In this article, M.S. Ram pursuing law from School of Law, SASTRA University, discusses the legal consequences of non-performance of a contract.
The author of this paper critically analyses the legal framework and consequences which is triggered when the circumstances of a particular case culminate into the breach or non-performance of a contract. When a party performing a contract does not do so to the standard required by the contract or within the timeframe set, that party breaches the contract. Breach also includes non-performance of the contract. The breach of a contract by a party will consequently lead to the providing of remedy as a legal obligation, towards the innocent party. This paper delves into some of the scenarios where legal obligations are breached due to non-performance and the remedies available for such breach by analyzing the legislation and the decided cases.
Legal Provisions under the Indian Contract Act, 1872
The Indian Contract Act, 1872 was drafted by the lawmakers based on the principle of Contracts derived from the English Law. Chapter XVI of the English Law of Contract provides for Damages arising with respect to a breach of legal obligations. Chapter VI of the Indian Contract Act deals with consequences of the Breach of Contract and Section 73 to 75 contains remedies for the breach.
Section 73. Compensation for loss or damage caused by breach of contract – When a contract has been broken, the party who suffered by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual 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.
Such compensation is not to be given for any remote and indirect loss or damage sustained by the reason of breach.
Compensation for failure to discharge obligation resembling those created by contract
When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge 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.
Explanation: n estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.
74. Compensation for breach of contract where penalty stipulated for – When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by the way of penalty, the party complaining of the breach is entitled, whether or not actual damage has been proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named, as the case may be, the penalty stipulated for.
Explanation – A stipulation for increased interest from the date of default may be a stipulation for penalty.
Exception – When any person enters into a bail-bond, recognizance, or other Instrument of the same nature, or under provisions of any law, or under the orders of the Central Government or of 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.
Explanation – A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.
Legislative Intent behind Section 73 & 74
- Section 73 is declaratory of the Common Law as to damages.
- Section 73 and 74 are for the benefit of a party willing to perform contract, and not for the defaulting party.
- Section 74 provides for the measure of damages in two classes: (i) where the contract names a sum to be paid in case of breach; and (ii) where the contract contains any other stipulation by way of penalty. In both the cases, the measure of damages is by s. 74, reasonable compensation not exceeding the amount or penalty stipulated for.
- Section 74 boldly cuts the most troublesome knot in the Common Law doctrine of damages. The distinction between penalty and liquidated damages has been removed by the Contract Act, and now every case (except bail bonds or where the bond is given for the performance of any public duty or act in which in which any public are interested) in which a sum is named as damages to be paid in case of breach of contract, the court is not bound to award more than ‘reasonable compensation’ not exceeding the amount so named. It has been observed that question as to unconscionable bargains must be decided according to this section, and the principles of the English courts of equity are not applicable.
Damages – An effective Remedy
- An action for damages is always available as a matter of right when a contract has been broken, as against the relief of specific performance, which lies in the discretion of the court.
- Even where the plaintiff has been able to prove his loss, damages may not necessarily be a full recompense for his loss; ‘it must be remembered that the rules as to damages can in the nature of things only be approximately just’.
- Compensation has also been granted on the same basis for expenses incurred and loss suffered in reliance of a promise to grant a lease, applying the doctrine of promissory estoppel.
Tortious and Contractual Liability – A brief Comparison with respect to Damages
- The function of damages in both the areas is compensatory, and these are assessed according to plaintiff’s actual loss. The test of the burden of proof, of remoteness and causation, are the same.
- Damages in both the cases are assessed as a rule with reference to the date of breach of contract or of duty.
- The function of damages in contract is to compensate losses,e., to give him the gains he had expected from performance of the contract; whereas damages in tort seek to protect the ‘reliance’ or ‘status quo’ interest, i.e., to put the plaintiff in a position as if the tort had not occurred.
- The defence of Contributory Negligence is not available in contract unless the defendant breaks a contractual duty of reasonable care in a manner which is independently actionable in tort.
- Punitive damages are awarded in tort, but not in contract. The standard of predictability of loss is normally more exacting in contract than in tort.
