A Detailed Analysis of Provisions Related to Compensation for Loss or Damage Caused by Breach of Contract under the Indian Contract Law

Introduction

An agreement enforceable by law constitutes a valid contract. In the case of a contract, each party is legally bound between both parties. Under section 2(h) of the Indian Contract Act, 1872 (ICA), the term contract has been defined as an agreement enforceable by law. The term agreement has been defined under section 2(e) of the ICA, 1872 as “every promise and every set of promises forming consideration for each other becomes an agreement.” An agreement involves a promise from both sides, and when an agreement becomes enforceable under the law, a valid contract arises. An important essential element of a valid contract is the offer and subsequent acceptance to form an agreement. An offer is the manifestation of the promisor’s mind, and an offer can be both positive and negative, that is, to do or not to do something. Towards this offer, consent should be signified and communicated by an act or omission by which the promisee or the party accepting the offer intends to express their consent, and this consent is known as acceptance Once a proposal is accepted by the other party and it is timely communicated to the party who proposed in a proper manner, it becomes a binding contract, provided that consideration and object are legal and the parties do have the intention to create legal relationships. 

Breach of Contract

A breach of contract occurs when a person that has an obligation to comply under a contract fails to do so, or when he does something that makes performing the contract impractical for him, or when he refuses to do so. When one of the parties makes a breach of contract, the other party has the following remedies available:

Damages 

Damages are the most common type of remedy available to the injured party. This enables the injured party to seek compensation for the loss suffered by him as a result of the breach of contract, from the party who causes the breach. Section 73 of the Indian Contract Act (ICA), 1872 states that if a contract is broken, the person who loses as a result of the violation is entitled to restitution/ compensation from the party who caused the breach for the damages or damages he suffered as a result of the breach, which inevitably resulted in the normal course of life from the breach, or which the parties knew would be likely to result from the breach when they made the contract. Such compensation is not to be provided for any injury or harm suffered as a result of the breach in the remote or indirect sense. From the provision laid down in section 73, it appears that the general principle for the valuation or calculation of damages arising because of breach of contract is compensation, that is, the innocent party is to be placed, so far as compensation for damages can do, in the same position as if the contract has been performed. The rule regarding the determination of the scope of consequential damages, which Defaulting party would be liable to pay to the Non-Defaulting party has been laid down in the landmark judgement of Hadley v Baxendale and this rule is known as the “Hadley v Baxendale” rule.

The Hadley v Baxendale Rule

The rule laid down in Hadley v Baxendale elaborated upon two concepts and hence, consists of two parts:

1. On the breach of contract such damages or loss can be recovered as may justly and reasonably consider arising naturally, that is, according to the usual course of things from such breach. 

2. On the breach of contract such damages can be recovered as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract.

The resulting damage must be the probable result of the breach of contract in both cases.

Damage Arising in The Usual Course of Things

In Hadley v Baxendale, the plaintiff’s mill stopped because of the breakage of the crankshaft. Subsequently, the defendants, who were common carriers, contracted with the plaintiff to take the broken shaft to the makers at Greenwich for repairs. Due to the defendant’s negligence, the delivery is delayed and the mill remained dysfunctional for a longer time. The plaintiff brought an action against the defendants to recover the loss. It was held that in the usual course of things, it could not be contended that the mill would be stopped by sending the broken shaft as the millers would have another shaft in reverse. The plaintiffs were not entitled to recover losses from the defendant. Similar reasoning was followed in Victoria Laundry v. Newman Industries Ltd. where it was held that reimbursement/compensation can be demanded only for damages arising in the usual course of things and not for damages that could not be anticipated by the defendants. 

But mental anguish cannot be ahead of damages for breach of the ordinary commercial contract. Whereas, in case of breach of promise to marry, exemplary damages for injury to feelings and disappointment may be claimed.

More Loss arising from the Special Circumstances 

If the loss on the breach of a contract does not arise naturally, that is, according to the usual course of things but it arises due to some special scenario or circumstances, then the individual making the breach of contract can be made liable only if those special circumstances were brought to the knowledge of the individual at the time of making the contract. In case of no prior knowledge of special circumstances, the individual making the breach of contract cannot be made liable for loss or damages.

