REMEDIES FOR BREACH OF CONTRACT
When a there is breach of contract, the injured party has one or more of the following remedies:
· Rescission of contract(The revocation, cancellation, of an agreement)
When one party to the contract breaches the contract, the other party need not perform his part of the obligations. The aggrieved party may rescind the contract. In such cases, the injured / aggrieved party can either rescind the contract of file a suit for damages. In general, a suit for damages accompanies rescission of the contract.
· Suit for damages
The aggrieved party of the contract is entitled for monetary compensation when the contract is breached. The objective of Suit for damages is to put the aggrieved / injured party in a position in which he would have been had there been performance and not breach. The aggrieved / injured party must be able to prove the actual loss or no damages will be awarded.
· Suit upon ‘quantum meruit’
The term "Quantum Merit" is derived from Latin, which means "what one has earned". The injured party can file a suit upon quantum merit and may claim payment in proportion to work done or goods supplied.
· Suit for specific performance of the contract
The Specific Relief Act, 1963, regulates the suit for Specific Performance. Specific Performance means the actual carrying out of the contract as agreed. The Court may grant for specific performance where it is just and equitable to do. Specific Performance may be granted under the following grounds.
• Lack of standard for ascertaining the damages
• Where compensation is not adequate relief
• Substantial work done by the plaintiff.
The Court cannot grant the remedy of specific performance in the following situations.
• Where monetary compensation is an adequate relief
• Where the Court cannot supervise the actual execution of the work
• Where the Contract is for personal services
• Where the Contract is not enforceable by either party against the other.
· Suit for injunction
Injunction is an order of the Court restraining a person from doing a particular act. Where the defendant is doing something which he is promised not to do, then the injured party will get a right to file a suit for injunction.
According to Section 73 of the Act, 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 himthereby, which naturally arosein the usual course of thingsfrom 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.
Damages can be of four kinds.
Ordinary or General Damages
Damages that arise in the ordinary course of events from the breach of contract are called ordinary damages. Damages arising out of natural and probable consequences of breach of contract are also considered an ordinary damage.
1. A contracted to sell and deliver to B 10 bags of wheat at Rs. 900 per bag, the price to be paid at the time of delivery. The price of wheat rose to Rs. 1,000 per bag and A refused to sell the rice. B can claim damages at the rate of Rs.100 per bag.
Rs. 100 per bag constitutes the direct loss suffered by B. This loss is measured by estimating the ordinary loss caused by the breach of contract.
As per law, compensation is not to be given for any remote or indirect damage.
2. A contracts to pay Rs.25,000 to B on a specified day. He does not pay the money on that day. So B is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay together with interest upto the day of payment.
Special damages are those damages that are payable for the loss arising on account of some special or unusual circumstances. They are not due to the natural and probable consequences of the breach of the contract. Indirect loss experienced by the affected party out of breach of contract is treated as special damage.
Special damages can be recovered only when the other party, while signing the contract, is informed of the special circumstances which are responsible for the special losses. Subsequent knowledge of special circumstances will not create any special liability.
Hadley V Baxendale (1854)
It sets the leading rule to determine consequential damages from a breach of contract: a breaching party is liable for all losses that the contracting parties should have foreseen, but is not liable for any losses that the breaching party could not have foreseen on the information available to him.
A shaft in Hadley’s (P) mill broke rendering the mill inoperable. Hadley hired Baxendale (D) to transport the broken mill shaft to an engineer in Greenwich so that he could make a duplicate. Hadley told Baxendale that the shaft must be sent immediately and Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be inoperable until the new shaft arrived. Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain shut down for an additional five days. Hadley had paid 2 pounds four shillings to ship the shaft and sued for 300 pounds in damages due to lost profits and wages. The jury awarded Hadley 25 pounds and Baxendale appealed.
An injured party may recover those damages reasonably considered to arise naturally from a breach of contract, or those damages within the reasonable contemplation of the parties at the time of contracting.
