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Breach of Contract

by Poorvi Chothani, Esq. LawQuest


www.lawquestinternational.com

September 9, 2011
IIM - Ahmedabad

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Introduction
A contract, which is a legal relationship can be brought to an end only by the Discharge of the Contract.

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Discharge of Contract may take place in various ways as follows by:

1. 2. 3. 4. 5. 6. 7.

Performance Attempted Performance or Tender Impossibility of Performance Agreement Breach of Contract Operation of Law Lapse of Time

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Definition of Breach of Contract


Breach of Contract under the Indian Contract Act, 1872: A legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. If the party does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract.

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Common Law Remedy


When a party has broken a contract the damages that the other party may receive should be such as may fairly and reasonably be considered either arising naturally from such breach or may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of its breach.

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Specific Performance
Specific Performance Only granted in rare cases: In a contract, parties only have: 1) The right to be compensated for damages; and 2) Do not have right to impose penalty on the other party or benefit from the breach. Specific performance is awarded only in transaction dealing with immovable property In most cases, a monetary equivalent is provided to compensate the innocent party for the breach of the contract Compensation is not a penalty. It is only aimed at putting the parties in the position they would have been in if the contract had been performed and not breached.

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Types of Damages
Unliquidated damages Liquidated damages Actual damages Punitive damages Nominal damages Damages for pain and suffering

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Remedies - Compensation
S.73 - 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 a 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.

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Forms of Breach of Contract


A party renouncing his obligations under the contract. A party by his own act making it impossible that he should fulfill his obligations under the contract. A party may fail to perform what he has promised.

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Classification of Breach
Actual breach or present breach. Anticipatory breach Where the party in default has repudiated the contract before performance is due or before it has been fully performed. Fundamental breach Where the party in default has committed what in modern judicial parlance (going to the root of the contract- condition or warranty)
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General Principles
When there is such a breach of contract by one party than the other party is entitled to discharge himself and does so, he is released from further performance. He is not obliged to accept any further performance from the party in breach.

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Consequences of Breach of Contract

The duty of the party in breach as well as his right of further performance comes to an end. Resulting in secondary liability to compensate in damages. Giving rise to the right of the injured party to claim damages.
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Compensation for Breach of Contract


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, 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

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Liquidated Damages
Section 74 of the Indian Contract Act: 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.

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Liquidated Damages and Penalty


Interchangeable use of the terms liquidated damages and penalty creates ambiguities Penalty deterrent value, often considered as a means of terrifying a party to fulfill his or her obligation. Exorbitant unconscionable Breach consists in paying of money and the sum stipulated is greater than the sum which ought to have been paid.

Liquidated damages genuine, covenanted pre-estimate of damages.


Nature of damages depends on facts of the case.

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Liquidated Damages
Nature of damages depends on: Character of transaction and Its special nature, if any, The relative situation of the parties, The statutory rights and obligations accruing from the transaction Intention of the parties as evidenced in the contract, The particular stipulation which is contended to be penal in nature If found to be burdensome or oppressive and it may operate in terrorem the provision could be found to be a Penalty.

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Liquidated and Unliquidated Damages


Under Indian law there is no qualitative difference between the nature of liquidated and unliquidated damages, as S.74 eliminates the somewhat elaborate refinement made under the common law between stipulations providing for payment of liquidated damages and stipulations in the name of penalty, which under the common is stipulation in terrorem; and a genuine pre-estimate of damages is regarded as liquidated damages, and is binding. A claim for liquidated damages stands on the same footing as a claim for unliquidated damages, and a party in breach of contract does not incur eo instanti a pecuniary liability, not as the injured party become entitled to claim a debt. The injured party is only entitled to sue for damages, and have them adjudicated upon.

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Common Law and Statutory Remedies

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Business Contracts
If the contract does not provide on the consequences of breach, the loss of profit is awarded as damages. The theme can be divided in to further parts. In a sale contract, there is a reference to the sale price. This makes quantification of the loss relatively easy. The courts have formulated specific principles in relation to this.
In other business contracts the assessment would be on the general principles.

