chapter 10_breach of contract

7/30/2019 Chapter 10_Breach of Contract

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Chapter 10REMEDIES FOR BREACH OF

CONTRCAT

A breach of contract is refusal by oneparty to abide by its terms, withoutlawful excuses such as, impossibility ofperformance, defective/lateperformance by the other party.


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Learning Objectives

Breach of Contract and Remedies:

Rescission

Damages

Specific Performance

Injunction

Quantum Meruit

Quasi-contract : Other Remedies


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What is breach of contract?

A breach of contract is refusal by one party to abide by itsterms, without lawful excuses such as, impossibility ofperformance, defective or even late performance by theother party etc.

Many commercial agreements contain express provisionsfor remedies available to the aggrieved party. For example,in a contract for the sale of goods, the buyer may beentitled to ask the seller to make good or replace defectiveitems. By incorporating such a clause, the contractingparties, perhaps, intended to displace any rights andremedies provided by law, which are not specified in thecontract. Contd.


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What is breach of contract?

A breach of contract does not per se bring a

contract to an end. The breach may give to the

aggrieved party the right to terminate the

contract. However, it is for the aggrieved or

the distressed party to decide whether or not

to exercise that right. If it elects to terminate

the contract, it needs not perform its part ofthe promise, and is also entitled to

compensation for the loss incurred by it.


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REMEDIES FOR BREACH OF CONTRACT

A remedy is a relief provided to an aggrievedparty should the other side commit a breach.Once a party fails to perform or performs

inadequately, the other (non-breaching) partycan choose one or more of several remedies.

The most common remedies available to anaggrieved party are: Rescission, Damages,Specific performance, Injunction, andQuantum Meruit.


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Rescission

Rescission is the revocation of a contract.

When a party to a contract has refused to perform, or disabledhimself from performing in its entirety, the promisee may put anend to the contract. (Section 39)

In such a case, the other (aggrieved) party can refuse further

performance and is absolved of all of its obligations under thecontract.

A promises to supply a PC for Bs office on a certain date on CODbasis. However,A fails to deliver the computer on the agreed date.B is absolved of the liability of paying the price and can rescind thecontract.

Rescission is done to bring the parties, as far as possible, back tothe position in which they were before entering into the contract.This is known as status quo ante. It is an equitable remedy and isdiscretionary.
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Damages

A breach of contract entitles the non-breaching or injuredparty to sue for monetary damages besides rescinding thecontract. Damages are designed to compensate theaggrieved party for the loss sustained in the bargain.

When a contract has been broken, the aggrieved party isentitled to receive, from the breaching party such damageswhich

naturally arose in the usual course of things from suchbreach. This relates to ordinary damages, and

which the parties knew, when they made the contract, tobe likely to result from the breach of it. This relates tospecial damages. (Section 73)


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Damages: A claim for damages raises the following issues

Remoteness of damage, which means for whatkind of damage should the plaintiff, becompensated? That is, whether the courts will

take the step of recognizing that a breach ofcontract can, in principle, give rise to a claim fordamages to the injured party.

Assessment of damages, which means what

monetary compensation or damages should theplaintiff receive in respect of the damage, whichis not too remote or indirect?


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Types of Damages

Depending upon the nature of the awards incompensating the injured or aggrieved party, damageshave been classified as follows:

1. Compensatory damages

2. Nominal damages3. Consequential damages

4. Punitive damages

5. Incidental damages

6. Liquidated damages and Penalty


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Types of Damages: Compensatory damages

Damages compensating the non-breaching party for the loss in the

bargain are known as compensatory damages. These are also called

ordinary damages. Since these damages compensate the aggrieved party

for injuries actually sustained and proved to have arisen directly from the

loss in the bargain due to the breach, the measure of ordinary damages is

the difference between the contract price and the market price on the

date of the breach. Accordingly, they simply replace the loss caused by the

wrong or injury. The aim of awarding compensatory damages is thus to

protect the claimants expectation of interest or his performance

interest.

