BREACH OF CONTRACT AND ITS CONSEQUENCES UNDER INDIAN CONTRACT ACT

WHAT IS BREACH OF CONTRACT?

A contract is breached or broken when any of the parties fails or refuses to perform its promise under the contract. Breach of contract is a legal cause of action in which a binding agreement is not honoured by one or more parties by non-performance of its promise by him renders impossible.

According to Section 39, where the party has refused to perform or disabled himself from performing, his promise in its entirely, the other party may put an end to the contract, unless that other party has expressly or impliedly signified its consent for the continuance of contract.

If the other party chooses to put an end to the contract, the contract is said to be broken and amounts to breach of contract by the party not performing or refusing to perform its promise under the contract. This is called repudiation.

Thus, repudiation can occur when either party refuses to perform his part or makes it impossible for him to perform his part of contract in each of the cases in such a manner as to show an intention not to fulfil his part of the contract.

CONSEQUENCES OF BREACH OF CONTRACT

Chapter VI (Section 73 to 75) of the Indian Contract Act,1872 deals with the consequences of breach of the contract.

  • SECTION 73 1ST PARAGRAPH DEALS WITH 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, which naturally arose in the natural 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.

No compensation shall be given to any remote and indirect loss or damage sustained by reason of breach.

  • COMPENSATION IN REGARD TO FAILURE TO DISCHARGE OBLIGATION WHICH RESEMBLES THOSE CREATED BY THE CONTRACT

An obligation resembling those created by contract has been incurred and has not been discharged, any person affected 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.

  • COMPENSATION FOR LOSS OR DAMAGE WHICH NATURALLY AROSE IN THE USUAL COURSE OF THINGS FROM SUCH BREACH

Compensations to be recovered for loss or damage which the parties knew or which would have naturally arisen in the usual course, to be likely to result from the breach of it.

  • SECTION 73 2nd PARAGRAPH DEALS WITH REMOTE AND INDIRECT LOSS OR DAMAGE

It states that no compensation is payable for remote and indirect loss or damage arising out on account of breach of contract. The indirect loss cannot be said to arise on usual course of things. The aggrieved party can claim compensation for indirect loss or loss of profit, only where it is expressly made known to the other party or contemplated by contract that breach of non-performance of the contract would result in some indirect loss or loss of profit to the party term remoteness of damage refers to the legal test used for deciding which type of loss caused by the breach of contract may be compensated by the award of damage.

  • SECTION 73 3rd PARAGRAPH DEALS WITH BREACH OF RESEMBLING CONTRACT

It confers a statutory right upon a party to get compensation from a party who has incurred a statutory obligation to pay compensation in case default even though there may be no contract to pay compensation. The party in default is under obligation to pay compensation to injured party as if there was contract and has broken such contract.

  • SECTION 73 4th PARAGRAPH DEALS WITH: MITIGATION OF LOSSES

It explains that the means which existed of remedying the inconvenience caused by the non-performance of the contract must be considered while calculating the damage or loss for breach of the contract. [M. Lachia Setty & Sons Ltd v. Coffee Board Bangalore, AIR 1981 SC 162, 168]

  • SECTION 74 PENALTIES IN REGARD TO BREACH OF CONTRACT

The party to the contract may agree at the time of contracting that, in the occurrence of breach, the party in default have to pay a stipulated sum of money to the other, or may agree that in the event of breach by one party any amount paid by him shall be forfeited. If this sum is genuine pre-estimate of damage likely to flow from the breach is called ‘liquidated damages. If it is not genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be called as ‘penalty’.

Section 74 provides for the measure of damages in two classes: (a) where the contract names a sum to be paid in case of breach; and (b) where the contract contains any other stipulation by way of penalty (Fateh Chand v. Balkrishna Das, [1964] 1 SCR 515).

  • SECTION 75. COMPENSATION TO THE PARTY RIGHTFULLY RESCIDING THE CONTRACT

A person who rightfully resides the contract is entitled to compensation for any damage which he has sustained through non fulfilment of the contract .A party to a contract is entitled to rescind the contract in circumstances given in Section 39, 53, 55, 64 and 65 of the Contract Act .The claim for compensation under Section 75 is maintainable when the right of repudiation of the contract has been exercised either of the Section 39, 53, 54 and 55 of the Contract Act.( Mirza Javed Murtaza v. UP Financial Corpn), Kanpur, AIR 1983 Alld. 235.)

TYPES OF DAMAGES

There may be situations that there is no clause in the contracts specifying the liquidated compensation to be paid in case of breach of contract, in that case, the court shall decide the amount (Unliquidated compensation) to be given as compensation based on the following types of damages: –

  • Nominal Damages: – these are the small amount of money give to the plaintiff when he has suffered no significant losses or injury caused to the plaintiff. These are given when there has been a breach but the party fails to prove the actual loss resulting from the breach of contract.
  • Substantial Damages: – this compensation is given where though the extent of the breach of contract is proved but there are uncertainties regarding the calculation of the amount.
  • Aggravated Damages: – in this case, the damage ascertained previously exceeds because of the malafide conduct of the defendant. Here the damage caused to the plaintiff is aggravated due to the conduct or manner in which the injury has been inflicted to the plaintiff.
  • General Damages: – damages which arise out of the normal course of action. It’s the damage which arises in the normal course of events. Once the damage is proven general damage can be claimed by the affected party.
  • Special Damages: – these are the damage which arises out of the circumstances which were reasonably anticipated by the parties at the time of entering into the contract. The proof of damage is not enough but the special proof of such damage is required to claim special damage.

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