UNIT 5 : BREACH OF CONTRACT AND ITS REMEDIES

We have so far seen how a contract is made, the essential of a valid contract and also how a
contract is to be performed as well as how a contract may be put an end. We shall now discuss
about the breach of contract and also the mode in which compensation for breach of contract is
estimated.
Breach means failure of a party to perform his or her obligation under a contract. Breach of
contract may arise in two ways:
(1) Actual breach of contract
(2) Anticipatory breach of contract

5.1 ANTICIPATORY BREACH OF CONTRACT

An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. When the promisor refuses altogether to perform his promise and signifies
his unwillingness even before the time for performance has arrived, it is called Anticipatory Breach.
Anticipatory breach of a contract may take either of the following two ways:
(a) Expressly by words spoken or written, and
(b) Impliedly by the conduct of one of the parties.
Example 1: Where A contracts with B on 15th July, 2016 to supply 10 bales of cotton for a specified
sum on 14th August, 2016 and on 30th July informs B, that he will not be able to supply the said
cotton on 14th August, 2016, there is an express rejection of the contract.
Example 2: Where A agrees to sell his white horse to B for ` 50,000/- on 10th of August, 2016, but
he sells this horse to C on 1st of August, 2016, the anticipatory breach has occurred by the conduct of
the promisor.
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as
follows: “When a party to a contract has refused to perform or disable himself from performing, his
promise in its entirety, the promisee may put an end to the contract, unless he has signified, but
words or conduct, his acquiescence in its continuance.”
Effect of anticipatory breach: The promisee is excused from performance or from further
performance. Further he gets an option:
(1) To either treat the contract as “rescinded and sue the other party for damages from breach of
contract immediately without waiting until the due date of performance; or
(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time of
performance and then hold the other party responsible for the consequences of non-performance.
But in this case, he will keep the contract alive for the benefit of the other party as well as his own,
and the guilty party, if he so decides on re-consideration, may still perform his part of the contract
and can also take advantage of any supervening impossibility which may have the effect of
discharging the contract.

5.2 ACTUAL BREACH OF CONTRACT

In contrast to anticipatory breach, it is a case of refusal to perform the promise on the scheduled
date. The parties to a lawful contract are bound to perform their respective promises. But when
one of the parties breaks the contract by refusing to perform his promise, he is said to have
committed a breach. In that case, the other party to the contract obtains a right of action against
the one who has refused to perform his promise.
Actual breach of contract may be committed
 UNIT 5 : BREACH OF CONTRACT AND ITS REMEDIES

(a) At the time when the performance of the contract is due.

Example: A agrees to deliver 100 bags of sugar to B on 1st February 2016. On the said day, he failed
to supply 100 bags of sugar to B. This is actual breach of contract. The breach has been committed
by A at the time when the performance becomes due.
(b) During the performance of the contract: Actual breach of contract also occurs when during the
performance of the contract, one party fails or refuses to perform his obligation under it by express
or implied act.

5.3 SUIT FOR DAMAGES

Compensation for loss or damage caused by breach of contract (Section 73)
When a contract has been broken, the party who suffers by such a 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
reason of the 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 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.
Explanation to Section 73 In 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.
Analysis of Section 73
The Act, in Section 73, has laid down the rules as to how the amount of compensation is to be
determined. On the breach of the contract, the party who suffers from such a breach is entitled to
receive, from the party who has broken the contract, compensation for any loss or damage caused
to him by breach.
Compensation can be claimed for any loss or damage which naturally arises in the usual course of
events.
A compensation can also be claimed for any loss or damage which the party knew when they
entered into the contract, as likely to result from the breach.
That is to say, special damage can be claimed only on a previous notice. But the party suffering
from the breach is bound to take reasonable steps to minimise the loss.
No compensation is payable for any remote or indirect loss.
Remedy by way of Damages or Kind of Damages
Remedy by way of damages is the most common remedy available to the injured party. This
entitles the injured party to recover compensation for the loss suffered by it due to the breach of
contract, from the party who causes the breach. Section 73 to 75 of the Contract Act incorporate
the provisions in this regard. The damages which may be awarded to the injured party may be of
the following kinds:
(i) Ordinary damages: 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
 UNIT 5 : BREACH OF CONTRACT AND ITS REMEDIES

