Consequences of Breach of Contract

Introduction

 A contractual agreement is the mainstay of trade and commerce of any country. Contractual agreements help in bringing a multifold increase in the trade and commerce of the country. This multifold increase, in turn, helps in a positive change in the Gross Domestic Product (GDP) of the country. Contractual agreements and Contractual transactions center around trust, that is, there should be the existence of trust from both the parties that either of them shall discharge the contractual obligations and liabilities it seeks to accomplice. Under the Indian Contract Act, 1872, Sections 73-75 elaborates on the consequences of a breach of contract. If any breach of contract happens, then the affected party has the right to claim different types of damages such as nominal damage or exemplary damage from the court and the court shall award those as per the facts and circumstances of the case. 

Breach of Contract

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. For instance X contracts Y to repair X’s house in a certain and specified manner. Y receives payment in advance and repairs the house, but not in the manner specified in the contract. Here, X is entitled to recover from Y the cost of making the repairs conform to the 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 the contract.

Section 73 of the Indian Contract Act, 1872, states that the party who suffers from the breach of contract are entitled to receive compensation/reimbursement for any loss caused to him, which naturally arose in the usual course of things from such breach, from the party who has broken the contract. An essential mentioned in this section is that the affected party can claim the damage caused to them by the breach of contract, only if provided that such loss has arisen in the usual course of things. But in case, the damages/losses have been caused by some indirect connections with the breach of contract, then the affected party is not entitled to demand compensation/reimbursement. The Hadley v Baxendalerule is an important rule in this regard.

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.

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. Section 73 of the Indian Contract Act, 1872, states that the party who suffers from the breach of contract are entitled to receive compensation/reimbursement for any loss caused to him, which naturally arose in the usual course of things from such breach, from the party who has broken 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. 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.

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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.