Law of Contract – Breach of Contract

 BREACH OF CONTRACT

Breach means breaking of the rules. In respect of contract, breach means failure to perform what is required under the contract. Breach of contract is of two types – Anticipatory and Actual.

Anticipatory Breach of Contract

Where the promisor refuses to perform his obligation even before the specified time for performance and signifies his unwillingness, then there is an anticipatory breach.

For example, A engages services of B as his attendant for a 3 months tour at Rs. 5000/- per month starting from 1^st June. However, A changes his mind before the date and informs B that his services are not required. This is anticipatory breach of contract.

In such cases, B may put an end to the contract even before the due date, 1st June, and he need not wait for the date meant for performance of the promise. B could also wait till the due date of performance before he puts an end to the contract.

The measure of damage depends upon the choice and circumstances. For example, A agrees to supply 10 bags of wheat to B at the rate of Rs. 2000/- on May 31^st. However, A gives notice to B of his unwillingness to sell on May 15^th. Price of wheat on 15^this Rs. 2200/-. If B repudiates that contract on 15^th, he may recover damages of Rs. 2000/- (at the rate of Rs. 200/- per bag).

But if B waits till May 31^st, and prices are Rs. 2250/-, he may recover damages of Rs. 2500/- (at the rate of Rs. 250/- per bag).

Alternatively, if B waits till May 31^st, and prices are reduced to Rs. 2100/-, he may recover damages of Rs. 1000/- only (at the rate of Rs. 1000/- per bag). Thus, postponement of right to repudiate is not meant to give unfair advantage to the promisee.

Actual Breach of Contract

Where one of the parties breaches the contract by refusing to perform the promise on due date, it is known as actual breach of contract. In such a case the other party to contract obtains a right of action against the one who breached the contract.

Measurement of Damages

Where a party makes a breach of contract, he is liable to compensate the other party for the loss suffered on account of such breach. But a party is liable to compensate only for such loss, that is –

(i) Naturally arose in usual course of things from such breach or

(ii) Which the parties knew, when they made the contract, to be likely to result from the breach

Second category of damages are special damages and can be claimed only on previous notice. However no compensation is payable for any remote or any indirect loss.

For example, A is owner of a mill. The mill had to be stopped because of a broken crank shaft. A sends the crank shaft as a pattern for manufacturing a new one. Till the arrival of the new crank shaft, the mill could not be resumed. Hence, A incurred losses. However this position was not properly conveyed to the carrier. There were some delay on the part of the carrier in delivering the crank shaft to the manufacturer which in turn delayed the reopening of the mill. As a result, there were losses to the mill. A claimed compensation for loss in profit. But since A did not explain the peculiar position to the carrier that delay in delivering the crank shaft would delay resumption of the mill, and this would result in losses, his claim for special damages was rejected.

A similar example can be, in a case a tailor had given his sewing machine to railways to be delivered at a station as a consignment. He did not mention that any delay in delivering the sewing machine would result in damages for the business of the tailor as he had planned to do good business at the place proposed where a festival was to be held. The sewing machine was delivered after the festival was over. Held Railways were not responsible for the damages as the Railway authorities were not informed of the specific purpose of delivery of the sewing machine namely business during a festival.

Calculation of the Damage

In case of a contract for sale of good the damages are calculated on the basis of the difference between contract price and market price as on the date of breach.

For a breach by buyer,

Damages = Contract Price – Market Price

For a breach by seller,

Damages = Market Price – Contract Price

Where the seller retains the goods after the contract has been broken by the buyer, the seller cannot recover from the buyer any further loss even if the market falls. Again he is not liable to have the damages reduced if the market rises.

Duty to mitigate loss

Law casts a duty on the person who suffers losses on account of breach of contract by the other party must take all reasonable steps to mitigate the loss. For example, if a buyer refuses to accept delivery and make payment of consignment of 100 bags of rice. The seller must try to find a new buyer and not let the stock perish from carelessness.

Compensation for Breach of Contract where the Penalty is stipulated for

At times, a contract may provide for a pre-estimate of compensation payable in case of its breach. The aim of such estimation is to avoid prolongation of dispute that may arise in future.

If the estimate is genuine compensation, it is called liquidated damages. If it is extravagant amount, it is termed as penalty.

The law states that in such cases, the party affected by the breach of contract is entitled to only to a reasonable compensation not exceeding the amount mentioned in the contract.

Other remedies for Breach

Apart from damages, the following remedies are also available to a Party affected by breach of contract –

(i) Rescission of contract

Where one party breaches the contract, the other party can treat it as rescinded. That is, the other party is absolved of his obligation to perform his part of the contract.

(ii) Suit upon quantum meruit

The phrase “quantum meruit” means “as much as earned”. For example, A person begins a civil contract work. He has to stop the work later for some reason beyond his control. He is entitled to receive compensation on the principle of ‘Quantum Meruit’, that is, in proportion to the work done.

(iii) Suit for specific performance

At times, the nature of contract is such that the damages for its breach are not sufficient remedy. In such cases a party may seek specific performance of the contract. That is direct the party in breach, to carry out his promise according to the terms of the contract. This remedy is at the discretion of the court.