending engineer asked the appellant to compensate on account of the delay in the execution of the project by an order of penalty. Thereafter, they called upon the appellant to deposit the amount.
- However, the appellant failed to give a response to the said order, which led to the filing of a suit by the respondent before the Delhi High Court for recovery of the amount along with interest.
- The single judge dismissed the suit and held that the appellant had not treated the time period fixed for the performance of the contract as of essence and therefore the compensation as mentioned in the contract should be paid by the appellant as a nature of penalty.
- The division bench on appeal held that the delay in construction was a ground for compensation.
Judgement of the Court
The Supreme Court held that the appellant failed to complete the work within the time period decided in the contract. Due to this delay in work, the respondent is entitled to receive reasonable compensation. The Court further viewed, “Evidence of precise amount of loss may not be possible but in absence of any evidence by the party committing breach that no loss was suffered by the party complaining of breach, the Court has to proceed on guess work as to the quantum of compensation to be allowed in the given circumstances. Since the respondent also could have led evidence to show the extent of higher amount paid for the work got done or produce any other specific material but it did not do so, we are of the view that it will be fair to award half of the amount claimed as reasonable compensation.”
Therefore, the appeal was partly allowed, the decree passed by the Delhi High Court was modified, and the respondent was entitled to receive half of the amount claimed along with interest.
A breach of contract results in loss or damage. Both parties to the contract suffer losses. One party suffers monetary or other types of losses due to the non-fulfilment of the obligation by the other party, and the other party ( the breaching party) suffers losses mostly in monetary terms by paying compensation. In the above cases, the Supreme Court of India impeccably interpreted the provisions of the Indian Contract Act, 1872 for breach of contract. It is concluded that wherever there is a breach of contract, the party suffering a loss or damage shall get reasonable compensation from the courts.
Frequently asked questions (FAQs)
What is the difference between liquidated damage and a penalty?
Liquidated damage is a predetermined estimate of the loss suffered by either of the parties to the contract, whereas a penalty is a fine that is disproportionate to the loss suffered by either of the parties. Liquidated damage is compensation that is equivalent to the loss suffered, whereas a penalty is higher than the loss that may result from a breach of the contract.
What is earnest money?
“Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee” observed by the Privy Council in Kunwar Chiranjit Singh v. Har Swarup. Therefore, the earnest money is a deposit that is made by the purchaser as part payment of the price after the contract is completed. It shows the intention of the purchaser to purchase the goods from the seller.
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