Professional Documents
Culture Documents
September 9, 2011
IIM - Ahmedabad
Introduction
A contract, which is a legal relationship can be brought to an end only by the Discharge of the Contract.
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Performance Attempted Performance or Tender Impossibility of Performance Agreement Breach of Contract Operation of Law Lapse of Time
Specific Performance
Specific Performance Only granted in rare cases: In a contract, parties only have: 1) The right to be compensated for damages; and 2) Do not have right to impose penalty on the other party or benefit from the breach. Specific performance is awarded only in transaction dealing with immovable property In most cases, a monetary equivalent is provided to compensate the innocent party for the breach of the contract Compensation is not a penalty. It is only aimed at putting the parties in the position they would have been in if the contract had been performed and not breached.
Types of Damages
Unliquidated damages Liquidated damages Actual damages Punitive damages Nominal damages Damages for pain and suffering
Remedies - Compensation
S.73 - 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 a 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 by reason of the breach.
Classification of Breach
Actual breach or present breach. Anticipatory breach Where the party in default has repudiated the contract before performance is due or before it has been fully performed. Fundamental breach Where the party in default has committed what in modern judicial parlance (going to the root of the contract- condition or warranty)
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General Principles
When there is such a breach of contract by one party than the other party is entitled to discharge himself and does so, he is released from further performance. He is not obliged to accept any further performance from the party in breach.
The duty of the party in breach as well as his right of further performance comes to an end. Resulting in secondary liability to compensate in damages. Giving rise to the right of the injured party to claim damages.
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Liquidated Damages
Section 74 of the Indian Contract Act: When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Liquidated Damages
Nature of damages depends on: Character of transaction and Its special nature, if any, The relative situation of the parties, The statutory rights and obligations accruing from the transaction Intention of the parties as evidenced in the contract, The particular stipulation which is contended to be penal in nature If found to be burdensome or oppressive and it may operate in terrorem the provision could be found to be a Penalty.
Business Contracts
If the contract does not provide on the consequences of breach, the loss of profit is awarded as damages. The theme can be divided in to further parts. In a sale contract, there is a reference to the sale price. This makes quantification of the loss relatively easy. The courts have formulated specific principles in relation to this.
In other business contracts the assessment would be on the general principles.
Reliance Loss is that which the plaintiff suffered because he relied on the fulfillment of a contract and incurred certain expenses,
Mitigation
The rule that the party in breach of contract be placed as far as money can do it, in as good a situation as if the contract had been performed, is qualified by one more principle: Which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part which is due to his neglect to take such steps.
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Rules of Mitigation
The plaintiff cannot recover the losses consequent upon the default of the defendant if the plaintiff could have avoided the loss by taking reasonable steps. If the plaintiff avoids or mitigates the loss, he cannot recover for such avoided loss even if he takes steps which are more than what was reasonable required of him. Where the plaintiff suffers loss or incurs expense despite taking reasonable steps to avoid or mitigate the loss resulting from the defendants default, he may recover the further loss due to expense.
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Mitigation Continued
The explanation of S.73 does not create an independent actionable duty to mitigate but a factor to be taken into account in assessing the damages naturally flowing from the breach. Mitigation also finds applications in the contract of employment. The duty of mitigation cannot impose any burden of an unusual nature.
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Damages In General
The consequences of a breach are limited by what the parties have expressly or impliedly provided, or the way the class of contract is normally conducted. Specific performance is awarded only in rare transactions dealing with immovable property. In most cases, a monetary equivalent is provided to compensate the innocent party to put him in the position he would be if the contract were performed. A party is only compensated for the loss and not allowed to impose a penalty or to make a gain from the breach. Parties come together in a contract for equal exchange a monetary equivalent is usually adequate compensation for a breach. Damages will not be too remote if they flow from the normal business position of the parties as the court assumes that this is known to both of them.
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Remoteness of Damage
Compensation must be in respect of the direct consequences flowing from the breach and not in respect of loss or damage indirectly or remotely caused.
The party who has suffered the loss should be placed in the same position, as far as compensation in money can do, as if the party in breach has performed his contract or fulfilled the duty.
