8

The Indian Contract Act, 1872: Remedies for Breach of Contract and Quasi-contract

Remedy means a course of action available to an aggrieved party when the other party breaches the contract. When one party to contract breaches the contract, the other party who is not at fault has certain remedy available to him. These remedies available are as shown in the chart below. But all the remedies are not available at the proper time. The aggrieved party has one or more remedies available, depending upon the facts and circumstances of each such case.

8.1 RESCISSION OF A CONTRACT—SECTION 39

The rescission of a contract means the right to the party to cancel the contract. In case of breach of contract, the other party may rescind the contract.

8.1.1 Effects of Rescission of a Contract

When the contract is rescind by the aggrieved party as a result of the breach of contract, it has the following effects:

1. The aggrieved party is not required to perform his part of obligation under the contract.
2. The aggrieved party can claim compensation for any loss.
3. The party is liable to restore benefit, if any.

In certain circumstances, on the application of any party to the contract, the court may also rescind the contract. If the court rescinds the contract, it is said that the court has set aside the contract. Generally, the court may set aside the contract when:

1. The contract is voidable.
2. The contract is unlawful.

8.2 SUIT FOR DAMAGES

It means the monetary compensation allowed for a loss. The purpose is to compensate the aggrieved party and not to punish the party at fault. In India, the rules relating to the damages are based on the English judgment of Hadley vs Baxendale. This case is a leading case on the remoteness of damage. The facts of case were—H’s mill was stopped due to the breakdown of the shaft. He delivered the shaft to a common carrier to repair it, and agreed to pay a certain sum of money for doing this work. H has not informed B that the delay would result into a loss of profit. B delivered the shaft a reasonable time after the repair. H filed a suit for the loss of profit. It was held that B is not liable for the loss of profit. The court laid down a rule that the damage can be recovered, if the party has a breach of contract. While determining the damages, the court takes the following points into account:

1. Inconvenience caused by the non-performance.
2. Motive of breach.
3. Manner of breach.

8.3 KINDS OF DAMAGES

Following are the different kinds of damages:

8.3.1 Ordinary Damages

These are the damages which are payable for the loss arising naturally and directly as a result of the breach of contract. The purpose of ordinary damage is that the injured party is to be put in the same financial position as he would have been, if the contract had been performed according to the terms of the contract. Ordinary damage is also known as the proximate damage or natural damage. It is also known as a general damage.

Example

Amar has agreed to give his car on lease to Aalap for a period of 1 year for ₹ 30,000. Amar later on refuses to give the car on lease and breaches the contract, and therefore, Aalap has to enter in lease for taking the car on lease for ₹ 40,000. In this case, Amar is liable to pay Aalap ₹ 10,000, the difference between the contract price and the price. Aalap pays for the lease of the car from some other person. Here, ₹ 10,000 is ordinary damage.

8.3.2 Special Damages

These are damages which are payable for the loss arising due to some special circumstances. It can be recovered only if the special circumstances which result in a special loss in the case of breach of contract and the party has a notice of such damage. If the defaulting party has no knowledge of the special circumstances, he will not be liable for the special damages.

Example

A sent a sample of his products for exhibition to an agent of a railway company for carriage to ‘New Delhi’ for an exhibition. The consignment note stated: ‘Must be at New Delhi Monday Certain’. Due to the negligence of the company, the goods reached only after the exhibition was over. Held, the company was liable for the loss caused by the late arrival of the products because the company’s agent was aware of the special circumstances.

8.3.3 Exemplary or Punitive or Vindictive Damages

These damages are a sum awarded beyond the pecuniary loss sustained by the injured party. Ordinarily, the damages for the breach of contract are intended to compensate the plaintiff and not to punish the defendant. But the exemplary damages are allowed not to compensate the party but as a means of punishment to the defaulting party. The courts generally do not award vindictive damage but it may award these damages in the case of:

1. Breach of contract to marry—loss based on mental injury.
2. Wrongful dishonor of the cheque-smaller the amount, larger the damage.

