CONSEQUENCES OF BREACH OF CONTRACT

A breach of a contract occurs when a party thereto, renounces his liability to perform his part of the contract either totally or partially. The failure to perform may take place when the time for performance has arrived or even before that. The law expects parties to a contract to perform their respective obligations and naturally frowns upon a contract’s breach. A breach is of two types:

• Anticipatory breach: This breach occurs when the promissory repudiates the contract before the promised date of performance. It is an announcement by the contracting party of his intention not to contract and that he will no longer be bound by it. 
• Present breach: This breach occurs at the time when the performance of the contract is due. This can be expressed by words or action. 

Section 73 to 75 of the Indian Contract Act deals with the consequences for breach of contract. In a sense, the liability and the course of action occurs in case of a breach of contract by either party. Therefore, the consequences for when either party commits a breach of the contract are: 

1. Claim damages for the loss sustained (Sec. 73)
2. Compensation for breach of contract where the penalty is stipulated for (Sec. 74)
3. Rights of a party rightfully rescinded a contract (Sec. 75)

Sec. 73 of the Act states that when there is a breach in contract, the party who suffers such breach is entitled to receive, from the party who has broken the contract, damages for any loss caused to him. “Damages” means compensation in terms of money. The burden lies on the injured party to prove his loss. Every action of damages raises two problems. The first problem being the remoteness of damage and the second one being the measure of damages. 

73(1) of the Act governs the measure of damages:

• General Damages: These naturally arise in the usual course of the breach, 
• Special Damages: These arise on account of unusual circumstances affecting the plaintiff. These are not recoverable. 

This section declares that compensation need not be given for any remote, indirect loss or damage suffered due to the breach. The principle in the above case can be divided into two parts- 

1. The claim should arise naturally and should arise as per the usual course of action, and 
2. The claim should be reasonable, in the sense that both the parties reasonably agree that if a certain act occurred then it would probably result in the breach of the contract.

In the leading case of Hadley v. Baxendale, the plaintiffs operated a mill, which they were forced to shut down when there was a breakage crankshaft of the steam. The defendants, a firm of carriers, were asked to carry the manufacture’s shaft as a pattern for a new one. The defendants were unaware that the plaintiffs’ mill had stopped working for want of the machinery they were to supply. They delayed the delivery by some neglect, and the consequence was that the plaintiff did not receive the new shaft for several days after they should have received it. The action was brought for the loss of profits which would’ve been made during the day. The defendants were held not liable for the loss of profit as they were unaware that the mill had stopped functioning due to the missing shaft. Sec. 73 in fact, is based on the Hadley v. Baxendale and the observations made therein. 

Sec. 74 of the Act states that if a sum is named in the contract as the amount to be paid and the contract has been broken, then, in case of such breach, the party complaining of the breach is entitled to such compensation, whether or not there is the actual damage caused by the party who has broken the contract. A sum previously agreed upon by both the parties in case of a breach of contract is known as liquidated damages. For example- A contracts with B to pay ₹1000, if he fails to pay ₹500 on a given day. A fails to pay B ₹500 on that day. B is entitled to receive compensation from A, not exceeding ₹1000. 

Sec. 75 lays down that a person who rightfully rescinds a contract is entitled to compensation for any damage he has sustained through the non-fulfilment of the contract from the other party. This section states that the party cancelling the contract will have to pay certain compensation to the other party even if there is no completion of the contract. For example- X a singer, contracts with Y, the manager of a hotel, to sing at his restaurant twice a week for the next two months and Y, agrees to pay her ₹400 for each nights performance. On the sixth night, X wilfully absent herself from the restaurant and Y consequently, rescinds the contract. Y is entitled to claim for compensation for the damage which X has caused through the non-fulfilment of the contract.

A contractual agreement is the backbone of trade and commerce of every country. Timely fulfilment of such contractual agreements is an important aspect in all commercial transactions. Any breach of such a contract would be frowned upon and will have legal consequences. A party who is injured by the non-fulfilment or non-performance of the contract may bring an action for damages. Provisions for a penalty for the breach of contract is necessary as it serves as a restraint for both the parties in leaving a contract midway, which may cause substantial harm to both.