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Expectation Loss and Reliance Loss


Expectation loss is that which the plaintiff would have received if the contract had been properly performed. For e.g. Loss of profit

Reliance Loss is that which the plaintiff suffered because he relied on the fulfillment of a contract and incurred certain expenses,

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Damages for mental pain and suffering


Ordinarily, in commercial contracts damages are not allowed for mental suffering. Damages, in principle cannot be recovered in a contract for injury to reputation. Damages for mental distress in contract are limited to a certain class of cases where the contract itself is to provide peace of mind and not in commercial contracts.

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Mitigation
The rule that the party in breach of contract be placed as far as money can do it, in as good a situation as if the contract had been performed, is qualified by one more principle: Which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part which is due to his neglect to take such steps.
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Rules of Mitigation
The plaintiff cannot recover the losses consequent upon the default of the defendant if the plaintiff could have avoided the loss by taking reasonable steps. If the plaintiff avoids or mitigates the loss, he cannot recover for such avoided loss even if he takes steps which are more than what was reasonable required of him. Where the plaintiff suffers loss or incurs expense despite taking reasonable steps to avoid or mitigate the loss resulting from the defendants default, he may recover the further loss due to expense.
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Mitigation Continued
The explanation of S.73 does not create an independent actionable duty to mitigate but a factor to be taken into account in assessing the damages naturally flowing from the breach. Mitigation also finds applications in the contract of employment. The duty of mitigation cannot impose any burden of an unusual nature.
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Damages In General
The consequences of a breach are limited by what the parties have expressly or impliedly provided, or the way the class of contract is normally conducted. Specific performance is awarded only in rare transactions dealing with immovable property. In most cases, a monetary equivalent is provided to compensate the innocent party to put him in the position he would be if the contract were performed. A party is only compensated for the loss and not allowed to impose a penalty or to make a gain from the breach. Parties come together in a contract for equal exchange a monetary equivalent is usually adequate compensation for a breach. Damages will not be too remote if they flow from the normal business position of the parties as the court assumes that this is known to both of them.
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Remoteness of Damage
Compensation must be in respect of the direct consequences flowing from the breach and not in respect of loss or damage indirectly or remotely caused.

The party who has suffered the loss should be placed in the same position, as far as compensation in money can do, as if the party in breach has performed his contract or fulfilled the duty.

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Hadley v. Baxendale
The Crankshaft Case delay in transportation by canal instead of rail Criteria for award parties intent, purposes and awareness. Absent explicit communication inference based on parties actions. Importance of communicating special circumstances. 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 as 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.

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Position in India
The principles of Hadley v. Baxandale are embodied in the first two paragraphs. The principle has two parts in limiting consequences of breach. First: if the parties have in express terms impliedly provided for the consequences, these should be followed. Second: Take the contract and its breach to be as it usually happens in general practice.

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Remoteness of Damage: Parties are bound by the consequences they have contemplated
The Supreme Court has recognized that Section 73 codifies the judgment in Hadely v. Baxendale. In Pannalal Jankidas v. Mohanlal it noted: The rule stated by Alderson B has consistently been accepted as correct; the only difficulty has been in applying it. The distinction drawn is between damages arising naturally (which means in the normal course of things) and cases where there were special and extraordinary circumstances beyond the reasonable provision of the parties. The distinction between these types is usually described in English Law as that between general and special damages.

The cases on remoteness of damage have abated as all commercial contracts have a clause stating: Neither party shall be liable to the other party for indirect or consequential losses.

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Remoteness of Damage Illustrations to S. 73


A contracts to pay a sum of money to B on a day specified. A does not pay the 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 day of payment. A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of Bs mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by closing of the mill.
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Remoteness of Damage Illustrations to S. 73


A contracts to sell and deliver to B, on the first of January, certain cloth which B intends to manufacture into caps of a particular kind, for which there is no demand, except at that season. The cloth is not delivered till after the appointed time, and too late to be used that year in making caps. B is entitled to receive from A, by way of compensation, the difference between the contract price of the cloth and its market price at the time of delivery, but not the profit which he expected to obtain by making caps, nor the expenses which he has been put to in making of preparation for the manufacture. A, ship owner, contracts with B to convey him form Calcutta to Sydney in As ship, sailing on the first of January, and B pays to A, by way of deposit, onehalf of his passage-money. The ship does not sail on the first of January, and B, after being, in consequence, detailed in Calcutta for some time, and thereby put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, loses a sum of money. A is liable to repay to B his deposit, with interest, and the expense to which he is put by his detention in Calcutta, and the excess, if any, of the passage-money which B lost by arriving in Sydney too late

