When a contract has been broken remedies

What is a Contract?

The term contract is defined in section 2(h) of the Indian Contract Act, 1872, as follows: An agreement enforceable by law is a contract. An agreement becomes a contract when there is some consideration for it, when the parties are competent to contract, when their consent is free and when their object is lawful.

Once the contract is formed, the next stage is the fulfilment of the object made by the contract. Only when the object is fulfilled that the contract comes to an end and then the said contract is said to be discharged. However, that is not the only way by which a contract is discharged. A contract may be discharged by performance, or my impossibility of performance, or by agreement or by a breach of contract.

What is meant by a Breach of Contract?

“A breach of contract occurs when a party thereto renounces his liability under it, or by his own act makes it impossible that he should perform his obligation under it or totally or partially fails to perform such obligations." [1] 

There are two types of breach –

Anticipatory Breach – An anticipatory repudiation occurs when, prior to the promised date of performance, the promisor absolutely repudiates the contract. [2] 

Present Breach – The failure to perform when the time for the performance of the contract has arrived.

Damages for a Breach of Contract

The party who is injured by the breach of a contract may bring an action for damages and by damages we mean compensation in terms of money for the loss suffered by the injured party. In fact damages are the only remedy which the Indian Contract Act affords to a breach of contract and some other remedies are afforded by the Specific Relief Act, 1963. However for the injured party to be liable for damages, he himself bears the burden of proving his loss. This is very clearly mentioned in the case of Sudesh Prabhakar Volvoikar v Gopal Babu Savolkar [3] , where a booking clerk of a theatre misappropriated a sum of money which was meant for deposit in the film exhibitor’s account, employer was liable, but the plaintiff had to prove the loss suffered by him. Here the court held that if the locus standi and the quantum of damages were not proved, the case could not stand.

Every action for damages raises two problems.

Remoteness of damage

Measure of damages

Remoteness of Damage

Even though the consequences of a breach may be endless theoretically, there must be an end to liability of the defendant as he cannot be held liable for everything that follows from his breach of the contract. The problem is to find where the limit to liability is as beyond that limit the damage is said to be too remote and irrecoverable. [4] 

In the well known case of Hadley v Baxendale, [5] an attempt was made to solve the problem by forming certain rules. In this case the plaintiffs, Mr Hadley and another, were millers and worked together in a partnership as proprietors of the City Steam-Mills in Gloucester. A crankshaft of a steam engine at the mill had broken and Hadley arranged to have a new one made by W. Joyce & Co. in Greenwich. Before the new crankshaft could be made, W. Joyce & Co. required that the broken crankshaft be sent to them in order to ensure that the new crankshaft would fit together properly with the other parts of the steam engine.

The plaintiffs contracted with defendants Baxendale to deliver the crankshaft to engineers for repair by a certain date at a cost of £2 sterling and 4 shillings. The plaintiff’s servant had told the defendant that the mill was stopped, and the shaft must be sent immediately. Baxendale failed to deliver on the date in question, causing Hadley to lose business. The plaintiff sued Baxendale for the loss of profits which would have been made during the period of the delay.

The question raised in this case was whether a defendant in a breach of contract case could be held liable for damages that the defendant was not aware would be incurred from a breach of the contract. According to the rule laid down by Alderson B when two parties have made a contract which one of them has broken, the damages which the injured party ought to receive as a result of the breach should be either according to the usual course of things, or something that would have been in the contemplation of both the parties, at the time they made the contract, as the probable result of the breach of it.

Based on this rule, the defendants were held not liable for the losses suffered by the plaintiff as it does not usually mean that the mill is stopped in case of millers sending off broken shafts for repair.

As a result of this decision, two major rules were laid down –

General Damages

Special Damages

General Damages is when the defendant is liable for all that which naturally happens in the usual course of things after the breach.

