Breach Of Contract And Remedies – Chapter Notes
CA Foundation Business Laws Indian Contract Act Unit 5 notes on Breach of Contract and its Remedies. Covers anticipatory breach, actual breach, damages, Hadley v Baxendale, penalty, liquidated damages, rescission, quantum meruit, specific performance and injunction.
Contents
This unit explains what happens when a contract is broken. The earlier units explain how a contract is made, performed and discharged. This unit explains the legal consequences when one party fails to perform.
- Concept of breach of contract and its modes.
- How damages are measured.
- Types of damages and compensation rules.
- Other remedies such as rescission, specific performance, injunction and quantum meruit.
- Confusing anticipatory breach with actual breach.
- Claiming remote loss as damages.
- Forgetting special damages require prior notice.
- Assuming full penalty amount is always recoverable.
- Confusing damages with quantum meruit.
- Missing the option available after anticipatory breach.
Breach means failure of a party to perform his or her obligation under a contract. Breach may occur before the due date or on/during performance.
| Type of Breach | Meaning | Example |
|---|---|---|
| Anticipatory Breach | Breach before the time fixed for performance arrives. | Seller informs in advance that he will not supply goods. |
| Actual Breach | Breach when performance is due or during performance. | Seller fails to deliver goods on due date. |
Anticipatory breach is a breach of contract occurring before the time fixed for performance has arrived.
It happens when the promisor refuses altogether to perform his promise or disables himself from performing the promise before the time of performance.
Modes of Anticipatory Breach
A agrees on 15 July to supply 10 bales of cotton on 14 August. On 30 July, he informs B that he will not supply. This is express anticipatory breach. Similarly, A agrees to sell his white horse to B on 10 August but sells it to C on 1 August. This is anticipatory breach by conduct.
When a party refuses to perform or disables himself from performing his promise in its entirety, the promisee may put an end to the contract unless he has signified by words or conduct his acquiescence in its continuance.
Effect of Anticipatory Breach
| Option | What promisee may do | Consequence |
|---|---|---|
| Option 1 | Treat contract as rescinded immediately. | Sue for damages at once without waiting for due date. |
| Option 2 | Treat contract as still operative. | Wait till performance date and then sue if breach continues. |
Facts A courier was engaged for future service, but before the service period began, the employer informed him that his services would not be required.
Issue Must the promisee wait until the actual date of performance to sue?
Held No. The promisee could sue immediately because the promisor had clearly repudiated the contract before due date.
Facts A person promised to marry after a future event. Before that event occurred, he refused to perform the promise.
Issue Does refusal before the event give rise to immediate action?
Held Yes. The refusal amounted to anticipatory breach, giving the other party the right to sue immediately.
Actual breach occurs when a party fails or refuses to perform at the scheduled time or during the performance of contract.
| Actual Breach occurs | Meaning | Example |
|---|---|---|
| At the time performance is due | Party fails to perform on the appointed date. | A fails to deliver 100 bags of sugar on 1 February. |
| During performance | Party begins performance but refuses or fails midway. | A supplies 20 bags out of 200 and then refuses to supply remaining bags. |
A agrees to deliver 100 bags of sugar to B on 1 February 2022. On that day, A fails to supply them. This is actual breach committed when performance becomes due.
When breach occurs, the injured party may use one or more remedies depending on the nature of breach and the kind of loss.
| Remedy | Meaning | Nature |
|---|---|---|
| Suit for Damages | Claim monetary compensation. | Most common remedy. |
| Rescission of Contract | Treat contract as cancelled. | Discharges injured party from further obligations. |
| Specific Performance | Court orders actual performance. | Used where damages are inadequate. |
| Injunction | Court restrains party from doing prohibited act. | Used mainly for negative promises. |
| Quantum Meruit | Claim reasonable value of work done. | Restitutionary remedy. |
Section 73 lays down how compensation is measured when a contract is broken.
The injured party is entitled to compensation for loss or damage caused by breach which naturally arose in the usual course of things, or which parties knew, when they made the contract, to be likely to result from the breach.
What Can Be Recovered
What Cannot Be Recovered
- Remote loss.
- Indirect loss.
- Loss that could not reasonably have been contemplated by parties.
Ordinary / General Damages
Ordinary damages are damages that naturally arise in the usual course of things from the breach. They compensate direct and natural loss, not remote loss.
Facts The crankshaft of a flour mill broke. The owner gave it to a carrier for delivery to a foundry. The carrier delayed delivery. Because of the delay, the mill remained closed longer, and the owner claimed loss of profits.
Issue Was the carrier liable for lost profits caused by the mill remaining idle?
Held No. The carrier knew only that he was carrying a broken shaft. He was not told that the mill would remain stopped and profits would be lost if delivery was delayed.