damage cause to him thereby, which naturally arose in the usual course of things from such breach,
or which the parties know, 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
reasons of the breach. (Section 73 of the Contract Act and the rule in Hadley vs. Baxendale).
HADLEY vs. BAXENDALE- Facts
The crankshaft of P’s flour mill had broken. He gives it to D, a common carrier who promised to
deliver it to the foundry in 2 days where the new shaft was to be made. The mill stopped working,
D delayed the delivery of the crankshaft so the mill remained idle for another 5 days. P received
the repaired crankshaft 7 days later than he would have otherwise received. Consequently, P sued
D for damages not only for the delay in the delivering the broken part but also for loss of profits
suffered by the mill for not having been worked. The count held that P was entitled only to
ordinary damages and D was not liable for the loss of profits because the only information given by
P to D was that the article to be carried was the broken shaft of a mill and it was not made known
to them that the delay would result in loss of profits.
Example: A agrees to sell to B bags of rice at ` 5,000 per bag, delivery to be given after two
months. On the date of delivery, the price of rice goes up to ` 5,500 per bag. A refuses to deliver the
bags to B. B can claim from A ` 500 as ordinary damages arising directly from the breach.
(ii) Special damages: Where a party to a contract receives a notice of special circumstances
affecting the contract, he will be liable not only for damages arising naturally and directly from the
breach but also for special damages.
Example: ‘A’ delivered a machine to ‘B’, a common carrier, to be conveyed to ‘A’s mill without
delay. ‘A’ also informed ‘B’ that his mill was stopped for want of the machine. ‘B’ unreasonably
delayed the delivery of the machine, and in consequence ‘A’ lost a profitable contract with the
Government. In this case, ‘A’ is entitled to receive from ‘B’, by way of compensation, the average
amount of profit, which would have been made by running the mill during the period of delay. But
he cannot recover the loss sustained due to the loss of the Government contract, as ‘A’s contract
with the Government was not brought to the notice of ‘B’.
(iii) Vindictive or Exemplary damages
These damages may be awarded only in two cases
(a) for breach of promise to marry because it causes injury to his or her feelings; and
(b) for wrongful dishonour by a banker of his customer’s cheque because in this case the injury due
to wrongful dishonour to the drawer of cheque is so heavy that it causes loss of credit and
reputation to him. A business man whose credit has suffered will get exemplary damages even if he
has sustained no pecuniary loss. But a non-trader cannot get heavy damages in the like
circumstances, unless the damages are alleged and proved as special damages. (Gibbons v West
Minister Bank)
(iv) Nominal damages: Nominal damages are awarded where the plaintiff has proved that there
has been a breach of contract but he has not in fact suffered any real damage. It is awarded just to
establish the right to decree for the breach of contract. The amount may be a rupee or even 10
paise.
(v) Damages for deterioration caused by delay: In the case of deterioration caused to goods by
delay, damages can be recovered from carrier even without notice. The word ‘deterioration’ not
only implies physical damages to the goods but it may also mean loss of special opportunity for
sale.
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(vi) Pre-fixed damages: Sometimes, parties to a contract stipulate at the time of its formation that
on a breach of contract by any of them, a certain amount will be payable as damage. It may
amount to either liquidated damages (i.e., a reasonable estimate of the likely loss in case of
breach) or a penalty (i.e., an amount arbitrarily fixed as the damages payable). Section 74
provides that if a sum is named in a contract as the amount to be paid in case of a breach, the
aggrieved party is entitled to receive from the party at fault a reasonable compensation not
exceeding the amount so named (Section 74).
Example: If the penalty provided by the contract is ` 1,00,000 and the actual loss because of
breach is ` 70,000, only ` 70,000 shall be available as damages, i.e., the amount of actual loss and
not the amount stipulated. But if the loss is, say, ` 1,50,000, then only, ` 1,00,000 shall be
recoverable.

5.4 PENALTY AND LIQUIDATED DAMAGES (SECTION 74)

The parties to a contract may provide before hand, the amount of compensation payable in case
of failure to perform the contract. In such cases, the question arises whether the courts will accept
this figure as the measure of damage.
English Law: According to English law, the sum so fixed in the contract may be interpreted either as
liquidated damages or as a penalty.
If the sum fixed in the contract represents a genuine pre-estimate by the parties of the loss, which
would be caused by a future breach of the contract it is liquidated damages. It is an assessment of
the amount which in the opinion of the parties will compensate for the breach. Such a clause is
effective and the amount is recoverable. But where the sum fixed in the contract is unreasonable
and is used to force the other party to perform the contract; it is penalty. Such a clause of
disregarded and the injured party cannot recover more than the actual loss.
Indian Law: Indian law makes no distinction between ‘penalty ‘and liquidated damages’. The
Courts in India award only a reasonable compensation not exceeding the sum so mentioned in the
contract. Section 74 of the Contract Act lays down if the parties have fixed what the damages will
be, the courts will never allow more. But the court may allow less. A decree is to be passed only for
reasonable compensation not exceeding the sum named by the parties. Thus, Section 74 entitles a
person complaining of breach of contract to get reasonable compensation and does not entitle him
to realise anything by way of penalty.
Exception: Where any person gives any bond to the Central or State government for the
performance of any public duty or act in which the public are interested, on breach of the condition
of any such instrument, he shall be liable to pay the whole sum mentioned therein.
Example 1: A contracts with B, that if A practices as a surgeon in Kolkata, he will pay B ` 50,000. A
practices as a surgeon at Kolkata, B is entitled to such compensation not exceeding ` 50,000 as the
court considers reasonable.
Example 2: A borrows ` 10,000 from B and gives him a bond for ` 20,000 payable by five yearly
instalments of ` 4,000 with a stipulation that in default of payment, the whole shall become due.
This is a stipulation by way of penalty.
Example 3: A undertakes to repay B, a loan of ` 10,000 by five equal monthly instalments with a
stipulation that in default of payment of any instalment, the whole shall become due. This
stipulation is not by way of penalty and the contract may be enforced according to its terms.
Distinction between liquidated damages and penalty
Distinction between liquidated damages and penalty
 UNIT 5 : BREACH OF CONTRACT AND ITS REMEDIES

