BBA Business Laws

Unit 8 – Discharge of Contract and Remedies for Breach of Contract

Structure

8.1 Introduction

8.2 Learning Objectives

8.3 Discharge of Contract and its Methods

8.4 Breach of Contract and its Remedies

8.5 Summary

8.6 Glossary

8.7 Self-Assessment Test

8.8 Suggested Readings/Reference Materials

8.9 Answers to Check Your Progress Questions

“A contract for better for worse is a contract that should not be tolerated.”
- George Bernard Shaw, Irish playwright

The quote explains that contracts entered are for performing better, and when such is negated due to
contractual breach then it should be compensated. This unit discusses the same through different
methods for discharge of a contract, and in case of contractual breach, the remedies available for the
injured from the breacher.

8.1 Introduction

In the light of the Contract Act 1872, the previous unit discussed on the contractual obligation for
performance of a contract. The present unit discusses different ways of discharging a contract and the
remedies available for breach of a contract.

As per the Contract Act 1872, a contract is a legally binding agreement between two or more parties, where
one agrees to do or refrain from doing something in exchange for consideration. A contract comes to an end
on performance of a contract and it is termed as discharge of a contract, and when it is non-performed it is
termed as breach of contract, unless otherwise stated.

In this context, this unit discusses various methods for discharge of a contract and the remedies available on
breach of a contract.

8.2 Learning Objectives

After going through this unit, you should be able to:

 Explain the meaning and various methods for discharge of a contract.
 Illustrate the meaning and various remedies available for breach of a contract
 Distinguish discharge of a contract from breach of a contract

8.3 Discharge of Contract and its Methods

A contract is said to be discharged when the rights and liabilities created by it come to an end.
Sections 38, 62 and 63 of the Indian Contract Act deal with the discharge of contracts. Contracts
may be discharged or terminated by the following methods:
  by performance of the contract, or
 by mutual consent, or
 by lapse of time (by limitation), or
 by operation of law, or
 by impossibility of performance, or
 by breach of contract.
Figure 5

