This article has been written by  Kartik H. Shah, pursuing a Diploma in contract drafting with LS. from Lawsikho.com. 

What is a contract?

Section 2(h) of the Indian Contract Act, 1872 simply defines a contract as:

An agreement which is enforceable by law.

In other words, a contract is an agreement, the object of which is to create an obligation. So, when an agreement enables a person to compel another to do something or abstain from doing something, it is called a contract.

What is a breach of contract?

A contract can be said to be breached or broken when either of the parties fails or refuses to perform his obligations, or his promise under the contract. Therefore, it can be said that when a binding agreement is not honoured by one or more parties by non-performance of his promise, the agreement can be said to be breached.

Introduction

Parties to a contract are legally expected to perform their respective obligations, so naturally, the law frowns upon a breach by either party. Therefore, as soon as one party commits a breach of the contract, the law grants to the other party three remedies. He may seek to obtain:

1. Damages for the loss sustained, or 
2. A decree for specific performance, or 
3. An injunction.

The laws relating to damages are governed by the Contract Act, whereas the laws relating to injunctions and specific performance are governed by the Specific Relief Act, 1963.

Damages for the loss sustained

Section 73 of the Indian Contract Act 1872 lays down four important rules governing the measure of damages.

First Rule: Section 73(1)

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 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 the contract.

An uncommonly known fact is that Section 73 is based on a case law, i.e. Hadley v. Baxendale (1854) 9 Ex. 354

The well-known rule in this case was stated by the Court as follows:

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be either such as may reasonably and fairly be considered as arising naturally, i.e. according to usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.”

Second Rule: Section 73(3)

The second rule of measuring damages deals with remoteness of damage. It states,

“Such compensation is not to be given for any remote and indirect loss or damage sustained by the reason of the breach.”

Damages are measured by the loss actually suffered by the party. The loss must naturally arise in the usual course of things from the breach; or it must be such as the parties knew, when they made the contract, to be likely to result from the breach of it. Therefore, it follows that a party is not liable for a loss too remote, i.e. which is not the natural or probable consequence of the breach of the contract.

In Madras Railway Company v. Govinda (1898) 21 Mad. 172, the Plaintiff, who was a tailor, delivered a sewing machine and some clothes to the defendant railway company, to be sent to a place where he expected to carry on his business in an upcoming festival. Due to mistakes made by the company’s employees, the goods were delayed and were not delivered until some days after the festival was over. The plaintiff had not given any notice to the railway company that the goods were required to be delivered within a fixed time for any special purpose. On a suit by the plaintiff to recover a sum of his estimated profits, the Court held that the damages claimed were too remote.

Third rule: Explanation to Section 73

The third rule is to be found in the Explanation to Section 73, which provides as follows:

“In estimating the loss or damage arising from a breach or contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.”

Therefore, if a railway company, having contracted with a passenger to take him to a particular station fails to do so, the passenger is entitled to damages for the inconvenience of having to walk and any reasonable expense which he incurs, like staying at a motel, and he may get some other conveyance, and charge the railways with that expense if it is a reasonable thing to do so in that particular circumstance. What is not reasonable is for him to charter a special train to save himself for waiting and charge the railway company with the expenses.

Fourth Rule: Section 73

It is to be noted finally, that damages payable for the breach of a quasi-contract are exactly the same as those payable for any other contract. To rephrase, all the above rules apply to quasi-contracts in the same manner.

It should be noted that when no loss arises from the breach of contract, only nominal damages are awarded. Damages are given by way of restitution and compensation only, and not by way of punishment. The aggrieved party can therefore recover the actual loss caused to him as compensation.

A decree for Specific Performance 

According to Section 10 of the Specific Relief Act, 1963, there are seven cases when specific performance of a contract may be allowed by the Court. They are: 

When there is no standard for ascertaining actual damage

When it is impossible to quantify the actual damage caused by the non-performance of the act agreed to be done, the Court may, in its discretion, grant a decree of Specific Performance of that act.

Duke of Somerset v. Cookson, 1935, 3 P Wins. 390

Art, paintings, old furniture, antiques, etc. have a special value to the contracting party, although such articles may not have much monetary value. For example, an idol which has been passed down from generation to generation of a family has immense value to that family, even if it means nothing to someone else. No amount of damages can compensate for the loss to the members of the family, even if the Court makes an attempt to assess the damages payable instead of the idol. Therefore, an order will be passed for specific delivery of that idol, not for damages.

In Vijaya Minerals v. Bikash AIR 1996 Cal. 67, the Hon’ble Calcutta High Court has observed that since manganese and iron ore are not ordinary items of commerce, if a contract for sale of iron and manganese ore from a mine has been made, specific performance of such an act would be allowed.