8.3.4 Nominal Damages

Where the party suffers no loss, the court may allow nominal damages, simply to establish that the party has proved his case and won. The nominal damage is very small in amount. The nominal damages are awarded only at the discretion of the court. The aggrieved party cannot claim the nominal damages as a matter of right.

8.3.5 Damages for Inconvenience

If the party has suffered physical inconvenience, discomfort, or mental agony as a result of the breach of contract, the party can recover the damage for such inconvenience.

Example

A photographer agreed to take photographs at a wedding ceremony but failed to do so. The bride brought an action for the breach of contract. Held, she was entitled to the damages for her injured feelings.

8.3.6 Liquidated Damages and Penalty

The party may specify an amount at the time of entering into a contract. The amount so specified may be (a) a liquidated damage or (b) a penalty. If the specified sum represents fair and genuine pre-estimate damages, likely to result due to breach, it is called as a liquidated damage. But if the specified sum is disproportionate to damages, it is called as a penalty. As regards the payment of the liquidated damages and the penalty, the court cannot increase the amount of damages beyond the amount specified in the contract. The penalty is imposed by a way of punishment for the breach of contract. While the intention for fixing the liquidated damages is to recover the damages that might arise due to breach.

Example

A gives B, a bond for the repayment of ₹ 1000 with interest at 12%, at the end of six months, with a stipulation that in case of default, the interest shall be payable at the rate of 75% from the date of default. This is a stipulation by a way of penalty, and B is only entitled to recover from A such compensation as the court considers reasonable.

8.3.7 Forfeiture of Security Deposit

This means, if there is any clause in the contract, entitling the aggrieved party to forfeit the security deposit in the nature of penalty. The court has held in the case of Chiranjit Singh versus Har Swarup that there is a difference between the security deposit and the earnest money. The earnest money is a part of the purchase price and is paid in advance. After the contract is completed, the earnest money is adjusted towards the purchase price. It means that if the party paying the earnest money fails to perform the contract, the other party can cancel the contract and retain the earnest money. It means the earnest money can be forfeited. The security deposit is for the performance of the contract. After the contract is completed, the security deposit is not adjusted towards the purchase price. And if the party fails to perform the contract, it cannot be forfeited as its forfeiture will amount to a penalty. Thus, the security deposit is not liable to be forfeited.

8.3.8 Payment of Interest

It is permissible when the contract provides that the payment of money is to be made on a particular date and the failure by a party will attract the payment of a specified percentage of interest. If the interest is in the nature of the penalty, the court may grant relief. If no rate of interest is specified in the contract, the party shall be liable to pay as per the law in force or as per the custom or usage of trade.

8.3.9 Cost of Suit or Decree

The court has also the discretion to award the cost of suit for damages, in addition to the damages for the breach of contract. This damage or remedy is available to the party who has won the case.

8.4 SUIT FOR A SPECIFIC PERFORMANCE

It means demanding an order from the court that the promise agreed in a contract shall be carried out. And the court may direct the defaulting party to carry out his obligation according to the terms of the contract. The party cannot demand a specific performance as a matter of right. The courts at their discretion grant specific relief.

8.4.1 When a Specific Performance Is Allowed?

The specific performance of a contract may be allowed by the court, where the subject matter of the contract is not an ordinary article of commerce or where the goods are not easily available in the market. The specific performance may be ordered by the court in the following situations:

1. Where the actual damages arising from the breach are not measurable.
2. Where the monetary compensation is not an adequate remedy.

8.4.2 When a Specific Performance Is Not Allowed?

In the following cases, specific performance is not allowed:

1. When the damages are an adequate remedy.
2. Where the performance of a contract requires a number of minute details and therefore, not possible for the court to supervise.
3. Where the contract is personal in nature.
4. Where the contract made by the company is beyond its power. (ultra-vires)
5. Where one party to contract is minor.
6. Where the contract is inequitable to either party.

Example

A agrees to sell B, an artist painting for ₹ 30,000. Later on, he refused to sell it. Here, B can file a suit against A for the specific performance of the contract.