Source: ICFAI Research Team

Each of the various modes of discharge of contract is explained below:
Performance of Contract
The most obvious and meaningful way to discharge a contract is to fulfill the terms and conditions
agreed by each of the parties in the contract. Section 38 provides for tender of performance. As
per this section if the promisor offers to perform his side of the contract, but the promisee does not
accept his performance the promisor is discharged from his liability. This is known as attempted
performance. The promisor may sue the promisee for the breach of contract if he so desires.
It must be noted that a valid tender must be made under circumstances which enables the other
party to ascertain that the promisor is able and willing to do what is bound to be done. If the
tender is for delivery of goods, the promisee must have a reasonable opportunity of seeing that the
goods offered are those one which the promisor is bound by his promise to deliver.
Discharge by Mutual Agreement or Consent
The contract may be terminated by mutual consent of both the contracting parties. Various cases
of discharge by mutual agreement are specified in Section 62 and Section 63 of the Act.
Section 62 provides
“If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the
original contract need not be performed.” The new contract is basically agreed upon to adjust the
remedial rights arising out of the breach of the old contract.
Section 63 provides
“Every person who accepts a proposal may dispense with or remit wholly or in part the
performance of the proposal made to him which he has accepted, or may extend the time for such
performance as may accept instead of it any satisfaction which he thinks fit.”
Thus a contract is discharged by agreement in any of the following ways:
 Novation;
 Recission;
 Alteration;
 Remission;
 Waiver; or
  Accord and Satisfaction.
Novation
Where the parties to an existing contract agree to substitute it with a new contract, it is called
novation. It is of two kinds. It may be (i) novation by change of the parties to the contract or (ii)
novation by substituting a new contract in place of the earlier contract.
There are certain essentials conditions which need to be fulfilled in case of novation. They are:
 Novation can take place only with the consent of the parties to the contract.
The new contract which is to replace the original contract should be valid and enforceable by
law. If it is not so, then the parties will have to revert to the original contract.
 Novation should take place before the expiry of time of performance of the original
contract.
Rescission
The meaning of the term ‘recission’ is cancellation. Section 63 deals with recission and provides
that where one party fails to perform the obligation on his part and the injured party agrees to
rescind the contract without prejudice to his right to claim compensation for the breach of
contract.
While novation leads to dissolution of the original contract and replacement of the same by
another, rescission involves only dissolution of the original contract.
The contract may be rescinded at any time before the completion of the contract by performance or
in any other way. The mutual consent of the parties to the contract is essential. If the parties agree to
rescind the contract, neither of them needs to perform its duties under the contract. Recission may
occur in any of the following ways:
 By mutual consent;
 By one of the parties under a voidable contract;
 By the affected party to a contract without prejudice to his rights to claim
compensation, where the other party has failed to perform his part of the contract.
In recission by mutual consent both the parties agree to cancel the contract. The parties willingly
put an end to an executory bilateral contract. The consent of the parties to non-performance of the
contract may be express or implied.
Illustration: A contracts with B to sell his house to B in 6 months time. Before the expiry of the
stipulated period both of them agree to cancel the agreement. This is recission by express consent.
On the other hand if B remains silent without any act on his part for a period of 1 year and A does
not complain about it, there is recission by implied consent.
The consent may be given either at the time of the formation of the contract or subsequent to the
formation of the contract. The parties may agree that the contract shall stand discharged on the
happening of a certain event or that one of the parties may, in specified circumstances, return the
goods sold.
Alteration
When the terms and conditions of a contract are changed, the contract is said to be altered.
However the original contract is not rescinded in toto. Only some terms of the original contract
are varied and rendered inoperative. Alteration can take place only with the approval of all the
parties to the contract. A valid alteration discharges the original contract and the parties are bound
by the new contract. It should be noted that in alteration, unlike novation there is only a change in
the terms of the contract but not in the parties to the contract.
Illustration: A agreed to deliver a bouquet of dozen red roses on the 1st of January to B for a price
of Rs.150. Subsequently, B rang up A asking him to deliver instead, a bouquet of yellow roses on
2nd of January. In this case the old contract is discharged and the parties are bound by the
changed contract.
It would always be open to the parties to alter or vary the terms of the contract, verbal or written,
by mutual consent. The alteration or variation of the terms of the contract without the knowledge
and consent of the other party vitiates a contract rendering it invalid.
Remission
 According to Section 63 a party to a contract may dispense with the performance by the other
party or may extend the time or accept any other satisfaction instead of performance. Therefore
the party who is entitled to performance under the contract may:
 Remit or dispense with it wholly or in part,
 Extend the time for performance,
 Accept any other satisfaction instead of performance.
Thus, remission means the acceptance by the promisee, of a lesser amount than what was
originally contracted for, in discharge of the total debt. The promisee unilaterally discharges the
obligation of the promisor according to his will and pleasure. The law applicable to remission is
different in England and India. In England, a person cannot remit unless the fresh promise is
supported by consideration. However, in India, the promisee may give up a part of his claim and
such a promise is binding even if there is no consideration to support this promise.
Waiver
When the parties to a contract mutually abandon their rights to the contract, they have resorted to
waiver of the contract. For a waiver, neither an agreement nor consideration is necessary. On the
other hand the party entitled to performance may waive it. Waiver is the abandonment of a right
which normally everybody is at liberty to waive. It signifies nothing more than an intention not to
insist upon the right. A waiver is unenforceable if it is opposed to public policy.
Illustration: A contracts with B to sing at a stage show. Later A forbids B to do so. Here A has
waived his right to claim performance.
Accord and Satisfaction
An accord is unenforceable in itself but if it is followed by satisfaction, and it discharges the
obligations under the old contract. Both accord and satisfaction must take place simultaneously
before the old contract is discharged.
The doctrine of accord and satisfaction has no practical application as consideration is not
necessary in India for discharge of contracts. Accord can be executory and part payment is good
enough for discharge of the entire debt. Thus if the contract involves a unilateral promise, the
party entitled to performance may waive its performance. Where the promisee accepts any other
satisfaction other than that which was originally agreed upon, the original obligation is
discharged. For example, If A owes a large sum of money to B and one C offers to pay a lesser
amount to B in discharge of A’s obligation and B accepts the same, B will not be entitled to
recover the balance from A after receiving payment in full satisfaction.
Discharge by Lapse of Time
A contract is entered into by the parties for their respective obligations to be performed within a
stipulated period or where no time is fixed within a reasonable period. The performance of a
contract cannot be extended indefinitely. The Limitation Act, 1963 provides for a certain time
frame within which the contract has to be performed (called period of limitation). It provides for a
definite time frame within which the deprived party may seek remedy at law. If no action is taken
by the contracting parties within the period of limitation, no remedy at law will be available. That
is, it becomes time barred. Consequently the contract is discharged and the parties to the contract
cannot enforce their respective obligation through the court of law.
Illustration: A contracts with B to supply timber for a period of one year at the rate of Rs.10,000
per ton. In the absence of any agreement regarding the period of payment, it has to be made or a
suit should be filed to recover it within three years from the date of delivery. Thus, if the timber is
delivered in Jan, 2004, a suit for recovery of money has to be filed before Jan 2007. If A does not
