What Does It Take for a Contract to Be Enforceable?
Not every agreement to engage in a commercial transaction will be legally enforceable in a court of law if conflicts arise down the road. Instead, contracts must have certain elements in order to be enforced. These are largely legal requirements that have developed over the years.
First, and foremost, contracts require consideration. This element means that each party agrees to provide something of value to the other. This can be an affirmative offering of something, or an agreement not to do something. Thus, for instance, consideration can involve agreeing not to compete with another business. Second, contracts require a clear offer and acceptance. Contracts are not necessarily created just because one party offers something to another. Typically, a clear acceptance is required. In offering and accepting a contract, the parties must also have a “meeting of the minds” as to what the contract entails. Both parties cannot believe that they are agreeing to entirely different contracts.
Additionally, in order for a contract to be enforceable, both parties must have the capacity to contract, meaning that they must mentally understand what they are agreeing to. Individuals who are incapacitated are often deemed unable to engage in contractual agreements, and those who are insane or are minors are presumed to lack such capacity. Lastly, contracts can only be enforceable if they have a legal purpose. This means that a contract agreeing to engage in illegal activity is not enforceable in a court of law.
While these requirements for enforceability encompass important concepts that all contracts must include, there are also practical requirements in contract creation. In many states, certain contracts must be in writing, such as contracts for real estate or those that will last more than a year. Even if a contract is not required to be in writing, it is often important to do so because oral contracts can be difficult, if not impossible, to prove in court.
Breach of Contract
When any party to a contract, whether oral or written, fails to perform any of the contract’s terms, they may be found in breach of contract. While there are many ways to breach a contract, common failures include failure to deliver goods or services, failure to fully complete the job, failure to pay on time, or providing inferior goods or services. In other words, a breach of contract is a broken promise to do or provide something.
People enter into contracts for mutual advantage because each has something the other party wants. It may be something as simple as buying a product for money, or something more complicated such as an employment contract with a no-compete clause.
If either of the parties do not fulfill their end of the contract, a breach of contract has occurred. At that time, you can try to resolve the issue with a letter or by negotiation. If all attempts fail, you may end up in a breach of contract case in a civil court.
When you are faced with a breach of contract, it is always wise to seek the advice of a business attorney who is experienced in that area. Your attorney will work to find the solution that is best and most efficient for you.
Breach of Contract Example Cases
Here are some examples of various kinds of breach of contract cases and attempts to resolve them.
Breach of Contract Example Number 1: Failure to Provide Services
Your business depends on other companies for some of its needs, including services like building maintenance and transporting clients. You have had a contract with a company for over ten years which is supposed to send in employees to do basic tasks like taking out the trash and cleaning common areas, but the company has failed to send anyone for the last two weeks.
When you called your main contact, you learned that the company had taken on extra work and was struggling to keep up with all the work. You got a promise that someone would come out when available.
You may either have a personal or business contract with another party who is supposed to perform services for you, but the reason you have a contract is that you depend on those services. In this case, you don’t have anyone you can spare to do this particular work, besides which you have already paid another company to perform those functions.
Best Option: Negotiation
In this case, you have a long-standing relationship with another company that you may want to protect. They are breaking the contract and being highly disrespectful, but they probably don’t want to lose your business either at this point.
Let them know that you are serious about enforcing the contract and that you expect to get credit for the work not done. You may want to talk to an attorney about whether it is better to find a mutual resolution where both parties walk away from the contract if the other company can no longer perform the necessary work.
Breach of Contract Example Number 2: Violation of Employment Non-Compete Clause
Your business has standard non-compete clauses in all its sales and technology employment contracts. In exchange, your employees receive several benefits, including training and certifications they won’t get at other businesses. One of your employees left on a bad note and immediately went to work for one of your local competitors. Your Human Resources Department sent a letter reminding him of the contract and providing a copy, but he has not responded.
Before you designed your standard contracts, you sat down with an attorney to make sure they complied with state law expectations. In Arizona, non-compete clauses are enforceable as long as they protect legitimate business interests, are reasonable in scope and duration, and as long as they don’t violate public policy. Your business stays ahead of the competition with some innovative training and methods, and you only require former employers not to work for local competitors for one year after separation from your company.
Best Option: Litigation and Attempt to Force Compliance
Although no one wants to go to court against a former employee, your rights in this matter are important. Once you can prove you have given consideration in exchange for their agreement not to work for competitors, you should seek to enforce the contract.