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Remoteness of Damage: Parties are bound by the consequences they have contemplated
A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, does not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived if the boat had sailed according to the contract. After that date, and before the arrival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrive Explanation: The owner of the boat knows that the jute is being taken to Mirzapur for sale. It is understood between the parties that delay could cause loses to B.
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Remoteness of Damage: Parties are bound by the consequences they have contemplated
A delivers to B, a common carrier, a machine, to be conveyed, without delay, to As mill, informing B that his mill is stopped for want of 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 profit 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.

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Remoteness of Damage: Parties are bound by the consequences they have contemplated
A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery, at the time specified, and, in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, 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, the difference between the contract price of the price 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 Illustration: In a normal sale contract, the buyer may or may not have obligations to one or more third party. Further, a seller may or may not take responsibility for the obligation of the buyer to third parties.

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Remoteness of Damage: Parties are bound by the consequences they have contemplated
A, a builder, contracts to erect and finish a house by the first of January, I order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensations to C for the breach of his contract. A must make compensation to B for the const of rebuilding of the house, for the rent loss, and for the compensation made to C Explanation: The parties have shared the consequences of breach in the loss of tenancy.

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Measure of Damages - the Principle


A basis for damages has already been adopted in the principle restitutio in integrum, namely that when an injured person has suffered damage, he must, so far as money can do it, be restored to the position before he suffered it.

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Measure of Damages
In business contracts, parties come together to earn a profit so loss of profit is the most common claim.
In a sale contract - difference between the contract price and the price of the goods on the date of performance adequately measures the loss. Difficult to measure loss of profit in other contracts such as work contracts. The courts take a percentage of the contract value as a measure of loss.
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Murlidhar Chiranjilal v. Harishchandra Dwarkadas

The Sale of Canvas Case


Measure of damages has to be calculated as they would naturally arise in the usual course of things from such breach.

Place of purchase versus place of delivery.

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Measure of Damage
Illustrations:

A contracts to sell and deliver 50 mounds of saltpeter to B, at a certain price to be paid on delivery. A breaks his promise. B is entitle to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 mounds of saltpeter of like quality at the time when the saltpeter ought to have been delivered
The illustration is of the measure of damages. The general principle is to put the party in the position they would be in if the contract were performed. On the breach, B would have bought the goods from another source. If the price were higher, the difference would be his loss, would A should pay. In addition, the innocent party would incur additionally costs in looking for an alternative

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Performance Interest: Damages that should be awarded to the innocent party:


A hires Bs ship to go to Bombay, and there takes on board, on the first of January, a cargo, which A is to provide, and to bring it to Calcutta, the freight to be paid when earned. Bs ship does not go to Bombay, but A has opportunities as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense. Explanation: A can only receive the expenses incurred for arranging the alternate carriage.

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Performance Interest: Damages that should be awarded to the innocent party:


A contracts to let his ship to B for a year, from the first of January, for a certain price. Freights rise, and, on the first of January, the hire obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from the first of January. Explanation: A must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship, for a year on and from the first of January. The illustration does not mention the expenses for finding the alternate carriage.

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Performance Interest: Damages that should be awarded to the innocent party:


A, builder, contracts to erect and finish a house by the first of January in order that B may give possession of it at that 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 of January, it falls down and has to be re-built 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 the breach of his contract. Explanation: If the contract, had been performed, B would not have incurred the cost of rebuilding the house. Thus, A should reimburse him the cost of rebuilding the house. It was expressly understood by the parties that A had contracted to rent the house to C. The consequences of breach reached to the contract between B and C. Thus A should pay to B the rent B lost and the compensation he had to pay to C.

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Performance Interest: Damages that should be awarded to the innocent party:


A, a ship-owner, contracts with B to convey him from Calcutta to Sydney in As ship, sailing on the first of January, and B pays to A, by way of deposit, one-half of his passage-money. The ship does not sail on the first of January, and B, after being in consequence detained in Calcutta for some time and thereby put to some expenses, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, loses a sum of money Explanation: In the case of a breach of carriage, the passenger would have to buy another ticket and suffer miscellaneous expenses in the while. However, as a result of the delay in reaching Sydney, he would incur losses is remote to the contract which is for carriage.

