11/10/2019 A Brief Note On Breach Of Service Agreements - CiteHR

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A Brief Note On Breach Of Service Agreements

#Rajatsahotra76 ❞
Hi everyone.......

i think breach of service agreement requires a long concluding discussions so every one is invited for
their views on this:-

Human Resources Managers often insist on surety from new recruits by having them execute a bond
stating that in case they commit a breach of the agreement, they will have to pay to the employer the
damages as may be agreed upon. Generally the agreements stipulate that the appointee shall not leave
the organization for a prescribed period especially when the employer trains the employee at his cost.
The purpose behind such agreements is that the employers who spend money and impart training to
their employees should get some benefit from the employees.
Experience however shows that several employees execute the bond but break the same within a short
period and leave employment. Disputes arise about the legality of the conditions of employment. The
agreements are questioned on the grounds of public policy. Disputes also arise about the quantum of
damages, which an employer can recover, from the employee in breach. Here are some notable cases of
breach of service agreements wherein the Courts have laid broad principles for recovery of damages.
In the case of Amar Singh v. Gopal Singh [AIR 1931 Lahore 133], one Amar Singh was employed under
Gopal Singh, as a chauffer on monthly wages. He left the service without notice of his own accord and he
was not paid his wages for 23 days. He had worked for only a fortnight and left service when his services
were badly needed. Amar Singh filed suit against Gopal Singh for recovery of unpaid wages. Gopal Singh
claimed damages for leaving service without notice. The dispute went up to the High Court of Lahore. In
that case, it was held that when a servant whose wages are due periodically, leaves service without legal
justification or without proper notice, he is entitled to be paid for the portion of the time during which
he served since last periodical payment and the master would be entitled to a reasonable compensation
for breach of contract. Very often, the question of quantity of damages, which an employer may recover
from the employee who commits breach of agreement, also arises.
A student entered into a bond with the State of Mysore, which agreed to pay for his education expenses
in the U.S.A. The condition for such payment was that after finishing his studies, he would serve the
State Government for a period of not less than five years on such salary as the Government may fix.
However, if he was not given employment within six months of his return, they should be deemed to
have waived their right to claim his services. He would then be free to seek services elsewhere. In the
event of a breach of the terms of the bond, the student would be obliged to refund all the expenses
incurred by the Government, along with interest. The student finished his studies at the Polytechnic
Institute of Brooklyn, New York in September 1949 and obtained diploma from that Institute on June
14, 1950 and with the permission of the State stayed on in the U.S.A. for practical training at his own
expense. Before finishing his training he returned for domestic reasons and stayed in India for 6 months
and again returned to U.S.A. to finish his training with the States permission. He finished his training
and got employed in the U.S.A, claiming waiver by the State Government. It was held by the Supreme
Court that staying on for six months in India, after his return on account of domestic reasons and his
being permitted to return for finishing his training his training did not indicate that he was waiting for
the State to offer him appointment. [M. Sham Singh v. State of Mysore, AIR 1972 SC 2440.]
The obligation to pay compensation or damages is a contractual obligation. The measure of damages in
contract is compensation for the consequences, which follow as a natural and probable consequence of
the breach; or in other words, which could reasonably be foreseen. [Cook v. S., (1967) 1 AII E.R. 299,
302.]
The rule is well settled, that damages due either for breach of contract, or for tort, are damages, which so
far as money can compensate, will give the injured party reparation for the wrongful act and for all the
natural and direct consequences of the wrongful act. In the absence of special circumstances the
measure of damages cannot be the amount of loss ultimately sustained by the injured party. [Trojan &
Co. v. Nagappa Chettiaar, (1953) S.C.R. 789. 799]. If the quantification of loss or damages is not
possible, even the party who suffered can request the Court to assess the reasonable damages provided
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there is damage. [State of Kerala v. United Shippers

Home New and Dredgers, AIR 1982 Ker 281].
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There is authority to the proposition that substantial damages can be claimed where a breach is proved
even though the calculation of damages is 'not only difficult but incapable of being carried out with
certainly or precision. In such cases, however, the via-media would be to stipulate the quantum of
compensation in the agreement itself. When a contract has been broken and if a sum has been 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 by virtue of s. 74 of the Indian Contract Act. The Indian legislature, by enacting s.
74, sought to cut across the web of rules and presumptions under the English common law, by enacting a
uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and
stipulations by way of penalty. [Fateh Chand v. Balkishan Das, AIR 1963 SC 1405].
The Supreme Court in Fateh Chands case said: 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 same proposition
has also received the support of the Supreme Court in Nareshchand Sanyal v. Calcutta Stock Exchange
Assn. Ltd., AIR 1977 SC 422, 428.
But in an English case, the House of Lords held: a clause in an artistes agreement suspending salary
upon her failure to appear and perform does not prevent the employers from recovering damages for
breach of contract as well as suspending her salary. The suspension of salary is not a penalty. [Gaumont
British Picture Corporation v. Alexander, (1936) 2 All E.R. 1686, 1693]. A sum which is payable in
pursuance of a contractual obligation is different from a sum payable on a breach of contractual
obligation. The former is not a penalty. [Tool Metal Co. v. Tungsten Electric Co. (1955) 2 All E.R. 657,
688.] Liquidated damages is the term used to indicate the sum, which the parties have, by the contract
assessed as the damages to be paid, whatever may be the actual damage. [Wallis v. Smith (1882) 21
Ch.D. 243, 267]
To claim penalty or liquidated damages, the onus of proof is on the plaintiff. The plaintiff has to prove
that the amount of damages stipulated whether by way of liquidated damages or penalty is a reasonable
pre-estimate of damages and he cannot be awarded a sum greater than the one stipulated. [George
Pictures Ltd. v. Neelakandaru Gopalakrishna, AIR 1971 Ker 271; Narasimha Rao v. Supdt. of Excise,
AIR 1974 AP. 157, 167].

