Discharge of Contract by Breach
Discharge of Contract by Breach
Discharge of Contract by Breach
CONTRACT BY
BREACH
BREACH OF CONTRACT
• A breach of a contract occurs when a party thereto
• renounces his liabilities under it, or
• by his own act makes it impossible that he should perform his obligations
under it or
• totally or partially fails to perform such obligations.
• Breach is of two types
• Actual / Present Breach &
• Anticipatory Breach
• Actual – When breach is committed either;
• (i) at the time when the performance of the contract is due; or
• (ii) during the performance of the contract.
• Anticipatory - Breach of a contract committed before the date of performance
of the contract.
ANTICIPATORY BREACH
• An anticipatory repudiation occurs when prior to the promised date of performance
the promisor absolutely repudiates the contract.
• It is an announcement by the contracting party of his intention not to fulfil the
contract that he will no longer be bound by it.
• Implications of Anticipatory Breach:
• Innocent Party is excused from further performance.
• Obligation under the Original Contract comes to an end.
• Entitlement of aggrieved party to receive damages
• Immediate Right of Action of Injured Party:
• Injured Party has a right to either
• sue immediately or
• Wait till the time the act was to be done – Contract will remain valid until actual
breach
ANTICIPATORY BREACH
Held:
It cannot be laid down as a universal rule that whereby an agreement an act is to be done
at a future date, no action can be brought for a breach of the agreement till the day for
doing the act has arrived. If a man promises to marry a woman on a future day and before
that day marries another woman another woman, he may be immediately sued for
breaking the contract.
ANTICIPATORY BREACH
• Two elements:
• Party must have refused to perform the contract
• The refusal must go to the whole of the contract
• Section 39: gives expression to the doctrine of Anticipatory Breach.
ANTICIPATORY BREACH
Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.
Explanation.—In estimating the loss or damage arising from a breach of contract, the
means which existed of remedying the inconvenience caused by the non-performance of
the contract must be taken into account.
DAMAGES FOR BREACH
• Section 73: incorporates two principles of Hadley v. Baxendale Case
• Compensation is not be given for any remote or indirect loss or damage
sustained by reason of will.
• Compensation will be recoverable for:
• Loss arising naturally in the usual course of things from the breach – OBJECTIVE
(REASONABLE MAN FORESIGHT)
• Parties knew at the time of the contract as likely to result from the breach –
SUBJECTIVE – EXTENT OF LIABILITY DEPENDS ON THE KNOWLEDGE OF THE PARTIES
• Burden of Proof is on the plaintiff to show:
• Damage is sustained PROOF OF LOSS IS
• Measure of Damages NECESSARY
• Liability in Ordinary Cases:
• As determined by Reasonable Man foresight.
DAMAGES FOR BREACH
• Fazal Ilahi v. East Indian Railway Company [ILR (1921) 43 All 623]
• Facts:
• The plaintiff delivered to the defendant railway company’s parcel office at Cawnpore four
boxes of Chinese crackers for consignment to Allahabad where he needed them for a
festival on June 5th, but he did not disclose the purpose.
• The Company’s servants considering it unsafe to send crackers by parcel train actually
sent them by goods train and they reached only after the conclusion of the festival.
• The company required him to take delivery on payment of additional freight, which he
refused to pay and therefore the company sold the goods at a nominal price.
• He sued the railway company.
• The court disallowed the claim for profits which would have been made as the plaintiff’s
disallowed the claim for profits which would have been made, as the plaintiff’s special
purpose was not within the knowledge of the company.
• But the plaintiff succeeded in recovering the cost of the price of the goods sold by the
company in breach of the contract and Rs. 100 as damages and other incidental
expenses.
DAMAGES FOR BREACH
• Assessment of Damages –
• Difference between the Market Price and Contract Price
• Actual Sale or Purchase of Goods not necessary in order to Claim the difference.
• Loss of Profits – Special Loss
Karandas H Thacker v. Saran Engg Company Limited [ AIR 1965 SCC 1981]
Facts:
• There was a contract to supply 200 tons of scrap iron. The buyer undertook to supply the
same quantity to the Export Corporation, Calcutta.
• The seller failed to supply and in consequence the buyer could not keep his date with the
corporation.
• The Corporation recovered from him the difference in the contract price and market price.
• The seller contended that he should not be held liable for anything because control price of
iron scrap was still the same and he had no knowledge of the contract of resale to the
corporation.
DAMAGES FOR BREACH
Karandas H Thacker v. Saran Engg Company Limited [ AIR 1965 SCC 1981]
Held:
• On account of non-delivery of scrap iron, the buyer could have purchased the scrap iron from the
market at the same controlled price and similar incidental charges.
• This means that he did not stand to pay a higher price than what he was to pay to the
respondent and therefore he could not have suffered any loss on account of breach.
• The actual loss which he suffered on account of the breach was the result of his contracting to
sell 200 tons of scrap iron for export to the Export Corporation.
• As the seller was not aware of this contract, he could not have known the likelihood of the loss
actually suffered.
The defendant failed to install the door as per the terms of the contract which required a security
door and locking system.
When the plaintiff’s property was subsequently burgled and a suit was filed for claiming damages,
the Court came to a conclusion that the burglary would not have taken place had the defendant
installed the door and locking system ; thus ‘but for’ the defendants breach, the loss would not
have been suffered
CAUSATION
• Acknowledging the “but for” test, in Alexander v. Cambridge Credit Corp Ltd., McHugh JA
stated that the applicable tests ought to be decided on the basis of the facts and
circumstances and not limited to the “but for” test, rather, a commonsensical approach is to
be adopted to establish a causal connection between the breach of the contract and the loss
or injury.
• This was pointed out, on consideration of the fact that there may be numerous factors
causing the loss or injury and in such cases, the “but for” test may not helpful.
Explanation.— A stipulation for increased interest from the date of default may be a
stipulation by way of penalty.
Exception — When any person enters into any bail-bond, recognizance or other
instrument of the same nature or, under the provisions of any law, or under the orders of
the Central Government or of any State Government, gives any bond for the performance
of any public duty or act in which the public are interested, he shall be liable, upon breach
of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation.— A person who enters into a contract with Government does not necessarily
thereby undertake any public duty, or promise to do an act in which the public are
interested.
LIQUIDAT
ED
DAMAGES
AND
PENALTY
LIQUIDATED DAMAGES
• Where a sum is named in a contract as the amount to be paid in case of breach,
regardless of whether it is a penalty or not, the aggrieved party is entitled to
receive reasonable compensation not exceeding the amount so named.
• The named sum – maximum amount of liability
• Courts to award a reasonable compensation not exceeding the stipulation.
• Objective – To knock down unconscionable or extravagant contracts.
State of Karnataka v. Shree Rameshwara Rice Mills [(1987) 2 SCC 160]
• A Clause in contract was in dispute which stipulated that in event of a breach of the contract, the
aggrieved party will determine the amount of compensation that it is entitled to and the same shall
be paid by the party breaching the contract.
• Held – Clause – Void – as it had the effect of making a party also a judge to decide breach and
assess damages. – Carries the potential of being misused.