A agrees to sell rice bags to B at ₹5,000 per bag after two months. On delivery date, market price rises to ₹5,500 and A refuses delivery. B can claim ₹500 per bag as ordinary damages because this loss arises directly from breach.
Special Damages
Special damages arise from special circumstances. They are recoverable only if those circumstances were communicated to the other party at the time of contract.
A gives a machine to carrier B for immediate delivery to A’s mill and tells B that the mill is stopped for want of the machine. B delays delivery. A can recover average profit lost during delay. But if A had a separate Government contract and did not inform B about it, loss of that Government contract is not recoverable.
Vindictive or Exemplary Damages
These are punitive damages. In contract law, they are awarded only in exceptional situations.
| Situation | Why exemplary damages may be awarded |
|---|---|
| Breach of promise to marry | It causes injury to feelings. |
| Wrongful dishonour of cheque by banker | It damages credit and reputation of customer. |
Facts A banker wrongfully dishonoured a customer’s cheque despite sufficient funds. The dishonour harmed the customer’s credit and business reputation.
Issue Can damages be awarded even if exact monetary loss is difficult to prove?
Held Yes. A business person may receive exemplary damages for loss of credit and reputation caused by wrongful dishonour.
Nominal Damages
Nominal damages are awarded where breach is proved but no real loss is suffered. The object is to recognise that a legal right was violated.
Damages for Deterioration caused by Delay
Where goods deteriorate because of delay, damages can be recovered from the carrier even without notice. Deterioration includes physical damage and loss of special opportunity for sale.
Sometimes parties decide in advance what amount will be payable if breach occurs. This may be called liquidated damages or penalty.
A sum named in the contract as payable on breach of contract.
| Type | Meaning | Simple Test |
|---|---|---|
| Liquidated damages | Genuine pre-estimate of likely loss. | Reasonable estimate. |
| Penalty | Amount fixed to threaten/force performance. | Extravagant or excessive. |
If contract states penalty of ₹1,00,000 and actual loss is ₹70,000, only ₹70,000 should be awarded. If actual loss is ₹1,50,000, recovery cannot exceed ₹1,00,000.
X promises Y, a priest, to pay ₹10,000 as charity. Relying on this, Y incurs ₹7,500 liability for temple repairs. Y can recover ₹7,500.
English Law
| Liquidated Damages | Penalty |
|---|---|
| Genuine pre-estimate of loss. | Unreasonable amount fixed to force performance. |
| Recoverable as agreed. | Not recoverable beyond actual loss. |
| Compensatory. | Punitive / terrorem. |
Indian Law
Indian law does not make a practical distinction between penalty and liquidated damages for recovery. Courts award reasonable compensation not exceeding the amount named in the contract.
Where a sum is named in a contract as payable on breach, the injured party is entitled to reasonable compensation not exceeding the amount so named.
Exception
Where a person gives a bond to Central or State Government for performance of public duty or an act in which public are interested, on breach he may be liable to pay the whole sum mentioned.
ICAI Illustrations
| Illustration | Legal point |
|---|---|
| Surgeon promises not to practise in Kolkata, failing which ₹50,000 payable. | Court awards reasonable compensation not exceeding ₹50,000. |
| Borrow ₹10,000, bond for ₹20,000 payable by five yearly instalments of ₹4,000, whole due on default. | Penalty. |
| Loan ₹10,000 repayable by five equal monthly instalments; whole due on default. | Not penalty; enforceable according to terms. |
Facts Parties had fixed a sum in a written agreement as payable on breach. The question was whether the aggrieved party could claim more than the sum mentioned.
Issue Can the court award compensation higher than the amount specified in the contract?
Held No. The Supreme Court held that the aggrieved party cannot claim more than the sum specified in the written agreement. The court may reduce the amount if reasonable.
When one party breaks the contract, the other party may treat the contract as rescinded. The injured party is discharged from his own obligations and may claim compensation for loss suffered.
A promises B to deliver 50 bags of cement on a certain day. B agrees to pay on receipt. A fails to deliver. B is discharged from his liability to pay the price.
Quantum meruit means “as much as earned”. It allows a party to claim reasonable value of work already done.
Damages are compensatory; quantum meruit is restitutionary. It focuses on payment for the value of benefit already conferred.
Conditions
When Quantum Meruit Arises
- Agreement discovered to be void or contract becomes void.
- Something is done without intention to do it gratuitously.
- Express or implied contract for services exists but remuneration is not fixed.
- One party abandons or refuses to perform contract.
- Divisible contract is partly performed and benefit is accepted.
- Indivisible contract for lump sum is completely performed but badly; deduction can be made for bad work.
If a buyer orders 12 bottles of whisky but also receives and accepts 2 bottles of brandy, he must pay reasonable price for the brandy. If X wrongfully revokes Y’s authority as agent before completion, Y can recover for work done and expenses incurred. If A delivers first instalment of 50 cotton bales but fails to supply second instalment, B must pay for the 50 bales received.