The Steps You Will Need to Take
1. Write your demand letter. This will always be your first step when you know you may be litigating the matter.
2. If your former employee doesn’t comply at that point, draft your complaint and explain what you are asking for. In this case, you may be asking for the Court to order compliance instead of asking for monetary damages. Make copies of everything.
3. Send a summons to your former employee.
4. Follow the rules of discovery and answer and crossclaims.
5. Prepare for court by gathering all your necessary proof. Also, bring to court with you information regarding the legal basis of your claim, so you can prove the contract was reasonable under Arizona law.
Breach of Contract Example Number 3: Misrepresentation of Assets Being Used As Collateral
You negotiated a contract with another party who wanted to purchase a larger property for their business. As part of the collateral, you eventually agreed to accept a smaller property the other party purported to own. The other party has taken possession of the property but almost immediately stopped making the agreed on payments. When you tried to contact the buyer, your phone calls were refused. Upon further investigation, you discovered that the property being used for collateral was not worth as much as was represented to you during the negotiations and that the party would have known the actual value.
This case seems frustrating because the other party is being evasive and dishonest. Negotiation will be difficult if not impossible with a party attempting to trick you. However, you may be able to get results when you try the same methods with an attorney. While the offending party may not take you or the situation seriously, the threat of legal action up front may be more persuasive.
Best Option: Litigation and Attempt to Recover Damages
In this case, you have a valid reason to believe the other party committed fraud when entering into the contract. In order to secure the contract, there was a material misrepresentation as to the value of the collateral. That means that if you have to go to court, you could qualify for both compensatory and punitive damages. Punitive damages go above and beyond the actual amount of the claim and are aimed at punishing parties who act in bad faith.
The Steps You Will Need to Take
1. Send your demand letter. Make it clear in your letter exactly what you are asking for, and that you know about the fraud.
2. Draft and file a complaint in the correct court, citing the amount of damages you are seeking. Sign everything and make copies. If you were asking for an amount less than $50,000, you would be required to go through dispute resolution first, but if you are asking for punitive damages that won’t be an option.
3. Send a summons to the other party.
4. If the other party responds, you will need to respond quickly. Otherwise, prepare for trial and comply with the rules of discovery.
5. Go to court and present your case to a judge or jury.
When you are the victim of a breach of contract, you only have a limited amount of time to bring a civil suit. There may be other reasons related to the contract that also make it urgent to resolve the issue as quickly as possible. If you contact a business attorney, you can learn your various options and how they might play out for your case.
Contract: A tool to estimate the loss or damage arising from a breach of contract
In the event of breach of contract, the other party earns certain rights including the right to claim damages or loss arising therefrom. What amount shall be recoverable as damages? Section 73 of the Indian Contract Act provides that when a contract has been broken, the party who suffers by such breach shall be entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, (i) which naturally arose, or (ii) which the parties knew, when they made a contract, likely to result from the breach it.
Section 73 further provides that such compensation is not to be given for any remote and indirect loss or damage sustained by the reason of breach.
Besides, Section 73 provides for compensation for failure to discharge obligation resembling those created by contract(i.e., quasi-contract).
These rules and others, as recognized through decided cases, may be studied under the following four heads:
● Ordinary Damages,
● Special Damages
● Vindictive/Punitive/Exemplary Damages, and
● Nominal Damages.
1. Ordinary Damages. Ordinary damages are those which naturally arose in the usual course of things from such breach. The measure of ordinary damages is the difference between the contract price and the market price at the date of breach. If the seller retains the goods after the breach, he cannot recover from the buyer any further loss if the market falls, nor is he liable to have the damages reduced if the market rises.
2. Special Damages. Special damages are those resulting from a breach of contract under some special or unusual circumstances. When there are certain special or extraordinary circumstances present and their existence is communicated to the promisor, the non performance of the promise entitles the promisee to not only the ordinary damages but also special damages that may result therefrom.
