Contract Law pdf-Breach of Contract measure of Damages and liquidated Damages and Penality
BA LLB 3rd semester for Contract-I Law pdf
Q. 5. Elaborate on the following with regard to Breach of Contract : (a) Measure of Damages (b) Liquidated Damages and Penality. Ans. (a) Measure of Damages After the extent of loss which the plaintiff can recover has been determined, it will be necessary to evaluate it in terms of money. In this connection, following two principles deserve special consideration : (1) Compensatory Nature of Damages : As aptly remarked by ANSON, “Damages for breach of contract are given by way of compensation for loss suffered, and not by way of punishment for wrong inflicted. The measure of damage is therefore not affected by the motive or manner of the breach.” In fact, “The object of awarding damages for breach of contract is to put the injured party into the position in which he would have been had the contract been performed.” “The normal rule for computing damages for non-supply of the goods would be the difference between contract price and the market price of such goods at the time when the contract is broken. If there is no available market, at the place of delivery, the market price at the nearest place or the price prevailing in the controlling market may be taken into consideration. This was held by the Division Bench of Delhi High Court in M/s. Saraya Distillary, Sardar Baggar v. Union of India, Further, “what the buyer is deprived of in the usual course delivery of things by non-delivery is the value of the goods at the time and place of the delivery, less price payable to him under the contract. The loss of value is the natural result of the breach, the only kind of damage that ensures in the usual course of things. The quantum of damages on account of the breach of such contract would be the difference between the contract price and the market price of the goods in question at the time when the contract is broken. The provisions contained in section 37 do not envisage that the buyer must resort to actual purchase and suffer, loss before claiming damages.” In Devender Singh v. State of U.P., The Allahabad High Court “The measure of damages in contract is compensation for the consequences which flows as a natural and capable consequence of the breach or, in other words, which could be foreseen”. It may be noted here that damages for anguish and vexation caused by breach of contract cannot be awarded in an ordinary commercial contract.
(2) Duty to mitigate damages suffered : Explanation to Section 73 provides : “In estimating the loss or damage arising from a breach of contract, the means which existed or remedying the inconvenience caused by the non-performance of the contract must be taken into account.” In M.N. Gangappa v. A.N. Setty and Co. and another, the Supreme Court reaffirmed this principle and observed that the rule for compensation of damages on the basis of the difference between the rate mentioned under the contract and the lowest market rate at the time of the breach of contract was neither “illegal nor unreasonable”. Yet another important Supreme Court case on the point is M’s. Murlidhar Chiranjilall case, wherein the Supreme Court examined the scope of Section 73 and the explanation thereto, while dealing with a case arising out of a breach of contract of sale of goods. After examining the scope of Section 73 of the Act, the Supreme Court has laid down the principles on which damages for the breach of Contracts have to be determined. The Supreme Court observed : “The two principles on which damages in such cases are calculated are well-settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed; but this principle is qualified by a second, 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 of the damages which is due to his neglect to take such steps. These two principles also follow from the law as laid down in Section 73 read with the explanation thereof.” Though the case dealt with by the Supreme Court was of a breach of a commercial contract of sale of goods, as the decision was rendered on the construction of Section 73 read with explanation thereof, the principles laid down by the Supreme Court are of general application in respect of all breaches of contracts to which Section 73 of the Act applies. The general principles deducible from the judgment of the Supreme Court are as follows: (i) As far as possible a party who has proved a breach of contract is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. (ii) A statutory duty is cast on the plaintiff who has proved the breach of the contract of taking all reasonable steps to mitigate the loss consequent on the breach of the contract. (iii) If the plaintiff, who proves the breach of the contract but fails to prove that he took all reasonable steps to mitigate the loss consequent on the breach of the contract, he will be debarred from claiming damages to the extent he could have mitigated the same by taking such steps. In Banco de Portugal v. Waterlow, Lord Macmillan aptly observed: “Where the sufferer from a breach of contract finds himself in
consequence of that breach placed in a position of embarrassment the measure which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.” The above observations were quoted with approval and applied by the Madras High Court in R.J. Mohamed Jacub Sahib v. The Indian Bank Ltd., Madras. (b) Liquidated Damages and Penalty Section 74 provides : “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 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.” The essential elements of Section 74 are as follows: (1) when a contract has been broken; (2) if a sum is named in the contract payable on breach or any other stipulation by way of penalty; (3) whether or not the actual loss is proved to have been caused thereby; (4) the party complaining the breach is entitled to receive reasonable compensation from the party who has broken the contract; and (5) the compensation should not exceed the amount named or the For example, P and Q agreed to play a wrestling match on the condition that the party who did not appear on the day fixed for the match would give Rs. 500 to the opposite party. P did not turn up on the fixed day. Q sued P for Rs. 500. Q will succeed in his suit but he will get only reasonable compensation not exceeding Rs. 500. If the court deems fit, it may allow Rs. 500 i.e., the sum named in the contract. If the court does not deem fit to award Rs. 500/- in accordance of the facts and circumstances of the case, it may award any sum below Rs. 500. In short, the court may award any sum not exceeding Rs. 500.
