Submitted by Faisal Akbar

Semester 4th A

Subject Contract Act 1872

Submitted to Prof Abdul Sammad

What are the consequences of breach of
contract?

Breach of Contract:-
The Latin maxim ‘Ubi jus, ibi remedium’Denotes ‘where there is a right, there is a remedy’
A contract, being a fountainhead of a correlative set of rights and obligations for the parties,
would be of no value, if there were no remedies to enforce the rights arising thereunder.

“Abreach of contract is a failure, without legal excuse, to perform

any promise that forms all or part of contract.”
This includes failure to perform in a manner that meets the standards of industry or the
requirements of any express warranty or implied warranty, including the implied warranty
of merchantability.

When one of the parties fails to perform its contractual obligations, such party is in breach
of contract and the other party has a right to demand the fulfillment of the agreement and
to demand performance of those obligations with the help of the authorities. However, it is
not always possible or even viable from the point of view of the damaged party to demand
that the other party perform the original contract. It may be better to demand other
consequences. The consequences of a breach of contract vary and are dependent on which
party is in breach of its obligations. Naturally, the seriousness of the breach also affects the
consequences. The common consequence is reduction of the contract price, remedy of the
defect, compensation for damage and interest for delay. It is only possible to rescind the
contract when the breach is fundamental. The parties may also agree on the consequences
of the breach of agreement when making a contract or separately. It might be reasonable to
agree on liquidated damages for delay A breach of contract can occur when a party to a
valid contract fails to fulfill their side of the agreement. The terms that are included in a
contract are what instruct the parties in what they must do, as well as how they should do
it, in order to maintain their promise. If one party does not do what the contract instructs
them to do, the non-breaching party will be allowed to take legal action such as by filing a
lawsuit against them in court. A breach of contract can occur as either a partial breach, or a
complete breach. A court will also assess whether the breach was substantial or minor,
 which will help the court determine what type of damages the breaching party should be
required to pay.

There are three overall ways in which a party can be held liable for breach of contract:

There Is An Anticipatory Breach:-

Often referred to as anticipatory repudiation, this type of breach occurs when the breaching
party informs the non-breaching party that they will not be able to fulfill the terms of their
contract. Once the other party has been notified, they can sue for breach of contract;

A Party Has Committed a Minor Breach:-

A minor breach of contract is what happens when one party fails to perform a small detail
of the contract. Under such circumstances the contract has not been violated, and as such it
can still be substantially performed. This also occurs when there is a technical error with the
contract, such as a wrong date, price, or typo within the terms of the contract; and/or

When There Is a Material or Fundamental Breach:-

These are the most common types of breaches that are cited as the basis of a breach of
contract action. Material or fundamental breaches occur when the breach is so substantial
that it essentially cancels the contract, because it renders performance by either party
largely impossible.

Some other ways in which a contract can be breached include: When the
contract is fraudulent; If the contract was formed illegally, or it is
unconscionable; and When there is a mistake of fact contained within the
contract terms.

REMEDIES FOR BREACH OF CONTRACT:-

There are several common remedies for breach of contracts. The appropriate remedy
depends on the terms of the contract, the nature of the breach, and the case’s specific
circumstances. The common consequence is reduction of the contract price, remedy of
the defect, compensation for damage and interest for delay. It is only possible to rescind
the contract when the breach is fundamental. The parties may also agree on the
consequences of the breach of agreement when making a contract or separately.
  Suit for damage
 Specific performance
 Injunctions
 Rescission

1.Suit for Damages :-

The word ‘damages’ means monetary compensation for loss

suffered. Whenever a breach of contract takes place, the remedy of

‘damages’ is the one that comes to mind immediately as the

consequence of breach. A breach of contract may put the aggrieved

party to some disadvantage or inconvenience or may cause a loss

to him. The court would desire the guilty part to accept

responsibility for any such loss of the aggrieved party and

compensate him adequately. The quantum of damages is

determined by the magnitude of loss caused by breach. An award of

compensatory damages is the most common of the legal remedies

for breach of contract. The calculation of compensatory damages is

based on the actual losses you have sustained as a result of the

breach of contract. They typically fall into two categories:

expectation damages and consequential damages.

Expectation damage:-
Expectation damages—also referred to as general damages—are those that

directly result from the breach of contract.

For example, imagine a company that provides bus tours enters into a
contract to buy a bus for 100,000. However, the seller backs out of the

contract and refuses to sell the bus. The bus company finds another seller

with a similar bus, but they won’t take less than 110,000. In that case, the

expectation damages would be 10,000—the difference between the contract

price and the amount the company had to pay another seller for the same

product.