A contracts to sell and deliver 50 kgs of salt to B, at a certain price to bepaid on delivery. A breaks his promise. B is entitled to receive from A, by

way of compensation, the sum, if any, by which the contract price falls

short of the price for which B might have obtained 50 kgs of salt of the

same quality at the time when the salt ought to have been delivered.


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Types of Damages: Nominal damages

Nominal damages are awarded in cases wherethe aggrieved party has suffered no loss as aresult of the other's breach. When a seller

fails to deliver the goods, but the buyer is ableto purchase elsewhere at no extra cost. Anaward of a small sum such as Rs 100 is grantedto the non-breaching party to reflect the view

that any loss or damage is purely technical.


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Types of Damages: Consequential damages

Consequential damages are also called special damages. These are

awarded as monetary compensation for loss suffered as a consequence of

the other party's breach. Consequential damage occurs because of some

special or unusual circumstances of the particular contractual relationship

of the parties. However, an aggrieved party cannot recover special

damages for loss that he could have avoided by taking reasonable steps.

This is sometimes expressed as the duty to mitigate (or minimize) these

damages. For an innocent party to obtain substantial damages, it must

show that it has suffered loss as a result of the breach.

A, having contracted with B to supply B with 1,000 tons of iron at Rs 100 a

ton, to be delivered at a stated time, contracts with Cfor the purchase of1,000 tons of iron at Rs 80 rupees a ton, telling Cthat he does so for the

purpose of performing his contract with B. Cfails to perform his contract

with A, and B, in turn, rescinds the contract. Cwill have to pay to A Rs

20,000, that being the profit which A would have made by fulfilling his

contract with B.


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Types of Damages:Punitive damages

Also known as exemplary or vindictive damages, punitive damages areavailable in a breach of contract very rarely. These are imposed not withan idea to compensate the injured or aggrieved party but to punish thewrongdoer so as to deter future such conduct. They reflect the courtsstrong disapproval of a defendants predominantly reprehensiblebehaviour. However, the mere fact that the defendant has broken the

contract with the claimant in order to pursue a more profitablerelationship with another party does not suffice to entitle the claimant topunitive damages. Much more is required before a conclusion is drawnthat a defendant has behaved in an outrageous manner. Oppressive,arbitrary, or unconstitutional action by the servants of the insurance andhealthcare undertakings are usually the most frequent targets to recoverpunitive damages, followed by employers and bankers who are oftensubjected to punitive damages. In case of wrongful dishonour of a cheque(due to the negligence or mistake on part of the banker), the governingrule is smaller the amount of the cheque, larger will be the amount ofdamages awarded and vice versa.


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Types of Damages: Incidental damages

Incidental damages compensate for reasonablecosts that the injured party incurs after thebreach in an effort to avoid further loss. For

example, if an employer breaches anemployment contract with one of his employees,the latter could recover as incidental damagesthose reasonable expenses he would incur in

attempting to procure substitute employment,such as long-distance telephone calls or the costof printing new resumes, etc.


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Types of Damages: Liquidated and Penalty

It is common for the contracting parties to expressly state in the contractthat a certain sum of money will be paid to the injured party or that goodswill be forfeited (the latter being known as retention clause) should abreach of contract occur. Clauses covering these areas are known asliquidated or agreed damages clauses. These are self-help remedies andgenerally appear in commercial contracts, and, most commonly, in relation

to late rather than defective performance, particularly in the fields ofconstruction and engineering, and supply or sale of goods. Such clauses donot usually appear in contracts of employment.

The purpose of such clauses is to make recovery of damages easier,avoiding the problems of proving actual loss; to avoid arguments as to theremoteness of certain types of consequential or indirect losses; and to

assure the other party of their intention to be bound by the contract. On the other hand, a clause will be construed as a penalty clause if the

sum specified is extravagant and disproportionate to the damage likely tooccur. Penalty clauses are generally not enforceable, whereas liquidateddamages clauses are. Contd.


