âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 90
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DAMAGES FOR BREACH OF CONTRACT
(Ss. 73 to 75)
QUESTION BANK
Q.1. Explain the principles as to what damages are recoverable in an action for breach
of a contract. State briefly the principles on which damages are awarded on the
breach of a contract.
Q.2. Explain the rule laid down in âHadley V/s Baxendaleâ.
Q.3. What are the remedies for Breach of Contract?
Q. 4. Explain the concept of âQuantum Meruitâ and âLiquidated damagesâ.
Q.5 What are the provisions under the Indian Contract Act regarding penalty and
liquidated damages?
Q.6. What are the various modes in which a contract may be discharged?
SHORT NOTES
1. Remoteness of damages
2. Suit for Damages
SYNOPSIS
âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 91
I.
Introduction:-
On the breach of contract by one of the parties to the contract, the other party may
sue for (i) damages, (ii) Quantum Meruit, or (iii) Specific performance and Injunction.
These are the remedies available to the injured party on breach of contract by the other
parties. We will discuss these remedies one by one:-
II.
Damages:-
The party injured by the breach of a contract may bring suit for damages.
âDamagesâ means âthe compensation in terms of money for the loss suffered by the injured
partyâ. Thus, âdamagesâ is the remedy for âdamageâ sustained by the innocent party. Every
action for damages raises two problems, viz:-
(i) To decide actually what consequences (loss) or effects occurred due to breach
(i.e. remoteness of damages)?
(ii) To measure the quantum of compensation to be paid for such consequences or
effects (i.e. Measures of damages)?
We will discuss them one by one:-
âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 92
A)
Remoteness of Damages:-
Every breach of contract may result in a number of losses to innocent parties, e.g.,
X ordering a cup of tea in a hotel. He drank almost all the tea and found a dead fly at the
bottom. He immediately got shocked by it and suffered dysentery. Due to dysentery, he
could not take his LL.B. examination properly. He failed in some subjects but passed
ATKT without wasting a year. After passing his LL.B., he could not practice well.
Therefore, he could not get a beautiful wife as he expected and also could not get a dowry
as he wished. Now the question is, can he recover damages for all these consequences
followed by the cup of tea with the fly? Obviously not. He, at the most, could get damages
for dysentery and for nothing else. The consequences of a breach may be endless, but there
must be an end to liability. The defendant cannot be held liable for all that follows from his
breach. There must be a limit to liability; beyond that limit, the damage is said to be too
remote and, therefore, irrecoverable. Therefore, it is important to decide where to limit
liability.
A good attempt has been made to lay the limit on liability by laying some important
Facts:-The plaintiff had a mill. The mill was stopped by the breakage of the crankshaft (by
which the mill was working). The defendant was a carrier agency and agreed to carry the
crankshaft to the manufacturer for repair. It was known to the defendant that the mill was
closed for want of a crankshaft. However, the defendant delayed the delivery because of
his neglect; the plaintiff could not receive the crankshaft for many days.
So he sued the defendant for damages for
a) breach of contract.
b) for loss of production during the period of stoppage of the mill, and
c) for loss of profit on production, which he would have earned.
Issue:- Whether the plaintiff is entitled to get damages under all these heads?
The Court held:- that âplaintiff is entitled to get damages for breach of contract and for
loss of production but not for profitâ. Justice Alderson B observed that âDamages
recoverable for breach of contract should be such as may fairly and reasonably be
considered either arising naturally, (i.e., according to the usual course of things, from
such breach of the contract itself) or such as may reasonably be supposed to have been in
the contemplation of both parties, at the time they made the contract, as the probable
result of the breach of it.â
This decision has laid down two important rules as to recovery of damages, viz.
1)
General Damages:-
1
(1854) 9 Ex 341.
âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 93
General damages are those which arise naturally in the usual course of things from
the breach itself. Such damages can reasonably be foreseen.
2)
Special Damages:-
Special damages are those which arise on account of the unusual circumstances
affecting the plaintiff. They are not recoverable unless the special circumstances were
brought to the defendant's knowledge.
