LAW OF CONTRACTS

B.B.A. LL. B. (Hons.) – Semester II

Research Paper: Law of Contracts

Topic: A study on Breach of Contracts and measures for its damages

Submitted to: -
Prof. Meenaz Kazi
Kirit P. Mehta School of Law, NMIMS
(Deemed to be UNIVERSITY)

Submitted by: -
Taneesha Bagherwal
SAP ID: 81022019201
ROLL NO.: E013

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TABLE OF CONTENTS

Sr. No. Contents Page No.

1 Introduction
2 Research Objectives
3 Research Questions
4 Research Methodology
5 Meaning
6 Types Of Breach Of Contracts
7 Legal Issues Concerning A Breach Of Contract
8 Economics Of Breach Of Contract
9 Can One Sue For Breach Of Contract
10 Remedies For A Breach Of Contract
11 Liquidated And Unliquidated Damages Under
Indian Contract Act, 1872
12 Conclusion

INTRODUCTION

“Contract, in the simplest definition, a promise enforceable by law. The promise may
be to do something or to refrain from doing something. The making of a contract

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requires the mutual assent of two or more persons, one of them ordinarily making an
offer and another accepting. If one of the parties fails to keep the promise, the other is
entitled to legal redress. The law of contracts considers such questions as whether a
contract exists, what the meaning of it is, whether a contract has been broken, and what
compensation is due the injured party. 1A true law of contract that is, of enforceable
promises implies the development of a market economy. Where a commitment’s value
is not seen to vary with time, ideas of property and injury are adequate and there will be
no enforcement of an agreement if neither party has performed, since in property terms
no wrong has been done. In a market economy, on the other hand, a person may seek a
commitment today to guard against a change in value tomorrow; the person obtaining
such a commitment feels harmed by a failure to honour it to the extent that the market
value differs from the agreed price. ”

“In a perfect world, business contracts would be entered into, both sides would benefit
and be pleased with the outcome, and no disputes would arise. But in the real world of
business, delays happen, financial problems can crop up, and other unexpected events
can occur to hinder or even prevent a written contract from being carried out and one
party ends up suing the other. This research paper deals with the discussion of the legal
concept of breach of contract and an overview of one’s legal options should such a
breach occur. ”

RESEARCH OBJECTIVES

1. To study and understand the meaning of contracts

2. To study and understand the meaning Breach of contracts
3. To determine the measures for the Breach of Contract in India

1
Mehran, (2019),” Contract”, Encyclopedia Britannica.

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RESEARCH QUESTIONS

1. What is the meaning of contracts?

2. What do one understand by Breach of contracts?
3. What are the measures available for the Breach of Contract in India?

RESEARCH METHODOLOGY

“Keeping in mind the nature of the topic and the subsequent research questions, the
researcher used both the methods, i.e., method of primary as well as secondary
research. As for facts and stats, various research paper, articles and journals are referred
and analyzed for the purpose of research. On the other hand, researcher has also
included study based on personal observations with an addition of ethnographic
research. Hence, this research paper has integrated all the data and information in a
cohesive manner. ”

MEANING

“A breach of contract is a violation of any of the agreed-upon terms and conditions of a

binding contract. The breach could be anything from a late payment to a more serious
violation such as the failure to deliver a promised asset.A contract is binding and will
hold weight if taken to court. To successfully claim a breach of contract, it is imperative
to be able to prove that the breach occurred. ”

“A breach of contract is when one party breaks the terms of an agreement between two
or more parties. This includes when an obligation that is stated in the contract is not
completed on time you are late with a rent payment, or when it is not fulfilled at all a
tenant vacates their apartment owing six-months' back rent.Sometimes the process for
dealing with a breach of contract is written in the original contract. For example, a

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contract may state that in the event of late payment, the offender must pay a $25 fee
along with the missed payment. If the consequences for a specific violation are not
included in the contract, then the parties involved may settle the situation among
themselves, which could lead to a new contract, adjudication, or another type of
resolution.2 ”