Express Provisions under the Contract for Reliefs
- A contract may contain, within itself, the elements of its own discharge, in the form of provisions, express or implied, for its determination in certain circumstances, e.g. a contract may be made by the parties, subject to a condition subsequent.
In Head v. Tattersall,where the buyer was given the option of returning the horse bought if it did not come up to the required standard.
- A continuing contract may contain a provision, making it determinable at the option of one of the parties, upon certain terms. Such a provision was implied, for instance, by custom in the ordinary contract of domestic service, which can be terminated either by a month’s notice or the payment of a month’s wage.
- The parties to a contract can create, for themselves, special rights and obligations such as providing for themselves the measure of damages for breach. Section 62 of the Sale of Goods Act, 1930 is statutory recognition of this right, under which it is open to parties to a Sale of Goods to provide their own measure of damages in case of breach of contract.
- Parties may provide that in the event of a breach, no compensation will be payable, except for refund of amounts paid. Such terms are enforceable.
Waiver of Right in Contractual Agreements
- Parties may, by making express provisions exclude the right to claim damages for its breach. Such provision is valid, provided it is expressed in plain and unambiguous language.
- Under English Law, attempts to exclude or limit liability for breach of contract are restricted by statute.
Actual or Anticipatory Breach
A breach of contract may take place before the time fixed for performance of the contract if the promisor has repudiated the contract, or where the promisor has disabled himself from performing the contract; but a party is not entitled to claim damages for breach of contract where, upon repudiation by the other party before the date of performance, it has chosen not to put an end to the contract, but has kept the contract open. In such a case, the damages will be assessed on the date the performance was due; even though the plaintiff’s loss may have increased after the date of repudiation, and no obligation to mitigate applies where the repudiation is not accepted.
Prospective Damages and Arising Claims
Prospective damages are awarded in respect of future damages or loss, as opposed to that which he has sustained at the time of trial. In case of pecuniary loss, it may be quantified separately, but in case of general damages for pain and suffering or loss of amenity, a single sum is given for past or future suffering.
Difficulty of Assessment is no bar
The mere fact that it is somewhat difficult to assess the damages, with certainty or precision, does not disentitle the plaintiff to compensation for the loss suffered. In Chaplin v. Hicks, the plaintiff, who was on the short list in a beauty competition organised by the defendant, but was given no opportunity to appear at the final selection through the defendant’s negligence, was awarded GBP 100 as damages.
Effect of Termination of Contract under Express Provisions
Where one party has terminated the contract under the provisions of the express terms of the contract, the other party can claim damages for breaches upto the date of termination, but not for the benefit of the defendant’s future performance lost because of termination.
Essential Condition, Warranty, and Effect of Breach
A condition is a clause ‘going to the essence of the contract’ and a warranty is a clause ‘only collateral to the contract’. The difference between an essential condition and a non-essential promise (a warranty) is this, in the former case, the innocent party, on becoming aware of the breach, can consider himself discharged and sue for damages for loss of contract or keep the contract on foot and recover damages for the particular breach. In the latter case, only the later course is available and not damages for loss of contract.
Plaintiff’s Conduct Disentitling Damages
Loss which is caused by the plaintiff’s failure to fulfil his duty, is not recoverable from the defendant. A party to a contract cannot be in a better position by reason of his own default, than if he had fulfilled his obligation.
Kinds of Damages
A contractual right when being violated confers the legal right to claim damages and this might be in various forms and kinds. Some of the kinds of damages include:
General and Special Damages
- In relation to liability, general damages are those which arise naturally and in the normal course of events; whereas special damages are those which do not arise naturally out of the defendant’s breach, and are recoverable only where they were in the reasonable contemplation of the parties at the time they made the contract.
- In relation to pleadings, general damages are those which will be presumed to be natural or probable consequence of the wrong complained of, with the result that the plaintiff is required only to assert that such damage has been suffered, whereas special damage refers to those losses which must be specifically pleaded and proved.
- In relation to proof, general damages are those losses – usually but not exclusively non-pecuniary – which are not capable of precise quantification in monetary terms, whereas special damages are those losses which can be calculated in financial terms. Special damages represent the precise amount of pecuniary loss which the claimant proves to have suffered from the set of facts pleaded.