Three Essentials of Damages 

The Supreme Court of India elaborated upon the three essentials of damages in the judgement of Organo Industries v. Union of India. In this case, the Supreme Court pointed out three essentials of damages. These are as follows:

Compensation for the Breach of Contract where Penalty is Stipulated in the Contract

Section 74 of the Indian Contract Act, 1872 states that in case a stipulated amount in the form of penalty is stated in the contract, even if no actual damage is caused, the party complaining breach is entitled to seek reasonable compensation from the party making breach of the contract. For instance, X contracts Y to pay Y Rs. 2,000 if X fails to pay Y Rs. 1,000 on the specified date. X failed to pay Y Rs. 1,000 on the specific date. In this case, Y is entitled to recover from X such compensation, not exceeding Rs 2,000 as the court considers reasonable. Section 75 of the Indian Contract Act, 1872 states that an individual rightfully rescinding a contract is entitled to be compensated/reimbursed for any loss suffered because of the breach of the contract.

Conclusion

A breach of contract occurs when any of the parties to contract, bound by the terms and conditions of the contract, breaks any of the terms agreed upon in a contract. A breach of contract mainly occurs when one party performs the contract partially and erroneously or when the party performs the contract in a delayed manner and not according to the terms of agreement concerning time frames for the performance of a contract Damages are the most common type of remedy available to the injured party. This enables the injured party to seek compensation for the loss suffered by him as a result of the breach of contract, from the party who causes the breach. The provision laid down in section 73 implies that the general principle for the valuation or calculation of damages arising because of breach of contract is compensation, that is, the innocent party is to be placed, so far as compensation for damages can do, in the same position as if the contract has been performed.

References:

  1. The Indian Contract Act, 1872, No. 2(h) (Indian).
  2.  The Indian Contract Act, 1872, No. 2(e) (Indian).
  3.  Diganth Raj, What are the essentials of Contract? IPleaders, https://blog.ipleaders.in/what-are-the-essentials-of-contract/ (last accessed Apr. 22, 2021).
  4.  Meera Annie Koshy, What do you mean by revocation of proposals and acceptance under a contract? (2020) IPleaders, https://blog.ipleaders.in/mean-revocation-proposals-acceptance-contract/ (last accessed Apr. 22, 2021).
  5.  Dr. R.K. Bangia, The Indian Contract Act, (12th Edition, 2005), Allahabad Law Agency, Haryana.
  6. The Indian Contract Act, 1872, No. 73 (Indian).
  7.  Hitesh Sablok, Consequential Damages Under The Indian Contract Act, 1872 Mondaq, https://www.mondaq.com/india/contracts-and-commercial-law/285520/consequential-damages-under-the-indian-contract-act-1872#:~:text=Section%2073%20of%20the%20Act,such%20breach%2C%20or%20which%20the (last accessed Apr. 22, 2021).
  8. Hadley v Baxendale, (1854) 9 Ex. 341.
  9. Bangia, supra note 5
  10. Id., at p. 296.
  11.  Koufos v, C. Czarnikow Ltd., (1867) 3 W.L.R. 1491.
  12. Victoria Laundry v. Newman Industries Ltd., (1949) 1 All E.R.
  13. Ghaziabad Development Authority v. Union of India, A.I.R. 2000 S.C. 2003.
  14. Prema v. Mustak Ahmad, A.I.R. 1987 Guj. 106; Laxminarayan v. Sumitra, A.I.R. 1995 M.P. 86.
  15.  Bangia, supra note 5, at p. 302.
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I am Raghav Sehgal, a 1st Year FYIC BALLB student at Rajiv Gandhi National University of Law, Patiala. I am new to the arc of law. I am actively seeking opportunities in Academic Writing, Networking and Critical Skills Development. My fields of interest include International Humanitarian Law, Human Rights Law, Current Affairs and Legal Developments around the law. I have two publications under my belt, and this is indicative of my orientation towards academic writing. My career objective is to be an expert in my profession and improve my standard of thought and mental capabilities and to add wealth to my nation and make my nation and family proud.