Hadley v. Baxendale
The Crankshaft Case delay in transportation by canal instead of rail Criteria for award parties intent, purposes and awareness. Absent explicit communication inference based on parties actions. Importance of communicating special circumstances. Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should as such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract, itself.
Position in India
The principles of Hadley v. Baxandale are embodied in the first two paragraphs. The principle has two parts in limiting consequences of breach. First: if the parties have in express terms impliedly provided for the consequences, these should be followed. Second: Take the contract and its breach to be as it usually happens in general practice.
Remoteness of Damage: Parties are bound by the consequences they have contemplated
The Supreme Court has recognized that Section 73 codifies the judgment in Hadely v. Baxendale. In Pannalal Jankidas v. Mohanlal it noted: The rule stated by Alderson B has consistently been accepted as correct; the only difficulty has been in applying it. The distinction drawn is between damages arising naturally (which means in the normal course of things) and cases where there were special and extraordinary circumstances beyond the reasonable provision of the parties. The distinction between these types is usually described in English Law as that between general and special damages.
The cases on remoteness of damage have abated as all commercial contracts have a clause stating: Neither party shall be liable to the other party for indirect or consequential losses.
Remoteness of Damage: Parties are bound by the consequences they have contemplated
A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, does not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived if the boat had sailed according to the contract. After that date, and before the arrival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrive Explanation: The owner of the boat knows that the jute is being taken to Mirzapur for sale. It is understood between the parties that delay could cause loses to B.
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Remoteness of Damage: Parties are bound by the consequences they have contemplated
A delivers to B, a common carrier, a machine, to be conveyed, without delay, to As mill, informing B that his mill is stopped for want of machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract.
Remoteness of Damage: Parties are bound by the consequences they have contemplated
A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery, at the time specified, and, in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been communicated to A), and is compelled to make compensation, the difference between the contract price of the price of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation Illustration: In a normal sale contract, the buyer may or may not have obligations to one or more third party. Further, a seller may or may not take responsibility for the obligation of the buyer to third parties.
Remoteness of Damage: Parties are bound by the consequences they have contemplated
A, a builder, contracts to erect and finish a house by the first of January, I order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensations to C for the breach of his contract. A must make compensation to B for the const of rebuilding of the house, for the rent loss, and for the compensation made to C Explanation: The parties have shared the consequences of breach in the loss of tenancy.
Measure of Damages
In business contracts, parties come together to earn a profit so loss of profit is the most common claim.
In a sale contract - difference between the contract price and the price of the goods on the date of performance adequately measures the loss. Difficult to measure loss of profit in other contracts such as work contracts. The courts take a percentage of the contract value as a measure of loss.
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Measure of Damage
Illustrations:
A contracts to sell and deliver 50 mounds of saltpeter to B, at a certain price to be paid on delivery. A breaks his promise. B is entitle to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 mounds of saltpeter of like quality at the time when the saltpeter ought to have been delivered
The illustration is of the measure of damages. The general principle is to put the party in the position they would be in if the contract were performed. On the breach, B would have bought the goods from another source. If the price were higher, the difference would be his loss, would A should pay. In addition, the innocent party would incur additionally costs in looking for an alternative
Sale Contract
A contracts to sell and deliver 50 mounds of saltpeter to B, at a certain price to be paid on delivery. A breaks his promise. Explanation: B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 mounds of saltpeter of like quality at the time when the saltpeter ought to have been delivered.
Sale Contract
A contracts to sell and deliver 50 mounds of saltpeter to B, on the first of January, at a certain price. B afterwards, before the first of January, contracts to sell the saltpeter to C at a price higher than the market price of the first of January.
Explanation: In estimating the compensation payable by A to B, the market price of the first of January, and not the profit which would have arisen to B from the sale of C, is to be taken into account.
Sale Contract
A contracts to buy Bs ship for 60,000 rupees, but breaks his promise. Explanation: A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise.
Sale Contract
A contracts to supply B with a certain quantity of iron a a fixed price, being a higher price than that for which A could procure and deliver the iron. B wrongfully refuses to receive the iron. Explanation: B must pay to A, by way of compensation, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it.