Nominal Damages are awarded when there is an infraction of legal right, and though it gives no right to any real damages, yet gives the right to a verdict because of the infringement.
The plaintiff is awarded nominal damages when:
- The defendant’s breach of contract has, in fact, caused no loss to the plaintiff;
- The defendant has committed a technical breach of contract and the plaintiff himself had no intention of performing his terms;
- The plaintiff fails to prove the loss, that he may have suffered from the breach of contract;
- He has suffered actual damage, which has arisen, not from the defendant’s wrongful act, but from the conduct of the plaintiff himself, or an external event;
- The plaintiff merely seeks to establish the infringement of his legal right, without being concerned about actual loss.
Aggravated and Exemplary Damages
In certain cases, the court may award more than normal measure of damages, by taking into account the defendant’s motives or conduct. Such damages may be:
- ‘aggravated damages’, which are compensatory in that they compensate the victim of a wrong for mental distress, or injury to feelings, in circumstances in which that injury has been caused or increased by the manner in which the defendant committed the wrong, or the defendant’s conduct subsequent to the wrong; or
- ‘exemplary damages’ are intended to make an example of the defendant; they are punitive and not intended to compensate the plaintiff for any loss, but rather to punish the defendant.
Liquidated and Unliquidated Damages
Damages are said to be liquidated when they have been agreed and fixed by the parties. Section 74 applies to these damages. In all other cases, the court quantifies or assesses the damage or loss; such damages are unliquidated. It is possible that the parties fix an amount as liquidated damage for a specific type of breach only; then the party suffering from another type breach may sue for the unliquidated damages arising from such breach.
- The term ‘remoteness of damage’ refers to the legal test used for deciding which type of loss caused by the breach of the contract may be compensated by an award of damages.
- In deciding whether damages claimed are too remote, the test is whether the damage is such as must have been in the contemplation of parties as being a ‘possible result’ of the breach. If it is. Then it cannot be regarded as too remote. The damages are to be assessed on the basis of natural and probable consequences of breach. Actual knowledge must be shown; mere imprudence and carelessness is not knowledge.
Specific Performance as Damages
Where a party to the contract commits breach, the other party is, as a rule, entitled to claim damages, and cannot compel the actual performance by the recalcitrant party but the rule of specific performance can be granted by the courts in those rare cases where damages would be inadequate.
Damages in law were contemplated to be used as an effective and also a deterrent mechanism to ensure compliance in respect to fulfilling contractual obligations. However, there is a shift in the trajectory in which the contract law has evolved with respect to provisions relating to damages. There has been a lot of developments which in turn has made sure that contract law has to be revisited to govern latest trends, some of which does not come under the ambit of the codified law which is more than 140 years old.
 The standard may be strict or may require only the exercise of reasonable care, ante p. 499.
 J. Beatson on ANSON’S LAW OF CONTRACT, 28th edn., pg. 589, para. 1.
 AKAS Jamal v. Molla Dawood Sons & Co., AIR 1915 PC 48.
 Timblo Irmaos Ltd v. Jorge Anibal Motos Sequeira, AIR 1977 SC 734.
 Fateh Chand v. Balkishan Das, (1964) 1 SCR 515 at 526-527.
 Maula Bux v. Union Of India, AIR 1970 SC 1955.
 Lala Balla Mal v. Ahad Shah, AIR 1918 PC 249.
 Specific Relief Act, 1963, ss 10-24, particularly ss. 10 & 20.
 Rodocanachi v. Milburn, (1886) 18 QBD 67 at 78.
 Food Corporation of India v. Babulal Agrawal, AIR 2004 SC 2926.
 Beoco Ltd. v. Alfa Laval Co. Ltd., (1995) QB 137.
 Miliangos v. George Frank (Textiles) Ltd., (1976) AC 443 at 468.
 Treitel, The Law of Contract, 10th edn., p. 875.
 BR Herman and Mohatta v. Asiatic Steam Navigation Co. Ltd., AIR 1941 Sind 146.
 Livingstone v. Rawyards Coal Co., (1880) 5 App Cas 25 at 39 per Lord Blackburn (HL).