file a suit within this period, the debt becomes time barred and hence irrecoverable.
Discharge by Operation of Law
The rights and obligations under a contract may be discharged by the operation of law in any of
the following ways:
By merger
A contract is said to have been discharged by way of merger where an inferior right possessed by
a person coincides with a superior right of the same person. Thus, where between the same parties
a new contract is entered into and security of higher degree or a higher kind is taken, it is said that
the previous contract is merged into the latter, the lower security is said to merge in the higher
security. Where securities of the same degree or kind are taken, there could be no merger. The
 person having the inferior rights gets some superior rights and the former is said to merge into the
latter. On merger the inferior rights vanish and that contract is discharged.
Illustration: A was a partner in a firm. Subsequently he purchased the firm and became the sole
proprietor. A’s rights as a partner merge into his ownership rights. The partnership agreement is
discharged by merger.
By unauthorized material alteration
Law does not permit any unauthorized alteration of the terms of a written agreement. Any such
act by any one of the parties will automatically make the contract as discharged by operation of
law. Where there is a material alteration, the other party has a right to avoid the contract, whether
the alteration was done by the other party himself, or by a stranger. And the onus is on the
claimant to show that not withstanding the alteration, the other party continued to be liable. But an
alteration due to mere accident or mistake, or an alteration which is not material will not avoid the
contract. The requirements for discharge of contract by unauthorized material alteration are:
 When alteration is made by a party to the contract;
 When it is made without the consent of the other party;
 When the alteration is material.
An alteration is said to be material when it changes the legal effect of the instrument; while an
alteration which carries into effect what was intended by the parties or what the law would even
otherwise have implied, would not be material, it follows that if the alteration is immaterial, it
does not discharge the contract.
By insolvency
A person may be adjudged insolvent by the court of law. When a person is adjudged insolvent, he
is discharged from all liabilities incurred prior to his adjudication as an insolvent.
By death of the promisor
Where a contract is entered into, based on personal consideration and where it is required that
performance of the contract should be made by the promisor in person, the contract will be
discharged on the death of the promisor. These are contracts involving personal skill and
knowledge. When the promisor dies before performing his obligation, the contract is discharged
by death. In other contracts not involving personal skill or expertise, the obligations devolve upon
the heirs/legal representatives of the promisor and the contract subsists unless terminated by the
parties.
Illustration: A, a painter, enters into a contract with B to paint B’s portrait. Subsequently A dies. The
contract is discharged by the death of A.
Discharge by Impossibility of Performance
A contract should be capable of being performed for it to be a valid contract. A contract which is
clearly impossible to perform is discharged and is considered as void. A contract which involves
the performance of certain act which is impracticable to perform by either of the parties is
assumed to be impossible to perform and hence the contract is discharged. A contract may be
impossible of being performed either from the beginning of the contract itself or subsequent to the
formation of the contract. Therefore impossibility may be either
 Initial; or
 Subsequent.
Initial Impossibility
The impossibility of the contract being performed exists even at the time of the formation of the
contract. The parties may or may not be aware of the fact. In case of known impossibility, the
contract is void ab initio. Unknown impossibility is an impossibility existing at the time of
formation of contract but which comes to the knowledge of the parties subsequently. In such a
case the contract becomes void when the impossibility is discovered because there is a mutual
mistake of fact.
Illustration: A agrees to sell his buffalo to B. But unknown to both the parties the animal had
already died. The contract becomes void when the death of the buffalo becomes known to the
parties.
Subsequent Impossibility (Doctrine of Supervening Impossibility)
 The contract at the time when it is entered into is a valid contract but becomes impossible of being
performed due to subsequent events. Section 56 states “A contract to do an act which after the
contract is made, becomes impossible, or, by reason of some event which the promisor could not
prevent, becomes void when the act becomes impossible or unlawful.”
In other words a contract which is made impossible to perform due to subsequent changes is taken
as void and hence discharged. This is known as ‘supervening impossibility’ or ‘supervening
illegality’. The following conditions have to be satisfied for a contract to be discharged by
supervening impossibility:
 The act should have become impossible.
 The impossibility should be caused by factors beyond the control of the parties.
 The impossibility should not be the result of the act of the parties.
The Doctrine of Supervening Impossibility means a premature termination of a lawful contract
due to certain intervening events or change of circumstances which fundamentally strike at the
foundation of the contract and are beyond the knowledge and control of the parties to the
agreement.
Discharge by Breach of Contract
Breach of contract means failure to perform the obligation without any lawful excuse. A breach of
contract may arise in any one of the following ways –
 When a party to a contract renounces his obligation under it;
 By one’s own act, which makes it impossible to perform the obligation; or
 When there is total or partial failure to perform the obligation.
Breach of contract is often referred to as the easiest way of discharging a contract. When either of
the parties does not fulfill the duties and liabilities prescribed by the contract, the contract is said
to be breached. There are two types of breach of contract:
 Actual breach of contract.
 Anticipatory breach of contract.
When the obligations are not performed by any one of the parties, the contract comes to an end
and it is said to have been discharged by ‘breach of performance’. Discharge of a party from
obligation may take place by breach of contract. Breach of contract happens when a party fails to
perform the duty or obligations in accordance with the conditions of the agreement. In other
words, the party may fail to perform his part of the contract. Depending upon the time at which
the breach is committed, the breach of contract can be classified as:
 While performance is actually due, or
 While performing the contract [present breach]
 Prior to the date of performance [anticipatory breach].
“Where there is a right, there is a remedy”. A remedy is the means given by law for the
enforcement of right. It is the legal means employed by a court to help a party recover a right or
obtain redress for a wrong. Persons are required to abide by their contracts, to “discharge” their
contractual obligations. Doing so completes the contract and frees each party from it.
In a contract between the parties, if contractual obligations are not respected, the delinquent party
is said to be in “breach of contract”. Breach of contract allows a party to bring the party in default
to court and to get the court to correct the situation, as best as it can. A variety of tools are used by
the courts to deal with breach of contract to ensure that the person who defaults on a contractual
obligation adequately compensates the person who did not receive full contractual benefit. Breach
of contract comes in many forms. There might be a complete breach, where one party completely
refuses to deliver on any part of its undertaking. In other situations, a person might have done a
major part of the commitments under the contract, but only a small residual portion might have
 been left over uncompleted. This latter situation is called “substantial performance” and it has the
effect of binding the other party to performance, at least in an equivalent portion.
Check Your Progress 1
1. Which of the following is not a method for contract discharge?
a. Non-performance of a contract
b. Mutual consent of contractual parties
c. Lapse of time for contract performance
d. Impossibility for contract performance
e. Breach of a contract
2. Identify the section that provides tender of performance.
a. Section 62
b. Section 63
c. Section 38
d. Section 56
e. Section 55
3. What is section 62 and 63 of the Contract Act 1872?
a. Performance of contract
b. Contract discharge by mutual agreement
c. Tender of contract performance
d. Contract discharge by subsequent impossibility
e. Anticipatory breach of contract
4. What do you call when the contractual parties agree to substitute the existing contract with a new
contract?
a. Accord
b. Waiver
c. Remission
d. Alteration
e. Novation
5. Which of the following is a discharge of contract by operation of law?
a. Merger
b. Novation
c. Recission
d. Alteration
e. Waiver