8.5 SUIT FOR INJUNCTION

The injunction may be defined as an order of the courts restraining a person from doing something which he promised not to do. It means a stay order granted by the court. This order prohibits a person to do a particular act. Where there is a breach of contract by one party and the order of a specific performance is not granted by the court, the injunction may be granted. The injunction is granted by the courts at their discretion.

Example

Film actress agreed to act exclusively for W for one year and for no one else. During the year, she contracted to act for Z.

8.6 QUANTUM MERUIT

Quantum meruit is a Latin phrase. It means ‘as much as is earned’ i.e., in proportion to the extent of work done. It is right to claim compensation for the work already done. The quantum meruit arises only when the original contract is discharged. The claim on quantum meruit can be claimed by the party at fault and by the party at default.

8.6.1 Claim on Quantum Meruit by a Party Not at Fault

Following are the cases in which a claim on quantum meruit may arise:

1. When one party prevents the other from a completion of the contract.
2. Where the contract has become void before the completion of the contract.
3. Where an agreement is discovered to be void.

8.6.2 Claim on Quantum Meruit by a Party at Fault

Following are the cases in which a claim on quantum meruit may arise, even by the party at fault:

If a divisible contract is partly performed and refuses to perform a part of work, in such a case, the party in default may sue on quantum meruit, if the other party has enjoyed the benefits of the part of performance.

Example

A agreed with B to supply 500 units of TV before a particular date. A supplied 400 units only, before the date, and declared his intention not to deliver the remaining units. B retained the 400 units. A, therefore, is entitled to recover the price of 400 units on quantum meruit.

Sometimes, an indivisible contract is performed completely but badly. In such a case, the person who has performed the contract is entitled to claim the lump-sum, less a deduction for the work of poor quality.

Example

A agreed to paint and decorate B’s house for lump-sum of ₹ 1 lakh. The work was done but in a defective manner. The cost of remedy the defect was ₹ 15,000. Held, A could recover from B ₹ 1 lakh less ₹ 15,000.

8.7 QUASI-CONTRACT—SECTIONS 68–72

‘Quasi-contracts’ are known as ‘constructive contracts’ in English law. The Indian Contract Act describes such contracts as, ‘certain relations resembling those created by contracts’.

It is not a real or a true contract at all in the sense of law. The quasi-contract is created by law without any enforceable agreement. It is not based on the express or implied intentions of the parties. It is not based upon the offer and acceptance rule. It means a contract which lacks one or more of the essentials of the contract. It does not arise from any formal agreement but is imposed by law.

It is based upon the principle of equity. In other words, it is based upon the maxim of ‘nemo debet locuplat ex liene justlia’ i.e., no one should grow rich out of another person’s cost. It is also known as the contracts implied by law or implied contracts. The quasi-contracts give rise to obligations similar to that of a true contract.

8.7.1 Cases of Quasi-contract

In the following circumstances quasi-contractual obligations arise:

8.7.1.1 Supply of Necessaries to Incompetent Persons This is the supply of necessaries to a minor or a person of unsound mind. Here, the minor or the person of unsound mind is not personally liable. The property of the incapable person is liable. And where the incapable person does not own any property, nothing shall be payable.

8.7.1.2 Payment by a Person Who Is Interested in Transaction An interested person who makes the payment is entitled to recover the money from the person who was legally bound to make the payment.

Example

A supplies to B, a lunatic, the necessaries for maintaining his life. Here, A is entitled to recover the amount from B’s property.

8.7.1.3 Obligation of a Person Enjoying Benefit of Non-gratuitous Act A non-gratuitous act means the act which is not done free. The person who does some non-gratuitous acts for another is entitled to recover the compensation for such acts. The obligation of a person enjoying the benefit or the non-gratuitous act arises in respect of the lawful acts only.

Example

A pizza boy delivers a pizza at your door step by mistake instead of your neighbour who ordered it. You eat it having knowledge that it was ordered by your neighbour. You are required to pay for the same. You enjoyed something which was a non-gratuitous act.