 Barclays Bank plc. v. Fairclough Building Ltd., (1995) QB 214.
 Henderson v. Merret Syndicates Ltd.,  2 AC 145.
 (1871) LR 7 Ex 7.
 Moult v. Halliday, (1898) 1 QB 125 at 130.
 Union of India v. Tribhawan Das Lalji Patel, AIR 1971 Del 120 at 122.
 Sitaram Bindraban v. Chiranjilal Brijlal, AIR 1958 Bom 291.
 Syed Israar Masood v. State of Madhya Pradesh, AIR 1981 SC 2010 (2).
 Pollock & Mulla on THE INDIAN CONTRACT AND SPECIFIC RELIEF ACTS, 14th edn., at p. 1143, para 3.
English Unfair Contract Terms Act, 1977.
 Section 39; Manindra Chandra Nandi v. Aswini Kumar Acharjya, AIR 1921 Cal 185.
 Grant Smith &Co. and McDonnel Ltd. v. Settle Constn. And Dry Dock Co., AIR 1919 PC 85(promissory rendering it impossible to perform because of loss of subject matter by his own negligence).
 Indian Contract Act 1872, s. 39.
 Narsimha Mudali v. Potti Narayanasami Chetty, AIR 1926 Mad 118.
 Tai Hing Cotton Mill v. Kamsing Nitting Factory, (1979) AC 91; Maung Po Kyaw v. Saw Tago, AIR 1933 Ran 25. Ibid.
 Tredegar Iron and Coal Co. Ltd. v. Hawthorn Bros & Co., (1902) 18 TLR 716 CA.
 British Westinghouse Electric & Mfg. Co.Ltd. v. underground Electric Railways Co. of London Ltd. (1912) AC 673 at 689.
 Jefford v. Gee, (1970) 2 QB 130 at 147.
 Chaplin v. Hicks,  2 KB 786; K Narendra v. Riviera Apartments (P.) Ltd., AIR 1999 SC 2309.
  2 KB 786
 Financings Ltd. v. Badlock, (1963) 2 QB 104.
 Heyworth v. Hutchinson, (1867) 2 QB 447 per Lord Blackburn at 451.
 AH McDonald & Co. Ply. Ltd. v. Wells, (1931) 45 CLR 506 at 513-514.
 Roper v. Johnson, (1873) LR 8 CP 167.
 Jiwa Ram v. Man Singh, AIR 1934 Lah 84.
 India General Navigation and Rly. Co. Ltd. v. Eastern Assam Co. Ltd., AIR 1921 Cal. 315.
 President of India v. La Pintada Cia Navegacion SA, (1985) AC 104 at 125-27.
 Mediana (Owners) v. Comet (Owners), The Mediana, (1900) AC 113.
 Clifton v. Hooper, (1844) 6 QB 468.
 Weld & Co. v. Har Charn Das, AIR 1921 Lah. 316.
 Vikas Electrical Service Pann Bazar Hubli v. Karnataka Electricity Board, AIR 2008 Kant 88.
 Hiort v. London & North West Rly. Co., (1879) 4 Ex D 188 (CA).
 Grant Smith & Co. and McDonnel Ltd. v. Settle Consstn. And Dry Dock Co., AIR 1919 PC 85.
 Surrey County Council v. Bredero Homes Ltd.,  3 ER 705.
 Halsbury’s Laws of England, Vol. 12(1), 4th edn., Reissue 31 July 1998, DAMAGES, para 811.
 Aktieselskabet Reidar v. Arcos.  1 KB 352.
 Chitty on Contracts, 28th edn., Vol. II, p. 1289, paras 27-039.
 Pravudayal Agarwala v. Ram Kumar Agarwala, AIR 1956 Cal 41.
 Hadley v. Baxendale, (1854) 9 Exch 341.
 Pravudayal Agarwala v. Ram Kumar Agarwala, AIR 1956 Cal 41.
 Monarch Steamship Co. Ltd v. A/B Karlshamns Oljefabriker, (1949) AC 196.
 Specific Relief Act, 1963,Chapter II
 Specific Relief Act, ss. 10,14.