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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 ‘Hadley V/s Baxendale’.
Q.3. What are the remedies for Breach of Contract?
- 4. Explain the concept of ‘Quantum Meruit’ and ‘Liquidated damages’.
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 contract may be discharged?
SHORT NOTES
- Remoteness of damages
- Suit for Damages
SYNOPSIS
- Introduction-
- Damages-
- A) Remoteness of damages
- General Damages
- Special Damages
- B) Measures of Damages
- Damages are compensatory and not penal in nature
- Nominal damages
- Duty to mitigate damage
- Damages for pre-contract expenditure
- Damages for mental pain and suffering
- Liquidated damages and penalty
- i) Liquidated damages, or
- ii) Penalty
- Earnest money or Advance
- C) Compensation on rightfully rescinding the contract (S. 75)
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[1]:-
The party injured by the breach of a contract may bring suit for damages. ‘Damages’ means ‘the compensation in terms of money for the loss suffered by the injured party’. Thus, ‘damages’ is the remedy for ‘damage’ sustained by the innocent party[2]. 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:-
A) Remoteness of Damages[3]:-
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 rules in-Hadley V/s Baxendale[4]
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 “plaintiff is entitled to get damages for breach of contract and for loss of production but not for profit”. Justice Alderson B observed that “Damages 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.”
This decision has laid down two important rules as to recovery of damages, viz.
1) General Damages[5]:-
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[6]:-
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[7]
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. Baxendale’s 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[8]:-
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[9]:-
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[10]:-
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[11]:-
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[12]
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[13]:-
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[14]
If the amount fixed is found to be excessive and highly disproportionate to the likely loss, it is called a “penalty”. 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.
- 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
(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[15]:-
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.
In H. Sowbhagya V/s N.G. Ltd[16]
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/—can 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[17] (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 night’s 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.
III. Quantum Meruit[18]:-
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 “law, as well as justice, should try to prevent unjust enrichment,” i.e. enrichment of one person at the cost of another. In other words, ‘Quantum Meruit’ 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.
In Dc Bernardy V/s Harding[19]
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 ‘Quantum Meruit’ and ‘damages’ is that the claim for ‘Quantum Meruit’ 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 ‘quantum meruit’, the court grants reasonable compensation based on the work done multiplied by the present market price.
IV] SPECIFIC PERFORMANCE AND INJUNCTION[20]:-
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 ‘damages’ 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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[1] नुकसान भरपाई [नुकसानी
[2] ‘Damages’ is not plural of ‘damage’ but these are two different terms. ‘Damage’ denotes the loss caused to person, property or reputation, whereas, ‘damages’ is the money compensation awarded by the court for such ‘damage’ caused to the person, property, or to reputation.
[3] नुकसान भरपाईसाठी मर्यादा घालणे. [नुकसान की दूरदर्शिता]
[4] (1854) 9 Ex 341.
[5] सर्वसाधारण नुकसान भरपाई.
[6] विशिष्ट नुकसान भरपाई.
[7] (1873) LR 8 CP 131.
[8] नुकसान भरपाई ही भरपाईच्या स्वरुपात असली पाहिजे शिक्षेच्या नाही. [नुकसान क्षतिपूर्ति हैं और प्रकृति में दंडात्मक नहीं हैं]
[9] नाममात्र नुकसान भरपाई. [नाममात्र का हर्जाना]
[10] नुकसान कमी करण्याचे कर्तव्य. [क्षति को कम करने का कर्तव्य]
[11] करारापूर्वी केलेल्या खर्चाबद्दल नुकसान भरपाई. [पूर्व-करार व्यय के लिए नुकसान]
[12] 1973All E.R.
[13] पूर्व निश्चित केलेली नुकसान भरपाई [पहले तय नुकसान भरपाई]
[14] पूर्व निश्चित रक्कम शिक्षेच्या स्वरपातील असल्यास/आढळल्यास [दंड]
[15] इसार रक्कम [अग्रिम धन]
[16] (AIR 2004 Kant. 155).
[17] योग्य प्रकारे करार रद्द केल्यास मिळणारी नुकसान भरपाई. [करार को सही तरीके से रद्द करने पर मुआवजा]
[18] योग्य ती नुकसान भरपाई – जेव्हा एक व्यक्ती करार प्रमाणे काही प्रमाणात कम करते व पुढील कम सामनेवाले करून देत नाही त्या केली जेवढे कम केले किवां सेवा दिली त्याचा योग्य मोबदला त्यास मिळण्याचा अधिकार आहे.
[प्रदान किए गए कार्य या सेवाओं के लिए उचित मुआवजा]
[19] (1873) 3 Ex. 822.
[20] ठरल्याप्रमाणे कराराची पूर्तता करून मागणे [विशिष्ट निष्पादन और निषेधाज्ञा