Example: A, a builder contracts to erect and finish a house by the 1st of January, in order that B may give possession of it at the time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that before the first January, it falls down and has to be rebuilt by B, who in consequence loses the rent which he was to have received from C, and is obliged to make compensation to C for breach of his contract. A must make compensation to B for the cost of re-building the house, for the rent lost, and for the compensation paid to C. It should however be emphasised again that the communication of the special circumstances is a prerequisite to a claim for special damages. In Hadley vs. Baxandale, X’s mill was stopped due to the breakdown of a shaft. He delivered the shaft to Y, a common carrier to be taken to a manufacturer to copy it and make it a new one. X did not make known to Y that delay would result in loss of profits. By some neglect on not making it known to Y that delay would result in loss of profits. By some neglect on the part of Y, the delivery of the shaft was delayed in transit beyond the reasonable time. As a result, the mill remained idle for a longer time than otherwise would have been had the shaft been delivered in time. Held, Y was not liable for loss of profits during the period of delay as the circumstances communicated to Y did not show that the delay in the delivery of shaft would entail loss of profits to the mill.
3. Vindictive/Punitive/Exemplary damages. Vindictive damages are awarded with a view to punish the defendant and not solely with the idea of awarding compensation to the plaintiff. They have been awarded: (a) for a breach of promise to marry; (b) for wrongful dishonour of a cheque by a banker. The measure of damages in the first case i.e., (a), is dependent upon the severity of the shock to the sentiments of the promisee. In the second case [i.e., (b)], the rule is – smaller the amount of cheque dishonoured, larger will be the amount of damages awarded.
4. Nominal damages. Nominal damages are awarded in cases of breach of contract where there is only a technical violation of the legal right, but no substantial loss is caused thereby. The damages granted in such a case are called nominal because they are very small.
Remedies for Breach of Contract
A ‘breach of contract’ occurs when-
(i) a party renounces his liability under the contract, or
(ii) by his own act makes it impossible that he should perform his obligations under the contract, or
(iii) totally or partially fails to perform his part of the contract. The failure to perform or renunciation may take place when the time for performance has arrived (present or actual breach) or even before that (anticipatory breach).
In the case of an ‘anticipatory breach’ (discussed earlier in the present book), the innocent party is excused from further performance and it entitles the injured party to an option either to sue immediately or to wait till the time the act was to be done. If, however, the injured party does not accept the repudiation and keeps the contract alive till the date of performance, he becomes bound to accept the performance of the contract if rendered, and if a supervening impossibility discharges the contract, he loses his claim to damages. In such a case, the contract ends by frustration and not by breach, so no damages need to be paid.
The date for assessment of damages in case the anticipatory repudiation is accepted, is the date of repudiation. If it is not accepted, then the date for assessment of damages is the date of performance.
Remedies for Breach of Contracts
Three remedies are available for breach of contract, namely:
(1) Rescission and Damages – It is the most common remedy. This entitles the injured party to recover compensation for the loss suffered by it due to the breach of contract, from the party who causes the breach (Secs. 73-75). Applying to the court for ‘rescission of the contract’ is necessary for claiming damages for breach. However, in certain cases a suit for ‘rescission’ may be filed even when no damages are to be claimed.
(2) Specific performance and Injunction – Specific performance of the contract consists in the contracting party’s exact fulfilment of the obligation which he has assumed -in his doing or omitting the very act which he has undertaken to do or omit. It is an equitable relief given by the courts, under the Specific Relief Act, requiring the defendant to actually perform the contract according to its terms and stipulations. It is allowed when damages would not be an adequate remedy.
The courts issue a decree for specific performance only where it is just and equitable to do so, i.e. where the legal remedy is inadequate or ineffective. Specific performance is not granted where monetary compensation is an adequate relief, or where the court cannot supervise the actual execution of the contract (viz. a building construction contract), or where the contract is for personal services (viz. a contract to paint a picture). Specific performance is usually granted in contracts with lands, buildings, rare articles and unique goods having some special value to the party suing.
An injunction restrains the other party from making a breach of the contract. It is also issued under the Specific Relief Act. It is a preventive relief and is appropriate in cases of ‘anticipatory breach of contract’ where damages would not be an adequate relief. It secures the specific performance of the negative terms of the contract (i.e. where a party is doing something which he promised not to do). In contracts for personal services, an injunction is granted in place of specific performance.
(3) Quantum Meruit – It literally means “as much as is earned” or “in proportion to the work done”. When the injured party has performed a part of his obligation under the contract before the breach of contract has occurred, he is entitled to recover the value of what he has done, under this remedy. It is an action which is alternative to an action for the breach of contract. This action in essence is one of restitution, putting the party injured by the breach of contract in a position in which he would have been had the contract not been entered into. It may be noted that if the party making a breach of contract has done a part of the work in connection with it, he cannot claim anything in respect thereof under this remedy. The party in default cannot sue upon quantum meruit.