“A business contract creates certain obligations that are to be fulfilled by the parties
who entered into the agreement. Legally, one party's failure to fulfill any of its
contractual obligations is known as a "breach" of the contract. Depending on the
specifics, a breach can occur when a party fails to perform on time, does not perform in
accordance with the terms of the agreement, or does not perform at all. Accordingly, a
breach of contract will usually be categorized as either a material breach or an
immaterial breach for purposes of determining the appropriate legal solution or remedy
for the breach. ”

An example,
“Let's assume that A contracts with B for the purchase of some of its products, for
delivery by the following Monday evening. If B delivers the product to A on the
following Tuesday morning, its breach of the contract would likely be deemed
immaterial, and A would likely not be entitled to money damages (unless he could
show that he was somehow damaged by the late delivery). ”

“However, assume now that the contract stated clearly and explicitly that time is of the
essence and the product MUST be delivered on Monday. If B delivers after Monday, its
breach of contract would likely be deemed material, and A damages would be
presumed, making B's liability for the breach more severe, and likely relieving A of the
duty to pay for the product under the contract. ”

TYPES OF BREACH OF CONTRACTS

2
Will Kenton (2021),"Breach of Contract", Investopedia

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“One may think of a contract breach as either minor or material.

1. Minor Breach: A minor breach happens when you don't receive an item or
service by the due date. For example, you bring a suit to your tailor to be
custom fit. The tailor promises (an oral contract) that they will deliver the
adjusted garment in time for your important presentation, but in fact, they
deliver it a day later.

2. Material Breach: A material breach is when you receive something that is

different from what was stated in the agreement. Say, for example, that your
firm contracts with a vendor to deliver 200 copies of a bound manual for an auto
industry conference. But when the boxes arrive at the conference site, they
contain gardening brochures instead.

“Further, a breach of contract generally falls under one of two categories:

1. Actual Breach: An actual breach is when one party refuses to fully perform the
terms of the contract

2. Anticipatory Breach: An anticipatory breach is when a party states in advance

that they will not be delivering on the terms of the contract. ”

LEGAL ISSUES CONCERNING A BREACH OF CONTRACT

“A plaintiff, the person who brings a suit to court claiming that there has been a breach of
contract, must first establish that a contract existed between the parties. The plaintiff also must
demonstrate how the defendant the one against whom a claim or charge is brought in a court
failed to meet the requirements of the contract. ”

1. Is the Contract Valid?

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“The simplest way to prove that a contract exists is to have a written document that is
signed by both parties. It's also possible to enforce an oral contract, though certain types
of agreements still would require a written contract to carry any legal weight. These
kinds of contracts include the sale of goods for more than $500, the sale or transfer of
land, and contracts that remain in effect for more than one year after the date on which
the parties sign the agreement. Courts will review the responsibilities of each party of
the contract to determine whether they have fulfilled their obligations. Courts also will
examine the contract to see if it contains any modifications that could have triggered
the alleged breach. Typically, the plaintiff must notify a defendant that they are in
breach of contract before advancing to legal proceedings. ”

2. Possible Reasons for the Breach

“The court will assess whether or not there was a legal reason for the breach. For
example, the defendant might claim that the contract was fraudulent because the
plaintiff either misrepresented or concealed material facts. The defendant may
alternatively argue that the contract was signed under duress, adding that the plaintiff
compelled it to sign the agreement by applying threats or using physical force. In other
cases, there might have been errors made by both the plaintiff and the defendant that
contributed to the breach. ”

ECONOMICS OF BREACH OF CONTRACT

“Economically, the costs and benefits of upholding a contract or breaching it determine

whether either or both parties have an economic incentive to breach the contract. If the
net expected cost to a party of breaching a contract is less than the expected cost of
fulfilling it, then that party has an economic incentive to breach the contract.
Conversely, if the cost of fulfilling the contract is less than the cost of breaking it, it
makes sense to respect it. Furthermore, when the expected cost to each party of

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following through with a contract is greater than the expected benefit, both parties have
an incentive to forgo the transaction in the first place or mutually agree to void the
contract. This may occur when relevant market or other conditions change over the
course of the contract. ”

CAN ONE SUE FOR BREACH OF CONTRACT

“When a breach of contract occurs or is alleged, one or both of the parties may wish to
have the contract enforced on its terms, or may try to recover for any financial harm
caused by the alleged breach. If a dispute over a contract arises and informal attempts at
resolution fail, the most common next step is a lawsuit. If the amount at issue is below a
certain dollar figure (usually $3,000 to $7,500 depending on the state), the parties may
be able to resolve the issue in small claims court. Courts and formal breach of contract
lawsuits are not the only options for people and businesses involved in contract
disputes. The parties can agree to have a mediator review a contract dispute or may
agree to binding arbitration of a contract dispute. These out of court options are two
methods of alternative dispute resolution that can take place as alternatives to business
litigation.”