Explanation to Section 74 further adds that: “a stipulation for increased interest from the date of default may be a stipulation by way of penalty.” Section 74, however, provides an exception : “in case of bail-bond when any person enters into any bail-bond recognizance or any 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, the person giving the bond “for the performance of any public duty or act in which the public are interested” shall be liable upon the breach of the condition of any such instrument, to pay the whole sum named or mentioned therein”. Explanation to above exceptions adds by way of clarification that : “a person who enters into a contract with the Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.” Illustration to Sec. 74 (a) A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on that day B is entitled to recover from A such compensation, not exceeding Rs. 1,000 as the Court considers reasonable. (b) A contracts with B that, if A practises as a surgeon within Calcutta, he will pay B Rs. 5,000. A practisee as a surgeon in Calcutta. B is entitled to such compensation, not exceeding Rs. 5,000 as the Court considers reasonable. (c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty. (d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 percent at the end of six months, with a stipulation that, in case of default , interest shall be payable at the rate of 75 per cent, from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable. (e) A, who owes morey to B, a money-lender, undertakes to repay him by delivering to him 10 maunds of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 maunds. This is a stipulation by way of penalty and B is only entitled to reasonable compensation in case of breach. (1) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that, in default of any installment, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms. (g) A borrows Rs. 100 from B and gives him a bond for Rs 200 payable by five yearly installments of Rs. 40 with a stipulation, that, in
default of payment of any installment, the whole shall become due. This is a stipulation by way of penalty, Explaining the provisions contained in Section 74 the Supreme The court further observed : Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases: (i) where the contract names sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty… The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74: reasonable compensation not exceeding the penalty stipulated for. 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.” Explaining the expression “the contract contains any other stipulation by way of penalty” the Supreme Court remarked : “In our judgment, the expression…..comprehensively applied to every covenant involving a penalty whether it is for payment on breach of the contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon the courts by Section 74. In all cases, therefore, where there is a stipulation in the nature of a penalty for forfeiture of an the amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the Court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture.” Regarding the scope of Section 74, the Supreme Court finally observed: “…..the application of the enactment is not restricted to cases, where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party, it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated.” In Jhurai Lai v. Mohin Das Bose, while construing a compromise decree to find out whether the default clause was penal or not, the Allahabad High Court observed the following: “Coming to the point as to what is a penal clause, certain facts have to be borne in mind. The first fact which should weigh in deciding the question would be as to whether the decree-holder was claiming something more than what he claimed in a suit, or he claimed in the execution by way of penalty only that much of the just claim to which
he was entitled to. The second consideration should as to whether the just part of the claim was conceded by the defendant-debtor in complying with the terms of the compromise within a certain period. And third the condition should be as to whether the judge failed to comply with the terms of the compromise without any just and proper cause so as to disentitle him to the concession allowed to him by the decree-holder under the compromise. The Court further added, “In a case where only a part of the prima facie just claim is given up or conceded in consideration of a certain condition and on failure to comply with that conditions, the default clause comes into operation, it cannot be said that it is penal because nothing is demanded from judgment-debtor by way of penalty.” Stipulation by way of penalty or forfeiture clause in bail-bond, recognizance or other instruments under the order of State or Central Government: As pointed out earlier, anexception to Section 74 provides that when any person enters into 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. In order to attract this exception following essentials must be present”: (1) A bail bond, recognizance, or other instrument is entered into with the Government. (2) The contract is entered into under the provisions of any law or under the orders of the Central or State Government. (3) The instrument is for the performance of any public duty or act in which the public is interested. (4) In case of breach of contract, the whole sum named or mentioned in the instrument shall be payable. Thus where the plaintiff has committed a breach of the contract and one of the clauses of the contract gives discretion to the Government to forfeit the security deposit, such forfeiture operating as a penalty, the a court cannot in view of the exception to Section 74 of the Contract Act, 1872, directly relieve the party concerned of the hardship on that score. It may also be noted that recourse to Section 74 can be taken only in the event of a breach of contract. Recourse to Section 74 cannot be taken if there is no concluded contract.