Suit for Specific Performance
Where damages are not adequate remedy, the court may direct the defaulting party to perform the contract according to its terms.
Suit for Injunction
Where a party does something which he promised not to do, the court may restrain him through injunction.
Facts N, a film star, agreed to act exclusively for one producer for one year. During that year, she contracted to act for another producer.
Issue Can the first producer restrain her from acting elsewhere?
Held Yes. She could be restrained by injunction from acting for another producer during the agreed exclusive period.
Facts A singer agreed to perform at B’s theatre for two months and promised not to perform anywhere else during that period.
Issue Can B stop the singer from performing elsewhere?
Held Yes. B can seek injunction restraining A from performing in other places.
A person who rightfully rescinds a contract is entitled to compensation for any damage sustained through non-fulfilment of the contract.
Facts A singer contracted with a theatre manager to sing for two nights every week for two months. The manager agreed to pay ₹10,000 for each night. On the sixth night, the singer wilfully absented herself.
Issue Can the theatre manager rescind and claim compensation?
Held Yes. The manager could rescind and claim compensation for damage caused by non-fulfilment of the contract.
| Case / Illustration | Topic | Principle |
|---|---|---|
| Hochster v. De La Tour | Anticipatory breach | Promisee can sue immediately after clear pre-performance refusal. |
| Frost v. Knight | Anticipatory breach | Future obligation repudiated before due date gives immediate cause of action. |
| Hadley v. Baxendale | Ordinary damages / remoteness | Remote loss is not recoverable unless special circumstances were communicated. |
| Gibbons v. Westminster Bank | Exemplary damages | Wrongful dishonour of cheque can justify exemplary damages. |
| Sri Chunni Lal v. Mehta & Sons Ltd. | Section 74 | Court cannot award more than named sum; may award less if reasonable. |
| Rice price rise example | Ordinary damages | Difference between contract price and market price is recoverable. |
| Machine delay example | Special damages | Special loss is recoverable only if special circumstances were communicated. |
| Film star / Singer illustrations | Injunction | Negative promise can be restrained by court. |
| Singer absenting from theatre | Section 75 | Rightful rescission gives compensation for loss. |
One-Line Revision
- Breach: Failure to perform contractual obligation.
- Anticipatory Breach: Breach before due date.
- Actual Breach: Breach on due date or during performance.
- Section 39: Promisee may rescind immediately unless he elects to continue.
- Section 73: Compensation for natural or contemplated loss only.
- Remote Loss: Not recoverable.
- Special Damages: Recoverable only if special circumstances were known.
- Hadley v. Baxendale: Foundation case for remoteness of damages.
- Exemplary Damages: Promise to marry and wrongful dishonour of cheque.
- Nominal Damages: Breach without actual loss.
- Section 74: Reasonable compensation not exceeding named sum.
- Quantum Meruit: As much as earned.
- Specific Performance: Court compels performance where damages are inadequate.
- Injunction: Court restrains breach of negative promise.
- Section 75: Rightful rescission gives right to compensation.
High-Frequency ICAI Traps
- Do not call every advance refusal actual breach; it is anticipatory breach.
- If aggrieved party keeps contract alive, the other party may still perform later.
- Remote and indirect losses are not recoverable.
- Special damages require notice of special circumstances.
- Exemplary damages are exceptional, not ordinary.
- Indian law awards reasonable compensation, not automatically the full penalty amount.
- Quantum meruit requires claimant not to be in default.
- Specific performance is discretionary, not automatic.
- Injunction restrains; it does not compel positive performance.
Breach of Contract and Remedies — One Page Recall
- Failure to perform contractual obligation.
- Gives injured party right of action.
- Two modes: anticipatory and actual.
- Before time for performance.
- Express: spoken or written refusal.
- Implied: conduct disables performance.
- Promisee may rescind now or wait.
- On due date.
- During performance.
- Refusal or failure to perform.
- Immediate right of action.
- Section 73.
- Natural loss.
- Contemplated loss.
- No remote or indirect loss.
- Duty to mitigate.
- Ordinary damages.
- Special damages.
- Exemplary damages.
- Nominal damages.
- Deterioration by delay.
- Pre-fixed damages.
- Section 74.
- English law distinguishes them.
- Indian law awards reasonable compensation.
- Cannot exceed named sum.
- Government bond exception.
- Rescission: contract cancelled.
- Specific performance: court compels performance.
- Injunction: court restrains prohibited act.
- Quantum meruit: as much as earned.
- Section 75: compensation after rightful rescission.
- Hochster v. De La Tour — sue immediately.
- Frost v. Knight — future refusal is breach.
- Hadley v. Baxendale — remoteness rule.
- Gibbons v. Westminster Bank — exemplary damages.
- Sri Chunni Lal — no more than named sum.