DEFENCES USED IN BREACH OF CONTRACT: ANALYSIS

THROUGH CASE LAWS

INTRODUCTION
The Indian Contract Act, 1872, provides a basic structure of the law of contract in India, its
enforcement, various provisions regarding non-performance and the breach of contract. This
paper is aimed to highlight provisions regarding damages in case of the breach of the
contract. Thus, before knowing what exactly liquidated damages are, it is important to
understand the consequences of breach of contract and the damages awarded in case of
breach. A party who is injured by the breach of a contract may bring an action for damages
and Damages means compensation in terms of money for the loss suffered by the injured
party. Thus, in contract when these damages are awarded it is known as liquidated damages.

The Indian Contract Act, 1872 provides for remedies and damages in case of breach of
contract from Section 73-75.

BREACH OF CONTRACT
Breach of contract is a legal cause of action in which a binding agreement is not honoured by
one or more of the parties to the contract by non-performance or interference with the other
party’s performance. If the party does not fulfil his contractual promise, or has given
information to the other party that he will not perform his duty as mentioned in the contract
or if by his action and conduct he seems to be unable to perform the contract, he is said to
make a breach the contract.

The breach of contract may be: A) actual or B) anticipatory.

The actual breach may take place either at the time the performance is due, or when actually
performing the contract. The anticipatory breach, i.e., a breach before the time for the
performance has arrived.

When a breach of contract takes place, the remedy of damages is the logical consequence of
breach. The aggrieved party may seek compensation from the party who breaches the
contract. When the aggrieved party claims damages as a consequence of breach, the court
takes into account the provisions of law in this regard and the circumstances attached to the
contract. The fact is that both damages and penalty are a form of economic gain which are
payable by the defaulter to the innocent party that has suffered a loss due to the breach. This
can be observed by analysing chapter VI of Indian Contract Act, 1872.

Section 73 OF INDIAN CONTRACT ACT, 1872

Compensation for Losses or Damages caused by a Breach of Contract- When a contract
has been broken, the party who suffers by such breach is entitled to receive, from party who
has broken the contract, compensation for any loss or damage caused to him thereby, which
naturally arose in the usual course of things from such breach, or which the parties knew,
when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage sustained by
reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract-

When an obligation resembling those created by contract has been incurred and has not been
discharged, any person injured by the failure to discharge it is entitled to receive the same
compensation from the party in default, as if such person had contracted to discharge it and
had broken his contract.

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.

As stated in the provisions relating to damages under the Indian Contract Act 1872, one of
the vital requirements for an award of damages is that the loss or damage “arose in the usual
course of things from such breach; or parties knew that such a loss or damage could
subsequently arise at the end of the time of entering into the contract.” Thus, the defendant
would not be liable for damages that are remote to the breach of contract.

In the landmark case of Hadley v. Baxendale the principle governing remoteness of damages
was elaborated. The rules enunciated in this case were that a party injured by a breach of
contract can recover only those damages that either should “reasonably be considered...as
arising naturally, i.e., according to the usual course of things” from the breach, or might
“reasonably be supposed to have been in the contemplation of both parties, at the time they
made the contract, as the probable result of the breach of it.” This forms the basis of the
understanding of special damages. In this case, the Court recognized that the failure of the
defendant to send the crankshaft for repairs was the only cause for the stoppage of the mill of
the plaintiffs, which resulted in loss of profits.

If the plaintiffs can establish that the defendants were aware of the particular losses suffered
by the plaintiffs due to the actions or inactions of the defendants, the latter shall be liable for
such losses, if such losses do not occur in the normal course of events. In circumstances
where it is evident that the defendant has not assumed such risk as contemplated under the
special circumstances under the terms of the contract or that any reasonable man would not
have assumed such risk, then mere knowledge of the special circumstances would not make
the defendant liable for the corresponding loss or injury.