If on investigation of facts, one finds that it is unjust to apply that rule, in the light of the general principles mentioned above it is not to be applied.
Charter v. Sullivan
The Car Dealer Case Consequences of excess demand over supply on loss of profit when no loss of profit -
Nominal damages
Union of India v. M/s Commercial Metal Corpn The decisive element is the date of breach and the market price prevailing on that date. The law does not penalise the buyers inaction
Anglia Television Limited v. Reed Compensation damages for expenses incurred prior to contract.
C. & P. Haulage (a firm) v. Middleton The rental of a yard for engineering services Not fair to put plaintiff in a better position than he would been in had the contract been fulfilled
Non-Pecuniary Losses
Generally, there is no award for inconvenience, pain and suffering. The exception is limited to contracts whose purpose is to provide peace of mind or freedom from distress. Jarvis v. Swans Tours Limited The Swiss holiday case Watts v. Morrow The house appraisal case The damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead.
Liquidated Damages
A fixed amount decided by the contracting parties to be paid in the case of a breach. Maximum award subject to the stipulated amount. Award subject to actual damages excess amount considered to be penal in nature. Except if the stipulated amount is a genuine preestimate of the losses.
Liquidated Damages
Compensation and Penalty: Actual damages are more than the total amount stipulated, the party pays only the total stipulated amount. Fateh Chand v. Balkrishna Dass: - The Sale of Property Case - In assessing damages the court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon Courts by S.74. As the party had not suffered any loss, no damages were awarded
Liquidated Damages
Maula Bux v. Union of India: - The Poultry Supply Case Reasonable amount of earnest deposit. Forfeiture of earnest money under a contract for sale of property movable or immovable if the amount is reasonable, does not fall within S 74. If forfeiture is of the nature of penalty, S. 74 applies. Not required to prove actual loss or damages before he can claim a decree and the court is competent to award reasonable compensation in case of breach even if no actual damage is proved.
In a case where agreement is executed by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used therein.
It is for the party who contends that stipulated amount is not reasonable compensation, to prove the same. The emphasis of the court was on the terms experts, genuine pre-estimate, and unambiguous.
If the terms are clear and unambiguous liquidated damages to be granted unless claim is unreasonable or penal in nature.
Section 74 is to be read along with Section 73 - therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. Award reasonable compensation granted even if no actual damage is proved.
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It must be given at the moment at which the contract is concluded It represents a guarantee that the contract will be fulfilled or, in other words, earnest is given to bind the contract It is part of the purchase price when the transaction is carried out It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.
Requirement of reasonableness cannot be imposed on earnest deposit has been approved in subsequent Supreme Court judgements.
Mitigation of Damages
Innocent party has a right to receive damages, he must also mitigate his losses and not further raise the liabilities of the party in breach
A plaintiffs duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.
There is a reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract cannot be gainsaid. In BSNL v. Reliance Communication Ltd. (2011) SC: Liquidated damages serve the useful purpose of avoiding litigation and promoting commercial certainty and, therefore, the court should not be astute to categorize as penalties the clauses described as liquidate damages.
Quantum of damages must be determined with reference to the provisions as it stood, at the time of commission of the breach where the parties agreed to pay damages in case of breach of contract.
Confirming Saw Pipes has recognized the importance of leading evidence to prove damages or reasonable compensation. Quantum of damages cannot be awarded only on the basis of presumption and assumption.
Innocent party entitled to direct damages but not remote damages. No need to prove the actual loss/damage suffered when contract has a liquidated damages clause.
Reasonable damages cannot exceed the amount of liquidate damages stipulate in the contract If the amount stipulated on account of breach of contract is shown to be by way of penalty, the innocent party suffering on account of the breach is entitled only to a reasonable compensation and not the amount stipulated in the contract. If it is not possible to assess damages the amount stipulated in the contract as liquidated damages should normally be accepted as a fair and reasonable preestimate of damages. The law imposes a duty upon the Plaintiffs to take all reasonable steps to mitigate loss