Activity 8.1
The following modes is a contract said to have been discharged by operation of law –
 Performance of the contract by both the parties, mutual content of both the parties, lapse of time in
performance of a contract, insolvency of either of the parties and breach of contract by either of the
parties.

Identify the nature of each mode and discuss whether or not it can be discharged by operation of
law.

8.4 Breach of Contract and its Remedies

A condition is a major term of the contract. In the event of a breach, the injured party is entitled to
rescind the contract and to claim damages. 1 The right to rescind is lost in the same way as in cases
of misrepresentation.
The innocent party is always entitled to affirm the contract. In such a case, he will still be entitled
to damages, but not to treat the contract as at an end.
Case law: A hired B’s ship to carry cargo from Russia. Later, B repudiated the contract.
A delayed a decision as to whether to treat the contract as at an end or sue for damages, hoping
that B would change his mind. War then broke out between Great Britain and Russia before the
performance date, thus frustrating the contract. It was held that A had kept the contract alive by
his actions, which led to the frustration of the contract. As such he had lost his right of action
(Avery vs. Bowden).
The law has provided certain remedies to the aggrieved party in case of breach of contract by the
other parties. The important feature in the event of breach of contract is that each party has a
responsibility to mitigate its losses at a minimum possible level.
Remedies Provided in the Indian Contract Act
The following are the remedies provided in the Act:
The Indian Contract Act, 1872 specifies the remedies available to the parties for the breach of
contract in Sections 73, 74 and 75;
 Section 73 deals with the compensation for loss or damage caused by breach of contract;
 Section 74 deals with the compensation of breach of contract where penalty is stipulated
for; and
 Section 75 provides that the Party who is rightfully rescinding the contract is entitled to
compensation.
Compensation of Loss or Damage caused by Breach of Contract
Section 73 of the Indian Contract Act states that, “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 of damage sustained by reason of the breach”.
Compensation for Failure to Discharge Obligation Resembling those Created by Contract
Section 73 of the Act further states that, “when an obligation resembling those created by contract
has been incurred and has not been discharged, any person injured by the failure to discharge it is

