Chapter – 2

Breach of Contract

2.1 Introduction
Before exploring the origins of the term "damages," it is essential to consider
the conditions that allow an individual to claim damages or compensation. This
encompasses liability for damages, the measurement of damages, proof of
damages, and the consideration of remote and indirect losses to justify specific
damages. However, before damages can be quantified, it is crucial to understand
the legal rights granted to an individual.
A thorough analysis of Sections 73 and 74 of the Indian Contract Act is
necessary. These sections clarify what constitutes a breach of contract that
enables a person to claim either liquidated or unliquidated damages. The
construction of the contract is vital for this purpose.In India, it is well-
established that a contract is formed when the sequence of offer and acceptance
is completed, as outlined in Sections 3 to 8 of the Indian Contract Act. Courts
are tasked with meticulously reviewing the correspondence between the parties
to determine whether the alleged contract was concluded. A suit for damages
can only be pursued if the contract was formed voluntarily by the parties
involved.
The parties have the liberty to enter into contracts under their own terms and
conditions. A mutual agreement can either release the parties from obligations
or require one party to fulfill specific duties. If these obligations are not met, the
other party may be entitled to compensation for losses, damages, or delays that
arise, even in cases of force majeure.1
Additionally, Sections 23 and 24 of the Indian Contract Act must be considered,
as they are essential for the validity of the agreement unless an exception clause
is present. The consideration or object of the agreement must always be lawful;
1
8. M/s. Basanti Bastralaya v. River Steam Navigation C. Ltd.; AIR 1987 Cal 271.
otherwise, the party would not be entitled to damages. If the agreement is
deemed unlawful, it renders the entire contract void under Section 64 of the Act.
However, if the unlawful consideration is separable, the lawful portion may be
enforced through specific performance or by seeking damages from the
defaulting party.
Either of the party to the contract will get discharges from the contractual
obligation mainly by two ways:
a) Discharge by Performance
b) Discharge by breach
Sections 73 and 74 of the Indian Contract Act, 1872 outline the principles for
assessing damages in cases of breach of contract. To properly analyze these
sections, it is essential to first understand the concept of a contract and when it
can be considered breached. Additionally, it is necessary to examine what
constitutes a breach of such a contract.
After establishing these foundational concepts, the next step is to determine the
appropriate compensation to be paid to the aggrieved party. Section 73 further
qualifies this by stating that the damages must have arisen in the usual course of
events from the breach. The section also stipulates that the parties must have
known at the time of contract formation what loss or damage would likely result
from a breach. However, the proviso clarifies that compensation should not be
granted for remote or indirect losses. Interestingly, Section 73 also allows for
compensation in cases where obligations resembling those created by a contract
have not been discharged, thereby encompassing quasi-contracts as well.
Before delving into the principles governing the award of damages, it is
beneficial to have a general understanding of Sections 4 and 5 of the Indian
Contract Act, which deal with the formation of bilateral contracts. These
sections establish that an offeror may withdraw their offer, but only before it has
been accepted or communicated to the offeree. Additionally, the acceptance
must be unconditional and absolute for a binding contract to exist. If the
acceptance is neither absolute nor unconditional, the party would not be entitled
to damages.
Another crucial aspect to consider for the grant of damages is the lawfulness of
the contract's consideration and object. Section 23 clearly states that a contract
with unlawful consideration is void (illegal). It is also important to note that
damages may be claimed based on the terms of the contract, and if time is an
essential ingredient, it can be a basis for asserting damages.In summary,
Sections 73 and 74 of the Indian Contract Act, 1872 lay down the principles for
assessing damages in cases of breach of contract. However, to fully understand
these principles, it is necessary to first establish the existence of a valid and
concluded contract, determine what constitutes a breach of such a contract, and
examine the lawfulness of the contract's consideration and object. Only then can
the appropriate compensation be determined based on the specific
circumstances of the case.