Special Damages are those which arise because of unusual circumstances affecting the plaintiff and are not recoverable unless the special circumstances were brought to the knowledge of the defendant so that the possibility of the special loss was in the contemplation of the parties. Therefore, it is safe to say that there is no recovery of special damages when special circumstances are not known to the parties while making the contract. The same rule was further applied in cases such as Horne v Midland Railway C, [6] and British Columbia Saw Mill v Nettleship. [7] 

The relationship between the two rules were re-examined in the case of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [8] where Newman Industries Ltd was meant to deliver a boiler for Victoria Laundry (Windsor) Ltd. The delivery was five months late. As a result of not having enough laundry capacity, Victoria Laundry lost a lucrative cleaning contract from the Ministry of Supply. Victoria Laundry sued for the ordinary profit that it had foregone through not having the boiler on time. The court allowed only general damages and not the loss of profits.

On appeal Judge Ashquith states as follows -

“that no supplier who has promised delivery of a boiler of an unusually large size by a particular date, with knowledge that it was to be put into use immediately on delivery can reasonably contend that he could not foresee that loss of business would be likely to result from the delay."

He worked out a number of propositions and concluded that both these rules are based upon on the principle of ‘foreseeability’ and therefore its actually just one single rule with two different instances.

The interpretation put upon the Hadley

Section 73 of the Indian contract act applies the same principle in India. The Privy Council observed that Section 73 is declaratory of the common law as to damages in the case of Jamal, A.K.A.S v Moola Dawood Sons & Co. [9] 

Supreme Court Judge Patanjali Sastri in the case of Pannalal Jankidas v Mohanlal [10] observed –

“That the party in breach mist make compensation in respect of the direct consequences flowing from the breach and not in respect of loss or damage indirectly or remotely caused."

Justice Kania, Chief Justice of the Supreme Court observed in the same case [11] that the rule stated by Alderson B has consistently been accepted as correct; the only difficulty has been in applying it.

Section 73 of the Contract act provides thus –

73. 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 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 - 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.

Illustration - (i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to A's mill informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the Mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract. [12] 

This section incorporates the Two Rules of Hadley v Baxendale. It says that compensation is not to be given for any remote or indirect loss sustained due to the breach of contract. This principle was applied in the case of U.P State Sugar Corpn v Mahalchand M. Kothari [13] where the receiver of sugar mill appointed for recovering dues of cane growers as arrears of land revenue, he contracted to supply sugar but failed to do so. However the party could not sue him as the suit could lie against the corporation into which the sick sugar mill was merged.

The section also provides that the same principles will apply where there has been a breach of a quasi-contractual obligation. A quasi contract is a contract that exists by order of a court, not by agreement of the parties. Courts create quasi contracts to avoid the unjust enrichment of a party in a dispute over payment for a good or service. A quasi contract is a contract that exists by order of a court, not by agreement of the parties. Courts create quasi contracts to avoid the unjust enrichment of a party in a dispute over payment for a good service. It is created plainly for equity purposes. The right of action depends upon the proof of breach.

Thus, according to the section, Compensation is recoverable for any loss or damage-

Arising naturally in the usual course of things from the breach

Which the parties knew at the time of the contract as likely to result from the breach.

The first rule is considered ‘objective’ as it makes the liability to compensate for the losses, to depend upon a reasonable man’s foresight of the loss that will naturally result from the beach of the contract. Whereas, the second rule is ‘subjective’ as it makes liability only to an extend where it depends upon the knowledge of the parties at the time of the contract about the probably result of the breach. The burden of proof is on the plaintiff to show that he suffered losses.

The extent of liability in ordinary cases

The extent of liability in ordinary cases is what may be foreseen by “the hypothetical reasonable man", as arising naturally in the usual course of things. In the case of Madras Railway Co. v Govinda Rau [14] where the plaintiff was a tailor and in order to make some special profit during a forthcoming festival, he delivered a sewing machine and some cloth to the defendant railway company to be sent to the place of the festival. The actions of the company’s servants delayed the delivery of the goods until some days after the conclusion of the festival. However it must be noted that the plaintiff had given no notice to the company of his special purpose. The tailor claimed damages for the expenses of travelling to the place of the festival and the stay and also the loss of profits which he would have earned. The court however, held that the damages claimed were too remote as all the claims were due to the frustration of the special purpose and that was not known to the company.

