Chapter 10 REMEDIES FOR BREACH OF CONTRCAT

A breach of contract is refusal by one party to abide by its terms, without lawful excuses such as, impossibility of performance, defective/late performance by the other party.

Learning Objectives
Breach of Contract and Remedies:
Rescission Damages Specific Performance Injunction

Quantum Meruit
Quasi-contract : Other Remedies

What is breach of contract?

A breach of contract is refusal by one party to abide by its terms, without lawful excuses such as, impossibility of performance, defective or even late performance by the other party etc. Many commercial agreements contain express provisions for remedies available to the aggrieved party. For example, in a contract for the sale of goods, the buyer may be entitled to ask the seller to make good or replace defective items. By incorporating such a clause, the contracting parties, perhaps, intended to displace any rights and remedies provided by law, which are not specified in the Contd. contract.

What is breach of contract?

A breach of contract does not per se bring a contract to an end. The breach may give to the aggrieved party the right to terminate the contract. However, it is for the aggrieved or the distressed party to decide whether or not to exercise that right. If it elects to terminate the contract, it needs not perform its part of the promise, and is also entitled to compensation for the loss incurred by it.

REMEDIES FOR BREACH OF CONTRACT

A remedy is a relief provided to an aggrieved party should the other side commit a breach. Once a party fails to perform or performs inadequately, the other (non-breaching) party can choose one or more of several remedies. The most common remedies available to an aggrieved party are: Rescission, Damages, Specific performance, Injunction, and Quantum Meruit.

Rescission
Rescission is the revocation of a contract. When a party to a contract has refused to perform, or disabled himself from performing in its entirety, the promisee may put an end to the contract. (Section 39) In such a case, the other (aggrieved) party can refuse further performance and is absolved of all of its obligations under the contract. A promises to supply a PC for Bs office on a certain date on COD basis. However, A fails to deliver the computer on the agreed date. B is absolved of the liability of paying the price and can rescind the contract. Rescission is done to bring the parties, as far as possible, back to the position in which they were before entering into the contract. This is known as status quo ante. It is an equitable remedy and is discretionary.

Damages
A breach of contract entitles the non-breaching or injured party to sue for monetary damages besides rescinding the contract. Damages are designed to compensate the aggrieved party for the loss sustained in the bargain. When a contract has been broken, the aggrieved party is entitled to receive, from the breaching party such damages which naturally arose in the usual course of things from such breach. This relates to ordinary damages, and which the parties knew, when they made the contract, to be likely to result from the breach of it. This relates to special damages. (Section 73)

Damages: A claim for damages raises the following issues

Remoteness of damage, which means for what kind of damage should the plaintiff, be compensated? That is, whether the courts will take the step of recognizing that a breach of contract can, in principle, give rise to a claim for damages to the injured party. Assessment of damages, which means what monetary compensation or damages should the plaintiff receive in respect of the damage, which is not too remote or indirect?

Types of Damages
Depending upon the nature of the awards in compensating the injured or aggrieved party, damages have been classified as follows: 1. Compensatory damages 2. Nominal damages 3. Consequential damages 4. Punitive damages 5. Incidental damages 6. Liquidated damages and Penalty

Types of Damages: Compensatory damages

Damages compensating the non-breaching party for the loss in the bargain are known as compensatory damages. These are also called ordinary damages. Since these damages compensate the aggrieved party for injuries actually sustained and proved to have arisen directly from the loss in the bargain due to the breach, the measure of ordinary damages is the difference between the contract price and the market price on the date of the breach. Accordingly, they simply replace the loss caused by the wrong or injury. The aim of awarding compensatory damages is thus to protect the claimants expectation of interest or his performance interest. A contracts to sell and deliver 50 kgs of salt to B, at a certain price to be paid on delivery. A breaks his promise. 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 kgs of salt of the same quality at the time when the salt ought to have been delivered.

Types of Damages: Nominal damages

Nominal damages are awarded in cases where the aggrieved party has suffered no loss as a result of the other's breach. When a seller fails to deliver the goods, but the buyer is able to purchase elsewhere at no extra cost. An award of a small sum such as Rs 100 is granted to the non-breaching party to reflect the view that any loss or damage is purely technical.

Types of Damages: Consequential damages

Consequential damages are also called special damages. These are awarded as monetary compensation for loss suffered as a consequence of the other party's breach. Consequential damage occurs because of some special or unusual circumstances of the particular contractual relationship of the parties. However, an aggrieved party cannot recover special damages for loss that he could have avoided by taking reasonable steps. This is sometimes expressed as the duty to mitigate (or minimize) these damages. For an innocent party to obtain substantial damages, it must show that it has suffered loss as a result of the breach. A, having contracted with B to supply B with 1,000 tons of iron at Rs 100 a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at Rs 80 rupees a ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, and B, in turn, rescinds the contract. C will have to pay to A Rs 20,000, that being the profit which A would have made by fulfilling his contract with B.