2.2 The order of performance and Non

Performance
In a bilateral contract, where both parties have obligations to fulfill, a question
often arises regarding who is to perform first. This issue primarily involves
interpreting the contract, assisted by presumptions related to the typical rules
governing such agreements. Typically, it is not a matter of one party completing
all their obligations before the other; rather, it involves determining which
obligations must be fulfilled first.For instance, in an employment contract, the
employer's obligation to pay wages is usually contingent upon the employee
completing a specified period of work, while the employer is also responsible
for providing a safe working environment. Analyzing this issue can be
facilitated by considering the concept of conditions.When discussing a contract
between two parties, A and B, we can identify at least three potential scenarios
regarding the order of performance.
I. An undertaking by A is a condition precedent to an undertaking by B .
II. Undertaking by A and B may be concurrent conditions in nature, and
III. Some undertakings by A and B may be independent in nature.
Section - 74 of the Indian Contract Act, does not say that compensation can be
awarded even though no loss, what so ever, has been caused, for the very
concept of award of compensation is to follow the loss or damage that results
from a breach of contract. All that Section - 74 permits is the award of
compensation even where the extent of the actual loss or damage is not proved
and gives discretion to the Court to f ix the amount.

2.3 Excuses for Non-Performance

As per the above discussion, prima facie it seems that failure to perform is
amount to breach. This is true in majority of cases but at the same time, it is
pertinent to recognize that in certain circumstances failure to perform contract
as per the agreed terms is excusable. Those excuses in nutshell are as below:

2.3.1 Agreement
As per the above discussion, prima facie it seems that failure to perform is
amount to breach. This is true in majority of cases but at the same time, it is
pertinent to recognize that in certain circumstances failure to perform contract
as per the agreed terms is excusable. Those excuses in nutshell are as below:

2.3.2 Impossibility of Performance

Sometimes, some event takes place after the contract has been made in such a
manner that makes performance impossible or commercially sterile. In a limited
number of cases, this may have the effect of bringing the contract to an end.
This concept has been elaborately discussed in the next chapter of this research
work.
2.3.3 Limitation
In principle, when one party has failed to perform on time, the other party can
sue and at this moment the appropriate limitation period will begin to run. At
the end of this period the action will normally no longer be maintainable.

2.4 The doctrine of substantial performance

The doctrine of substantial performance, developed by courts in their desire to
do justice between contracting parties, provides a relaxation to the requirement
of exact and complete performance of the entire contract. In the famous words
of Lord Mansfield in Boone v. Eyre2, "If there has been a substantial, though not
an exact and literal performance by the promisor, the promise cannot treat
himself as discharged. Despite a minute and trifling variation from the exact
terms by which he is bound, the promisor is permitted to sue on the contract,
though he is of course liable in damages for his partial non-
performance."According to this doctrine, the question of whether entire
performance is a condition precedent to any payment is always a matter of
contract interpretation. In Cutter v. Powell3, the court construed the contract to
mean that the sailor was entitled to nothing unless he served as mate for the
entire voyage. Similarly, in a contract to construct buildings or perform work on
another's land for a lump sum, the contractor cannot recover anything if they
abandon operations after completing only part of the work, as their right to
payment depends on full performance.
However, the doctrine of substantial performance allows the promisor to
2
Boone v. Eyre, (1779 ) 1 Hy B 1 273
3
Cutter v. Powell, ( 1795) 6 Term Rep 310 .
recover on the contract, despite a minor deviation from the exact terms, subject
to a reduction in the contract price to account for the defective performance.
The promisor is still liable for damages caused by their partial non-performance.
The application of this doctrine depends on the nature of the contract and the
intention of the parties. If the contract clearly stipulates that complete
performance is a condition precedent to payment, the doctrine will not apply.
But if the contract is silent or ambiguous on this point, the court will consider
the extent of the defect, the degree of completion, and the purpose of the
contract to determine whether substantial performance has occurred.In
summary, the doctrine of substantial performance aims to prevent the injustice
that would result from a strict interpretation of the contract, while still
protecting the promisee's interests through the award of damages for the
promisor's partial non-performance. It allows the promisor to recover on the
contract, subject to a reduction in the contract price, if they have substantially
performed their obligations, despite a minor deviation from the exact
contractual terms.