1
Wallis sons and Webb vs. Pratt & Haynes (1910).
 entitled to receive the same compensation from the party in default, as if such person had
contracted to discharge it and had broken his contract”.
“Explanation: In estimating the loss or damage arising from a breach of contract, the means which
existed of remedying the inconvenience caused by non-performance of the contract must be taken
into account.”
A condition to perform the obligation by the parties is a major term of the contract.
When a contract is broken, the injured party has one or more of the following remedies.
 Suit for Rescission,
 Suit for injunction,
 Suit for specific performance,
 Suit for damages, and
 Suit for Quantum Meruit.
These remedies are discussed below.
Suit for Rescission
When a contract is broken by one party, the other party may sue to treat the contract as rescinded
and refuse further performance. The aggrieved party may need to approach the court to grant him
a formal rescission, i.e., cancellation of the contract. This will enable him to be free from his own
obligations under the contract. Section 39 of the Indian Contract Act extends the right to the
aggrieved party to put an end to the contract. Section 64 of the Indian contract Act states that,
“when a person at whose option a contract is voidable rescinds it, the other party thereto need not
perform any promise therein contained in which he is a promisor. The party rescinding a voidable
contract shall, if he has received any benefit thereunder from another party to such contract,
restore such benefit, so far as may be, to the person from whom it was received”.
As such, when a party treats the contract as rescinded, he should restore any benefits he has
received under it. According to Section 75 of the Indian Contract Act, “a person who rightfully
rescinds a contract is entitled to compensation for any damage which he has sustained through the
non fulfillment of the contract”.
Thus, formal declaration of rescission clears the way for other consequences to take effect
following the breach of contract.
Suit for Injunction
Injunction is the order from a court that prohibits a party to do or refrain from doing a certain act.
This is available in contract actions in only limited circumstances. Such an order of injunction
from a court that is granted at the instance of the aggrieved party against the person who has
breached the contract acts as remedy and makes the guilty party refrain from doing or not doing
precisely the act, which is causing the breach of contract.
The guilty party may be committing a violation to certain negative terms of the contract, which
ultimately leads to some loss or injury to the aggrieved party. The order of injunction acts as a
negative relief to the aggrieved party. The positive relief is in other forms like damages.
Illustration: R enters into an agreement with M to present an entertainment programme at M’s hotel on
the eve of the New Year’s Day. Later, R enters into another agreement with N to conduct the
same type of performance at the same time at N’s hotel. M treats it as an anticipatory breach of
performance on the part of R and seeks for an injunction from the court. The court may pass an
injunction order against R not to present the programme at N’s hotel at that time.
Suit for Specific Performance
“Specific performance” means doing exactly what had been intended to be done by the parties in
the contract. The specific performance is the remedy granted by the courts to the aggrieved party
in equity only in cases where it is absolutely essential to grant it. Specific performance is a rare
remedy at law, but sometimes available where the subject of the breached contract is special and
irreplaceable. The courts order the guilty party to actually perform his obligation only when
monetary compensation (by way of damages) will not be an adequate remedy. Specific remedies
direct the party in default to do or to forbear the very thing, which he is bound to do or forbear or
make a declaration of rights which the nature of the case may require.
 Illustration: If A agrees to sell a house to B, B can enforce the contract specifically. So A will be
required to convey the house to B. This remedy is granted because the court finds that the remedy
of damages is not an adequate remedy in such a case.
In Indian law, the various modes of specific relief are mentioned in the Specific Relief Act, 1963,
which came into force from 1.3.1964. They are:
 Restoration of possession: The court orders that the disputed property is be
delivered to the rightful claimant.
 Specific performance of contracts: The court can order the defendant to perform
the very act, which he has contracted to do.
 Injunction: An injunction is granted to the plaintiff to prevent the breach of an
obligation existing in his favour by a mandatory injunction. The court directs the
defendant to do the requisite acts to prevent the breach of his obligation.
 Declaratory relief: The court may grant a declaration as to the rights of the parties.
 Other forms of specific relief are Rectification of documents, Rescission of
contracts, and Cancellation of instruments.
Suit for Damages
Damages are a monetary compensation allowed to the injured party by the court for the loss of
injury suffered by him by the breach of a contract. The object of awarding damages for the breach
of a contract is to put the injured party in the same position, so far as money can do it, as if he had
not been injured i.e., place him in the position in which he would have been had there been
performance and not breach. This is called as “the doctrine of restitution (restitution in integrum).
The fundamental basis of awarding damages is compensation for the pecuniary loss which natural
flows from the breach.
The foundation of modern law of damages in contracts, both in India and England, is to be found
in the judgment in the case of Hadley vs. Baxendele2. The facts of this case were as follows:
Hadley vs. Baxendale - (The rule of remoteness and special circumstances).
A broken shaft was given to a carrier to bring it to a repair shop. The carrier was not told that the
absence of the shaft would completely stop the work of the owner. The carrier was in breach of
contract because the delivery was delayed by several days. Admitting to damages, the defendant
nevertheless argued that the loss of profit damages were too remote.
The court said that damages should be restricted to what “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 reasonably be supposed to have been in the contemplation of both the
parties, at the time they made the contract, as the probable result of the breach of it”. Now, if the
special circumstances under which the contract was actually made were communicated by the
plaintiffs to the defendants, and thus known to both the parties, the damages resulting from the
breach of such a contract, which they would reasonably contemplate, would be the amount of
injury which would ordinarily arise from a breach of contract under these special circumstances
so known and communicated.”
Section 73 of the Contract Act which deals with the “compensation for loss or damage caused by
breach of contract” is based on the judgment in the above case. The rules as given in Section 73
are as follows:
When a contract has been broken, the injured party is entitled to:
 such damages which naturally arose in the usual course of things from such breach.
This relates to ordinary damages arising in the usual course of things;
 such damages which the parties knew, when they made the contract, to be likely to
result from the breach. This relates to special damages. But,
such compensation is not to be given for any remote or indirect loss or damage
sustained by reason of the breach; and

