DISCHARGE OF

CONTRACT BY
BREACH
 BREACH OF CONTRACT
• A breach of a contract occurs when a party thereto
• renounces his liabilities under it, or
• by his own act makes it impossible that he should perform his obligations
under it or
• totally or partially fails to perform such obligations.
• Breach is of two types
• Actual / Present Breach &
• Anticipatory Breach
• Actual – When breach is committed either;
• (i) at the time when the performance of the contract is due; or
• (ii) during the performance of the contract.
• Anticipatory - Breach of a contract committed before the date of performance
of the contract.
 ANTICIPATORY BREACH
• An anticipatory repudiation occurs when prior to the promised date of performance
the promisor absolutely repudiates the contract.
• It is an announcement by the contracting party of his intention not to fulfil the
contract that he will no longer be bound by it.
• Implications of Anticipatory Breach:
• Innocent Party is excused from further performance.
• Obligation under the Original Contract comes to an end.
• Entitlement of aggrieved party to receive damages
• Immediate Right of Action of Injured Party:
• Injured Party has a right to either
• sue immediately or
• Wait till the time the act was to be done – Contract will remain valid until actual
breach
 ANTICIPATORY BREACH

Hochester v. De La Tour [118 ER 922]

Facts:
• The plaintiff was engaged by the defendant to accompany him on a tour scheduled to
commence from June 1, 1852.
• Nearly a month before this date the defendant wrote to plaintiff that he had changes his
mind and declined his services. The plaintiff sued him for damages for breach of the
agreement before the day when the performance was due
• The defendant argued that there could not be a breach of the agreement before the day
the performance is due.

Held:
It cannot be laid down as a universal rule that whereby an agreement an act is to be done
at a future date, no action can be brought for a breach of the agreement till the day for
doing the act has arrived. If a man promises to marry a woman on a future day and before
that day marries another woman another woman, he may be immediately sued for
breaking the contract.
 ANTICIPATORY BREACH

• Anticipatory Breach of an Contingent Contract:

• When before the happening of the event on which the contract is dependant,
the either of the party excuses themselves from performing the contract.
• Consequences with the aggrieved party waiting for performance:
• The aggrieved party may treat the notice of breach as inoperative
• Contract remains operative
• Aggrieved party are required to perform their respective obligation
• When the party repudiating the contract chooses to perform:
• The party repudiating the contract may nevertheless choose to perform when
the time comes and the promisee will be bound to accept the same provided :
• The aggrieved party has not accepted the anticipating breach and ended the
contract.
 ANTICIPATORY BREACH

• Date of Assessment of Damages:

• The date on which the repudiation takes place.
• Where anticipatory breach is not accepted – damages will be counted when
actual breach takes place.

Section 39: Effect of refusal of party to perform promise wholly.—When a party

to a contract has refused to perform, or disabled himself from performing, his
promise in its entirety, the promisee may put an end to the contract, unless he
has signified, by words or conduct, his acquiescence in its continuance

• Two elements:
• Party must have refused to perform the contract
• The refusal must go to the whole of the contract
• Section 39: gives expression to the doctrine of Anticipatory Breach.
 ANTICIPATORY BREACH

Rash Behari Shaha v. Nirttya Gopal Nundy [1928 33 CWN 477]

Facts:
A agreed to purchase from B under two contracts 300 tons of sugar to be delivered at different
dates. A having failed to take delivery under the first contract, B claimed to rescind both the
contracts.
Held:
There was no refusal on the part of A to perform his promise in its entirety within the meaning of
Section 39 and B was not entitled to rescind the contract.
Partial Failure going to the Root of the Contract? - It is a question of fact.