REMEDIES FOR A BREACH OF CONTRACT

“When an individual or business breaches a contract, the other party to the agreement is
entitled to relief (or a remedy) under the law. 3 The main remedies for a breach of
contract are:

1. Damages

3
FindLaw (2020),"Breach of Contract and Lawsuits”, available at:
https://www.findlaw.com/smallbusiness/business-contracts-forms/breach-of-contract-and-lawsuits.html

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“The payment of damages payment in one form or another is the most common
remedy for a breach of contract. There are many kinds of damages, including the
following:

a) Compensatory damages aim to put the non-breaching party in the position

that they would have been in if the breach had not occurred.
b) Punitive damages are payments that the breaching party must make, above
and beyond the point that would fully compensate the non-breaching party.
Punitive damages are meant to punish a wrongful party for particularly
wrongful acts, and are rarely awarded in the business contracts setting.
c) Nominal damages are token damages (small number of damages) awarded
when a breach occurred, but no actual money loss to the non-breaching
party was proven.
d) Liquidated damages are specific damages that were previously identified by
the parties in the contract itself, in the event that the contract is breached.
Liquidated damages should be a reasonable estimate of actual damages that
might result from a breach. ”

2. “Specific Performance
If damages are inadequate as a legal remedy, the non-breaching party may seek an
alternative remedy called specific performance. Specific performance is best
described as the breaching party's court-ordered performance of duty under the
contract.Specific performance may be used as a remedy for breach of contract if the
subject matter of the agreement is rare or unique, and damages would not suffice to
place the non-breaching party in as good a position as they would have been in had
the breach not occurred. ”

3. “Cancellation and Restitution

A non-breaching party may cancel the contract and decide to sue for restitution if
the non-breaching party has given a benefit to the breaching party.Restitution as a
contract remedy means that the non-breaching party is put back in the position it

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was in prior to the breach, while cancellation of the contract voids the contract and
relieves all parties of any obligation under the agreement. ”

LIQUIDATED AND UNLIQUIDATED DAMAGES UNDER INDIAN

CONTRACT ACT, 1872

“Under the Indian Contract Act, 1872, Section 73 and Section 74 provide for
unliquidated and liquidated damages respectively. Unliquidated Damages are the
damages awarded by the courts on the basis and assessment of actual loss or injury
caused to the party suffering breach of contract. Whereas, Liquidated Damages are the
damages which the parties to the contract may agree to, as payment of a certain amount
on the breach of contract.4 ”

“The relevant parts of the sections are as follows:

1. Section 73: Compensation for loss or damage caused by breach of

contract: When a contract has been broken, the party who suffers by such breach is
entitled to receive, from the 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.

2. Section 74: Compensation for breach of contract where penalty is 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 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. ”
4
Sara Siddiqi (2019),"India: Proof of Actual Damage”, Mondaq

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TYPES OF DAMAGES UNDER SECTION 73 OF THE INDIAN

CONTRACT ACT, 1872

1. “General Damages:General damages refer to those damages which arose naturally

during the normal course of the events. In relation to the pleadings, the complained of is
presumed to be a natural and probable consequence with the result. In relation to proof,
it refers to those losses, usually but not exclusively non-pecuniary, which in monetary
terms are not capable of precise quantification. ”

2. “Special Damages: Special damages are those that do not, of course, arise from the
breach of the defendant and can only be recovered if they were in the reasonable
consideration of the parties at the time, they made the contract. It refers to those losses
that must be specifically pleaded and proven. It refers to those losses that can be
calculated financially. It represents the exact amount of pecuniary loss that the claimant
proves to have suffered from the set of pleaded facts.5 ”

3. “Nominal Damages: If the defendant is found liable for breach of contract, the plaintiff
is entitled to nominal damages even if no actual damage is proven. Nominal damages
are awarded if there is an infringement of a legal right and if it does not give the rise to
any real damages, it gives the right to a verdict because of the infringement. In the
following circumstances, nominal damages are awarded to the plaintiff:

 The defendant committed a technical breach and the plaintiff himself did not
intend to execute the contract.
 The complainant fails to prove the loss he may have suffered as a result of the
contract breach.