The law tries to give an appropriate remedy for every type of breach. But even so the maxim ubi jus ibi remedium (‘where there is a right, there is a remedy’) is not wholly true. There are cases, for example, where a contract has been broken and the plaintiff has suffered no loss, according to a few decisions of the Supreme Court, damages would not be allowed.
Damages for Breach
The party who is injured by the breach of a contract may bring an action for damages. ‘Damages’ means compensation in terms of money for the loss suffered by the injured party. In every case of assessment of damages, there are two problems:
(1) Remoteness of damage, and
(2) Measure of damages.
(1) Remoteness of Damage
Theoretically the consequences of a breach may be endless (e.g. loss of profits, loss of social prestige and of business reputation, time and money and energy wasted on defence), but there must be an end to liability. The defendant cannot be held liable for all that follows from his breach. In other words, the compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach.
The decision in Hadley v Baxendale3 (1854) 9 Ex 341, laid down two rules:
(i) General damages- those which arise naturally in the usual course of things from the breach itself. This rule is ‘objective’ as it makes the liability dependent upon a “reasonable man’s foresight” of the loss that will naturally result from the breach.
(ii) Special damages- those which arise on account of the unusual circumstances affecting the plaintiff. They are not recoverable unless the special circumstances are brought to the knowledge of the defendant so that the possibility of the special loss was in the “contemplation of the parties”. This rule is ‘subjective’ as the extent of liability depends upon the actual knowledge of parties at the time of the contract about the likely result of breach.
The relationship between the two rules was re-examined in Victoria Laundry Ltd. v Newman Industries Ltd. (1949) 1 All ER 997. The judgment emphasizes that both the rules are based upon the principle of “foreseeability”.
Foreseeability depends upon knowledge. Accordingly what was at that time reasonably foreseeable depends upon the knowledge then possessed by the parties. Knowledge possessed is of two types: One imputed i.e. assumed to be possessed by everyone (‘first rule’ in Hadley v Baxendale), and the other actual (‘second rule’). Thus, two rules formulated in Hadley are only two different instances of the application of a single rule. The Victoria Laundry case had virtually replaced the expression “contemplation of the parties” with “reasonable man’s foresight” and this being the principle in the law of tort also, hardly any distinction remained between tort and contract principles relating to remoteness of damages.
But in Heron II, Koufos v Czarnikow Ltd., (1967) 3 All ER 686, the decision restored the distinction by again laying emphasis upon the “contemplation of the parties”, as laid down in Hadley case. It was observed that a result which will happen in the great majority of cases should reasonably be regarded as having been in the contemplation of the panics, but a result which, though foreseeable as a substantial possibility would happen only in a small minority of cases should not be regarded as having been in their contemplation. Thus the damages recoverable for breach of contract are such as flow naturally in most cases from the breach, whether under ordinary circumstances or from special circumstances due to the knowledge either in the possession of or communicated to the defendants. This means that the claim depends on the contemplation of the parties to the contract and the question of remoteness as such does not arise. Consequently liability in tort may often be of a wider kind.
The facts of major English cases could be summarized as below: (i) In Hadley v Baxendale (1854) 9 Ex 341, the plaintiff’s mill had been stopped due to the breakage of a crankshaft. The defendants, a firm of carriers, were engaged to carry the shaft to the manufacturers as a pattern for a new one. The plaintiff’s servant told the defendants that the mill was stopped, and that the shaft must be sent immediately. But the defendants delayed the delivery by some neglect, thus the mill remained stopped for a longer time than it would have been. The action was brought for the loss of profits arising out of the delay. The defendants were held not liable for the loss of profits, because in the great multitude of cases of millers sending off broken shafts for repair, it does not follow the ordinary circumstances that the mill is stopped (as the millers might have another shaft in reserve). The fact that the mill was out of action for the want of shaft was a ‘special circumstance’ affecting the plaintiff’s mill and the same should have been pointed out to the defendants in clear terms.