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Business Contract Knowledge of Special Circumstances


A delivers to B, a common carrier, a machine, to be conveyed, without delay, to As mill informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine Explanation: The parties know that the mill will be idle if the contract is breached. As a result of this, the loss to the party will be of profit.

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Business Contract Usual Course of Business


A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of Bs mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.
Explanation: It is not shared between the parties the B has a mill and it would be closed if the delivery were delayed.

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Sale Contract
A contracts to sell and deliver 50 mounds of saltpeter to B, at a certain price to be paid on delivery. A breaks his promise. Explanation: B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 mounds of saltpeter of like quality at the time when the saltpeter ought to have been delivered.

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Sale Contract
A contracts to sell and deliver 50 mounds of saltpeter to B, on the first of January, at a certain price. B afterwards, before the first of January, contracts to sell the saltpeter to C at a price higher than the market price of the first of January.

Explanation: In estimating the compensation payable by A to B, the market price of the first of January, and not the profit which would have arisen to B from the sale of C, is to be taken into account.

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Sale Contract
A contracts to buy Bs ship for 60,000 rupees, but breaks his promise. Explanation: A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise.

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Sale Contract
A contracts to supply B with a certain quantity of iron a 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. Explanation: B must pay to A, by way of compensation, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it.

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W L Thompson Limited v. R Robinson (Gunmakers) Limited


Sale of Goods Award of Lost Commission Where the buyer wrongfully neglects or refuses to accept and pay for the goods - action against for damages for non-acceptance. The measure of damages - estimated loss directly and naturally resulting in the ordinary course of events, from the buyers breach of contract. Where there is an available market for the goods the measure of damages is the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no, time was fixed for acceptance, then at the time of the refusal to accept.

If on investigation of facts, one finds that it is unjust to apply that rule, in the light of the general principles mentioned above it is not to be applied.

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Charter v. Sullivan
The Car Dealer Case Consequences of excess demand over supply on loss of profit when no loss of profit -

Nominal damages

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Union of India v. M/s Commercial Metal Corpn The decisive element is the date of breach and the market price prevailing on that date. The law does not penalise the buyers inaction

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Anglia Television Limited v. Reed Compensation damages for expenses incurred prior to contract.

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C. & P. Haulage (a firm) v. Middleton The rental of a yard for engineering services Not fair to put plaintiff in a better position than he would been in had the contract been fulfilled

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Non-Pecuniary Losses
Generally, there is no award for inconvenience, pain and suffering. The exception is limited to contracts whose purpose is to provide peace of mind or freedom from distress. Jarvis v. Swans Tours Limited The Swiss holiday case Watts v. Morrow The house appraisal case The damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead.

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Liquidated Damages
A fixed amount decided by the contracting parties to be paid in the case of a breach. Maximum award subject to the stipulated amount. Award subject to actual damages excess amount considered to be penal in nature. Except if the stipulated amount is a genuine preestimate of the losses.

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Liquidated Damages
Compensation and Penalty: Actual damages are more than the total amount stipulated, the party pays only the total stipulated amount. Fateh Chand v. Balkrishna Dass: - The Sale of Property Case - In assessing damages the court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon Courts by S.74. As the party had not suffered any loss, no damages were awarded

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Liquidated Damages
Maula Bux v. Union of India: - The Poultry Supply Case Reasonable amount of earnest deposit. Forfeiture of earnest money under a contract for sale of property movable or immovable if the amount is reasonable, does not fall within S 74. If forfeiture is of the nature of penalty, S. 74 applies. Not required to prove actual loss or damages before he can claim a decree and the court is competent to award reasonable compensation in case of breach even if no actual damage is proved.

