Consequences of Breach of Contract
Section 73. Compensation for loss or damage caused by breach of contract.
When a contract is broken, the party who suffers from the breach is entitled to compensation from the party who broke the contract.
Direct loss or damage:
The compensation covers loss or damage that naturally arises from the breach in the ordinary course of events.
Loss known to the parties:
Compensation also includes losses that the parties knew or could reasonably foresee at the time of making the contract as likely to result from a breach.
No remote or indirect losses:
Losses that are too remote or indirect are not recoverable under this provision.
Example:
A contracts to deliver 1,000 bags of rice to B by a certain date
A fails to deliver on time.
Recoverable loss: If B goes any buys rice from somewhere else , then B can recover the price difference on the date of breach, nothing more by default.
Non-recoverable loss: Profits B would have made from selling the rice to a third party that were not foreseeable at the time of the contract.
Compensation for failure to discharge obligation resembling those created by contract.If someone fails to fulfill a duty similar to a contract, the injured person can claim compensation as if a contract had been broken.
Quasi-contractual obligations are duties imposed by law even when there is no formal contract, such as:
Preventing unjust enrichment
Compensation is calculated like damages in a normal contract.
Courts consider the actual ways the injured person could have avoided or reduced their loss, so compensation reflects real loss, not hypothetical or avoidable losses.
Example:
(a).
A person receives goods meant for B and refuses to deliver them.
B can claim compensation equivalent to the loss suffered, just as if A had broken a contract to deliver the goods.
Illustrations:
(a).
A promises to sell 50 kgs of salt to B at a set price and then fails to deliver.
B can claim compensation from A.
The compensation is the difference between the contract price (set price) and the price B would have had to pay to buy the same 50 kgs of salt at the time it should have been delivered.
(b).
A hires B’s ship to carry cargo from Bombay to Calcutta and agrees to pay freight later.
B’s ship doesn’t go, so A has to find another way to transport the cargo.
A manages to find another transport on similar terms, but it causes extra trouble and expenses.
Compensation is A can claim from B the costs and trouble caused because B didn’t fulfil the contract.
So even though A still got the cargo transported, B is responsible for the extra problems and expenses A had to deal with.
(c).
A agrees to buy 50 kgs of rice from B at a fixed price, but no delivery date is set.
Later, A tells B that he won’t accept the rice.
B can sell the rice to someone else, but probably at a lower price than A agreed to pay.
Compensation means A must pay B the difference between the original contract price and the price B actually gets when selling the rice to someone else.
Basically, A has to cover B’s loss caused by refusing the rice.
(d).
A agrees to buy B’s ship for 60,000 rupees.
A backs out of the deal.
B sells the ship to someone else, possibly for less than 60,000 rupees.
Compensation is the difference between 60,000 rupees and the amount B actually receives.
Basically, A must make up for B’s financial loss caused by breaking the contract.
(e).
A owns a boat and agrees to carry B’s jute to Mirzapur on a specific day.
The boat is late due to A’s fault.
Because of the delay, the jute reaches Mirzapur later, when the price has dropped.
Compensation B can claim from A is the difference between the price the jute would have sold for if it had arrived on time and the price it actually sells for on late arrival.
(f).
A agrees to repair B’s house in a specific way and gets paid in advance.
A does the repairs, but not as agreed.
B can claim from A the money needed to fix the work so it meets the original agreement.
Basically, A must pay for correcting the work.
(g).
A agrees to let his ship to B for a year at a fixed price starting January first.
By January first, the market price to hire a similar ship is higher than the contract price.
A breaks the agreement.
A must compensate B the difference between the contract price and the current market price for a similar ship.
Basically, B should not lose out because the market price went up.
(h).
A agrees to sell iron to B at a fixed price, which is higher than what A could actually buy and deliver it for.
B refuses to accept the iron without a valid reason.
B must pay A the difference between the contract rice and the actual cost A would have spent to get and deliver the iron.
Basically, B has to cover A’s lost profit due to refusing the iron.
(i).
A gives a machine to B, a transporter, to take it quickly to A’s mill and tells B that the mill is stopped without it.
B delays unreasonably in delivering the machine.
Because of the delay, A loses some profit from running the mill, but the loss of the Government contract is not counted.
B must compensate A for the average profit that A would have earned while the mill was idle due to the delay.
B pays for the lost regular profit caused by the delay, not for special missed opportunities.
(j).
A agrees to sell 1,000 tons of iron to B at 100 rupees per ton.
To fulfil this, A contracts with C to buy 1,000 tons at 80 rupees per ton and tells C it’s for B’s order.
C fails to deliver the iron to A.
A cannot get the iron elsewhere, so B cancels the contract.
C must pay A 20,000 rupees, which is the profit A would have made from selling to B.
C is responsible for the profit A lost because C didn’t deliver the iron.
(k).
A agrees to make and deliver a machine to B by a certain date for a fixed price.
A fails to deliver on time.
B buys another machine at a higher price to replace it.
B also had a separate contract with someone else that he couldn’t perform because of the delay, but A doesn’t have to cover that loss.
A must compensate B only for the extra amount B paid for the replacement machine.
A pays B for the higher cost of getting the machine elsewhere, but not for any other losses B suffers.
(j).
A, a builder, agrees to build a house for B by January 1.