(ii) In British Columbia Saw Mills v Nettleship (1868) LR 3 CP 499, also, lack of knowledge of special circumstances once again prevented recovery of special damages. The parts of a saw mill machinery, packed in cases, were given to the defendant, a carrier, for carriage to Vancouver. One of the cases was lost and consequently a complete mill could not be erected and operated. The plaintiff claimed the cost of lost machinery and the profits which could have been earned if the mill had been installed in time. Holding that the defendant was a mere carrier having no knowledge of the purpose to be served by the goods to be transported by it, his liability was only for the cost of lost machinery. The court gave an illustration: “If a barrister is on his way to practice at the Calcutta Bar, where he may have a large number of briefs awaiting him. got stranded in the Suez boat through the default of Peninsular and Oriental Company, is the company to be responsible for that, because they happened to know the purpose for which the traveller was going?”
(iii) In Simpson v London & North Western Railway Co. (1876) 1 QBD 274, held that if the special circumstances are already within the knowledge of the party breaking the contract, the formality of communicating them to him may not be necessary. The plaintiff was in the habit of exhibiting samples of his implements at cattle shows. He delivered his samples to the defendant company for consignment to the showground at New Castle. The consignment note said: “must be at NewCastle on Monday certain”. But no mention was made of the intention to place the goods in the exhibition. Due to the defendant’s negligence, the goods reached the destination only after the exhibition was over. It was held that since the defendant company was having the knowledge of the special circumstances that the goods were being sent for the New Castle show, they were liable for the loss of profits resulting from late arrival of goods.
(iv) In Diamond v Campbell-Jones (1960) 1 All ER 583, the defendants contracted to sell certain leasehold premises to the plaintiff, who intended to make profits by converting the premises into offices. The defendants having made a breach of contract, the plaintiff sued them for recovering loss of profits which he could earn by using premises according to his intended use. The court disallowed on the ground that the defendants did not have the knowledge about the plaintiff’s intended use of premises.
Section 73, Contract Act 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 other 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.”
Thus, Sec. 73 is declaratory of the common law as to damages (i.e. rule of Hadley v Baxendale). In Hadley case, Alderson, J. laid down the following rule: “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in the respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally i.e. according to the usual course of things, from such breach of contract itself, or such as may be reasonably supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.” Sec. 73 also provides that the same principles will apply in relation to breach of a quasi- contract.
Illustration (i) (Delay caused by carrier)5- A delivers to B, a common carrier, a machine, to be conveyed without delay, to A’s mill, informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and A in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profits which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract (This illustration is a Hadley v Baxendale module). (A is entitled to profit as A has brought to the knowledge of B the ‘special circumstance’ affecting him i.e. mill is stopped for want of machine. A is not entitled to loss sustained through the loss of Government contract as this fact was not brought to the knowledge of B).
In Madras Railway Co. v Govinda Rau6 (1898) 21 Mad 172, the plaintiff, a tailor, delivered a sewing machine and some cloth to the defendant railway company to be sent to a place where he expected to carry on his business with special profit by reason of a forthcoming festival. The goods were delayed due to the company’s negligence and were delivered after the conclusion of the festival. The plaintiff claimed damages for the expenses of travelling up to the place of the festival and of staying there and the loss of profits, which he would have earned. The court held that the damages claimed were too remote. All of these were due to the frustration of the ‘special purpose’ and that was not known to the company.
A similar case is – Fazal Illahi v East Indian Railway Co. (AIR 1922 All. 774)
In Dominion of India v All India Reporter Ltd. (AIR 1952 Nag 32), the loss by railways of three volumes of a set of books without which the set of 8 volumes became useless, recovery allowed only for the lost volumes. Since the fact that the loss of three volumes would render the whole set useless was not brought to the knowledge of the defendant, the value of the whole set could not be claimed. Compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Illustration (n) to Sec. 73 reads: A contracts to pay a sum of money to B on a specific day. A does not pay money on that day. B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest up to the date of payment.
In Union of India v Steel Stockholders Syndicate, Poona (1976) 3 SCC 108, a consignment of goods with the railways reached its destination after an inordinate delay of seven months. The plaintiff’s money remained blocked for the period. He was allowed to recover interest on the money by way of damages for the loss.
In Dwarka Das v State of M.P. (AIR 1999 SC 1031), a works contract was rescinded on the ground that the contractor had not completed within the stipulated time even 10% of the works. But evidence showed that the contract was improperly rescinded and, therefore, it amounted to a breach of contract. The contractor claimed Rs. 20,000 as compensation, being 10% of the value of the contract. The court said that the contractor was entitled to claim damages for loss of profit which he expected from the project. His claim was held to be fully justified. The High Court erred in holding that the claim should’ve been based on actual loss suffered.