2.5 Right to claim termination of the contract by

the innocent party
The concept of termination of contract by the innocent party is distinct from the
previously discussed topics, yet interconnected. For example, if a buyer charters
a ship for a voyage to transport frozen meat and finds upon arrival that the ship's
refrigeration is not working, they are under no obligation to load the meat.
However, this does not automatically entitle the buyer to terminate the contract.
The buyer's right to terminate depends on whether the law allows the seller time
to repair the refrigerators and whether the seller can make use of that time.
Under a contract for the sale of goods, strict doctrines have been developed
regarding the buyer's right to reject goods that do not conform to the agreed
terms. The seller has a duty to deliver goods exactly as per the agreed
specifications. If the seller delivers more goods than ordered, the buyer may
reject the entire consignment and is not required to select the correct quantity
from the bulk4. Similarly, if less than the correct quantity is delivered, the buyer
may reject the entire consignment.
Now, let us examine the circumstances under which a breach entitles the
innocent party to terminate the contract5. A breach always gives the innocent
party the right to sue for damages, but the established rule is that the right to
treat a contract as discharged arises only in two cases:
1. When the defaulting party has repudiated the contract before performance
is due or before full performance.
2. When the defaulting party has committed a fundamental breach. A breach
is fundamental if, considering the contract as a whole, the violated
promise is of major rather than minor importance.
A repudiatory breach occurs when a party indicates, before the time for
performance arrives, that they will not perform their obligations under the
contract. This gives the innocent party the right to terminate the contract
immediately and sue for damages.
A fundamental breach is one that goes to the root of the contract, depriving the
innocent party of substantially the entire benefit of the contract. Examples
include delivering completely different goods, failing to deliver within a
reasonable time, or preventing the other party from performing their obligations.
If the breach is fundamental, the innocent party can terminate the contract and
sue for damages.
However, if the breach is not repudiatory or fundamental, the innocent party
must continue to perform their obligations under the contract. They can only
terminate if the contract expressly allows termination for that type of breach.
Otherwise, the innocent party's remedy is to sue for damages for the breach.

4
Cunliffe v. Harrison, (1851) 6 Exch 903.
5
Delvin [1966] CLJ 192; Treitel 30 MLR 139.
2.6 Contract Remedies: Damages
Once a contract is established, any breach of that contract gives rise to specific
remedies, highlighting the distinct difference between liquidated damages and
penalties. The researcher aims to explore these concepts in detail in the
forthcoming chapters.6

2.6.1 Remedies for breach of contract

When a breach of contract occurs, the injured or the aggrieved party becomes
entitled to the following relieves.
i. Rescissions of contract
ii. Suit for remedies
iii. Suit upon quantum merit
iv. Suit for specific performance
v. Suit for injunction
vi. Suit for rectification
vii. Suit for restitution
viii. Suit for cancellation of contract

2.6.2 Damages for breach

An injured party in a breach of contract may seek damages, which refers to
monetary compensation for the loss incurred. Every claim for damages involves
two key issues: the "remoteness of damages" and the "measure of damages."In
the context of awarding damages for breach of contract, both Indian and English
law rely on principles established by the courts over time. Specifically, the
concepts of remoteness and the measure of damages must be understood,
emphasizing that damages are intended to be compensatory rather than
punitive.7
6
Annual Survey of the Indian Law, 1982, Vol. 18.
7
Hadley v. Baxendale, (1854) 9 Exch. 341; Horne v. Midland Rly. Co.; Victoria Laundry (Windsor)
Ltd. v. Newman Industries Ltd., [1949] 2 K.B. 528, C.A. at 537-538; S. 73 of the Indian Contract Act
2.7 Conclusion
The definition of damages under Indian law has evolved significantly compared
to the traditional principles that were previously in place. The rules governing
the discharge of a contract due to breach, along with the various remedies
available, have become well-defined, distinguishing between injunctions and
the law of damages. The primary purpose of damages is to provide
compensation, which is inherently compensatory in nature. It is important to
note that while damages arise from breaches of contract, they can also include
compensation for physical harm to a person or property under Indian law.In
contrast, English law does not limit damages solely to financial compensation.
Even if there is no direct impact on the value of the property, English law has
historically maintained that difficulties in quantifying damages do not prevent a
party from claiming compensation. Over time, both English law and Indian law
have developed distinct categories of general and special damages. Indian
courts have often followed English precedents, but they are not obligated to
award damages if no legal injury has occurred, and the provisions of law
regarding assumptions are based on estimated values.
Indian courts have clearly delineated the circumstances under which liquidated
and unliquidated damages are permitted. The Supreme Court of India, in the
case of Union of India v. Raman Iron Foundry8, succinctly defined the
comparative nature of such claims.
The discussions presented earlier indicate that while Indian law is largely
influenced by English law, it has undergone modifications. The stipulations
regarding damages and penalties have been refined under Sections 73 and 74 of
the Indian Contract Act. In contrast, under common law, a genuine pre-estimate
of damages agreed upon by the parties is recognized as liquidated damages.
Indian legislation has sought to establish a uniform rule applicable to all
8
Union of India v. Raman Iron Foundry, ( 1974 ) 2 SCC 231
elements constituting a breach of contract, providing separate remedies as
stipulated in the law.