8.7.1.4 Finder of Goods A finder of goods means a person who finds the goods belonging to another and takes them into his custody. A person who finds the goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee. A finder of goods has the duty to find the real owner and return the goods. He can reimburse the expense, he has incurred in preserving and maintains the goods from the original owner.

8.7.1.5 Money Paid Under the Mistake or Delivery of Goods Under Mistake If certain amount of money is paid or goods delivered to a person under a mistake, the person receiving the money or goods must repay it.

Example

A and B jointly owe ₹ 100 to C. A pays the amount to C, and B, not knowing this fact, also pays ₹ 100 to C. C is bound to repay ₹ 100 to B.

8.8 DISTINGUISH BETWEEN A QUASI-CONTRACT AND A CONTRACT

Matter	Quasi-contract	Contract
Intentionally Form	It is not intentionally formed but law-imposes upon the parties.	It is intentionally formed by the parties.
Essentials of contract	A quasi-contract does not posses all the essentials of a valid contract.	A contract possesses all the essentials of a valid contract.
Obligations	Obligations are implied upon by the law.	Obligations are mutually created by the parties.
Foundation	It is founded upon the principle of equity.	It is founded upon general principles of law of contracts.

LIST OF LANDMARK JUDGEMENTS

1. Hadley vs Baxandale (1854)

   The ordinary damages are recoverable, which arise due to the natural and probable consequences of breach.

2. Sunder Koer vs Rai Sham Krishan (1907)

   The stipulation to pay a compound interest at a higher rate of interest than the ordinary rate of interest may be regarded as a penalty.

3. Lumely vs Wagner (1852)

   The injunction is a mode of securing the performance in negative terms in the contract.

4. Trojan vs Nagappa (1953)

   The damages should be ascertained as on the date of breach, and any risk of profit or loss arising from a subsequent increase or decrease is entirely the vendor’s and has nothing to do with the other party.

5. Smith vs Green (1876)

   The damages may also be claimed from a breach of warranty or condition (Refer Sales of Goods Act—condition and warranty).

6. Union of India vs Vasudeo Agarwal (1960)

   If the amount fixed is a genuine pre-estimate of the loss in case of breach, it is the liquidated damages and will be allowed. But if the amount fixed is without any regard to the probable loss, it is a penalty and will not be allowed.

7. Tayya vs Gangayya (1927)

   Where the contract provides for the payment in a number of instalment but on failure to pay any instalment, the whole amount is to be paid forthwith, such stipulation is not a penalty and the contract can be enforced according to its terms.

8. Pudi Lazarus vs Johnson Edward (1976)

   The party to contract who seeks specific performance must in his turn, performs all the terms of the contract which he ought to have performed at the date of action.

9. UOI vs Tribhuwan Das Lalji Pate (1971)

   The party is not entitled to recover the damages, unless he has actually suffered some loss as a result of the breach of contract.

10. Planche vs Cocburn (1831)

    When one party abandons or refuses to perform the whole conduct, the compensation for the work done, may be recovered on the basis of quantum meruit.

11. Murlidhar vs Harishchandra (1962)

    If a person does not take steps to mitigate the loss subsequent on breach, he cannot claim the damages which are due to his neglect to take such steps.

12. Dakin and Co. vs Lee (1961)

    An indivisible contract for a lump-sum is completely performed but of a poor quality. In such cases, the person who has performed the contract is entitled to claim the lump-sum less a deduction for the work of a poor quality.

