In the business world, a contract plays an important role. Contracts are the assurance to both the parties that they will get their work done without fail and if either one of the parties doesn’t perform the duty they are bound to perform as per the contract. They have to pay the damages for the loss incurred by the other party as the result of a breach of contract.
Table of Contents
What is a Contract?
A contract is an agreement made by two or more parties in order to perform something legal by mutual consent and consideration.
According to Section 2(h)[i] of the Indian Contract Act, 1872, a contract is “An agreement enforceable by law”. The Act further says that all Contracts are agreements but all the agreements are not contract.
Essentials of a valid contract
· There should be a valid agreement between the parties.
· There should be a valid offer and acceptance.
· There should be a consideration in a contract.
· There should be free consent of the parties to enter into a contract.
· Capacity to contract- a minor, lunatic and insolvent person cannot enter into a contract. One should be a major to enter into a contract.
What is a Breach of Contract?
Breach of contract happens when a party to a contract does not perform its duty as per the agreement to the contract. Breach of contract is a civil wrong. There are certain remedies provided for the breach of contract in the Contract law.
In other words, when a party fails to adhere to the terms of the agreement and violates the contract by not performing its duty leads to breach of contract.
Section 73 of the Indian Contract Act, 1872 is provided for the compensation for loss or damage caused by a breach of contract.
Essentials of a lawsuit for breach of Contract
These essentials are;
· A proof that there is a valid contract between the parties,
· A proof that the terms of the contract have been breached,
· Proof of losses and damages.
Types of Breach of Contract
This kind of breach of contract takes place when a party to contract breaches the contract at the time of performance.
This kind of breach of contract takes place when a party to the contract breaches the contract before the time of performance.
Remedies available for Breach of Contract
There are certain remedies available for the breach of contract:
Recession of Contract
This action can be taken when a party to the contract does not perform the contract as per the agreement and the other party can cancel the contract in order to avoid the loss.
For instance, A made a contract with B that he will deliver 20 bags of sugar to B on 1st December on payment of rupees Rs 15,000. Now A fails to deliver 20 bags of sugar to B in a given time so that A can cancel the contract with B.
Suit upon quantum meruit
This action can be taken when a party to contract breaches the contract and another party has done some work so the non-breaching party can claim the amount for work done by it.
For instance, A made a contract with B to design the interior of his house but after a few days when B has started working A breach the contract. Now in such case B can claim for the amount of work done by him.
This remedy is available in the cases where;
· An agreement is found to be void
· Something is done or delivered without intention to do gratuitously.
Suit for Specific performance
This action can be taken when a party to the contract breaches the contract and the contract has some terms and conditions to be fulfilled when a breach of contract takes place. The breaching party has to compensate for the losses incurred by the non-breaching party and additionally for the specific performance.
There are certain cases where a decree of specific performance cannot be given;
· Cases where monetary compensation is sufficient Redressal.
· Cases where the court cannot oversee the performance or execution of a contract.
· Cases where the parties entered into a contract into is of personal services.
· Cases where either a party of contract is minor.
Suit for injunction
This action can be taken when a party to the contract disables themselves from performing the contract.
For instance, A made a contract with B that he will perform in B’s Bar for 1 year. Later on A made the same contract with C. Now in this situation, B can approach the court on grounds of breach of Contract by A. And the court then issues an injunction order in the contract between A and C.
Suit for damages
Kinds of damages:
· Ordinary damages– The actual damages incurred by the non-breaching party by breach of Contract.
· Special damage– These damages are also called special damages. Such damages are not to be natural or probable. The non-breaching party has to prove that the breaching party was known to the consequences at the time of making the contract.
· Vindictive or exemplary damages-Damages that are awarded to punish a breaching party. These damages can be awarded in two cases: When there is a Breach of contract to marry and Dishonor of a Cheque by bank agent when there is a sufficient amount of money in the account holder.
· Nominal damages– Nominal damages are awarded by the Court in cases where non-breaching parties sue the breaching party even if there is no loss suffered by the non-breaching party. A small amount of money is payable by the breaching party as compensation for breach of Contract just to set an example before the society.
Section 73 of the Indian Contract Act, 1872 states that when a party to contract breaches the contract then the suffered party can claim the compensation for the losses incurred by it. But in certain cases, the compensation amount is not payable if the loss is abnormal in nature.
According to the Indian Contract Act, 1872 the damages are of two types;
In many cases, the party to contract will agree to the amount payable for breach of contract. Such damages are called liquidated damages.
The cases where the amount payable for breach of contract is assessed by the Court or any appropriate authority then it is called the unliquidated damages.
Damages that can be awarded
There are two types of damages that can be awarded in case of breach of Contract;
Compensatory damages are also called actual damages. These are the damages that are to be awarded when a party to contract incurred losses as a result of a breach of contract.
It has two types:
General damages– General damages include the direct damages incurred by the breach of contract.
Special damages- these damages are also called consequential damages. This damage is awarded when the loss incurred by the non-breaching party is not direct or immediate. And in order to claim such damages, the non-breaching party has to prove that the breaching party was aware of the inferior consequences at the time of making the contract.
These kinds of damages are also called exemplary damages. These are very rare damages. And these damages are awarded in order to punish a wrongdoer to set an example. These damages are awarded additionally to the compensatory damages.
Remedies under the Indian Contract Act,1872
· Section 73 of the Indian Contract Act,1872
This Section provides that the damages are payable only in a case where any loss has been incurred by the non-breaching party by the act of breach of Contract. According to this section the compensation can only be paid by the breaching party when the other party suffered any loss.[ii]
In the case of Tata Iron and Steel Co. Ltd v. Ramanlalkandoi (1971) it was held by the Calcutta High Court that in case of non-delivery of goods, the damages can be fixed on the price prevailing on the date on which delivery is to be made. The same thing was held by the Supreme Court in the case of Union of India v. Jolly Steel Industries Private Limited.[iii]
· Section 74 of the Indian Contract Act, 1872
The section provides that at the time of making the contract if there is a sum named as the amount to be paid in case of breach of contract or the contract, therefore, contains any other stipulation by the way of penalty, the party who is complaining about the breach of contract is entitled to the compensation even if there is no loss or damage caused by the breach of contract but the compensation should not exceed the limit named in the contract.[iv]
· Section 75 of the Indian Contract Act, 1872
This section provides that if a person rightfully rescinds a contract is entitled to the compensation for the loss suffered by non-fulfilment of the contract by the other party.[v]
Indian Contract Act deals with the provisions related to contracts. In cases where a breach of contract takes place, the non-breaching party has the right to claim the compensation from the breaching party and if the breaching party denies paying the compensation the non-teaching party can approach the court for the execution of compensation.
[i] The Indian Contract Act, 1872, s 2(h)
[ii] The Indian Contract Act, 1872, s 73
[iii] AIR 1965 HC 178
[iv] The Indian Contract Act, 1872, s 74
[v] The Indian Contract Act, 1872, s 75
BY DEVSHREE DANGI | INDORE INSTITUTE OF LAW, INDORE