Types of Damages: Punitive damages

Also known as exemplary or vindictive damages, punitive damages are available in a breach of contract very rarely. These are imposed not with an idea to compensate the injured or aggrieved party but to punish the wrongdoer so as to deter future such conduct. They reflect the courts strong disapproval of a defendants predominantly reprehensible behaviour. However, the mere fact that the defendant has broken the contract with the claimant in order to pursue a more profitable relationship with another party does not suffice to entitle the claimant to punitive damages. Much more is required before a conclusion is drawn that a defendant has behaved in an outrageous manner. Oppressive, arbitrary, or unconstitutional action by the servants of the insurance and healthcare undertakings are usually the most frequent targets to recover punitive damages, followed by employers and bankers who are often subjected to punitive damages. In case of wrongful dishonour of a cheque (due to the negligence or mistake on part of the banker), the governing rule is smaller the amount of the cheque, larger will be the amount of damages awarded and vice versa.

Types of Damages: Incidental damages

Incidental damages compensate for reasonable costs that the injured party incurs after the breach in an effort to avoid further loss. For example, if an employer breaches an employment contract with one of his employees, the latter could recover as incidental damages those reasonable expenses he would incur in attempting to procure substitute employment, such as long-distance telephone calls or the cost of printing new resumes, etc.

Types of Damages: Liquidated and Penalty

It is common for the contracting parties to expressly state in the contract that a certain sum of money will be paid to the injured party or that goods will be forfeited (the latter being known as retention clause) should a breach of contract occur. Clauses covering these areas are known as liquidated or agreed damages clauses. These are self-help remedies and generally appear in commercial contracts, and, most commonly, in relation to late rather than defective performance, particularly in the fields of construction and engineering, and supply or sale of goods. Such clauses do not usually appear in contracts of employment. The purpose of such clauses is to make recovery of damages easier, avoiding the problems of proving actual loss; to avoid arguments as to the remoteness of certain types of consequential or indirect losses; and to assure the other party of their intention to be bound by the contract. On the other hand, a clause will be construed as a penalty clause if the sum specified is extravagant and disproportionate to the damage likely to occur. Penalty clauses are generally not enforceable, whereas liquidated damages clauses are. Contd.

Liquidated or Agreed Damages and Penalty

Whether a particular sum is liquidated damages or a penalty depends on the intentions of the parties. And the mere use of the words penalty or liquidated damages are not conclusive evidence of intentions. It is necessary to examine whether the amount specified is befitting penalty or liquidated damages. The courts normally seek to determine whether the sum stipulated is extravagant in comparison with the greatest loss, which could have followed from the breach? If so it is a penalty. Otherwise the same will represent liquidated damages. Thus, as a general rule, if the sum specified in the contract, is a genuine pre estimate of loss it is termed liquidated damages, and if it bears no reflection on the loss suffered, it is termed a penalty. Nonetheless, it is for the party in breach to show that the sum is a penalty (Robophone Facilities Ltd vsBlank ).

SPECIFIC PERFORMANCE
Specific performance is a decree issued by the court, which orders the defendant (party accused of breaching a contract ) to perform his obligations under the contract. Where damages represent inadequate or unjust remedy (for example, where the subject matter of the contract is unique or where there are no standards to ascertain the quantum of loss) the non-breaching party may approach the court for the grant of an order for specific performance of the contract. The court has broad discretion to award specific performance and in exercising this discretion it takes into account factors such as: Whether the person seeking performance is prepared to perform his side of the contract (Chappell vs Times Newspapers Ltd) Whether the person against whom the order is sought would suffer hardship in performing it. (Patel vs Ali) ). The difference between the benefits that the (court) order would give to one party and the cost of performance to the other (Tito vs Waddell).

SPECIFIC PERFORMANCE
However, specific performance is not granted in the following circumstances: Monetary compensation is an adequate remedy. It will be inequitable to either party. Thus, it is not available to an infant in respect of a contract not enforceable against him. The contract requires personal services such as employment contracts because such an order would restrict an individual's freedom (Chappell vs Times Newspapers Ltd). The contracts which require extensive supervision, for example building contracts. The defendant cannot perform exactly in accordance with the original contractual obligation. On the basis of above-mentioned constraints, it can be argued that specific performance is a substitutionary and not a specific remedy.