TEST YOUR KNOWLEDGE

1. What are the remedies available to an aggrieved party on the breach of contract?

   (Ref. Para-8.1,8.2,8.3,8.4,8.5,8.6)

2. Comment—The damages for the breach of contract are granted by a way of compensation, and not by a way of punishment.

   (Ref. Para-8.2)

3. Explain the case of Hadely versus Baxendale on which the damages are assessed for the breach of contract.

   (Ref. Para-8.2)

4. The damage for the breach of contract is awarded by the court for the purpose of punishing the defaulting party.

   (Ref. Para-8.2)

5. What kind of damage may be awarded in case of the breach of contract under the law of contract?

   (Ref. Para-8.3)

6. Explain the type of damages awarded in the case of a breach of contract.

   (Ref. Para-8.3)

7. Explain the ordinary damage with a suitable example.

   (Ref. Para-8.3)

8. What do you understand by special damages? When special damages are granted?

   (Ref. Para-8.3)

9. Distinguish between the ordinary and special damages.

   (Ref. Para-8.3)

10. Explain the vindictive damage.

    (Ref. Para-8.3)

11. Distinguish between the liquidated damages and a penalty.

    (Ref. Para-8.3)

12. Distinguish between the ordinary damages and liquidated damages.

    (Ref. Para-8.3)

13. What do you understand by a specific performance? When can a specific performance be granted by the court?

    (Ref. Para-8.4)

14. When can a specific performance not be granted by the court?

    (Ref. Para-8.4)

15. When can a court grant injunction order? Give its one suitable example.

    (Ref. Para-8.5)

16. Write a short note on quantum meruit.

    (Ref. Para-8.6)

17. When can the party to contract claim on quantum meruit? Explain.

    (Ref. Para-8.6)

18. Write a short note on quasi-contract.

    (Ref. Para-8.7)

19. Quasi-contract is based upon the principle of equity. Comment.

    (Ref. Para-8.7)

20. Explain any three examples or cases of quasi-contract.

    (Ref. Para-8.7)