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Liquidated or Agreed Damages and Penalty

Whether a particular sum is liquidated damages or a penaltydepends on the intentions of the parties. And the mere use of thewords penalty or liquidated damages are not conclusive evidenceof intentions. It is necessary to examine whether the amountspecified is befitting penalty or liquidated damages. The courts

normally seek to determine whether the sum stipulated isextravagant in comparison with the greatest loss, which could havefollowed from the breach? If so it is a penalty. Otherwise the samewill represent liquidated damages. Thus, as a general rule, if thesum specified in the contract, is a genuine pre estimate of loss it istermed liquidated damages, and if it bears no reflection on the loss

suffered, it is termed a penalty. Nonetheless, it is for the party inbreach to show that the sum is a penalty (Robophone Facilities LtdvsBlank).


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SPECIFIC PERFORMANCE

Specific performance is a decree issued by the court, which orders thedefendant (party accused of breaching a contract ) to perform hisobligations under the contract. Where damages represent inadequate orunjust remedy (for example, where the subject matter of the contract isunique or where there are no standards to ascertain the quantum of loss)the non-breaching party may approach the court for the grant of an order

for specific performance of the contract. The court has broad discretion toaward specific performance and in exercising this discretion it takes intoaccount factors such as:

Whether the person seeking performance is prepared to perform his sideof the contract (Chappell vs Times Newspapers Ltd)

Whether the person against whom the order is sought would suffer

hardship in performing it. (Patel vs Ali)). The difference between the benefits that the (court) order would give to

one party and the cost of performance to the other (Tito vs Waddell).


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SPECIFIC PERFORMANCE

However, specific performance is notgranted in the followingcircumstances:

Monetary compensation is an adequate remedy.

It will be inequitable to either party. Thus, it is not available to aninfant in respect of a contract not enforceable against him.

The contract requires personal services such as employmentcontracts because such an order would restrict an individual'sfreedom (Chappell vs Times Newspapers Ltd).

The contracts which require extensive supervision, for examplebuilding contracts.

The defendant cannot perform exactly in accordance with theoriginal contractual obligation.

On the basis of above-mentioned constraints, it can be argued thatspecific performance is a substitutionaryand not a specific remedy.


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INJUNCTION

An injunction is a court order directing a person to do or refrainfrom doing some specified act, which, of course, has been thesubject matter of a contract. Like specific performance, aninjunction is an equitable remedy and therefore only granted at thediscretion of the court. It is awarded in circumstances wheredamages would not be an adequate remedy to compensate theclaimant.

For example, A factory begins to allow harmful smoke to escapefrom its chimney, affecting the health of people in theneighbourhood. Damages would be inadequate, as the residentswould want the emission of smoke to stop altogether. This can

therefore be remedied by an injunction order. Injunction orders are of two types: prohibitory and mandatory.


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INJUNCTION

Prohibitory injunction This orders the defendant to restrain from committing a breach of anegative contractual obligation i.e., where he does something, which he had promised not to do.Such an injunction may be granted to prevent the breach of a reasonable restraint of trade clause.For instance G agreed to source all the electric power required for his house from M but startedbuying part of his requirement from some other company. He was restrained by an injunction orderfrom buying electricity from the other source. (Based on Metropolitan Electric Supply Company vsGinder).

Mandatory injunction This, on the other hand compels the performance of a positive contractual

obligation, for example, compel an employee to do any work or attend at any place for the doing ofany work.

The main use of injunction in the contractual situation has been as an indirect means of enforcing acontract involving personal services. In exercising its discretion (of injunction) the court will use thebalance of convenience test weighing the benefit to the injured party and the detriment to theother party. For example, a factory begins to allow noxious fumes to escape from a chimney,affecting the health of neighbouring residents. Damages here would be inadequate, as theresidents would want to stop the fumes being emitted. This can only be remedied by an injunctionorder. An injunction will not be granted if its effect would be to compel a party to do something,which he could not have been ordered to do by a decree of specific performance (Lumley vsWagner).