Sumpter v. Hedges [(1898) 1 QB 673 CA]

• Facts:
• A Building Contractor had done a little more than half the work for which he received a part
payment. He informed the owner that he had no money and could not go ahead with the work.
• The owner finished the building himself using the building materials which the contractor had left
behind.
• Held: The contractor was entitled to get the value of the materials used.
• If the aggrieved party had the option to reject the work but nevertheless accepted it
in its partial state, he would be bound to pay to the other an amount worked on the
basis of quantum meruit.
 ANTICIPATORY BREACH

• Aggrieved Party’s Liability to offer Restitution :

• The aggrieved party may, after putting an end to the contract bring an action
for damages for breach but he will be bound under Section 64 to restore to the
other party the benefits he might have received under the contract.
 DAMAGES FOR BREACH
• A Contract is a promise supported by some consideration upon which either the
remedy of specific performance or that of damages is available.
• The party who is injured by the breach of contract may bring an action for
damages
• Damages means compensation in terms of money for the loss suffered by the
injured party.
• Burden lies on the injured party to prove his loss.
• Every action for damages raised two issues :
• Remoteness of damages &
• Measure of Damages
 DAMAGES FOR BREACH –
REMOTENESS OF DAMAGES
• Every breach of contract – leads to a chain of consequences
• But there needs to be an end to liability of the defendant
• Beyond a limit, damage should be said to be too remote and consequently
irrecoverable.
• Issue: Where to draw this line?
Hadley v. Baxendale [(1854) 9 Exch 341]
Facts:
• The plaintiff carried on an extensive business as miller. Their mill was stopped by a breakage of
the crankshaft by which the mill was worked.
• 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 defendant delayed the delivery due to neglect due to which the plaintiff did not receive
the new shaft at the appropriate time.
• The action was brought for loss of profits which would have been made during the period of
delay.
 DAMAGES FOR BREACH –
REMOTENESS OF DAMAGES
Hadley v. Baxendale [(1854) 9 Exch 341]
Held:
• Justice Alderson –
• Where two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in 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 be supposed to have been in the contemplation of both parties, at the time
they made the contract, as the probable result of the breach.
• On the basis of this reasoning, the defendants were held not liable for the loss of the profits because
in the great multitude of cases, where the shafts are sent for repairs, it doesn’t mean that the mill
has to stop.
• The plaintiff could have made alternate arrangements rather than waiting for the new shaft to
arrive.
• The fact that the mill was out of order due to non-availability of a new shaft is a special
circumstances which should have been communicated to the defendants.
 DAMAGES FOR BREACH –
REMOTENESS OF DAMAGES
• Hadley v. Baxendale gives us two Types of Damages:
• General Damages
• General Damages are those which arise naturally in the usual course of things from
the breach itself.
• Defendant is liable for all that which naturally happens in the usual course of things
after the breach.
• Special Damages
• Those damages which arise on account of special 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 in the
contemplation of the parties.
 DAMAGES FOR BREACH
Section 73: Compensation for loss or damage caused by breach of contract.—When a
contract has been broken, the party who suffers by such breach is entitled to receive,
from the party who has broken the contract, compensation for any loss or damage
caused to him thereby, which naturally arose in the usual course of things from such
breach, or which the parties knew, when they made the contract, to be likely to result
from the breach of it. —

Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract.—

• n an obligation resembling those created by contract has been incurred and has not
When
been discharged, any person injured by the failure to discharge it is 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 the non-performance of
the contract must be taken into account.
 DAMAGES FOR BREACH
• Section 73: incorporates two principles of Hadley v. Baxendale Case
• Compensation is not be given for any remote or indirect loss or damage
sustained by reason of will.
• Compensation will be recoverable for:
• Loss arising naturally in the usual course of things from the breach – OBJECTIVE
(REASONABLE MAN FORESIGHT)
• Parties knew at the time of the contract as likely to result from the breach –
SUBJECTIVE – EXTENT OF LIABILITY DEPENDS ON THE KNOWLEDGE OF THE PARTIES
• Burden of Proof is on the plaintiff to show:
• Damage is sustained PROOF OF LOSS IS
• Measure of Damages NECESSARY
• Liability in Ordinary Cases:
• As determined by Reasonable Man foresight.
 DAMAGES FOR BREACH
• Fazal Ilahi v. East Indian Railway Company [ILR (1921) 43 All 623]
• Facts:
• The plaintiff delivered to the defendant railway company’s parcel office at Cawnpore four
boxes of Chinese crackers for consignment to Allahabad where he needed them for a
festival on June 5th, but he did not disclose the purpose.
• The Company’s servants considering it unsafe to send crackers by parcel train actually
sent them by goods train and they reached only after the conclusion of the festival.
• The company required him to take delivery on payment of additional freight, which he
refused to pay and therefore the company sold the goods at a nominal price.
• He sued the railway company.
• The court disallowed the claim for profits which would have been made as the plaintiff’s
disallowed the claim for profits which would have been made, as the plaintiff’s special
purpose was not within the knowledge of the company.
• But the plaintiff succeeded in recovering the cost of the price of the goods sold by the
company in breach of the contract and Rs. 100 as damages and other incidental
expenses.
 DAMAGES FOR BREACH