The court held that the usual rule was that the claimant is entitled to the amount he or she would have received if the breaching party had performed; i.e. the plaintiff is placed in the same position she would have been in had the breaching party performed. Under this rule, Hadley would have been entitled to recover lost profits from the five extra days the mill was inoperable, if such loss of profit was in the contemplation of the parties at the time of contracting.
A contracted with B to supply certain material who had in his turn contracted to supply the same to a business entity at a very high profit. At the time of entering into the contract, B’s contract with the business entity was made clear to A. A committed a breach of contract. B can claim not only the difference between the market price and the contracted price on the delivery date, but will also be entitled to the profit which he would have made and the damages which he would have to pay to the business entity.
Exemplary or Punitive Damages
These damages are awarded against the party who has committed a breach of the contract with the object of punishing the erring or defaulting party and to compensate the aggrieved party
Such damages are awarded due to its difficulty in measuring the amount of the mental suffering or the extent of the injury to the feelings of the aggrieved party. The main aim of awarding such damages is to deter a person from committing a breach of such contract.
An author wrote an article containing libel against a respectable gentleman. The same was published in a magazine. The aggrieved gentleman brought a suit for damages. He was awarded Rs. 25,000 as compensatory and Rs. 30,000 as exemplary damages against the author & the publisher.
Nominal damages are awarded to the aggrieved party when there is only violation of the legal rights but no substantial loss is caused. These damages are very small in amount. They are awarded simply to recognize the right of the party to claim damages for the breach of the contract.
A contracted to buy 10 bags of sugar from B, a dealer. But he failed to purchase the bags of sugar as promised. However, the demand for sugar far exceeded the supply, and B could sell 10 bags agreed to be purchased without loss of profit. B is entitled only to nominal damages.
Measure of Damages
• Damages are compensatory; not penal
• In ordinary cases, damages for mental pain and suffering caused by the breach are not allowed.
• Injured party has to take reasonable steps to see that his loss is kept to the minimum. (Duty to mitigate)
Liquidated damages (also referred to as ascertained damages) are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach.
When damages are not predetermined/assessed in advance, then the amount recoverable is said to be 'at large' (to be agreed or determined by a court or tribunal in the event of breach).
In order for a liquidated damages clause to be upheld, two conditions must be met.
First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term.
Second, the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.
Generally, contracts that involve the exchange of money or the promise of performance have a liquidated damages stipulation.
The purpose of this stipulation is to establish a predetermined sum that must be paid if a party fails to perform as promised.
Note: Damages can be liquidated in a contract only if:
1. The injury is either ‘uncertain’ or ‘difficult to quantify’;
2. The amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and
3. The damages are structured to function as damages, not as a penalty.
If these criteria are not met, a liquidated damages clause will be void.
A sample liquidated damages clause:
Party A acknowledges that the actual damages likely to result from breach of this agreement are difficult to ascertain on the date this Agreement is entered into and may be difficult for party B to prove in the event of a breach. Therefore, the parties intend that the payment of Liquidated Damages in the amount of Ten Thousand Rupees (Rs.10, 000) would serve to reasonably compensate B for B’s actual damages sustained, and not as a penalty, due to any breach by A of its obligations under agreement and A agrees to pay this amount to B for material breach of the agreement.
A penalty is a sum that is disproportionate to the actual harm. It serves as a punishment or as a deterrent against the breach of a contract. Penalties are granted when it is found that the stipulations of a contract have not been met. For example, a builder who does not meet his or her schedule may have to pay a penalty.
According to Section 74 of the 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, on the other hand, are an amount estimated to equal the extent of injury that may occur if the contract is breached. These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.
A sample penalty clause:
In case of delayed delivery except for force majeure, the Seller shall pay to the Buyer for every day of delay 0.1% of the total value of the goods whose delivery has been delayed. The Seller shall be not liable for the penalty of late delivery if the Buyer fails to pay the down payment or issue the L/C according to the scheduled time in this contract.