INJUNCTION
An injunction is a court order directing a person to do or refrain from doing some specified act, which, of course, has been the subject matter of a contract. Like specific performance, an injunction is an equitable remedy and therefore only granted at the discretion of the court. It is awarded in circumstances where damages would not be an adequate remedy to compensate the claimant. For example, A factory begins to allow harmful smoke to escape from its chimney, affecting the health of people in the neighbourhood. Damages would be inadequate, as the residents would want the emission of smoke to stop altogether. This can therefore be remedied by an injunction order. Injunction orders are of two types: prohibitory and mandatory.

INJUNCTION
Prohibitory injunction This orders the defendant to restrain from committing a breach of a negative contractual obligation i.e., where he does something, which he had promised not to do. Such an injunction may be granted to prevent the breach of a reasonable restraint of trade clause. For instance G agreed to source all the electric power required for his house from M but started buying part of his requirement from some other company. He was restrained by an injunction order from buying electricity from the other source. (Based on Metropolitan Electric Supply Company vs Ginder ). Mandatory injunction This, on the other hand compels the performance of a positive contractual obligation, for example, compel an employee to do any work or attend at any place for the doing of any work. The main use of injunction in the contractual situation has been as an indirect means of enforcing a contract involving personal services. In exercising its discretion (of injunction) the court will use the balance of convenience test weighing the benefit to the injured party and the detriment to the other party. For example, a factory begins to allow noxious fumes to escape from a chimney, affecting the health of neighbouring residents. Damages here would be inadequate, as the residents would want to stop the fumes being emitted. This can only be remedied by an injunction order. An injunction will not be granted if its effect would be to compel a party to do something, which he could not have been ordered to do by a decree of specific performance (Lumley vs Wagner).

QUANTUM MERUIT

Quantum Meruit is a Latin term meaning, 'as much as is merited' or 'as much as earned'. In the context of contract law, it means something along the lines of reasonable value of services rendered. The normal rule of law is that unless a party has performed its promise in its entirety, it cannot claim performance from the other party. Contrary to it, in certain cases, when a person has done some work under a contract, and the other party repudiates the contract or some such event occurs that renders the rest of the performance unworkable, then the court may allow remuneration to the party which has performed for the work he has done. Thus, quantum meruit is imposed to avoid the unjust enrichment of one party at the expense of another. The action of quantum meruit is allowed in Indian courts under Section 70 of the Contract Act. The concept of quantum meruit applies to the following situations: When a person employs (impliedly or expressly) another person to do work for him, without any agreement as to his compensation, the law implies a promise from the employer to the workman that he will pay for the services, as much as the workman may deserve or merit. When there is an express contract for a stipulated amount and mode of compensation for services, the plaintiff cannot abandon the contract and resort to an action for a quantum meruit. However, if there is a total failure of consideration, the plaintiff has a right to elect to repudiate the contract and then seek compensation on a quantum meruit basis.

QUANTUM MERUIT
If a contract is divisible and a party to a contract is prevented from fulfilling its contractual obligations by the other party then obviously he will not be in default. For example, in a building contract, if the owner should prevent the builder from completing, like not allowing him to enter the construction site, the builder can recover a reasonable price for the work done on a quantum meruit basis. If an indivisible contract is completely executed, but badly, the person who has performed will be entitled to a lump sum less deduction to make good the defect in the performance. In all the above cases, the claim is not based on the original contract, but on the implied promise by the other party arising from the acceptance of an executed contract. For example, A contractor is contracted to work on a school. He does some work but quits (breach of contract) midway. The contractor is entitled to be paid for the services he has already rendered for the school on the basis of quantum meruit. However, the school would also be entitled to damages arising out of the need to look for a new contractor.

QUASI CONTRACT: OTHER REMEDIES

Quasi-contractual obligations are the obligations, which the common law implies in circumstances, distinct from obligations under a contract. It is an area of law in its own right. Quasi-contractual remedies are sometimes available either as an alternative to a remedy for breach of contract or where there is no remedy for breach of contract. For example, a claim for quantum meruit (a reasonable remuneration for work done, or for goods supplied under a contract which is later discovered to be void). Claim for necessaries supplied to person incapable of contracting, or on his account [Section 68]. If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. Reimbursement of person paying money due by another, in payment of which he is interested [Section 69].- A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.

QUASI CONTRACT: OTHER REMEDIES

Obligation of person enjoying benefit of non-grauitous act [Section 70]. Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. Illustrations (a) A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is bound to pay A for them. (b) A saves B's property from fire. A is not entitled to compensation from B, if the circumstances show that he intended to act gratuitously. Responsibility of finder of goods [Section 71]. A person, who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee. Liability of person to whom money is paid, or thing delivered, by mistake or under coercion [Section 72]. A person to whom money has been paid or anything delivered, by mistake or under coercion, must repay or return it. [Section 72]