But where the engagement is for one full year, say from 1st April, 1908, to 31st March 1909, and the
salary is fixed at so much (say Rs. 18) per month, and the servant wrongfully leaves his employers
service on 20th March, 1909, he is nevertheless entitled to his salary for the eleven months during which
he actually served his employer, less the damages incurred by the employer by the breach, through the
salary be payable under the terms of the agreement in a lump sum of Rs. 216 at the end of the year.
Though actual damage has not been proved, the sum stipulated in the contract towards liquidated
damages can be recovered by the employer for the breach committed by the employee. [P. Nagarajan v.
Southern Structurals Ltd., 1996 (2) LLN 810.
In Fertiliser and Chemical Travancore Ltd. v. Ajay Kumar and others, 1990 LLR 711, the employer
selected three trainees who then signed a bond that they would obtain two years training in the
Company and after the training they will put in at least five years service in the company. In case of a
breach of these conditions by the trainees, Rs.10,000/- was to be paid as reasonable compensation for
the damages likely to be incurred by the employer. But the trainees resigned after five months.
The employer filed a suit for recovery of damages on the basis of the bond executed by the employees.
The trial court dismissed the suit holding that the work done by the trainees during the period of
training would sufficiently compensate the management. However, their Lordships at the High Court of
Kerala observed that though the selection of trainees was for absorption into training, the employer was
not bound to appoint them on permanent service. But a trainee, who accepts the selection and joins
training after entering into bond, binds himself to undergo the training and then accept regular
appointment, if offered, for a minimum period of five years. The process of selection itself involves time,

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energy and expenses for the employer. This is the

Home case of training also. Over and above other expenses
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during training, each trainee gets Rs.800/- per month
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next year from the employer.
The employer will definitely incur loss when a trainee breaks the conditions of the bond and walks off.
The employer is deprived of the expected service of a competent person, for which fresh selection and
training may become necessary. Breach of bond by the trainee is, therefore an aspect involving damages
to the employer. Only the question of the quantum of the damage then remains to be decided.

The Court also observed that s. 73 the Indian Contract Act provides for compensation for failure to
discharge obligation resembling those created by contract. When a contact is broken, what is recoverable
is only the loss or damage caused, which naturally arose in the usual course of things from the breach or
which the parties knew, when they made the contract, to be likely to result from the breach of it. Section
74 of the Indian Contract Act providing compensation for breach of contact where penalty stipulated for
is to be read along with s. 73 as s. 74 is only supplementary to s. 73 irrespective of the amount stipulated
in the contract. Whether it is liquidated damage or by way of penalty, the party complaining of breach is
entitled to get reasonable compensation and the amount stipulated could be taken as the outer limit.
Another case is Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad & Ors., 1997 LLR 500 decided by the
Madras High Court. In this case, an employee who was engaged as Sale Engineer committed a breach of
the undertaking when he left the services of the plaintiff after serving for 14 months only as against the
contracted period of three years. When the case reached the High Court, the High Court of Madras held
that in such a case, it becomes unnecessary for the employer to prove separately any post-breach
damages. On the other hand, it would suffice to substantiate the fact that the concerned employee was
the beneficiary of special favour or concession or training at the cost and expense wholly or in part of the
employer and there had been a beach of the undertaking by the beneficiary of the same. In such cases,
the breach would per se constitute the required legal injury resulting to the employer, out of the breach
or violation by the employees. The High Court, also clarified that while awarding damages as stipulated,
the statutory exception for mitigating the quantum of damages will have no bearing.

rajat:?:
20th July 2009

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#Chomy
Sir,
Very good posting.
I have a query what is that employer liabilty when he recovers taining cost. Does he need to show
training cost occured? If so what is that training cost?
Please help with any case laws
Regards,
Sowmya Shetty
9th April 2010 From India, Bangalore

#Raj.Uk
Hello All,
Even i want to know what are all the cost to be considered as a training cost.
and what are all the cost to be claimned as a damages if the employees break bond
looking for your feed back
regards
raj
11th April 2010

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