5
Janhavi Aaker (2019),"Types of Damages under Section 73 of the Indian Contract Act, 1872"I
pleaders

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 He has suffered actual damage, not because of the defendant’s wrongful act, but
because of the complainants’ own conduct or from an outside event.
 The complainant may seek to establish the infringement of his legal rights
without being concerned about the actual loss. Where there is no basis for
determining the amount. The view that nominal damage does not connote a
trifling amount is erroneous; nominal damage means a small sum of money.
Nominal damages have been defined as a sum of money that can be spoken of,
but which does not exist in terms of quantity.

Where the loss is small and quantifiable, the damages awarded, although small, are not
nominal damages. If the market rate on the date of the breach is not proven, the plaintiff
shall be entitled to nominal damages. However, the fact that the buyer does not sustain
any actual loss as a result of the seller’s failure to deliver the goods is no reason to
award the buyer nominal damage. ”

4. “Substantial Damages: In cases where an offense is proven, many authorities may

claim substantial damages even if it is not only difficult but also impossible to calculate
the damages with certainty or accuracy. In all these cases, however, the extent of the
breach has been established. There was a complete failure to perform the contract on
one side. However, where the breach is partial and the extent of the failure is
determined, only nominal damage is awarded. The plaintiff who cannot show that after
the breach he would have had the contract performed, he is in a worse financial
position, usually, recover only nominal damages for breach of contract. Where a
defendant refuses to accept goods sold or manufactured for him, the plaintiff sells them
to a third party on the same terms as the defendant agreed and makes a similar profit,
the plaintiff shall be entitled to nominal damages if the demand exceeds the supply of
similar goods; but if the supply exceeds the demand, the plaintiff shall be entitled to
recover his loss of profit on the defendant’s contract. ”

5. “Aggravated Damages: Aggravated damages, that compensate a victim for mental

distress or injured sensations in circumstances where the injury was caused or increased

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by the manner in which the defendant committed the wrong or the defendant’s behavior
following the wrong. It is compensatory in nature. ”

6. “Exemplary Damages: Exemplary damages are intended to give the punishment to the
defendant an example they are punitive and not intended to compensate the defendant
for loss, but rather to punish the defendant. It is punitive in nature. ”

HOW TO MEASURE THE DAMAGE CAUSED?

“The measure of damage or measure of damages is concerned with the legal principles
governing recoverability; the principle of the remoteness of damage confines the
recoverability of damages. Questions of quantum of damages are only concerned with
the number of damages to be awarded and are, therefore, different from the measure of
damages; the latter involves consideration of the law. ”

PROOF OF LOSS/INJURY IN CASE OF LIQUIDATED DAMAGE

“Firstly, irrespective of the nature of damages, breach of contract is the pre-condition to

claim the same. That is, there can be no claim for damages if there is no breach of
contract between the parties. Secondly, to claim damages, the party making such claim
has to establish the loss. It is understood that the reasonable compensation agreed upon
as liquidated damages in case of breach of contract is in respect of some loss or injury
and hence existence of such loss or injury is indispensable for such claim of liquidated
damages. In some cases, the courts have demanded the parties to prove the degree of
loss or damage suffered as a result of breach of contract.6 ”

“In the case of Maula Bux7, the court has specifically held that the court is competent to
award reasonable compensation in a case of breach even if no actual damage is proved
to have been suffered in consequence of the breach of contract. The court has, however,