Loss of Profits is a Special Loss
The loss of profits, which were to accrue upon resale, cannot be recovered unless it is communicated to the other party that the goods are for resale upon a special contract.
Illustration (J) [knowledge of resale, loss of profit)- A, having contracted with B to supply B with 1,000 tons of iron at 100 Rs./ ton, to be delivered at a stated time, contracts with C for the purchase of 1000 tons of iron at 80 Rs./ ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, who cannot procure other iron, and B in consequence, rescinds the contract. C must pay to A Rs. 20,000, being the profit, which A would have made by the performance of his contract with B.
Illustration (k) (Where no knowledge of resale agreement, no more than market difference recoverable)- A contracts with B to deliver to B, by a fixed day, for a specified price, a machinery. On A’s failure to do so, B is obliged to procure another piece at a higher price, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been communicated to A), and is compelled to make compensation for breach of that contract. A must pay to B the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation.
KARSANDAS H. THACKER V SARAN ENGINEERING CO.7 (AIR 1965 SC 1981)
In this case, there was a contract to supply 200 tons of scrap iron. The buyer undertook to supply the same quantity to the Export Corporation, Calcutta. The seller failed to supply in consequence the buyer could not perform his contract with the Corporation. The Corporation recovered from him the difference between the contract price and the market price. The seller contended that he should not be held liable for anything because the control price of iron scrap was still the same and he had no knowledge of the contract of resale to the Corporation. The court accepted the seller’s contentions. The court observed: Sec. 73 lays down that when a contract has been broken, the party who suffers by such breach is entitled to receive, from the other 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. Compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
According to illustration (k), Sec. 73, the seller has not to pay any compensation that the buyer may have to pay to his sub-buyers by reason of the breach unless he was made aware of the buyer’s promise at the time of the contract, in the present case, on account of non-delivery of scrap iron the buyer would have purchased the scrap iron from the market at the same controlled price. This means that the buyer did not stand to pay a higher price than what he was to pay to the respondent (the seller) and therefore he could not have suffered any loss on account of the breach … Thus, the loss which could have naturally arisen in the usual course of things from the breach of contract by the respondent would be nil. The actual loss he (the buyer) suffered on account of the breach was the result of his contracting to sell 200 tons of scrap iron for export to the Corporation. As the parties did not know and could not have known when the contract was made that the scrap iron would be ultimately sold by the appellant (buyer) to the Corporation, the parties could not have known of the likelihood of the loss actually suffered by the appellant on account of the failure of the respondent to fulfil the contract.]
Market Rate Theory
Illustration (a) (Market rate criterion) – A contracts to sell and deliver certain goods to B, at a certain price. A breaks his promise, B is entitled to receive from A, the sum, if any, by which the contract price falls short of the price for which B might have obtained goods of like quality at the time when the goods ought to have been delivered.
Illustration (h) (Buyer’s breach, difference between market and contract prices) – A contracts to supply B with a certain quantity of iron at a fixed price, being a higher price than that for which A could procure and deliver the iron. B wrongfully refuses to receive the iron. B must pay to A, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it. In almost all sale transactions, which fail to go through, the normal yardstick for working out the sum of money to which the aggrieved party is entitled is the difference between the contract and market prices.
This rule presupposes the existence of a market and the possibility of ascertaining the price of the goods in that market. The ‘market price’ is the buying price at which the buyer can obtain equivalent goods. It is the current price at the contractual time of delivery when the buyer can obtain identical goods in an available market. The buyer has not to prove that he actually bought the goods after the seller had failed to deliver. Sec. 73 does not envisage that the buyer must resort to actual purchase before claiming damages.
In Shearson Lehman Hutton Inc. v Machine Watson & Co. (1990) 3 All ER 723 QBD, the buyer refused to accept the goods. The court observed: In assessing damages for failure to perform a contract for the purchase of goods the measure of damages payable by the defaulting buyer is the difference between the contract price and the current or market price ‘at the date of the breach.’ This is based on a hypothetical sale of the particular amount of the goods in question in the available market (disregarding any characteristics of the seller which might have led to a lower price being obtained). In determining whether there is an ‘available market’ for the goods in question, if the seller actually offered the goods for sale there is no available market unless there is one actual buyer on that day at a fair price. If, on the other hand, there is only a hypothetical sale there is no available. market unless on the relevant day there were in the market sufficient traders potentially in touch with each other to evidence a market in which the seller could if he had wished have sold the goods. Furthermore, the market price on a hypothetical sale is the fair market price for the total quantity of goods if they had to be sold on the relevant day but taking into account the price which might be negotiated within a few days with other potential buyers who were not part of the market on that day only because of difficulties in communication.