• Assessment of Damages –
• Difference between the Market Price and Contract Price
• Actual Sale or Purchase of Goods not necessary in order to Claim the difference.
• Loss of Profits – Special Loss
Karandas H Thacker v. Saran Engg Company Limited [ AIR 1965 SCC 1981]
Facts:
• 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 and in consequence the buyer could not keep his date with the
corporation.
• The Corporation recovered from him the difference in the contract price and market price.
• The seller contended that he should not be held liable for anything because control price of
iron scrap was still the same and he had no knowledge of the contract of resale to the
corporation.
 DAMAGES FOR BREACH
Karandas H Thacker v. Saran Engg Company Limited [ AIR 1965 SCC 1981]
Held:
• On account of non-delivery of scrap iron, the buyer could have purchased the scrap iron from the
market at the same controlled price and similar incidental charges.
• This means that he did not stand to pay a higher price than what he was to pay to the
respondent and therefore he could not have suffered any loss on account of breach.
• The actual loss which he suffered on account of the breach was the result of his contracting to
sell 200 tons of scrap iron for export to the Export Corporation.
• As the seller was not aware of this contract, he could not have known the likelihood of the loss
actually suffered.

• Consequences of Delay in Transit –

• Whether to award damages or interest on damages is a question of fact.
 DAMAGES FOR BREACH –
MEASURE OF DAMAGES
• Claim for Damages is not Debt –
• A claim for damages for breach of contract only remains a claim till its
adjudication by the court and becomes a debt only after the court awards it.
• Damages are Compensatory – not penal
• Purpose of Damages is to put the aggrieved party in a position as if the loss had
never happened.
• Not to punish the defendant.
• Hence Motive of the breach is irrelevant.
• Inconvenience caused by breach
• Can be awarded provided the inconvenience is in the reasonable foresight of the
parties.
 DAMAGES FOR BREACH –
MEASURE OF DAMAGES
• Nominal Damages:
• No loss situation
• Where the plaintiff suffers no loss the court may still award him nominal
damages in recognition of his right.
• Illustration (a)
• Objective is to protect the negative interests of the party i.e.
• To compensate the aggrieved party for the expenses incurred and the losses suffered
in reliance on the contract.
• Principle of Restitutionary Interest:
• Restitutionary Award are sometimes given with an objective to not to
compensate the plaintiff for loss but to refrain the defendant from the benefit he
gained by breach of contract.
 DAMAGES FOR BREACH –
MEASURE OF DAMAGES
• Pre-Contract Expenditure
• Pre-contract expenditure may be recovered as damages if its was within the
contemplation of the parties.
• Punitive Damages:
• In ordinary cases, damages for mental pain and suffering caused by the breach
are not allowed.
• But may be allowed in special circumstances
• Test – Where the defendant knew that the breach would cause mental
suffering Addis v. Gramophone Co Limited [1909 AC 488]
• The House of Lords listed 3 situations in which mental pain and suffering can be taken into
account:
1. When a Banker refuses to pay a customer’s cheque when he has in his hands the funds of the
customer.
2. Actions for breach of Marriage
3. Actions where the vendor of real estate fails to make the title.
 DAMAGES FOR BREACH –
MEASURE OF DAMAGES
• Damages for Breach of Confidence – Usually allowed. Depends upon the
facts of the case.
• Injunction may be used against improper use of confidence.
Fraser v. Thames Television Limited [1984 QB 44 HL]
Facts:
• 3 actresses formed a rock group. They conceived an idea of producing a television serial based
on their experience to focus attention on their individual and group life so as to contrast their
collective character with their individual character.
• The idea was conveyed in the course of the oral negotiations to a television company.
• This resulted in written agreement which provided some payment to the ladies but forbade the
organizers from using the idea unless the ladies were given an opportunity to act and they
declined it.
• Without giving this opportunity, the company produced the programme with great commercial
success.
• Held: The company was held liable in damages to the ladies.
• The agreement implied a negative covenant.
 DAMAGES FOR BREACH –
MEASURE OF DAMAGES
• Duty to Mitigate
• Explanation to Section 73:
• In estimating the loss or damage arising out of a breach of contract, the means
which existed of remedying the inconvenience caused by non-performance of the
contract must be taken into account.
• The injured party has to make reasonable efforts to avoid the losses resulting
from the breach so that his loss is kept to the minimum.
• For eg:
• Sale & Purchase of Shares– Failure to make the payment
• The seller should immediate sell the shares to the another buyer.
• In case he / she waits and the prices go up / low, he cannot recover the enhanced
loss.
 DAMAGES FOR BREACH –
MEASURE OF DAMAGES
• Duty to Mitigate
• Auction Sales and Duty to Mitigate –
• In case the lowest / highest bidder refuses the buy, the tender / auction should be
awarded to the bidder next in line.
• Where the aggrieved party increases his loss by unreasonable conduct, he
cannot hold the defendant liable for the same.
• Court has to take into account the conduct of the injured party so as to see what
he out in reason to have done whereby his loss has been or would have been
diminished.
• Caution: Aggrieved party not to be inflicted with the unusual burdens.
 DAMAGES FOR BREACH –
MEASURE OF DAMAGES
• Contributory Negligence?
• Where the loss is either caused or increased by the claimant’s contributory
negligence.
• Injured party cannot claim damages to the extent of their contribution in the loss
 CAUSATION
• For a claim of damages and affixing liability, there has to be causal connection
between the breach committed and the loss or injury suffered.
• This causal connection is said to have been established if the act of the
defendant amounting to breach of the contract is the only “real and effective”
cause in relation to the injury or damage for which damages are claimed; in the
presence of multiple causes, the “dominant and effective” cause is to be taken
into consideration.
• Courts have developed = ‘But for’ test
Reg Glass Pty Ltd v. Rivers Locking Systems Ltd [(1968) 120 CLR 516]