Penalty and liquidated damages have one thing in common that both are payable on the
occurrence of a breach of contract. It is very difficult to draw a clear line of distinction between the
two but certain principles as laid down below may be helpful.
1. If the sum payable is so large as to be far in excess of the probable damage on breach, it is
certainly a penalty.
2. Where a sum is expressed to be payable on a certain date and a further sum in the event of
default being made, the latter sum is a penalty because mere delay in payment is unlikely to cause
damage.
3. The expression used by the parties is not final. The court must find out whether the sum fixed in
the contract is in truth a penalty or liquidated damages. If the sum fixed is extravagant or
exhorbitant, the court will regard it is as a penalty even if, it is termed as liquidated damages in the
contract.
4. The essence of a penalty is payment of money stipulated as a terrorem of the offending party.
The essence of liquidated damages is a genuine pre-estimate of the damage.
5. English law makes a distinction between liquidated damages and penalty, but no such
distinction is followed in India. The courts in India must ascertain the actual loss and award the
same which amount must not, however exceed the sum so fixed in the contract. The courts have
not to bother about the distinction but to award reasonable compensation not exceeding the sum
so fixed.
Besides claiming damages as a remedy for the breach of contract, the following remedies are also
available:
(i) Rescission of contract: When a contract is broken by one party, the other party may treat the
contract as rescinded. In such a case he is absolved of all his obligations under the contract and
is entitled to compensation for any damages that he might have suffered.
Example: A promises B to deliver 50 bags of cement on a certain day. B agrees to pay the amount
on receipt of the goods. A failed to deliver the cement on the appointed day. B is discharged from
his liability to pay the price.
(ii) Quantum Merit: Where one person has rendered service to another in circumstances which
indicate an understanding between them that it is to be paid for although no particular
remuneration has been fixed, the law will infer a promise to pay. Quantum Merit i.e. as much as
the party doing the service has deserved. It covers a case where the party injured by the breach
had at time of breach done part but not all of the work which he is bound to do under the contract
and seeks to be compensated for the value of the work done. For the application of this doctrine,
two conditions must be fulfilled:
(1) It is only available if the original contract has been discharged.
(2) The claim must be brought by a party not in default.
The object of allowing a claim on quantum merit is to recompensate the party or person for value
of work which he has done. Damages are compensatory in nature while quantum merit is
restitutory. It is but reasonable compensation awarded on implication of a contract to remunerate.
Where a person orders from a wine merchant 12 bottles of a whiskey and 2 of brandy, and the
purchaser accepts them, the purchaser must pay a reasonable price for the brandy.
The claim for quantum merit arises in the following cases:
(a) When an agreement is discovered to be void or when a contract becomes void.
(b) When something is done without any intention to do so gratuitously.
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(c) Where there is an express or implied contract to render services but there is no agreement as to
remuneration.
(d) When one party abandons or refuses to perform the contract.
(e) Where a contract is divisible and the party not in default has enjoyed the benefit of part
performance.
(f) When an indivisible contract for a lump sum is completely performed but badly the person who
has performed the contract can claim the lump sum, but the other party can make a deductionfor
bad work.
Example 1: X wrongfully revoked Y‘s (his agent) authority before Y could complete his duties. Held,
Y could recover, as a quantum meruit, for the work he had done and the expenses he had incurred
in the course of his duties as an agent.
Example 2: A agrees to deliver 100 bales of cottons to B at a price of `1000 per bale. The cotton
bales were to be delivered in two installments of 50 each. A delivered the first installment but failed
to supply the second. B must pay for 50 bags.
(iii) Suit for specific performance: Where damages are not an adequate remedy in the case of
breach of contract, the court may in its discretion on a suit for specific performance direct party in
breach, to carry out his promise according to the terms of the contract.
(iv) Suit for injunction: Where a party to a contract is negating the terms of a contract, the court
may by issuing an ‘injunction orders’, restrain him from doing what he promised not to do.
Example: N, a film star, agreed to act exclusively for a particular producer, for one year. During the
year she contracted to act for some other producer. Held, she could be restrained by an injunction.
Party rightfully rescinding contract, entitled to compensation (Section 75) A person who rightfully
rescinds a contract is entitled to compensation for any damage which he has sustained through
non-fulfilment of the contract.
Example: A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two
nights in every week during the next two months, and B engages to pay her ` 100 for each night’s
performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence,
rescinds the contract. B is entitled to claim compensation for the damage which he has sustained
through the non-fulfilment of the contract.