2
(1854)9 Ex. 341
 such compensation for damages arising from breach of a quasi-contract shall
be same as in any other contract.
In estimating the loss of damage 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. In case a conflict persists between the parties after the breach, the court has to perform
the difficult task of measuring the amount of damages. In this task the court takes into account the
provisions of law and the circumstances attached to the contract. In order to quantify the loss, the
court identifies the nature of loss that has resulted in the breach of contract and based on that
factor the loss is quantified.
Classification of Damages
Damages can be classified under the following types based on the courts’ judgments and the
provisions of Section 73 of the Indian contract Act and also depending upon the circumstances of
the case.
 General damages;
 Special damages;
 Exemplary or Vindictive or punitive damages;
 Nominal damages;
The details of the above types of damages are discussed below.
General or ordinary damages
The losses that naturally and directly arise out of the breach of the contract in the usual course of
the things are called as general damages. They would be the unavoidable and logical consequence
of the breach. The damages for such losses are called as general damages or ordinary damages.
The general measure of damages is such sum as will put the aggrieved party as nearly as possible
into the position in which he would have been if the contract had been duly performed. Such
damages cover the loss which the aggrieved party has suffered and the gain of which he has been
deprived.
Special damages
Special damage is what arises in the peculiar circumstances of a particular case quite apart from
the usual course of things. While making the contract, one party to the contract may bring to the
notice of the other party about the particular type of losses that he would suffer under certain
special circumstances. In case the contract is not performed properly and if the other party still
proceeds to make the contract, it is construed that the other party has expressly agreed to be
responsible for the special losses that may be caused by improper performance of his obligation.
Compensation for such special losses is called as “special damages”.
In accordance with the provisions of Section 73 of the Act, 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, the compensation for any loss or damage caused to him thereby or which the parties
knew, when they made the contract, to be likely to result from the breach of it. These damages are
called as special damages.
Illustration: M told C that there should not be any delay in the performance of the contract i.e.,
repairs to be made to the specified machinery, as his business would be affected and he would
incur losses for any delay by the latter and C has promised not to cause delay. This would imply
that C has agreed to become liable for the special losses that may be caused by means of the
improper performance of his obligation. Compensation for such losses are called as ‘special
losses’.
Mitigation of Losses
The important factor in the event of breach of contract is that each party has a responsibility to
mitigate its losses at a minimum possible level. For example, if A enters into a contract to deliver
apples to B and B refuses to take delivery (in so doing, B is in breach of contract), A would be
well advised to try to sell the fruit elsewhere to minimize any damages that he may suffer by the
breach. The law does not require a party to do cartwheels to minimize losses, just what can be
reasonably done without incurring substantial costs. The general rule is: “ in a case where there is
a breach of contract, the plaintiff if he can minimize his loss by a reasonable course of conduct, he
 should do so, though the onus is on the defaulting defendant to show that it could be, or could
have been, done and is not being, and has not been done”.
Indirect Damages (Loss of Profits)
The following illustration shows the nature of the indirect damages:
“A delivers to B, a courier company, a machine to be delivered overnight to A’s factory. B does
not deliver the machine on time, 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
profit which would have been made by the working of the factory during the time that delivery of
it was delayed, but not the loss sustained through the loss of the Government contract.”
The leading case on this subject is that of Hadley vs. Baxendale3. Section 73 and various cases
clearly provide that knowledge of circumstances leading to loss of profits to the plaintiff imposes
liability on the defendant.
Exemplary or Vindictive Damages
The principle underlying the award of damages is compensation to the aggrieved party. But, law
generally would find it difficult to heal the mental pain or suffering or sense of humiliation that
may be caused to the aggrieved party by the breach. In two exceptional cases, the courts award
damages that can be punitive. i.e., by way of punishment. These are:
(1) Breach of promise to marry, (2) Bank dishonoring a customer’s cheque, though customer has
sufficient funds in his account. Damages awarded in these two exceptional cases are called
exemplary damages or vindictive damages.
Breach of Promise to Marry
An agreement to marry a person is like any other contract. If the obligation is broken even before
the marriage takes place, it would cause enormous amount of mental agony, emotional hurt and
loss of reputation in the society to the aggrieved person. It may be very difficult for the courts to
measure exactly such losses in terms of money. Under such circumstances, the courts would
award a large amount as damages to the aggrieved party which could cause a certain degree of
discomfort to the guilty party.
Unjustified Dishonor of Cheques by Banks
Section 31 of the Negotiable instruments Act, 1881 stipulates the liability to the drawee of a
cheque as, “The drawee of a cheque having sufficient funds of the drawer in his hands properly
applicable to the payment of such cheque must pay the cheque when duly required to do so, and,
in default of such payment, must compensate the drawer for any loss or damage caused by such
default”. If a bank wrongfully dishonors a cheque that is drawn by its customer on his account
when there is sufficient money in that account to meet that cheque at the time the cheque is
presented for payment, it results in loss of reputation in the business (market) as well as a lot of
mental agony to that customer. This loss is very difficult to be measured in terms of money or
otherwise. Under such situations, the aggrieved customer shall be allowed punitive damages by
the courts.
Nominal Damages
Sometimes the breach of a contract does not cause any loss. If the market is rising, i.e., prices are
going up, a breach by the buyer does not entail loss to the seller for the seller can easily sell even for
a higher price. Still the breach of a contract being a wrong, the seller can recover damages in a
technical sense. The damages awarded in such a case are called nominal damages (Eg. One rupee or
even one pie).
Stipulated Damages and Penalty
Section 74 of the Indian contract Act deals with the compensation to be awarded for breach of
contract where a penalty is stipulated in the contracts.
Section 74 of the Act states that, “When a contract has been broken, if a sum is named in the
contract as the amount be paid in case of such breach, or if the contract contains any other
stipulation by way of penalty, the party complaining of the breach is entitled, whether or not
actual damage or loss or 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”.