Thus the damages are based on the fair market or current price on the date of the breach, which in turn is based on both the price obtained by a sale of all goods on the date of the breach and the price obtained by sales negotiated over a short period before or after that date.
In Rajasthan Rajya Sahkari Kraya Vikrya Sangh Ltd., Jaipur (1988) 2 Raj LR 962 (a case of seller’s breach),
It was observed that it is not necessary to prove actual loss. Anticipated loss of profits can be determined by the court while determining compensation. What is necessary is that the plaintiff should establish what the contractual rate of purchase was and what the rate of the article was on the date on which it was to be supplied. The difference between the two is a loss to the purchaser, if it is not supplied by the seller to the purchaser. This is so because the buyer cannot be allowed to be put in a better position than he would have been if the contract had been performed. What would be the position when the goods are delivered, but delivered late?
In Wertheim v Chicoutimi Pulp Co. (1911) AC 301
Goods were delivered by the seller late when they were worth Rs. 50 per ton in the market as against the contract price of Rs. 80, but the buyer got Rs. 70 per ton on resale. He was allowed Rs. 10 per ton by way of his loss. If :he carrier causes the delay in delivering the goods at the destination he can be made liable to pay the difference between the prices prevailing on the agreed date of delivery and that on which the goods are actually delivered (Koufos v C. Czarmilkow Ltd.).
(2) Measure of Damages
Once the extent of recoverable loss is determined, it has to be evaluated in terms of money. This is the problem of measure of damages and is governed by certain fundamental principles. It may be noted that the fact that damages are difficult to assess does not prevent the injured party from recovering them. The governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if the rights have been observed. “The object of damages is to put the suffering party in the same position as if the contract had been performed. Hence, loss of profits can be awarded, as part of damages” [A. T. Brij Paul Singh & Bros, v State of Gujarat AIR 1984 SC 1703].
(a) Damages are Compensatory, not Penal
Damages are compensatory in nature. The object of awarding damages to the aggrieved party is to put him in the same position in which he would have been if the contract had been performed. Damages are, therefore, assessed on that basis. Thus, in Robinson v Harman (1848) 18 LJ Ex 202, the defendant, having agreed to grant a lease of a certain property to the plaintiff, refused to do so. The plaintiff was allowed by way of damages the expenses incurred by him on the preliminary legal work and also for the profits which he would have earned if the lease had been granted to him. Thus damages are given by way of compensation for the loss suffered by the plaintiff and not for the purpose of punishing the defendant for the breach (i.e. damages are not penal). Motive for and the manner of breach is not taken into account because generally “punitive damages” are not recoverable for the breach of contract. But the inconvenience caused by breach may be taken into account.
GHAZIABAD DEVELOPMENT AUTHORITY v UNION OF INDIA (AIR 2000 SC 2003)
In this case, the Ghaziabad Development Authority had announced through advertisements schemes for allotment of developed plots. There was unreasonable delay by the Authority in completing the scheme for development of plots. Thus, the complainants filed petitions against Authority on grounds of excessive delay and failure to hand over possession of plots. The question arose whether compensation can be awarded for mental agony suffered by the claimants. Also, whether in the absence of any contract or promise held out by the Authority, an amount by way of interest can be directed to be paid on the amount (refund) found due and payable by the Authority to the claimants. There was a term in the brochure issued by the Authority that it shall not be liable to pay interest in the event of the applicant withdrawing its offer i.e. in the event of an occasion arising for refund.
The Supreme Court observed that broadly the principle underlying the assessment of damages is to put the aggrieved party in the same position as far as possible, in which he would have been if the contract had been performed. It was held that “mental anguish” cannot be a head of damages for breach of ordinary commercial contract.