The defendant failed to install the door as per the terms of the contract which required a security
door and locking system.
When the plaintiff’s property was subsequently burgled and a suit was filed for claiming damages,
the Court came to a conclusion that the burglary would not have taken place had the defendant
installed the door and locking system ; thus ‘but for’ the defendants breach, the loss would not
have been suffered
 CAUSATION
• Acknowledging the “but for” test, in Alexander v. Cambridge Credit Corp Ltd., McHugh JA
stated that the applicable tests ought to be decided on the basis of the facts and
circumstances and not limited to the “but for” test, rather, a commonsensical approach is to
be adopted to establish a causal connection between the breach of the contract and the loss
or injury.
• This was pointed out, on consideration of the fact that there may be numerous factors
causing the loss or injury and in such cases, the “but for” test may not helpful.

• Pannalal Jankidas v. Mohanlal and Another AIR 1951 SC 144

• the Hon’ble Supreme Court had stated that neglect of duty of the defendant to keep the
goods insured resulted in a direct loss of claim from the government (there was an ordinance
that the government would compensate for damage to property insured wholly or partially at
the time of the explosion against fire under a policy covering fire risk).
• The Supreme Court concluded that, “But for the appellants’ neglect of duty to kept the goods
insured according to the agreement, they (the respondents) could have recovered the full
value of the goods from govt. So there was a direct causal connection between the
appellants’ default and the respondents’ loss.” -
 LIQUIDATED DAMAGES AND
PENALTY
• English Law:
• The parties to a contract may determine beforehand the amount of
compensation payable in the event of a breach. It could be either:
• (a) Liquidated Damages or
• (b) Penalty
• Liquidated Damages:
• Where the sum is fixed and it represents a genuine pre-estimate of the probable
damage that is likely to result from the breach, it is liquidated damages. Or
• A sum less than the amount of probable damage is also regarded as liquidated
damages.
• Section 74: damages that are stipulated for
 LIQUIDATED DAMAGES AND
PENALTY
• Liquidated Damages v. Penalty –
• Court – it is a question of construction.
• Penalties are usually extravagant in nature and not proportionate to the loss
• Has the effect of deterring the parties from breaching the contract.
• Court’s Power to reduce Specified Amount –
• Courts usually are not favourable towards Penalty.
• Tend to reduce the amount of liquidated damages.
• In India – Distinction between Liquidated Damages and Penalty is
abolished
• Courts do not award damages beyond the stipulated amount.
• Actual Damages awarded are usually in proportion to the loss and not
exemplary.
 LIQUIDATED DAMAGES AND
PENALTY
• The named sum in the contract constitutes the maximum limit on the liability.
• Even the court cannot order damages beyond that
ENGLISH LAW INDIAN LAW
Both Liquidated Damages & Penalty are No difference between the two
recognised
Courts either the accept the amount of Courts consider the stipulated amount as
damages fixed under the contract or reject the maximum amount. Can award any
it but cannot alter with it amount within the range of stipulated
amount.
• Under Section 74: Whether the party suffers actual loss or not – Immaterial
• Breach and Right of Compensation has to be established
 LIQUIDATED DAMAGES &
PENALTY
Section 74: Compensation for breach of contract where penalty stipulated for:- When a
contract has been broken, if a sum is named in the contract as the amount to be paid in
