Sunday, 9 September 2012

CONTRACT ACT - PART VII (REMEDIES FOR BREACH OF CONTRACT - DAMAGES - LIQUIDATED DAMAGES - PENALTY)


Agreements enforceable by law are contracts.
The Contract Law is mostly Commonsense
Points for discussion as based on The Indian Contract Act 1872

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
  • Suit for damages
  • Suit upon ‘quantum meruit’
  • Suit for specific performance of the contract
  • Suit for injunction

DAMAGES
….monetary compensation for the loss caused to the injured party.
Every action for damages raises two problems:
  1. Remoteness of damage
  2. Measure of damages


Remoteness of Damages
Hadley Vs Baxendale (1854)
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.
Held that:
  • 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.


Two Rules:
  1. General damages are for loss which arises naturally in the usual course of things from the breach itself.
  2. Special damages are for loss which arises on account of the unusual circumstances affecting the plaintiff.
  • They are not recoverable unless the special circumstances were brought to the knowledge of the defendant so that the possibility of the special loss was in the contemplation of the parties.


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
Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract.

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.

Damages can be liquidated in a contract only if :
  • the injury is either ‘uncertain’ or ‘difficult to quantify’;
  • 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
  • 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.

PENALTY
  • 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.
  • 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.

No comments:

Post a Comment