When monetary compensation would not afford adequate relief

When the act agreed to be done is such that compensation offered in money for its non-performance would not afford adequate relief. However, until the contrary is proved, it is to be presumed that:

• The breach of a contract to transfer immovable property cannot be adequately compensated by payment of money.
• The breach of a contract to transfer movable property can be so compensated, except in the following cases:
  1. Where the property is not an ordinary article of commerce or is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market;
  2. Where the property is held by the defendant as the agent or trustee of the plaintiff.

Usually, the Courts are entitled to presume that in case of breach of contract to transfer of immovable property, mere compensation is not adequate relief, whereas specific performance is adequate relief, whereas in the case of movable property, compensation is the ordinary relief and specific performance is exceptional. However, it must be noted that these presumptions are rebuttable.

In Bank of India v. Chinoy, AIR 1949 PC 90, it was held that if shares are freely available in the market, then specific performance would not be granted. If shares of a particular company, for instance a private company are not readily available in the market, specific performance would be granted.

Suits for enforcement of a contract to execute a mortgage

In a suit for the enforcement of a contract to execute a mortgage or furnish any other security for the repayment of any loan which the borrower is not willing to pay at once, specific performance may be allowed. However, where only part of the loan has been advanced by the lender, he must be willing to advance the full amount of the loan.

1. Contracts for the purchase of any debentures of a company.
2. Suits for the execution of a formal deed of partnership.
3. Suits for the purchase of partner’s share.
4. Suits for the enforcement of a building construction contract or any other work on land, provided the following 3 conditions are fulfilled:
   • The building or other work has been described in the contract in a reasonably precise manner, so as to enable to Court to decide the exact nature of building or work;
   • The plaintiff has substantial interest in the performance of the contract, and the interest is such that financial compensation for non-performance of the contract would not be adequate relief; and
   • After the contract, the defendant has obtained possession of the whole or any part of the land in question.

It is important to remember that specific performance is an equitable remedy, and is therefore left to the discretion of the Court, rather than to the right of a person by law.

An injunction

Under Section 36 of Specific Relief Act 1963, an injunction is defined as an order of a competent court, which: 

1. Forbids the commission of a threatened wrong,
2. Forbids the continuation of a wrong already begun, or
3. Commands the restoration of status quo (the former course of things).

Clauses i and ii deal with preventive relief, whereas clause iii deals with an injunction called mandatory injunction, which aims at rectifying, rather than preventing the defendant’s misconduct.

Under Sections 36 & 37 of the Specific Relief Act 1963, there are two types of injunctions – temporary and perpetual, whereas Section 39 governs mandatory injunctions.

Temporary or interim injunctions are governed by Order 39 of Civil Procedure Code 1908 and are those injunctions that remain in force until a specified period of time, e.g. 15 days, or till the date of the next hearing. Such injunctions can be granted at any stage of the suit. 

Permanent or perpetual injunctions, as under Sections 38 to 42 of the Specific Relief Act, 1963 are contained in the decree passed by the Court after fully hearing the merits of the case. Such an injunction permanently prohibits the defendant from committing an act which would be contrary to the plaintiff’s rights. 

Q: When are perpetual injunctions granted?

A: Under Section 38 of the Specific Relief Act 1963, whenever the defendant invades, or even threatens to invade the plaintiff’s right to enjoyment of property or right to property itself, the Court may grant to the plaintiff a perpetual or permanent injunction in the four cases as follows:

1. Where there is no standard for quantifying the actual damages caused, or likely to be caused, to the plaintiff, by the invasion of his rights;
2. Where invasion of the plaintiff’s rights is such that any compensation in money would be inadequate relief; 
3. Where the defendant is a trustee of the property for the plaintiff;
4. Where the injunction is necessary to prevent multiplicity of judicial proceedings.

Mandatory injunctions are granted in cases where in order to prevent the non-performance of an obligation, it is necessary to compel the performance of certain acts which the Courts are capable of enforcing. Thus, the Court may at its discretion grant an injunction to prevent such non-performance and also to compel performance of the required acts. This injunction is applicable to the breach of any obligation. It may be permanent or temporary, although temporary-mandatory injunctions are rare.

Damages instead of, or in addition to injunction:

Section 40 of the Specific Relief Act 1963 states that a plaintiff may claim damages either in addition to or in substitution for suing for perpetual or mandatory injunction, and if the Court deems fit, it may even grant such damages.

It is worth emphasizing that damages and injunction are not alternate remedies. Both may be allowed at the discretion of the Court.

However, damages cannot be granted unless the plaintiff has claimed damages in the plaint. In the event that the plaintiff has not claimed damages in the plaintiff itself, he should be allowed to amend the plaintiff, at any stage of the proceedings, on such terms as may be just in the circumstances of the case. 

To conclude, it is thus evident that there are several remedies available in case of breach of a contract, none of which are very simple. One would have to overcome an abundance of challenges and rebuttals to prove a case of breach of contract.