case of such breach, or if the contract contains any other stipulation by way of penalty,
the party complaining of the breach is entitled, whether or not actual damage or loss is
proved to have been caused thereby, to receive from the party who has broken the
contract reasonable compensation not exceeding the amount so named or, as the case
may be, the penalty stipulated for.

Explanation.— A stipulation for increased interest from the date of default may be a
stipulation by way of penalty.

Exception — When any person 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.

Explanation.— A person who enters into a contract with Government does not necessarily
thereby undertake any public duty, or promise to do an act in which the public are
interested.
LIQUIDAT
ED
DAMAGES

AND
PENALTY
 LIQUIDATED DAMAGES
• Where a sum is named in a contract as the amount to be paid in case of breach,
regardless of whether it is a penalty or not, the aggrieved party is entitled to
receive reasonable compensation not exceeding the amount so named.
• The named sum – maximum amount of liability
• Courts to award a reasonable compensation not exceeding the stipulation.
• Objective – To knock down unconscionable or extravagant contracts.
State of Karnataka v. Shree Rameshwara Rice Mills [(1987) 2 SCC 160]
• A Clause in contract was in dispute which stipulated that in event of a breach of the contract, the
aggrieved party will determine the amount of compensation that it is entitled to and the same shall
be paid by the party breaching the contract.
• Held – Clause – Void – as it had the effect of making a party also a judge to decide breach and
assess damages. – Carries the potential of being misused.

• Statutory Compensation - where Compensation is payable in terms of a

statutory provision, the SC has held that the provision applicable would be the
one in force in law at the time of cause of action and not one that was in force at
the time of the contract.
 INTEREST ON DAMAGES
• Generally speaking, interest, whether it is statutory or contractual,
“represents the profit the creditor might have made if he had the use of the
money or the loss he suffered, because he had not that use.
• With respect to interests on damages, it is noteworthy that these damages
denote compensation to the plaintiff for being deprived of the damages till
the judgment is made in his favour, and not merely an increase in value of
damages done to keep up with the inflation.
• Thus, a court may grant interests from the date of filing of the suit till the
realization of the amount of damages
• In the context of contractual breaches, grant of interests on damages
greatly depends on the terms of the agreement, customs governing the
payments and the relevant statutory provisions
 INTEREST ON DAMAGES
• Interests that are granted as damages would be calculated at the rate of
interest that the person to whom it ought to have been paid would have
got on it, if it had been paid per the terms of the contract.
• Section 34 of the Civil Procedure Code provides that rates for such
interests shall not exceed 6%;
• however, where the liability has arisen out of a commercial transaction,
the rate of such interest may exceed 6% per annum, but shall not exceed
the contractual rate of interest or where there is no contractual rate, the
rate at which moneys are lent or advanced by nationalized banks in
relation to commercial transactions.
 PARTY RESCINDING THE CONTRACT
ENTITLED TO COMPENSATION
• Section 75: Party rightfully rescinding contract, entitled to
compensation.—A person who rightfully rescinds a contract is entitled
to compensation for any damage which he has sustained through the
non-fulfilment of the contract.