MULTIPLE-CHOICE QUESTIONS

1. The remedies available to a person, suffering from the breach of contract are
   1. suit for damages.
   2. suit for injunction.
   3. quantum meruit
   4. all of the above.
2. The court may grant rescission where the contract is
   1. voidable.
   2. void.
   3. unenforceable.
   4. all of the above.
3. A specific performance may be ordered by the court when
   1. the contract is voidable
   2. the damages are an adequate remedy
   3. the damages are not an adequate remedy.
   4. the quantum meruit is not possible.
4. In case of breach of contract of sale of some antique goods, the court may grant a/an
   1. quantum meruit.
   2. rescission.
   3. specific performance.
   4. injunction.
5. In which of the following situations is specific performance not granted?
   1. Where the monetary compensation is an adequate relief.
   2. Where the contract is of a personal skill.
   3. Either (i) or (ii).
   4. Neither (i) nor (ii).
6. ..............means an order of the court restraining a person from doing what he promised not to do.
   1. Quantum meruit
   2. Rescission
   3. Injunction
   4. Specific performance
7. When a person has done some work under a contract and the other party repudiates the contract, then the party who performed the work can claim remuneration for the work done. This is based on the principle of
   1. rescission.
   2. quantum meruit.
   3. injunction.
   4. specific performance.
8. Remedy under the quantum meruit is available to a
   1. party at the fault.
   2. party not at the fault.
   3. either (i) or (ii).
   4. both (i) and (ii).
9. In case of the breach of contract, the compensation can be claimed for the
   1. remote consequences of the breach.
   2. the natural consequences of breach.
   3. indirect consequences of the breach.
   4. all of the above.
10. In case of a breach of contract, the Indian Law awards the damages
    1. for the loss of profit which may have been earned.
    2. which arose naturally.
    3. as matter of a penalty.
    4. to compensate party from physical loss.
11. A contracts to deliver 1000 bags of rice at ₹ 100 per bag on a future date. On the due date, he refuses to deliver. The market price on that day is ₹ 120 per bag. Which damages can be granted by the court?
    1. Ordinary damage
    2. Special damage
    3. Remote damage
    4. Vindicative damage
12. When there is a breach of contract, special damages are awarded
    1. when there are special circumstances.
    2. when there is a special loss.
    3. when there is a notice of the likely special loss.
    4. all of the above.
13. H’s mill stopped due to the breakdown of a shaft, which was delivered to B, a common carrier to be taken to the manufacturer for the repairs. H did not communicate to B that a delay in the delivery would cause a loss of the profits. For some reason, the delivery was delayed by B beyond a reasonable time. Here,
    1. H can rescind the contract.
    2. H cannot claim the loss of profits from B.
    3. H can claim the loss of profits from B.
    4. H can claim the loss of profits from the manufacturer.
14. The damages awarded by a way of punishment are called as
    1. special damages.
    2. ordinary damages.
    3. exemplary damages.
    4. nominal damages.
15. Nominal damages are awarded to indicate that the party has …..
    1. won the case.
    2. actually suffered the loss.
    3. suffered huge loss.
    4. suffered unusual loss.
16. Exemplary damage is also known as
    1. a vindictive damage.
    2. a punitive damage.
    3. a direct damage.
    4. either (i) or (ii).
17. Vindictive damages have been awarded
    1. for a breach of the promise to marry.
    2. for a wrongful dishonour of a cheque.
    3. either (i) or (ii).
    4. neither (i) nor (ii).
18. Nominal damages can be
    1. claimed by the aggrieved party as a matter of right.
    2. awarded only at the discretion of the court.
    3. claim by the aggrieved party for loss.
    4. all of the above.
19. Liquidated damages means an amount of the ….. that may result from the breach of contract.
    1. actual loss
    2. loss suffered
    3. pre-estimated probable loss
    4. pre-estimated actual loss
20. Liquidated damages are calculated …. a contract.
    1. at the time of making
    2. after making
    3. at the time of performance of
    4. either (ii) or (iii).
21. A stipulation for increased interest from the date of default is known as
    1. a compensation.
    2. a penalty.
    3. liquidated damages.
    4. damages.
22. A quasi-contract
    1. is a contract.
    2. is an agreement.
    3. has only a legal obligation.
    4. is not any of these.
23. Which of the following is incorrect?
    1. In a quasi-contract, the promise to pay is always an implication of law and not of facts.
    2. Quasi-contracts are not contracts at all.
    3. A quasi-contract is implied in law.
    4. A quasi-contract is not a real contract.
24. A quasi-contract is …… law.
    1. entered by
    2. creature of
    3. made by
    4. both (i) and (iii).
25. A saves B’s goods from fire.
    1. A is not entitled to compensation from B.
    2. A is entitled to compensation from B.
    3. B must compensate A.
    4. None of the above.
26. A finder of goods
    1. has no responsibility for the goods.
    2. is subject to the same responsibility as a bailee.
    3. is the owner of the goods.
    4. none of the above.
27. A and B jointly owe ₹ 10 lakhs to C. A pays the amount to C and B, not knowing this fact, B pays ₹ 10 lakhs over again to C.
    1. C is bound to repay the amount to B.
    2. C is bound to repay the amount to B and A jointly.
    3. C is bound to repay the amount to A and B equally.
    4. C is not bound to repay the amount to B.
28. In which of the following cases, specific performance can be allowed?
    1. Contract to sing a song.
    2. Contract to paint a picture.
    3. Contract to enter into partnership at will.
    4. None of the above.
29. Where the banker wrongfully dishonors a customer’s cheque, the court may award
    1. ordinary damages.
    2. special damages.
    3. exemplary damages.
    4. none of the above.
30. A contracts to repair B’s house and receives payment in advance. A repairs the house but not according to the contract.
    1. B is entitled to recover from A, the additional cost of making the repairs as per the contract.
    2. B is not entitled to recover any cost from A.
    3. B is entitled to recover a penalty from A for the non-performance of the contract.
    4. None of the above.

ANSWER KEYS

1. iv
2. i
3. iii
4. iii
5. iii
6. iii
7. ii
8. iii
9. ii
10. iv
11. i
12. iv
13. ii
14. iii
15. i
16. iv
17. iii
18. ii
19. iii
20. i
21. iv
22. iv
23. ii
24. ii
25. i
26. ii
27. i
28. iv
29. iii
30. i