6
Fateh Chand v. Balkishan Dass AIR 1963 SC 1405
7
  (1969)2 SCC 554

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also specifically held that in case of breach of some contracts it may be impossible for
the court to assess compensation arising from breach. In such a case, the sum named by
the parties if it be regarded as a genuine pre-estimate may be taken into consideration as
the measure of reasonable compensation, but not if the sum named is in the nature of a
penalty. Where loss in terms of money can be determined, the party claiming
compensation must prove the loss suffered by him. In the case of Iron & Hardware
(India) Co. v. Firm Shamlal & Bros8, it was stated that an automatic pecuniary liability
does not arise in the event of a breach of a contract which contains a clause for
liquidated damages. Till the time, it is determined by the court that the party
complaining of the breach is entitled to damages, the plaintiff shall not be granted
compensation by the mere presence of a liquidated damages clause. ”

“It is however, apparent from the above that this demand to prove the loss suffered,
defeats the very purpose for which liquidated damages clauses are inserted in contracts.
Section 74 of the Act emphasizes on reasonable compensation. Only if the
compensation in the contract is by way of penalty, consideration would be different and
the party would only be entitled to compensation for the loss suffered. But if the
compensation named in the contract is a genuine preestimate of loss, which the party
knew at the time of entering into contract, there is no question of proving such loss.
Burden is in fact on the other party to lead evidence to prove that no loss is likely to
occur by such breach.9 ”

“In the case of Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd, it was held that if
the terms of the contract are clear and unambiguous stipulating the liquidated damages
in case of the breach of the contract, unless it is held that such estimate of
damages/compensation is unreasonable or is by way of penalty, party who has
committed the breach is required to pay such compensation. However, in some
contracts, it would be impossible for the court to assess the compensation arising from
breach and if the compensation contemplated is not by way of penalty or unreasonable,
court can award the same if it is genuine pre-estimate by the parties as the measure of
reasonable compensation. ”
8
AIR 1954 Bom 423
9
Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd (2003) 5 SCC 705

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“In the case of Indian Oil Corporation v. Lloyds Steel Industries Ltd 10, the court held
that: ”

"...The guiding principle is 'reasonable compensation'. In order to see what

would be the reasonable compensation in a given case, the Court can adjudge
the said compensation in that case. For this purpose, as held in Fateh Chand it is
the duty of the Court to award compensation according to settled principles.
Settled principles warrant not to award a compensation where no loss is
suffered, as one cannot compensate a person who has not suffered any loss or
damage. There may be cases where the actual loss or damage is incapable of
proof; facts may be so complicated that it may be difficult for the party to prove
actual extent of the loss or damage."

“In the case Construction & Design Services v. Delhi Development Authority 11, the
apex court reconfirmed that the court must determine the reasonable compensation and
then grant it to the injured party. It held as follows: ”

"Applying the above Principle to the present case, it could certainly be

presumed that delay in executing the work resulted in a loss for which the
respondent was entitled to reasonable compensation. Evidence of precise
amount of loss may not be possible but in the absence of any evidence by the
party committing breach, the court has to proceed on guesswork as to the
quantum of compensation to be allowed in the given circumstances. Since the
respondent also could have lead evidence to show the extent of higher amount
paid for the work got done or produce any other specific material but it did not
do so, we are of the view that it will be fair to award half of the amount claimed
as reasonable compensation."

“In the case of M/s. Herbicides (India) Ltd. v. M/s. Shashank Pesticides P. Ltd 12, the
court held in case of liquidated damages that "... even if it does not prove the actual

10
MANU/DE/8665/2007
11
MANU/SC/0313/2015
12
180 (2011) DLT 243

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loss/damage suffered by it, is entitled to reasonable damages unless it is proved that no

loss or damage was caused on account of breach of the contract"”

“The provisions relating to liquidated damages are required to be drafted with clarity
and one has to prove that the amount is a genuine pre-estimate of loss or injury
suffered.13 ”

“Since Section 74 awards reasonable compensation for damage or loss caused by a

breach of contract, damage or loss caused is a sine qua non for the applicability of the
Section. However, as long as it serves a compensatory function, liquidated damages
should be allowed without the requirement to prove exact losses. ”

