BREACH OF CONTRACT AND DAMAGES UNDER INDIAN CONTRACT ACT

INTRODUCTION

The Indian Contract Act 1872 defines the term contract as “An agreement enforceable by law as to contract”[1] it is a legally binding agreement that is formed with the consent of two or more parties agreed on the point mutual terms forming consideration for each other. With the growing technology and dynamic changes, the role of the law and the cases by the court is increasing. The majority of the people are well versed while taking out the transaction through a contract. Formation of a contract in contemporary times is in a more detailed way by specifying the interest of both the parties and in case if the interest of either of the parties is distorted the means for safeguarding and protecting the interest is also mentioned. Breach terms for a contract are also provided in the contract itself which is earlier generally negotiated and agreed upon by the parties involved in the contract so that it makes the task easier for the aggrieved party to later claim for the loss suffered due to such breach.

WHAT IS A BREACH?

The non-performance of a contract without any legal reasonability is called a breach. It happens when one of the parties to the contract fails to perform by the terms agreed upon in the contract. A contract can be either written or oral contract. Breach of contract is a type of discharge of contract that is after which contract will not be performed. Section 73 of the Indian contract act details the breach of the contract. It states that “Compensation of loss or damage caused by a 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 because 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 non-performance of the contract must be taken into account.”

The essentials of Sec 73 can be traced down as follows:

  • Breach of Contract,
  • Compensation,
  • Two parties (Not the third party),
  • Parties knew (The compensation was decided)

Indian laws are materially equal in case of a breach of England laws.

In the case of Hadley v Baxendale [1854],[2] there was a mill owner, one day the shaft that was used in the mill got broke so the mill owner wanted to get the shaft repair. So the mill owner contacted a transportation company so that they can pick the shaft and transport same to the repair shop. The transportation company picked the shaft and got delayed in delivering it to the repair workshop, the mill owner only had one shaft this fact was not known to the transportation company. So, due to this delay by the transportation company mill remains closed. And the mill owner had only one mill. Going through the customary practice followed in this business people generally had more shafts and mills so the transportation company considered the customary practice. The court said the damages must be given in the case only were that loss occurred out of natural cause. Court also said that there is a difference between liquidated and unliquidated damages.

For damages:

  • The Contract must be referred
  • Damages must be given to the natural cause.
  • Parties have the right to give named damages in the contract.
  • A Court can give special damages in case of special circumstances.

This same issue has been settled in the Supreme Court of India In Karsandas H. Thacker v. The Saran Engineering Co. Ltd.[3] the issue of the remoteness of damages, it was held that distant and indirect loss or harm supported because of breach won’t qualify the party for any compensation.

Where two parties have made a contract and one of them has defaulted the damage to the other party which is in respect to the breach of contract should be fair and reasonable that is arising out of the natural and usual course of things for such breach of contract itself as the probable result of the breach.

Sec 73 (1) – Special Damages and General damages

Sec 73 (2) – Remote damages are not applicable (remoteness theory of damage is applicable in a contract)

Sec 73 (3) – if for necessity certain goods are provided to a minor. Later minor has to be reimbursed it through their estate. If the minor doesn’t do it then this act of non-performance will be treated the same as the breach of contract. This helps the person who provides necessity to not be at the loss position hence people tend to support minors as they later get the reimbursement with the help of this regulation. So, to preserve the rights of both parties the remoteness theory is applied which means only the compensation for those damages which are directly linked to the act is to be done. So that neither of the parties has the extra burden of the act which they have not done.

Different types of damages involved are Liquidated and Unliquidated damages.

  • Liquidated damages are the remedy given in the case of breach of contract. These have set principles for the calculation of damages given in Sec 57 of the Indian Contract Act. These are the pre-estimated loss.

Liquidated damage is of three types:

  • General damages
  • Special damages
  • Nominal damages
  • Unliquidated damages as the damages which are given in case of torts. No set principle for the calculation of the damages.

What are the objects of damages?

  • The main and first object of providing damages is to provide a sense of security in the parts of both parties.
  • To put the aggrieved party in the same position as it would have been if the breach of contract was not been happened.
  • To bring the parties back to square one whether they were before the formation of the contract.

Calculation of damages is done by also done by taking the other party also. And it is seen that were there any measures that aggrieved party could do to lessen down the losses if such breach was foreseen, this is the duty which the aggrieved party has.

If there are no such circumstances of lessening the damage then the breach committed by the other party is liable to pay the damages and if some circumstances are there where the aggrieved party has the means to reduce the losses but they fail to do so then as a consequence of it the other party can try to reduce the number of damages while calculating the damages.

The general principle of claiming the damages by the aggrieved party is that it is entitled to recover the damages from the defaulting party. The cases of the supreme court and the law stated in both works together to give utmost possible compensation or damages in case of the breach of contract by examining the position how the breach happened what led to the non-performance by the defaulting party and providing an equivalent solution. Even we can consider the Indian contract act as the one of oldest acts it is still governing the contracts in the present scenario, but it surely needs certain changes with the changing society that are supported by the cases decided by the supreme court of India. Both words are in the same line and together to provide the rights of the parties to being enforced.

Author(s) Name: Shubhangi Agrawal (Hidayatullah National Law University, Raipur)

References:

[1] Indian Contract Act, 1872, Act No. 9 of 1872 (India)

[2] Hadley v. Baxendale 156 ER 145 (1854)

[3] Karsandas H. Thacker v. The Saran Engineering Co. Ltd. AIR 1965 SC 1981(India)

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