3
9, Ex. 341: 96 R.R. 742
 Explanation: A stipulation for increased interest from the date of default may be a stipulation by
way of penalty.
Exception: When any person who enters into any bail bond, recognizance or other instrument of
the same nature or, under the provisions of any law, or under the orders of the Central
Government or of any State Government, gives any bond for the performance of any public duty
or act in which the public are interested, he shall be liable, upon breach of the condition of any
such instrument, to pay the whole sum mentioned therein.
Liquidated Damages
Such an amount that is specifically mentioned in the contract by the parties themselves to be
payable to the aggrieved party in case towards the breach, is also called as liquidated damages.
Usually it is for the court to determine the quantum of damages. It is always contemplated
whether the courts would award the same amount towards the damages that the parties themselves
have specified in the contract towards the damages for breach of contract. If this is done, the
stipulated damages would be known as ‘liquidated damages. Liquidated damages are in the nature
of ascertained damages.
In Mehata & Sons vs. Century Spinning and Manufacturing Co4, the plaintiff claimed damages for
premature termination by the defendant company of the plaintiff’s service as Managing Agents.
They claimed as damages 10% of the gross profits of the company, (which was their remuneration
as Managing Agents under the Managing Agency Contract.) for unexpired period of the contract
of service.
Penalty
Let us understand this concept as discussed below:
Stipulation in Contract by Way of Penalty
When an amount is named in a contract by the parties themselves towards the amount of
liquidated damages (as ascertained by them) to be paid by the breaching party, the courts need not
necessarily accept the figure named in such contract. The parties may have fixed an excessive
amount as damages so that it may operate in terrorem and counteract any inclination to commit a
breach of the contract. It is then called a “Penalty”. The court can grant relief against a party.
Test of Penalty
The test to be applied is to consider whether the amount really represents a reasonable pre-
estimate of the probable damage or it is an excess over the amount that is reasonably estimated as
liquidated damages. When it is known that the amount so fixed in the contract by the parties at the
time of entering into contracts is extravagant compared to the probable loss, it would be termed as
a penalty.
Payment of Reasonable Compensation
Section 74 of the Act eliminates the distinction between liquidated damages and penalties as
mentioned in English Law. It enacts a uniform principle applicable to all stipulations naming
amounts to be paid in case of breach, whether by way of penalty or otherwise. In all cases what
can be claimed is only the reasonable compensation.5
The payment of reasonable compensation can be observed in the case law,
“Fateh Chand vs. Balkishan Das” 6
There was a contract for the sale of immovable property for a total cost of Rs.1,12,500. The
contract contains the conditions for payment of earnest money of Rs.1,000 and advance payment
of Rs.24,000 towards the sale cost by the buyer to the seller and in case the buyer commits a
default, he has to forego the entire amount of Rs.25,000. The buyer paid the earnest money as
well as the advance amount and the possession of the property was also handed over to the buyer.

4
(1962) SC 1314.
5
*The words “reasonable compensation” gives a wide discretion to the court in the assessment of
damages. The only restriction is that the court can not decree damages exceeding the amount previously
agreed upon by the parties. The discretion so vested must be exercised with care, caution, and on sound
principles. (M/s. Macbrite Engineers vs. Tamilnadu Sugar Corporation Ltd. AIR 2002 Mad. 429). (*“Law of
Contract” by Justice P.S.Narayana and S.R.C. Nayanar.)
6
(1964) SCR 515.
 Subsequently, the buyer defaulted in payment of the balance amount and the seller forfeited the
entire amount of Rs.25,000. It was held that the earnest money could be forfeited but not the
advance payment towards the sale price. No proof of damage was adduced by the seller. So, the
forfeiture of Rs.1,000 was regarded as reasonable compensation under Section 74 of the Act.
Charging of increased interest from the date of default may be stipulated by way of penalty.
Suit for Quantum Meruit
Quantum meruit means, simply, “for what it’s worth”. Quantum meruit also means “as much as
he deserves”. Even where there is no contract, per se, there may be a cause of action where a
person gives value to another under circumstances that would cause the first person (if
reasonable) to believe the second person will give fair market value for what he received.
Quantum meruit offers recovery of “whatever the thing was worth”. It is a beautiful invention of
wise judges in the past that recognized that very often there is not a written or even a verbal
contract between two persons yet an understanding exists upon the passing of some value, that is
monetary in nature, from one to the other. The law recognizes the right of one to recover from the
other for sums delivered for which no return value is given. This right gives rise to the cause of
action known as ‘quantum meruit’.
The term “quantum meruit” actually describes the measure of damages for recovery on a contract
that is said to be “implied in fact.” The law imputes the existence of a contract based upon the
situation where the service rendered by one party must have been understood and intended to pay
the compensation for it. Therefore, recovery in quantum meruit is said to be based upon the “assent”
of the parties and, being contractual in nature. To recover under quantum meruit one must show that
the recipient: (1) acquiesced in the provision of services; (2) was aware that the provider expected to
be compensated; and (3) was unjustly enriched thereby.
Quantum meruit recovery is appropriate where the parties, by their conduct, have formed a
relationship which is contractual in nature, even though an enforceable contract may never have
been created. For Illustration, where a written agreement between an owner and a contractor is
deemed unenforceable as a result of a technical deficiency or because it violates public policy, the
contractor may still recover in quantum meruit. As a general rule, one should not look to recover
in quantum meruit unless there have been direct dealings between the parties that create the basis
for the contract to be “implied in fact.”
Since specific terms in an implied contract are absent, the law supplies the missing contract price
by asking what one would have to pay in the open market for the same work. Thus the measure of
damages under quantum meruit is defined as “the reasonable value of the labor performed and the
market value of the materials furnished” to the project.

Activity 8.2

1. What type of damages are awarded in case of breach of a promise to marry?

2. Michel, a popular singer, enters into a contract with the manager of a theatre, to sing at the theatre two
evenings a week for the next two months and the manager of the theatre agrees to pay him at the rate of
Rs.1,000 for each performance. From the sixth evening onwards, Michel absents himself from the theatre. In
this context, which of the following remedies is/are available to the manager of the theatre against Michel?