As decided in the case of Chief secretary of Gujurat v Kothari Associates [15] , in a claim for general damages the plaintiff has to assert that he has suffered loss but for the purpose of claiming special damages he has specifically to please and prove that he has sustained such special loss.

Damages cannot be recovered by a person who does not do his duty under the contract as in the case of Patel Dadubhai v GEB [16] where a person whose electricity supply is suspended for non-payment of bills. Here, he cannot claim for damages as he has not carried out his part of the contract. However, damages are allowed where there was a long delay in restoring suplly after all requirements were fulfilled, for example, the case of Gujurat Electricity Board v K. R. Patel. [17] 

Liability for building contracts

When considering building contracts, the situation is a little different. Till now the loss of expected profit was not claimable but in the case of A.T. Brij Paul Singh v State of Gujarat [18] the Supreme court came to a different conclusion since works and building contracts are undertaken only with a view to earning profits, the party committing the breach would be liable for the contractor’s loss in terms of expected profits. In the above mentioned case however, a government building contract was allotted through tenders. It fell to the share of a Poona-based contractor who transported his mobile workshop from there to work site at Rajkot in Gujarat. He had done only a part of the work when the Government unjustifiably repudiated the contract. The contractor sued for loss of profits. It was decided in the court that where in a works contract the party entrusting the work commits breach, the contractor would be entitled to claim damages for loss of profit which he expected from the project. In another case, State of Kerala v Bhaskaran, [19] where in a works contract the Government undertook the responsibility of supplying cement but failed to do so and the contractor was allowed to recover 10% of the estimated profits as the Government did not controvert it.

Sale and Supply transactions

In a sales transaction, damages are generally awarded on the basis of the difference between the contract price and market price. If the seller defaults, the buyer may have to buy elsewhere at an extra cost. If the buyer defaults, the seller may have to make a forced sale which may bring him less money. Such differences is recoverable as damages. However, if, because of the seller’s default, the buyer could not carry out production in his factory and suffered losses and such losses were held to be not recoverable being a remote consequence. It is the duty of the buyer to keep his loss to the minimum by buying his material elsewhere so as to keep his business going. In the case of Murlidhar Chiranjilal v Harishchandra Dwarkadas [20] the same principles were followed. There was a contract for supplying canvas to be consigned to Calcutta free on rail from Kanpur. The transport and labour charges were to be borne by the buyer. The seller was responsible for loading the goods onto the train for Calcutta. The seller failed to supply at Kanpur and the issue was whether damages were to be assessed according to Kanpur or Calcutta prices and whether the seller was entitled to profits which he could have made on resale at Calcutta. Justice Wanchoo held that the goods were deliverable at Kanpur and therefore damages should be assessed according to the difference between contract and market prices at Kanpur, for that was the only loss which would be said to have arisen naturally in the usual course of things from the breach. The judge said that as far as money is considered the aggrieved party is to be put in as good a situation as if the contract had been performed. It was decided by the judge that, “On this state of the evidence it could not be said that any damage naturally arose in the usual course of things."

Measure of Damages

Once it is decided whether it is the general or special damages to be recovered, the next step is to evaluate it in terms of money. This is the problem of measure of damages and is governed by some fundamental principles.

Claim for damages is not debt

In the case of Greenhills Exports (P) Ltd v Coffee Board [21] is was clearly said that a claim for damages is not debt. A claim becomes a debt only after the court awards it and till its adjudication it remains only as a claim. Till then and on the basis of the claim alone, the claimant cannot present a winding up petition of the defendant company on the ground of its inability to pay debts.

Damages are compensatory, not penal

It is important to note that damages are compensatory, not penal. Quoting Asquith J,

“It is well-settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights have been observed." [22] 

The case Robinson v Harman [23] is a perfect example. The defendant, having agreed to grant a lease of a certain property to the plaintiff, refused to do so. The court allowed the plaintiff by way of damages the expenses incurred by him n the preliminary legal work and also for the profits which he would have earned if the lease had been granted to him. Damages are given by way of compensation for the loss suffered by the plaintiff and not for the purpose of punishing the defendant for the breach.