In Horne V/s Midland Railway Company
Facts: Plaintiff, a shoe manufacturer firm, entered into a contract to supply a quantity
of shoes to a firm in London for the use of the French army at an unusually high price. The
shoes were to be delivered by the 3rd of February. They consigned the shoes with the
defendant railway company, telling them that the consignment must reach by the 3rd, but
they did not say that there was anything exceptional in the contract. The consignment was
delayed, and the consignee refused to accept it. The plaintiff had to sell them in the market
at about half their contract price.
The Plaintiff sued for breach of contract and for the price they would have received from
the contract.
The Court held that since the circumstances leading to the special loss had not been
communicated to the defendant, the defendant could not be made liable for them.
The concept of giving general and not special damages unless foreseeable or
brought to the other party's knowledge is provided in S.73 of the Indian Contract Act. S.
73 of the Act incorporates the principle of Hadley V. Baxendaleâs case.
B]
Measures of Damages-
Once the heads of loss are determined, they have to be evaluated in terms of money.
This is the problem of damages measures and is governed by some fundamental principles,
viz.
1)
Damages are Compensatory and not penal in Nature:-
The main object of awarding damages is that the person who sustains loss due to
breach of a contract should be put, as far as it is possible, in the same monetary position in
which he would have been if there had been no breach and the contract would have
performed. The damages are not awarded to punish the party for breach of contract but to
compensate him.
2)
Nominal Damages:-
Where the plaintiff suffers no loss in actual terms of money or in the form of
inconvenience, the court may still award him nominal damages in recognition of his right.
But this is at the discretion of the court. The court may refuse to award any damages or
may award even substantial damages.
3)
Duty to Mitigate Damage:-
âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 94
The injured party has to make reasonable efforts to avoid the losses resulting from
the breach of contract to keep his loss as minimal as possible (Explanation to S. 73).
4)
Damages for Pre-Contract Expenditure:-
Pre-contract expenditure might be recovered as damages if it were within the parties'
contemplation. For example, a leading actor repudiated the contract, which caused the
producer to abandon the film project. Though the loss of profit cannot be estimated, the
court can award money spent by the producer to engage the director, designer, etc.
5)
Damages for Mental Pain and Suffering:-
In ordinary cases, damages for mental pain and suffering caused by the breach are
not allowed. However, they may be allowed in special cases, i.e., when the breach was
wanton or reckless and caused bodily harm and where the defendant had reason to know
that the breach would cause mental suffering.
In Jarvis V/s Swan Tours Ltd
Fact: The defendant was a Tourist Company that announced many services during the tour,
relying on which the plaintiff joined the tour. However, the defendant did not provide any
of the services promised. The plaintiff sued for disappointment and mental stress.
Court held- In this case, damages for mental distress can be recovered.
6)
Liquidated Damages and Penalty:-
Sometimes, contracting parties may determine beforehand the amount payable in
case of a future breach of contract by any party.
According to English law, the sum so fixed may either be liquidated damages or a penalty.
i)
Liquidated Damages:-
If the amount fixed represents a genuine pre-estimate of the probable damage that
is likely to result from the breach, it is liquidated damages. In England, if the sum fixed
by the parties is found to be liquidated, damages, the whole of it is recoverable. The court
has no power to reduce or increase the amount.
ii)
Penalty
If the amount fixed is found to be excessive and highly disproportionate to the likely
loss, it is called a âpenaltyâ. It is not the actual loss or damage which occurs due to breach
but a sort of coercion for not breaking that contract. Hence it is not recoverable; therefore,
the court may reject the same. Damages then (in case of penalty) will be calculated
according to ordinary principles.
S. 74 lays down the rules regarding liquidated damages and penalties in India. This
provides that where the sum is named in the contract as the amount to be paid in case of a
breach, regardless of whether it is a penalty or not, the party suffering from a breach is
entitled to receive reasonable compensation not exceeding the amount so named.
Illustrations
âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 95
(a) A contracts with B to pay B Rs. 1,000/-if he fails to pay B Rs. 500/- on a given day. A
fails to pay B Rs. 500/- on that day. B is entitled to recover from A such compensation,
not exceeding Rs. 1,000/-, as the Court considers reasonable.
(b) A contracts with B that if A practices as a surgeon within Calcutta, he will pay B Rs.
5,000/-. A practices as a surgeon in Calcutta. B is entitled to such compensation, not
exceeding Rs. 5,000/-, as the Court considers reasonable.