3. Govind agrees to sell a house to Arvind and a contract is entered into. However, Govind subsequently
refuses to sell. Arvind approaches the court. What type of remedy can the court award if it finds that the
remedy of damage is not adequate in this specific case?
Check Your Progress 2

6. When a contract is broken, identify a remedy for an injured party.

a. Suit for rescission
b. Novation of a contract
c. Tender of performance
d. Material alteration of a contract
e. Anticipatory breach of a contract
7. What is an order from a court that prohibits a party to do or refrain from doing a certain act?
a. Rescission
b. Injunction
c. Specific performance
d. Damages
e. Quantum Meruit
8. What does it mean when doing exactly what had been intended to be done by the parties in a
contract?
a. Rescission
b. Injunction
c. Specific performance
d. Damages
e. Quantum Meruit
9. What are monetary compensation that allowed to an injured party by the court for the loss of injury
suffered by him by the breach of a contract?
a. Rescission
b. Injunction
c. Specific performance
d. Damages
e. Quantum Meruit
10. What is the nature of a vindictive damage?
a. General
b. Special
c. Exemplary
d. Nominal
e. Anticipatory

8.5 Summary

 A contract is defined as an agreement enforceable at law, made between two or more

persons, by which rights are acquired by one or more, to act on the part of the other. It
creates and defines obligations between the parties.
 A contract creates self-imposed obligations. A contract establishes the reciprocal
responsibilities of the parties and the extent and standard of their performances. Further
a contract also facilitates the allocation of burden of risk in case of any contingency in
advance. Finally, it also makes allowance for any loss arising out of any mishap or non-
happening of any event.
 Contracts may be discharged or terminated by the following methods by performance of
the contract, or by mutual consent, or by lapse of time (by limitation), or by operation of
law, or by impossibility of performance, or by breach of contract.
 The law has provided certain remedies to the aggrieved party in case of breach of
contract by the other parties. The important feature in the event of breach of contract is
that each party has a responsibility to mitigate its losses at a minimum possible level.
 There are five remedies available for breach of contract: they are damages, specific
performance, Injunction, Quantum Meruit and Rectification. The Court awards damages
 in order to put the injured party into the position he would have been in, if the contract
had been performed so far as money can make this possible.

8.6 Glossary

Absolute – It means in general, ‘total’ or ‘without restriction’.

Breach of Contract - This is a failure by one party to abide by the terms of a contract, without lawful
excuse.

Case Law - The recorded decisions of the judiciary, to which other courts may refer in order to make
decisions in cases with similar circumstances.

Condition - Condition is a term of the contract that is fundamental to its fulfillment. Breach of such a term
gives the party not in breach to repudiate (see repudiation of contract), and/or seek damages.

Contract - An agreement between a number of parties, binding them to carry out certain actions or forebear
from certain actions, and intending to have legal consequences.
Conveyance - A deed that transfers a legal estate in land from one owner to another.
Defendant - A person against whom court proceedings are brought.
Drawee - One to whom a bill of exchange or cheque directs to pay a certain sum of money specified therein.
Drawer - The maker of a bill of exchange or cheque is called the drawer.
Misrepresentation - A false statement made to induce a party to enter into a contract.
Per se - By itself.
Plaintiff - A person applying for relief against another person in an action, suit, petition, motion, summons or
any other form of court proceeding.
Quantum Meruit - As much as he deserved.
Quasi-Contract - An agreement that has the form of a contract but is different in some technical way.

8.7 Self-Assessment Test

1. Explain the different methods of discharging a contract.

2. What are the remedies available to the parties for the breach of a contract?

3. Discuss the suits available for the injured party when a contract is broken.
4. Into how many ways can a contract be discharged by agreement? How you differentiate one from
the other.
5. Describe in detail the suit for Quantum Meruit.

8.8 Suggested Readings/Reference Materials

1. PPS Gogna. Business Laws. S. Chand Publishing, 6th edition, 2018

2. N.D. Kapoor. Elements of Mercantile law. Sultan Chand and Sons, 2020

3. S.N.Maheswari & S.K.Maheshwari. A Manual of Business Laws. Himalaya Publishing House. 2018

4. K.R.Bulchandani. Business Law for Management. 8th revised edition, Himalaya Publishing House.
2020

8.9 Answers to Check Your Progress Questions

1. (a) Non-performance of a contract

Except option (a), rest are the methods for discharge of a contract.
2. (c ) Section 38

Section 38 of the Contract Act 1872 provides tender of performance.

3. (b) Contract discharge by mutual agreement

Section 62 and 63 of the Contract Act 1872 deals with the discharge of contract by mutual
agreement of its parties.

4. (e) Novation
When the contractual parties agree to substitute the existing contract with a new contract, it is called
novation.

5. (a) Merger
Merger is one of the methods for contract discharge by operation of law.

6. (a) Suit for rescission

Suit for rescission is a remedy for an injured party.

7. (b) Injunction
Injunction is an order from a court that prohibits a party to do or refrain from doing a certain act.

8. (c ) Specific Performance
Specific performance means when doing exactly what had been intended to be done by the parties in
a contract.

9. (d) Damages
Damages are monetary compensation that allowed to an injured party by the court for the loss of
injury suffered by him by the breach of a contract.

10. (c ) Exemplary damage

Exemplary damage is the nature of a vindictive damage.