Breach Of Contract in Business Law
Breach Of Contract in Business Law
- Breach means failure of a party to perform his/her obligation under a contract.
- Breach of contract may arise in two ways:
(1) Actual breach of contract
(2) Anticipatory breach of contract
ANTICIPATORY BREACH OF CONTRACT
- 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 passies.
- Example 1: Where A contracts with B on 15th July to supply 10 bales of cotton for a specified sum on 14th August, and on 30th July informs B, that he will not be able to supply the said cotton on 14th, 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 August, but he sells this horse to Con 1st of August, the anticipatory breach has occurred by the conduct of the promisor.
- 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(1) To either treat the contract as “rescinded and sue the other party for damages from breach of contract immediately without waiting until the due date of performance;
(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.
ACTUAL BREACH OF CONTRACT
- In contrast to anticipatory breach, it is a case of refusal to perform the promise on the scheduled date.
Actual breach of contract may be committed
- (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
SUIT FOR DAMAGES
- 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.
- 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.
Kinds of Damages
- (i) Ordinary damages: Compensation for any loss or damage 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.
- 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.
- (iii ) 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 –
- for breach of promise to marry because it causes injury to his or her feelings; and
- 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. (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.
- (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).
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.
PENALTY AND LIQUIDATED DAMAGES
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.
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. 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.
Exception: Where any person gives any bond to the CG/SG 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 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
- Penalty and liquidated damages have one thing in common that both are payable on the occurrence of a breach of contract.
- Point of differences are:
- If the sum payable is so large as to be far in excess of the probable damage on breach, it is certainly a penalty.
- 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.
- 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.
- 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.
- English law makes a distinction between liquidated damages and penalty, but no such distinction is followed in India.
(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.
(ii) Quantum Meruit: 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 Meruit i.e. as much as the party doing the service has deserved. 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 meruit is to recompensate the party or person for value of work which he has done. Damages are compens story in nature while quantum merit is restitutory.
The claim for quantum meruit arises in the following cases:
– (a) When an agreement is discovered to be void or when a contract
– (b) When something is done without any intention to do so gratuitously.
– (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.