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QUANTUM MERUIT

Quantum Meruitis a Latin term meaning, 'as much as is merited' or 'as much as earned'. Inthe context of contract law, it means something along the lines of reasonable value ofservices rendered.

The normal rule of law is that unless a party has performed its promise in its entirety, itcannot claim performance from the other party. Contrary to it, in certain cases, when aperson has done some work under a contract, and the other party repudiates the contract orsome such event occurs that renders the rest of the performance unworkable, then the courtmay allow remuneration to the party which has performed for the work he has done. Thus,quantum meruit is imposed to avoid the unjust enrichment of one party at the expense ofanother. The action of quantum meruit is allowed in Indian courts under Section 70 of theContract Act.

The concept ofquantum meruitapplies to the following situations:

When a person employs(impliedly or expressly) another person to do work for him, withoutany agreement as to his compensation, the law implies a promise from the employer to theworkman that he will pay for the services, as much as the workman may deserve or merit.

When there is an express contract for a stipulated amount and mode of compensation forservices, the plaintiff cannot abandon the contract and resort to an action for a quantummeruit. However, if there is a total failure of consideration, the plaintiff has a right to elect torepudiate the contract and then seek compensation on a quantum meruitbasis.
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QUANTUM MERUIT

If a contract is divisible and a party to a contract is prevented fromfulfilling its contractual obligations by the other party then obviously hewill not be in default. For example, in a building contract, if the ownershould prevent the builder from completing, like not allowing him to enterthe construction site, the builder can recover a reasonable price for thework done on a quantum meruitbasis.

If an indivisible contract is completely executed, but badly, the person whohas performed will be entitled to a lump sum less deduction to make goodthe defect in the performance.

In all the above cases, the claim is not based on the original contract, buton the implied promise by the other party arising from the acceptance ofan executed contract. For example, A contractor is contracted to work on a

school. He does some work but quits (breach of contract) midway. Thecontractor is entitled to be paid for the services he has already renderedfor the school on the basis ofquantum meruit. However, the school wouldalso be entitled to damages arising out of the need to look for a newcontractor.


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QUASI CONTRACT: OTHER REMEDIES

Quasi-contractual obligations are the obligations, which the common law implies

in circumstances, distinct from obligations under a contract. It is an area of law in

its own right. Quasi-contractual remedies are sometimes available either as an

alternative to a remedy for breach of contract or where there is no remedy for

breach of contract. For example, a claim for quantum meruit (a reasonable

remuneration for work done, or for goods supplied under a contract which is laterdiscovered to be void).

Claim for necessaries supplied to person incapable of contracting, or on his

account [Section 68].If a person, incapable of entering into a contract, or anyone

whom he is legally bound to support, is supplied by another person with

necessaries suited to his condition in life, the person who has furnished such

supplies is entitled to be reimbursed from the property of such incapable person. Reimbursement of person paying money due by another, in payment of which he

is interested [Section 69].- A person who is interested in the payment of money

which another is bound by law to pay, and who therefore pays it, is entitled to be

reimbursed by the other.


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QUASI CONTRACT: OTHER REMEDIES

Obligation of person enjoying benefit of non-grauitous act [Section 70]. Where aperson lawfully does anything for another person, or delivers anything to him, notintending to do so gratuitously, and such other person enjoys the benefit thereof,the latter is bound to make compensation to the former in respect of, or torestore, the thing so done or delivered.Illustrations

(a)A, a tradesman, leaves goods at B's house by mistake. B treats the goods as hisown. He is bound to pay A for them.(b)A saves B's property from fire. A is not entitled to compensation from B, if thecircumstances show that he intended to act gratuitously.

Responsibility of finder of goods [Section 71]. A person, who finds goodsbelonging to another and takes them into his custody, is subject to the sameresponsibility as a bailee.

Liability of person to whom money is paid, or thing delivered, by mistake or undercoercion [Section 72]. A person to whom money has been paid or anythingdelivered, by mistake or under coercion, must repay or return it. [Section 72]
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chapter 10_breach of contract

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