Consequential damages:-

Consequential damages are those that flow as a natural consequence of the

breach. Consequential damages often comprises profits that a company lost

as a result of the breach. In the case of the bus example, imagine it took an

extra week to secure the new bus. As a result, the tour company had to turn

away 1,000 customers that would have each paid 50 for a bus tour. In that

case, the company could likely recover consequential damages for the

50,000 they lost in ticket sales. Often the breaching party will attempt to

avoid paying consequential damages by claiming that they are too

speculative or that they are not foreseeable. Also, sometimes parties to a

contract may limit or preclude either party from recovering consequential

damages. An experienced attorney can help you combat these arguments

and maximize your damages award.

Types of damage:-

A. Liquidated Damages:-

Liquidated damages are a specific amount the parties agree to in the

contract as compensation for a breach. Contracts often use liquidated

damages provisions where it might be difficult to calculate the correct

amount of compensatory damages. Real estate purchase agreements

and construction contracts commonly rely on liquidated damages.

They might be a specific sum, such as the amount of the earnest

money on a purchase contract. Or they could depend on a formula,

such as a certain amount of money for each day a deadline is not met.

Partnership agreements are also likely to include liquidated damages

provisions. Although courts typically uphold liquidated damages

clauses, they may disregard them if the amount of liquidated damages

is drastically smaller or greater than the value of the actual harm the

plaintiff has suffered.

Example:-
A contractor that failed to complete a construction project on time and is

charged daily until the project has been finished.

B .Nominal damages :-

A court may award nominal damages as a legal remedy for breach of

contract when the plaintiff cannot support their claim for compensatory

damages. With nominal damages, the court recognizes that a breach of

contract occurred, but no harm can be calculated. While receiving

nominal damages may feel like a pyrrhic victory, the plaintiff does get the

benefit of the ruling in their favor. This may be simply a moral victory, or

it may pave the way for the plaintiff to pursue another type of legal

action. If the contract has an attorney fee provision, an award of nominal

damages may also enable the plaintiff to seek their attorney fees from the

defendant. “Nominal damages are awarded when the plaintiff is legally in

the right, but has not suffered substantial losses. Because the plaintiff has

no established need for compensation, the amounts awarded in these

cases are usually very small.”

C. Compensatory damages.

Compensatory damages (also called “actual damages”) cover the loss the

nonbreaching party incurred as a result of the breach of contract. The

amount awarded is intended to make good or replace the loss caused by

the breach.

There are two kinds of compensatory damages that the non-

breaching party may be entitled to recover:

I. General Damages.

General damages cover the loss directly and necessarily incurred by the

breach of contract. General damages are the most common type of

damages awarded for breaches of contract.

Example:

Company A delivered the wrong kind of furniture to Company B. After

discovering the mistake later in the day, Company B insisted that

Company A pick up the wrong furniture and deliver the right furniture.

Company A refused to pick up the furniture and said that it could not

supply the right furniture because it was not in stock. Company B

successfully sued for breach of contract. The general damages for this

breach could include:

refund of any amount Company B had prepaid for the furniture; plus

compensatory reimbursement of any expense Company B incurred in

 sending the furniture back to Company A; pluspayment for any increase in

the cost Company B incurred in buying the right furniture, or its nearest

equivalent, from another seller.

II. Special Damages.

Special damages (also called “consequential damages”) cover any loss

incurred by the breach of contract because of special circumstances or

conditions that are not ordinarily predictable. These are actual losses caused

by the breach, but not in a direct and immediate way. To obtain damages for

this type of loss, the non breaching party must prove that the breaching

party knew of the special circumstances or requirements at the time the

contract was made.

Example:

In the scenario above, if Company A knew that Company B needed the new

furniture on a particular day because its old furniture was going to be carted

away the night before, the damages for breach of contract could include all

of the damages awarded in the scenario above, plus: payment for Company

B’s expense in renting furniture until the right furniture arrived.

D. Punitive Damages
 Punitive damages (also called “exemplary damages”) are awarded to

punish or make an example of a wrongdoer who has acted willfully,

maliciously or fraudulently. Unlike compensatory damages that are

intended to cover actual loss, punitive damages are intended to punish

the wrongdoer for egregious behavior and to deter others from acting

in a similar manner. Punitive damages are awarded in addition to

compensatory damages. Punitive damages are rarely awarded for

breach of contract. They arise more often in tort cases, to punish

deliberate or reckless misconduct that results in personal harm.

2. Specific Performance:-

Specific performance is a type of remedy for breach of contract in which a

court orders the breaching party to perform their end of the bargain.

Monetary damages are typically favored over specific performance as a

remedy for breach of contract. However, specific performance may be

available when monetary damages won’t adequately compensate you.