Reiterating the finding in Hadley v. Baxendale, the following principles of remoteness and
foreseeability were enunciated in Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd.
Section 73 Incorporates Two Rules of Hadley V Baxendale-
It is declared by the section that compensation is not to be given for any remote or indirect
loss or damage sustained by reason of the breach. It also declares that same principles will
apply where there has been a breach of a quasi-contractual obligation.

Compensation is recoverable for any loss or damage-

Arising naturally in the usual course of things from the breach, or which the parties knew at
the time of the contract as likely to result from the breach.
The burden of proof lied on the plaintiff to show that damages have been sustained and what
shall be the measure of converting the loss into money.

Liability in Ordinary Cases-

The extent of liability in ordinary cases is what may be foreseen by "the hypothetical
reasonable man". It is necessary that some loss should be shown by evidence.

SECTION 74 OF INDIAN CONTRACT ACT, 1872

Compensation for breach of contract where penalty stipulated for- When a contract has
been broken, if a sum is named in the contract as the amount to be paid in case of such
breach, or if the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is proved to have
been caused thereby, to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the case may be, the penalty
stipulated for.

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.

In Fateh Chand v Balkishan Das, the Supreme Court stated:

Section 74 declares the law as to liability upon breach of contract where compensation is by
agreement of parties predetermined or where there is a stipulation by way of penalty. But the
application of the enactment is not restricted to cases where the aggrieved party claims relief
as a plaintiff. The section does not confer a special benefit upon any party. It merely declares
the law that notwithstanding any term in the contract for determining the damages or
providing for forfeiture of any property by way of penalty, the Court will award to the party
aggrieved only reasonable compensation not exceeding the amount named or penalty
stipulated.

The purpose of such clauses is to promote certainty, especially in commercial contracts.

Parties to a contract would fix such a sum in advance at the time of making the contract
because it facilitates calculation of risks; it reduces the difficulty and expense of proving
actual damage or loss and facilitates recovery of damages. It also avoids the difficulty in
assessment, even where the consequences of breach are ascertainable and avoids the risk of
under-compensation; the party may otherwise not be able to recover indirect, consequential
loss by the rule of remoteness. It gives promisee an assurance that he may safely rely on the
fulfilment of the promise.

Penalty and Liquidated Damages

Often the term 'liquidated damages' is mistaken or rather confused with the term 'penalty'.
Thus, understanding the terms, we can clearly distinguish between the two.

A penalty can be said to be a sum so stipulated in terrorem (with the object of coercing the
party into performing the contract), and thus an amount qualifies to be a penalty if the sum
named is extravagant and unconscionable. It is also a penalty if the breach consists in paying
of money and the sum stipulated is greater than the sum which ought to have been paid.
However, liquidated damages are a genuine, covenanted pre-estimate of damages as seen
above. They are both to be so judged on the facts of each case.

The question whether a particular stipulation in a contract is in the nature of the penalty has
to be determined by the court against the background of various relevant factors, such as the
character of transaction and its special nature, if any, the relative situation of the parties, the
rights and obligations accruing from such a transaction under the law and the intention of the
parties incorporating in the contract, the particular stipulation which is contended to be penal
in nature. If on such a comprehensive consideration, the court finds that the real purpose for
which the stipulation was incorporated in the contract was that by reason of its burdensome
or oppressive character, it may operate in terrorem over the promisor so as to drive him to
fulfil the contract, and then the provision will be held to be of Penalty

SECTION 75 OF INDIAN CONTRACT ACT, 1872

Party rightfully rescinding contract entitled to compensation- A person who rightfully
rescinds a contract is entitled to compensation for any damage which he has sustained
through the non- fulfilment of the contract.

Example: A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her 100 rupees
for each night’s performance. On the sixth night, A wilfully absents himself from the theatre,
and B, in consequence, rescinds the contract. B is entitled to claim compensation for the
damage which he has sustained through the non-fulfilments of the contract.

CONCLUSION
In this research paper it has been found that variety of remedies is made available to the
victim of breach of contract. Explaining chapter VI of Indian Contract Act, 1872 i.e. section
73, 74 and 75 by analysing through case laws.