B plans to rent the house to C starting January 1 and tells A about this
A builds the house badly, and it collapses before January 1
B has to rebuild the house, loses rent from C, and must pay C for breaking the rental agreement
A must compensate B for the cost of rebuilding, the lost rent, and the money B had to pay C
(m).
A sells goods to B, promising they are of a certain quality.
B sells the same goods to C, also promising the quality, relying on A’s promise.
The goods turn out to be of lower quality than promised.
C claims compensation from B for the defect.
B can recover that compensation from A.
(n).
A promises to pay B a certain amount on a specific day.
A does not pay on that day.
B cannot pay his own debts and suffers huge losses as a result.
A is only responsible to pay the original amount plus interest up to the day he actually pays.
A is not responsible for B’s additional losses caused by not paying on time.
(o).
A agrees to deliver 50 kgs of saltpetre to B on a fixed date at an agreed price.
Before that date, B plans to sell it to C at a higher price than the market price on the delivery date.
A fails to deliver the saltpetre.
Compensation from A to B is calculated based on the market price on the delivery date, not the profit B would have made from selling to C.
(p).
A agrees to deliver 500 bales of cotton to B on a set day.
A does not know how B runs his business.
A fails to deliver the cotton.
B has to close his mill because of no cotton.
A is not responsible for the loss caused by B closing the mill, only for failing to deliver the cotton.
(q).
A agrees to deliver cloth to B on 1st January.
B wants to make seasonal caps from the cloth.
A delivers the cloth late, after the season for making the caps.
B can claim from A the difference between the contract price and the market price at delivery.
B cannot claim expected profits from making caps or any preparation costs.
(r).
A agrees to take B from Calcutta to Sydney on 1st January and B pays half the fare as a deposit.
A’s ship does not sail on time.
B has to wait in Calcutta, spending extra money, then travels on another ship.
A must pay B back the deposit with interest, the extra expenses in Calcutta, and the extra fare for the second ship.
A does not have to compensate B for any money lost because he arrived late in Sydney.
Section 74. Compensation for breach of contract where penalty stipulated for.
When a contract specifies a sum to be paid on breach, or contains a penalty clause, the injured party is entitled to reasonable compensation up to the amount named or the penalty.
It does not require proof of actual loss & the clause itself establishes the maximum compensation.
Example:
If a contract says, “If A fails to deliver goods on time, he shall pay ₹10,000,” B can claim up to ₹10,000 even if actual loss is less.
Explanation:
A stipulation for increased interest from the date of default can also be treated as a penalty.
Exception:
With respect to Government Contracts or Public Bonds:
When a person enters into a bail-bond, recognizance, or any bond for a public duty under law or government orders, he is liable to pay the entire sum mentioned if the condition is breached.
This differs from private contracts, where only reasonable compensation is recoverable.
Contracting with the Government does not automatically mean a public duty is undertaken and it depends on the nature of the instrument.
Illustrations:
(a).
A contracts with B to pay B Rs. 1,000.
If he fails to pay B Rs. 500 on a given day.
A fails to pay B Rs. 500 on that day.
B is entitled to recover from A such compensation, not exceeding Rs. 1,000, as the Court considers reasonable.
(b).
A contracts with B that, if A practises as a surgeon within Calcutta, he will pay B Rs. 5,000.
A practises as a surgeon in Calcutta.
B is entitled to such compensation and not exceeding Rs. 5,000, as the Court considers reasonable.
(c).
A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain day.
He forfeits his recognizance. He is liable to pay the whole penalty.
(d).
A borrows Rs. 1,000 from B with 12% interest for six months.
The bond says if A defaults, interest will jump to 75% per year.
This 75% interest is considered a penalty, not a fair estimate of loss.
B can only claim what the court thinks is reasonable compensation, not the full 75% interest.
(e).
A owes B some money and promises to repay it by giving 10 kgs of grain on a certain date.
The agreement says if A fails, he must give 20 kgs instead.
This extra 20 kgs is considered a penalty, not a fair estimate of loss.
If A fails, B can only claim reasonable compensation from the court, not the full 20 kgs.
(f).
A borrows Rs. 1,000 from B and agrees to repay in 5 equal monthly instalments.
The agreement says if A misses any instalment, the entire loan becomes immediately payable.
This condition is not a penalty, it’s a valid term of the contract.
B can enforce the contract as it is and demand full repayment if A defaults on any instalment.
(g).
A borrows Rs. 100 from B but signs a bond promising to pay Rs. 200 in 5 yearly instalments of Rs. 40.
The bond states if A misses any instalment, the entire Rs. 200 becomes immediately payable.
This condition is considered a penalty, not a fair term.
B can only claim reasonable compensation, not the full Rs. 200 immediately.
Section 75: Party rightfully rescinding contract, entitled to compensation
When a person rightfully rescinds a contract, they are entitled to compensation for any loss or damage suffered due to the non-fulfilment of the contract.
Compensation is for losses directly caused by the failure to perform the contract
The goal is to restore the injured party as much as possible to the position they would have been in if the contract had been fulfilled
It does not include unrelated or speculative losses
The amount is limited to what is considered reasonable under the circumstances
Illustration:
(a).
A singer (A) contracts to perform at a theatre managed by B for 2 nights a week, at ₹100 per night.
On the sixth night, A wilfully fails to perform.
B rescinds the contract and can claim compensation for the losses caused by A’s breach.