For example,:-

They may apply to a contract for something that is unique and can’t

be easily replaced. In the bus example above, monetary damages

would be sufficient to compensate the tour company for its loss. But

imagine that the new bus had been used previously by a famous
 singer. The tour company wanted to use the bus for tours of the

singer’s home town. In that case, the tour company could argue for

specific performance rather than monetary damages because no

other bus would be comparable to the one it contracted to buy

3.Injunction:-
Injunctions serve a similar purpose as specific performance. The difference is that with
specific performance, the court orders a party to do something. With an injunction, the
court often orders a party not to do something.
An injunction may be permanent or temporary. Temporary injunctions are often ordered
while litigation is pending to prevent potential damage.

For example:-
In a lawsuit that concerns a breach of a noncomplete contract, a court might order the
defendant to cease the allegedly competitive activity until the lawsuit is resolved. A
permanent injunction, as the name suggests, is permanent. A judge may issue a permanent
injunction as part of their final ruling in a lawsuit.

4.Rescission:-

Rescission allows a nonbreaching party to cancel the contract as a

remedy for a breach. Rather than seeking monetary damages, the

nonbreaching party can simply refuse to complete their end of the

bargain. Rescission puts the parties back in the position they would have

been in had they never entered into the contract. However, to justify

rescission, the breach must be material. That means that it has to go to

the heart of the contractual agreement.

 For example:-

Imagine that you contract to provide catering services for an event. The

contract requires the other party to pay half the contract price by a

certain date, but they never pay. Since payment goes to the heart of the

contract, you would be justified in rescinding the contract and refusing to

provide the catering services.

Case law regarding breach of contract:-

The dispute arose out of the failure of the Respondent in supplying the said

equipment as per schedule, due to labor problems in Europe. This led to the

Applicant extending the time for delivery with the specific caveat that

liquidated damages would be recovered.

ONCG vs Saw pipes:-

This case arose out of a challenge to an arbitral award rendered with regard

to a dispute relating to supply of equipment for off shore oil exploration by

the respondent. The case was heard by M.B Shah and Arun Kumar JJ.

Facts
Oil and Natural Gas Commission had placed an order on Saw Pipes for supply

of equipment for off shore exploration, to be procured from approved

European manufacturers. The delivery was delayed due to general strike of

steel mill workers in Europe. Timely delivery was the essence of the contract.

ONGC granted extension of time, but it invoked the clause for recovery of

Liquidated Damages by withholding the amount from the payment to the

supplier. ONGC deducted from the payment $3,04,970.20 and Rs 15,75,557

towards customs duty, sales tax and freight charges. Saw pipes disputed the

deduction and matter was referred to arbitration. While the arbitral tribunal

rejected Saw Pipe’s defence of force majure, it required ONGC to lead

evidence to establish the loss suffered by breach and proceed to hold, in

absence of evidence of financial losses, that the deduction of Liquidated

damages was wrongful. The award was challenged by ONGC; inter alia as

being opposed to public policy ONGC’s case was that the arbitral tribunal

failed to decide the dispute by not applying the prevailing substantive law,

ignoring the terms of the contract and customary practices of usage of trade

in such transactions. ONGC challenged the award as being patently illegal.

The single judge and division bench of Bombay High Court dismissed the

challenge. The Supreme Court set aside an arbitration award directing ONGC

to refund $3,04,970.20 and Rs 15.76 Lakhs towards liquidated damages

retained by it while making payment to the company.

Issue Raised
Whether ONGC had the right to Liquidated Damages. Whether Patent

illegality could be used as a ground to assail the award under section 34

Decision of the supreme court:-

The Hon’ble Court first extensively discussed the court’s jurisdiction to set

aside an award under Section 34 of the Arbitration and Concilliation Act 1996

and the various grounds on which interference was permissible. Passing over

to the question of damages, the Hon’ble Court opined that when the words of

the contracts are clear, there is nothing that the court can do about it. If the

parties had agreed upon a sum as being pre- estimated genuine liquidated

damages there was no reason for the tribunal to ask the purchaser to prove

his loss.It further opined that when the court concludes that stipulation for

damages is by way of penalty, it can grant reasonable compensation upon

proof of damage. However, where an agreement has been executed by

experts in the field, the court should be slow to construe a clause providing

for liquidated damages as penalty. At paragraph 49, citing Maula Bux v

Union of India (the court concludes that this is especially true where the

court is unable o assess compensation or such assessment is fraught with

difficulties. In such cases the burden of proof would be on party who

contends that the stipulation amount is not reasonable. There was no such

contention raised in the instant case. As regards forfeiture, after considering

its decision in Union of India v Rampur Distellery the court states the

forfeiture clause can be construed either as liquidated damages or as a

penalty, depending on the reasonableness of the amount to be forfeited.

Therefore, as regards Liquidated Damages and penalties, the primary

conclusion of the court appears to be that Liquidated Damages should be

regarded as reasonable compensation, while penalties should not. Further, it

also appears to have concluded in case of penalty damages will have to be

proved. The Hon’ble Court reaffirms that no compensation at all be awarded

if the court concludes that no loss is likely to occur because of the breach.