(c) A gives B a bond for the repayment of Rs. 1,000/- with interest at 12 per cent at the end
of six months, with a stipulation that, in case of default, interest shall be payable at the
rate of 75 per cent, from the date of default. This is a stipulation by way of penalty, and
B is only entitled to recover from A such compensation as the Court considers
reasonable.
7)
Earnest money or Advance:-
Sometimes, a small amount is given as earnest money (or advance) for the
performance of a contract. But when the purchaser does not purchase the thing, the earnest
money given can be forfeited. However, it is not a general rule.
Facts:- Appellant undertook to purchase property of respondent worth Rs.
22,24,149/-. For this purpose, he paid a 25% amount of Rs. 5,56,037/- to the appellant as
earnest money. He further agreed to pay the remaining balance of 75% amount within 30
days; the time could be extended up to a further 60 days by paying interest on the amount.
However, the appellant could not pay the remaining balance of the amount in the agreed
period. Hence, the respondent rescinded the contract and forfeited the earnest money paid.
The Appellant sued for earnest money.
The Court held that the forfeiture of the whole amount of Rs. 5 56 037/âcan not be
justified. It is a penalty. Hence, the court ordered a refund of Rs. 4 lakh approximately to
the appellant.
C)
Compensation on Rightfully Rescinding the Contract (S. 75):-
A person rightfully rescinding a contract is entitled to compensation for any damage
he has sustained due to another party's non-performance of the contract.
Illustration
A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights
every week during the next two months, and B engages to pay her 100 rupees for each
nightâs performance. On the sixth night, A willfully absences herself from the theatre, and
B, in consequence, rescinds the contract. B is entitled to claim compensation for the
damage which he has sustained through the non-fulfilment of the contract.
2
(AIR 2004 Kant. 155).
âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 96
III. Quantum Meruit:-
Where one party to the contract has done some work or rendered some service, and
the other party's further performance is made useless, he may recover reasonable
compensation for the work or services rendered. It is based on the principle that âlaw, as
well as justice, should try to prevent unjust enrichment,â i.e. enrichment of one person
at the cost of another. In other words, âQuantum Meruitâ means so much to be given, as
much he is entitled to receive.
The court allows recovery of the amount in several cases where a person has
rendered services under a supposed contract that later turned out to be a nullity. The
obligation to pay reasonable remuneration for the work done when there is no binding
contract between the parties is imposed by the rule of law and not by an inference of fact
arising from the acceptance of services or goods.
However, where adequate relief is available under the contract itself, the court may
not provide any relief under a quasi-contract.
Facts:- The defendant was to erect and let the seats so erected to view the funeral
of the Duke of Wellington. The defendant, therefore, appointed the plaintiff as his agent to
advertise and sell tickets for the seats. The plaintiff was to be paid a commission on the
tickets sold by him. The plaintiff incurred some expenses in advertising for the tickets, but
before any of the tickets were actually sold by him, the defendant wrongfully revoked the
authority to sell tickets.
The Court held that the plaintiff was entitled to recover the expenses he had already
incurred under the rule of quantum meruit.
The difference between a suit for âQuantum Meruitâ and âdamagesâ is that the
claim for âQuantum Meruitâ is not based on the original contract, but the claim for damages
is based on the original contract. Secondly, in a claim for damages, the court grants
damages or liquidated damages (i.e. damages pre-determined by the parties), whereas, in
a claim for âquantum meruitâ, the court grants reasonable compensation based on the
work done multiplied by the present market price.
3
(1873) 3 Ex. 822.
âLaw Masterâs Publicationâ âDamages For Breach Of Contractâ Prof. Santosh D. Bhosale 97
IV]
SPECIFIC PERFORMANCE AND INJUNCTION:-
Sometimes, the party to the contract may, instead of getting damages, sue for
specific performance of the contract or restrict the other party from making a breach
through an Injunction. These remedies are available to him if, in the court's opinion, the
ordinary remedy of âdamagesâ would not provide an adequate remedy to the party, or there
exists no standard to measure damages in terms of money, which another innocent party
will suffer. (For detailed provisions, see Specific Relief Act in notes of Contract II).
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