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Liquidated Damages Maula Bux


To summarize the court interpreted Section 74 as follows:
1. The court should assess the actual damages even in the case of contracts where damages are stipulated. Actual damages not exceeding the stipulated amount should be awarded. 2. In some cases, it may not be possible to assess damages. In such cases, if the stipulated sum is genuine pre-estimate, it should be awarded or taken into consideration for working out a reasonable compensation.
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Oil and Natural Gas Corporation Limited v. SAW Pipes Limited


Supply of Pines to Oil Rigs Express agreement that recovery from the contractor for breach of the contract is pre-estimated genuine liquidated damages and is not by way of penalty duly there is no need to prove that loss is suffered. Overturned the arbitrators findings.

In a case where agreement is executed by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used therein.
It is for the party who contends that stipulated amount is not reasonable compensation, to prove the same. The emphasis of the court was on the terms experts, genuine pre-estimate, and unambiguous.

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Award of Damages Case-By-Case Determination


Terms of the contract.

If the terms are clear and unambiguous liquidated damages to be granted unless claim is unreasonable or penal in nature.
Section 74 is to be read along with Section 73 - therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. Award reasonable compensation granted even if no actual damage is proved.

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Earnest Money and Deposit


1. Earnestmeant something given for the purpose of binding a contract, something to be used to put pressure on the defaulter if he failed to carry out his part.

2.

Deposit.is a guarantee that the contract shall be performed.

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Earnest Money and Damages


Earnest money did not preclude the party from claiming damages for breach.
1. 2.
3. 4. 5.

It must be given at the moment at which the contract is concluded It represents a guarantee that the contract will be fulfilled or, in other words, earnest is given to bind the contract It is part of the purchase price when the transaction is carried out It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.
Requirement of reasonableness cannot be imposed on earnest deposit has been approved in subsequent Supreme Court judgements.

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Mitigation of Damages
Innocent party has a right to receive damages, he must also mitigate his losses and not further raise the liabilities of the party in breach

A plaintiffs duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.

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Recent Judgments 2011


Gatta Rattaiah v. Food Corporation of India confirming Fateh Chand v. Balkishan Dass Under the common law a genuine pre-estimate of damages by mutual agreement in regarded as a liquidated damages and binding between the parties. A stipulation in a contract seeks to terrorize it is a penalty and the Court refuses to enforce it awarding to the aggrieved party only reasonable compensation. When evidence shows that the extent of the damages or loss suffered by the party is less no one can be allowed to enrich by taking undue advantage of the forfeiture clause.

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Recent Judgments 2011


MSK Projects v. State of Rajasthan

There is a reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract cannot be gainsaid. In BSNL v. Reliance Communication Ltd. (2011) SC: Liquidated damages serve the useful purpose of avoiding litigation and promoting commercial certainty and, therefore, the court should not be astute to categorize as penalties the clauses described as liquidate damages.

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Recent Judgments 2011


ONGC v. Oil Country Tubular Limited

Quantum of damages must be determined with reference to the provisions as it stood, at the time of commission of the breach where the parties agreed to pay damages in case of breach of contract.
Confirming Saw Pipes has recognized the importance of leading evidence to prove damages or reasonable compensation. Quantum of damages cannot be awarded only on the basis of presumption and assumption.

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Recent Judgments 2011


Herbicides (India) Ltd. v. Shashank Pesticides P. Ltd. Innocent party is entitled to receive compensation from the guilty party.

Innocent party entitled to direct damages but not remote damages. No need to prove the actual loss/damage suffered when contract has a liquidated damages clause.
Reasonable damages cannot exceed the amount of liquidate damages stipulate in the contract If the amount stipulated on account of breach of contract is shown to be by way of penalty, the innocent party suffering on account of the breach is entitled only to a reasonable compensation and not the amount stipulated in the contract. If it is not possible to assess damages the amount stipulated in the contract as liquidated damages should normally be accepted as a fair and reasonable preestimate of damages. The law imposes a duty upon the Plaintiffs to take all reasonable steps to mitigate loss

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The Situation Abroad


In the US stipulations for liquidated damages are intended to estimate damages. Differs from state to state but subject to two principles:
Uncertainty whether harm caused is difficult to calculate Reasonableness in proportion to actual or anticipated harm

Most common law countries do not allow penal damages


India does not differentiate between liquidated damages and penalties contractual damages may be granted even if intent was to penalize subject to certain criteria. Civil law countries penalties allowed but recently have been reduced by courts based on circumstances.
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