The ordinary heads of damages allowable in contracts for sale of land are settled. A vendor who breaks the contract by failing to convey the land to the purchaser is liable to damages for the purchaser’s loss of bargain by paying the market value of the property at the fixed time for completion less the contract price. The purchaser could claim the loss of profit which occurred due to delay by the vendor of the plots if the vendor had actual or imputed knowledge thereof (normally it is the use of the land for the period of delay viz. its rental value). However, the buyer of plots could not claim any compensation for mental anguish and vexation caused by the delay in the performance of the contract. The court further held that interest on equitable grounds can be awarded in appropriate cases (for example, where the claimant himself is not responsible). The Authority is liable to pay interest as it was at fault, although the brochure issued by it provided that no interest would be payable by it. The rate of interest should not be too high or too low viz. rate of 12 per cent per annum would be just and proper.]
(c) Nominal Damages
Where the plaintiff suffered no loss the court may still award him nominal damages (small sum of money) in recognition of his right. However, Sec. 73 does not give any cause of action unless and until damage is actually suffered. “If actual loss is not proved, no damages will be awarded.” In the State of M.P. v Recondo Ltd. (1989 MPLJ 822), a Government contract was terminated before the expiry of the notice period in circumstances which did not entitle the contractor to recover loss of profit, but he was allowed nominal damages.
In Union of India v Tribhuwan Das Lalji Patel (AIR 1971 Del 120), a person agreed to supply sleepers to the Railway on the condition that irrespective of whether the Railway suffered any loss or not on account of the contractor’s failure to supply the sleepers the Railway will be entitled to damages. The contractor failed to supply but the Railway did not suffer any loss. The court dismissed the action for damages. In such a case, the nominal damages may be awarded by the court.
(d) Exemplary or Vindictive Damages
These are awarded with a view to punishing the guilty party for the breach and not by way of compensation. Thus these damages have no place in the law of contract. There are, however, certain exceptional cases, viz. breach of a contract to marry, dishonour of a cheque by a banker when there are sufficient funds to the credit of the customer.
(e) Duty to Mitigate
Explanation to Sec. 73 says: In estimating the loss or damages arising from a breach of contract, the means, which existed of remedying the inconvenience caused by the non-performance of the contract, must be taken into account.
Thus the injured party has to make reasonable efforts to avoid the losses resulting from the breach so that his as well as other party’s loss is kept to the minimum. The plaintiff is debarred from claiming any part of the damage, which is due to his neglect to make such efforts. The onus of proof is on the defendant to show that the plaintiff has failed in his duty of mitigation and the plaintiff is free from the burden of proving that he tried his best to mitigate the loss.
The duty to mitigate damages in its essence means that the court can take into account the conduct of the injured party so as to see what he ought in reason to have done, whereby his loss has been or would have been diminished. What matters is the reasonableness of the conduct of the injured party which is a question of fact. Where the aggrieved party increases his loss by unreasonable conduct, he cannot hold the defendant liable for the same. However, he is under no obligation to destroy his property or to injure himself or his commercial reputation to keep down the damages payable by the defendant.
The Explanation to Sec. 73 is not in the nature of an independent rule but is merely a factor to be taken into account in assessing the damages naturally arising from the breach, for the purpose of main part of Sec. 73 (K.G Hiranandani v Bharat Barrel & Drum Mfg. Co. AIR 1963 Bom. 373).
Thus, the principle of mitigation of loss does not give any right to a party in breach of contract but it is a circumstance to be borne in mind in assessing damages [M. Lochia Setty & Sons Ltd. v Coffee Board, Bangalore (1980) 4 SCC 636]. It is a positive defence in the matter of quantum of damages.
The loss to be ascertained is the loss at the date of the breach of contract. If at that date the plaintiff could do something to mitigate the damage, the defendant is entitled to the benefit of it. However, the rule in regard to mitigation must be applied with discretion and a man who has already put himself in the wrong by breaking his contract has no right to impose new and extraordinary duties on the aggrieved party (Pollock and Mulla).
The most frequent application of this rule takes place in contracts for sale or purchase of goods. On the buyer’s refusal to take delivery, the seller could resell the goods at the prevailing market price and he may then recover from the defaulting buyer the difference between the price he realized and the contract price. If the seller does not resell the goods and his loss is aggravated by the falling market, he cannot recover the enhanced loss. Similarly, where the seller refuses to perform the contract, the buyer should buy the goods if they are available from any alternative source and cannot recover any further loss that may be due to his own neglect. It is important to note that it is not necessary that the seller (or buyer) should resell (or re-purchase) on the date of breach of the contract. Actual re-sale by the seller is not necessary; similarly, actual re-purchase by the buyer is not necessary.