“Thus, where a sum is named in a contract as a liquidated amount payable by way of

damages, the party complaining of a breach can receive as reasonable compensation
such liquidated amount only if it is a genuine pre-estimate of damages fixed by both
parties and found to be such by the court. In cases where the amount fixed is in the
nature of penalty, only reasonable compensation can be awarded not exceeding the
penalty so stated. In both cases, the liquidated amount or penalty is the upper limit
beyond which the court cannot grant reasonable compensation. ”

“The expression whether or not actual damage or loss is proved to have been caused
thereby means that where it is possible to prove actual damage or loss, such proof is not
dispensed with. It is only in cases where damage or loss is difficult or impossible to
prove, that the liquidated amount named in the contract, if a genuine pre-estimate of
damage or loss, can be awarded. Thus, it is the nature of the Liquidated Damages
clause that needs to be considered, that is, whether it's a genuine pre-estimate of loss
occurred on breach of contract or whether it is in form of penalty and deterrent in
nature.14 ”

CONCLUSION

13
ONGC v. Saw Pipes (2003) 5 SCC 705
14
Dunlop Pneumatic Tyree Co. Ltd v. New Garage & Motor Co Ltd, [1914] UKHL 1

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This study mainly deals with breach of contracts and measures for its damages. The
author has talked about the meaning and concept of contracts, its breach as well as
remedies available for the same. This paper consists of types of breach of contracts,
legal issues concerning about it, and economics of the same. The paper further
discusses the damages available under Section 73 and 74 of the Indian Contract Act,
1872. Hence, the author has completed this research thesis after a thorough research
and in a systematic as well as very cohesive manner.

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COMPARISION STUDY FOR BREACH OF CONTRACT IN INDIA

AND SOUTH AFRICA

I. INDIA

1. “TYPES OF BREACH OF CONTRACT

a) Minor Breach: A minor breach happens when you don't receive an item or
service by the due date.

b) Material Breach: A material breach is when you receive something that is

different from what was stated in the agreement.

c) Actual Breach: An actual breach is when one party refuses to fully perform the
terms of the contract

d) Anticipatory Breach: An anticipatory breach is when a party states in advance

that they will not be delivering on the terms of the contract. ”

2. “REMEDIES AVAILABLE

a) Damages: The payment of damages — payment in one form or another — is

the most common remedy for a breach of contract.
b) Specific Performance: If damages are inadequate as a legal remedy, the non-
breaching party may seek an alternative remedy called specific performance.
Specific performance is best described as the breaching party's court-ordered
performance of duty under the contract. ”
c) “Cancellation and Restitution: A non-breaching party may cancel the contract
and decide to sue for restitution if the non-breaching party has given a benefit to
the breaching party. Restitution as a contract remedy means that the non-
breaching party is put back in the position it was in prior to the breach, while
cancellation of the contract voids the contract and relieves all parties of any
obligation under the agreement.

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d) Section 73 and 74 of ICA, 1872 also provides for all liquidated as well as
unliquidated damages. ”

II. SOUTH AFRICA

1. “TYPES OF BREACH OF CONTRACT

a) Late performance or mora:A party is in mora when:

1. the debt is due and enforceable, but performance is not delivered on time;
2. the breach is due to their fault; and
3. the performance remains objectively possible.
b) Repudiation:Repudiation is behaviour by a party that clearly and unequivocally
indicates that the party is not going to honour its obligations under the contract
and does not intend to be bound by the contract. Repudiation occurs when:

1. there is conduct indicating a refusal to perform;

2. there is no justification for a refusal to perform; and
3. the other party has performed. ”
c) “Prevention of performance:This breach occurs in instances where a party
makes performance of the obligations under the contract impossible. The
requirements for such a breach are:

1. the performance must be objectively impossible; and

2. the breaching party must be at fault.
d) Defective performance:This occurs when defective performance is delivered by
a party to the contract. The party alleging that a breach has occurred bears the
onus of proving, on a balance of probabilities, that the other party has breached
the contract. ”

2. “REMEDIES AVAILABLE

a) Remedies aimed at keeping the contract alive

 Specific Performance
 Exceptio non adimpleti contractus
b) Cancellation
c) Damages
d) Other Remedies

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 Interdict
 Declaration of Rights”

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