Introduction
A contract is a legally enforceable agreement that is binding on its parties. It is considered to be breached when one of the parties to a contract refuses to perform its obligations. In India, the remedies for breach of contract include monetary reliefs, specific performance, or both. The court generally adopts the principle of granting monetary relief to not make the person discharge obligations against his/her will. Monetary reliefs can be in the form of compensation, special damages, and/or penalty. Compensation is awarded by the court to make good for the actual loss incurred by the plaintiff.
The special damages are sought for the loss of goodwill, mental harassment, loss of plausible profits, etc that is directly caused as a breach of contract. Penalty is the monetary relief that is punitive in nature and granted to set a precedent. It may be in the form of default interest, transfer of assets, break fees, loss of deposits, compulsory buyouts, and so on. Anticipatory breach is when one party signifies to the other about its inability or non-willingness to perform its obligations according to the provisions of the contract. The damages arising out of such a breach are mitigated when the party communicates about its intention well in advance. This is because the counter-party has an opportunity to minimize the effect of breach by finding a third party to perform the contractual obligations.
Relevant sections from the Indian Contract Act, 1872
There are two sorts of damages: unliquidated and liquidated.
The unliquidated damages are those which were unforeseeable by the parties during formation of the contract. Hence determined by the courts on case to case basis on the grounds of certain settled parameters. Like reasonable foreseeability, remote loss and indirect loss. Section 73 of the Indian Contract Act, 1872 categorically distinguishes between the damages resulting from the breach of contract. Also damages arising out of breach of obligations created by the contract. The compensation awarded shall be fair and reasonable which would naturally arise in the usual course of things. Compensation to be pay is primarily the amount of increase costs; that are incur by the plaintiff due to the breach of contract.
The liquidated damages are those which are predetermine by the parties. Also stipulated in the contract (if it is a written one). Section 74 of the Act provides for the procedure to be follow. When the parties have pre-estimated the penalty for breach of contract. In such cases, the court may award any reasonable amount not exceeding the penalty stipulated therein. The reasonable compensation will be determine inter alia on the basis of contract law principles. Such a sum may be pay in the past or payable in the future. In the cases where it is possible to prove the actual loss or damage, such proof is not dispens with.
However, only if it is difficult or impossible to prove the amount of actual loss, the genuine liquidated amount prefixed by the contract is awarded.[1] As regards to this, the Hon’ble Supreme Court has also held that a reasonable sum could only be recovered. It need not in all cases even be the amount specified in the contract. Section 74 also applies when the forfeiture of earnest money deposited is in the nature of penalty i.e. When the defaulting party has undertaken to pay a sum of money to the party complaining of breach.[2] According to Section 75, when a party rightfully rescinds the contract on the account of breach of certain obligations by its counter-party. Then the party is entitled to compensation for the loss caused due to the said breach.
Reasonable Foreseeability
To prove the tort of negligence, the requisite relationship shall exist between the parties by the virtue of which the party should have reasonably foreseen the “known limited class” that would get affected by its carelessness.[3] The existence of this relationship of proximity and neighborhood is essential in granting damages for the economic loss like loss of profits or opportunity arising out of the breach of contract. A reasonable person must be able to contemplate that such a breach or non-performance of certain obligations in a particular manner would result in commercial loss of the other party.[4]
In the case of Hadley v. Baxendale,[5] the defendant was held not liable to compensate the plaintiff, who was a mill owner, for delay in delivery of mill shafts, after which the mill could not operate. A party can only be liable for the losses that would arise in the ordinary course of things. Therefore, in cases wherein there are special circumstances, such information has to be communicate to the other party. If the defendant has no knowledge about the exceptional loss that can be incur if the delivery is withheld, then the party cannot be liable for such losses.[6]
Analysis
As per Section 73, the party guilty of breaching the contract has to pay to the other party difference between the contract price of the commodity agree to be sale and the sum pay by the non-defaulting party for purchasing another commodity owing to the default of the first party. Thus, any indirect or remote loss or damage sustained by the reason of breach would not entitle the party to compensation.[7] As under Section 74, “the party complaining of the breach is entitle, whether or not actual damage or loss is prove to have been cause thereby”. This section merely dispenses with the proof of ‘actual loss or damage’.
Nevertheless, it does not justify the grant of compensation when there is no legal injury whatsoever. This means that the court is only bound to award compensation to make good for loss when a legal injury is cause due to the breach of contract. When the loss in terms of money is determine, the party claiming such a loss has the burden of proving it.[8] As oppose to this when the amount claim is a pre-estimate of loss by the way of penalty, the burden of proof lies with the defaulting party.[9]
The Court held that the forfeiture of the earnest sum of money deposited during the sale of the property does not amount to the imposition of a penalty if the sum is reasonable. But, when a defaulting party undertakes to pay or forfeit a sum of money which they have already paid, then such an undertaking is of the nature of a penalty.[10] Hence, Section 74 eliminates the elaborate refinements between liquidated damages and penalty made under English Common Law.
Conclusion
At times, there could be difficulty in assessing the damages with certainty or precision. However, this does not absolve the defaulting party from paying damages arising due to their breach of duty.[11] The Court shall not award any far-fetching damages that could have not been contemplated by either of the parties. Damages are to be award for the losses that naturally arose in the usual course of things or which the parties know to be likely to result from the breach. Moreover, the measure of damages shall be reasonable and not exceeding the penalty stipulated for in the contract.
Terms of the contract are to be primarily consider while arriving at a decision about whether a party is entitle to compensation. In case the stipulate terms are unambiguous and clear. The party has to be award the amount of damages specify therein, unless the terms are unreasonable. It is conclude that the Hon’ble Court is competent to award reasonable compensation even if the actual loss could not be proven. This is because Section 73 has to be read along with Section 74. The essentiality of terms of contract like time and date of delivery are to be determine on the entirety of the contract and nature of the transaction.[12] The parties generally negotiate and decide the remedies that can be invoke to mitigate and compensate for losses that can be suffer in the event of a breach.
References:
[1] Kailash Nath Associates v. DDA, (2015) 4 SCC 136
[2] V.K. Ashokan v. CCE, (2009) 14 SCC 85
[3] Donoghue v. Stevenson, [1932] A.C. 562
[4] Anns v. Merton London Borough Council, [1978] A.C. 728
[5] Hadley v. Baxendale, (1854) 156 E.R. 145
[6] Victoria Laundry (Windsor) Ld. v. Newman Industries, Ld., [1949] 2 K.B. 528
[7] Karsandas H. Thacker v. The Saran Engineering Co. Ltd., AIR 1965 SC 1981
[8] Fateh Chand v. Balkishan Das, 1963 AIR 1405
[9] Oil and Natural Gas Ltd. v. SAW Pipes Ltd., (2003) 5 SCC 705
[10] Maula Bux v. Union Of India, 1970 AIR 1955
[11] Union of India v. Inland Construction Company, 2011 SCC OnLine Cal 1075
[12] Supra Note 9
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