UNIT 05 BREACH OF CONTRACT AND ITS REMEDIES
Breach of contract occurs when one party fails to fulfill their obligations under a contract. The Indian Contract Act, 1872 provides for different types of breaches and remedies available to the aggrieved party.
- Types of Breach of Contract
- Anticipatory Breach
This occurs before the time for performance is due. One party clearly indicates, either through words or actions, that they won’t perform their part of the contract. The aggrieved party has two options:
- Treat the contract as immediately rescinded and sue for damages without waiting for the due date.
- Keep the contract alive and wait until the due date. If the other party still fails to perform, the aggrieved party can then sue for damages.
- Actual Breach
This happens on the due date of performance or during the course of performance. It’s when a party fails to perform their promise on the scheduled date, giving the other party the right to take legal action.
- Remedies for Breach of Contract
When a contract is breached, the party who suffers is entitled to seek one or more of the following remedies.
- Rescission of the Contract
This is the cancellation of the contract. When one party breaches, the other party can treat the contract as rescinded and is excused from performing their own obligations. The aggrieved party can then sue for damages for the breach.
- Suit for Damages
This is the most common remedy. The aggrieved party can claim monetary compensation for the loss or injury suffered due to the breach. The primary purpose is to compensate the injured party, not to punish the breaching party.
Types of Damages:
Ordinary Damages: These are damages that naturally arise in the usual course of things from the breach. The aggrieved party can recover for any loss or damage that is a direct consequence of the breach.
For example, if a seller fails to deliver goods, the buyer can claim the difference between the contract price and the market price on the day of the breach.
Special Damages: These are damages that arise from special circumstances known to both parties at the time of the contract. To claim these, the aggrieved party must prove that they gave notice of the special circumstances to the other party when the contract was made.
For instance, if a carrier delays the delivery of a machine part and the factory owner had informed them that the whole factory would shut down because of this, the owner can claim for the loss of profits.
Nominal Damages: These are awarded when a breach of contract has occurred, but the aggrieved party has not suffered any actual loss. The court awards a small, token amount to acknowledge that a legal right has been violated.
Vindictive or Exemplary Damages: These are awarded to punish the breaching party for their malicious conduct. They are generally not awarded in contract cases in India, except in two specific situations:
- Breach of a promise to marry.
- Wrongful dishonor of a check by a bank.
- Liquidated Damages and Penalty:
Liquidated Damages are a pre-estimated, genuine sum agreed upon by the parties at the time of the contract as a reasonable compensation for a future breach.
A Penalty is a sum stipulated to be paid in case of a breach that is excessive and intended to threaten or compel performance.
In Indian law, there is no distinction between liquidated damages and penalty. The court will only award a reasonable compensation not exceeding the sum mentioned in the contract, regardless of whether it’s a penalty or liquidated damages.
- Suit for Specific Performance
This remedy is granted when monetary compensation is not an adequate remedy. The court orders the breaching party to actually carry out their promise according to the terms of the contract. It’s typically granted for contracts involving unique items like a specific piece of land, a rare painting, or heirlooms, where a substitute can’t be found.
- Suit for Injunction
An injunction is a court order that prohibits a party from doing a specific act. It’s a “negative” remedy, used to stop a party from breaching a negative promise in a contract.
For example, a court may issue an injunction to prevent a movie star from working for any other producer during the term of their contract with a particular studio.
- Suit upon Quantum Meruit
The phrase ‘Quantum Meruit’ means “as much as is earned.” It’s a claim for reasonable payment for the work already done. This remedy is available when a party has performed part of the contract but is prevented from completing it by the other party.
For example, if a contractor is hired to build a house but is wrongfully stopped halfway, they can sue for the value of the work they have already completed.