Parke B stated the principle as –

“What damages is the plaintiff entitled to recover? The rule of the common law is that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be places in the same situation, with respect to damages, as if the contract had been performed."

Inconvenience caused by breach

The motive and manner of the breach are not taken into account but the inconvenience caused by the breach may be taken into account. In Hobbes v London & South-western Railway Co. [24] where a train pulled its passengers in the wrong direction and the plaintiff and his wife, finding no other transportation, had to walk home at midnight. The jury allowed damages for the inconvenience caused.

Loss caused by misrepresentation

When there is a difference between the price at which a thing is purchased and the real value when the misrepresentation is discovered would be paid as damages when in the case of loss caused by misrepresentation. The case of Naughton v O’Callaghan [25] where a horse was sold by misrepresentation or in the case of East v Maurer [26] where a dressing salon was sold by misrepresentation shows the application of this principle clearly.

No loss situation

As a discretion of the court, it may award nominal damages to the plaintiff in recognition of his right even if he suffers no loss the court may. In the judgement of T. A Choudhary v State of A. P [27] it was stated that –

“The court is competent to award reasonable compensation in case of breach, even if no actual damage is proved or shown to have been suffered in consequence of breach of contract."

Mental pain and suffering and Punitive damages

In ordinary cases damages for mental suffering caused by the breach are not allowed. In landmark cases of Hayes v. Dodd and Perry v. Phillips, it was decided that no damages would not be awarded for anguish and vexation caused by breach of a commercial contract. But in special cases they may be allowed. In Westesen v. Olathe State Bank [28] the Court allowed for payment of damages for humiliation and suffering caused to the plaintiff by the dishonouring his cheque.

Breach of promise of marriage

The reason for an agreement to marry being different from all other contractual relations is that both its object and the relationship created between the parties are completely different from those of any other contract. In order to recover for breach of promise, the plaintiff must establish that the two parties had a valid existing contract to marry. This can be accomplished by a showing that both parties had a clear intent for the agreement to be binding. Recoverable damages include compensatory damages for injury to the feelings and health of the plaintiff as well as to his or her reputation. A plaintiff may also recover damages for any financial loss resulting from the breach, comparable to the recovery in a breach of any other contract action, in addition to compensation for loss of advantages that would have stemmed from a marital relationship with the defendant. [29] 

Section 73 provides for the following:

Compensation not penalty

Limited damages

Damage for attributable losses

Mitigation of losses http://jurisonline.in/2010/04/damages-under-indian-contract-act/

Liquidated Damages

Liquidated damages can be defined as Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract. [30] 

English Law

English law broadly categorises damages into Liquidated damages and Penalty. When the parties to a contract agree to the payment of a certain sum as a fixed and agreed upon satisfaction for not doing certain things particularly mentioned in the agreement, the sum is called liquidated damages.

Rules have been adopted to ascertain whether the sum agreed upon is to be considered a penalty or liquidated damages.

In Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd [31] , Lord Dundein stated the rules for determining the true nature of the sum stipulated in the contract.

It Has Been Treated As Penalty:

1. Where the parties in the agreement have expressly declared the sum intended as a forfeiture or a penalty, and no other intent can be collected from the instrument;

2. Where it is doubtful whether it was intended as a penalty or not, and a certain debt or damages less than the penalty is made payable on the face of the instrument

3. Where the agreement was evidently made for the attainment of another object, to which the sum specified is wholly collateral;

4. Where the agreement contains several matters of different degrees of importance, and yet the sum named is payable for the breach of any, even the least;

5. Where the damages are capable of being certainly known and estimated.

It Has Been Considered As Liquidated Damages:

1. Where the damages are uncertain, and are not capable of being ascertained by any satisfactory and known rule;

2. Where, from the tenor of the agreement or the nature of the case, it appears that the parties have ascertained the amount of damages by fair calculation and adjustment.

Indian Position

The ambiguity felt in England over the distinction between liquidated damages and penalty was not felt in India due to statutory codification of the contract law. Section 74 of the India Contract Act deals with “Compensation of breach of contract where penalty stipulated for “

When a contract has been broken, if a sum is named in the contract as the amount be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss or proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.