DAMAGES

CONSEQUENCES OF BREACH OF CONTRACT

LIQUIDATED DAMAGES

• In a contract, the parties may name a sum to be payable in event of breach. If

such sum is genuine pre-estimate of loss it is termed as liquidated damages,
and if it bears no reflection on the loss suffered, it is termed a penalty.

• Whether it is a penalty, forfeiture or liquidated damages is not dependent on

the inclusion of such words in the instrument/agreement/contract but
depends on the intent of the parties to it.

PURPOSE OF LIQUIDATED DAMAGES

 It facilitates calculation of risks.

 It alleviates the difficulties and expenses of proving actual damage or loss

and facilitates recovery of damages.

 It avoids the difficulties in assessment, even where the consequences of

breach are ascertainable. It avoids the risk of under compensation.

 It gives the promisee an assurance that he may safely rely on the fulfillment
of the promise.

Section 73: Compensation for loss of 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 usual course of things from such breach, or
which the parties knew, when they made the contract, to be likely to result from such breach.
Such compensation if not to be given for any remote and indirect loss or damage sustained by
reason of the breach.
Remedies for breach of Contract.

• Recession of Contract.
• Suit for Damages.
• Suit for Specific performance.
• Suit for Injunction.
• Quantum Meruit.
Claim for extra payment.--An agreement was entered into by a company and the government and under
the terms of the contract the work entrusted to be performed was required to be completed within a year.
The company was asked to spread-over the work in 3 years. The company agreed on condition that extra
payment will have to be made in view of the increased rates of either material or wages. To this proposal
no intimation was communicated to the company. The company completed the work within spread-over
period and submitted bills including the extra payment. The Supreme Court has held that both in equity
and in law the company was entitled to receive the extra payment for the work done as there was no
dispute that the rates of material, etc. has increased during the period. Hyderabad Municipal Corpn. v. M.
Krishnaswami Mudaliar, AIR 1985 SC 607.

Breach of contract.--When there is a contract between the parties of supply of goods and that contract is
breached, then a claim for damages is made, the relevant date for computing the amount of damages is
the date of the breach of contract and for the purpose for working out the amount of damages what is to
be seen is the prevailing market price of the goods on the date of breach, and that price is to be
compared with the price of the goods agreed in the contract and if the market price is higher than the
contractual price, damages are to be awarded. Goods purchased subsequently sold at profit will not be
relevant for the purpose of deciding entitlement of party two suffered because of breach of contract. V/o
Tvazhprom Export v. Mukund Ltd., (2006) 1 BC 504 (Bom).

Breach of contract.--When petitioner extended validity of its offer without any challenge to terms and
conditions maintained in contract form, cannot claim any right on account of enhanced rates when it
extended the validity of its offer with clear understanding that other terms and conditions were accepted
by him. Mukati Transformers Ltd. v. Jaipur Vidyut Vitran Nigam Ltd., (2006) 1 BC 455 (Raj).

Consequence for breach.--A student who has executed a bond in favour of the State Government for
prosecuting his studies in U.S.A at the expense provided by the government is liable to pay compensation
for breach of the terms of the bond. M. Sham Singh v. State of Mysore, AIR 1972 SC 2440.

Black listing of contractor.--Blacklisting of contractor without giving notice and informing reasons,
therefore, violative of principles of natural justices. Well Project Manpower Service v. Indian Council of
Agricultural Research, (2006) 1 BC 256 (Del).
When a contractor is black-listed by a department, he is debarred from obtaining a contract. If a person
raises a bona fide dispute in regard to a claim, so long as the dispute is not resolved, he may not be
declared to be a defaulter. B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd., (2006) 11 SCC 548.
S. 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 of 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 so 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.
Illustrations

( 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 R. 1,000, as the court considers reasonable.
1. A contracts with B that, if a practices as a surgeon within Calcutta, he will pay B Rs. 5,000, A
practices 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.
Section 74--Notes
A clause in a compromise which provides for payment of a larger sum in default of payment of smaller
sum, is in terrorem, penal in nature and is void. But were the decree is for a beggar amount and the
decree-holder agrees to accept a smaller amount if paid within the stipulated period and in default of such
payment the decretal amount would be payable is not penal. This clause for payment of the bigger
amount in default is not of a penal nature. It is really withdrawal of the concession and is valid. Prithvi
Chand Pranchand Sablok v. S.I. Shinde, AIR 1993 SC 1929.
A contract makes a provision for payment of money in instalments with a stipulation that on default being
made in payment of any of the instalments the whole amount was on the date of the bond a debt due, but
the creditor for the convenience of the debtor allowed it to be paid by instalments intimating that if default
should be made in the payment of any instalment he would withdraw the concession, then the stipulation
that the whole amount of the balance becomes payable would not be penal. If, on the other hand, on a
proper consideration of the terms of the contract, the court comes to the conclusion that the debt itself
arose or becomes due and payable by the debtor only on the respective dates fixed for the instalments
the stipulation that on default being made in the payment of any instalment the whole of the balance
should become due and payable would be in the nature of a penalty. P.K. Achuthan v. State Bank of
Travancore, AIR 1975 Kerala 47 (FB); K.P. Subbarama Sastri v. K.S. Raghavan, AIR 1987 SC 1257.

Penalty for breach.--The earnest money deposit must be treated as by way of liquidated damages and
such amount will be liable for forfeiture on account of any default by him and thus respondent can insist
upon retention of money in excess of sum ordered by Company Judge. [ Narendra Kumar Nakhal v.
Nandi Hasbi Textiles Mills Ltd. (In Liquidation) Bangalore, (1998) 1 BC 304 (Kant).]

Compensation for breach of contract.--Petitioner had entered into milling contract with Food
Corporation for conversion of 130 tonnes of Harhar Dal. Dispute arose due to late delivery of Harhar Dal.
Arbitrator's award in favour of Food Corporation was made rule of the court. A perusal of clause XX of the
agreement showed that in the event of breach of contract, the FCI had the right to recover liquidated
damages on account of administrative and other expenses incurred by it and on the basis of any actual
loss or damage. The said clause specifically provided that FCI shall be entitled to recover liquidated
damages on account of administrative and other expenses suffered by it. Apart from the above, as per
section 74 of the Indian Contract Act, 1872 no details were to be given of the administrative and other
expenses incurred by the FCI. Bansal Industries, Palwal v. Food Corporation of India, (2007) 2 BC 73
(P&H).
Refund of earnest money with interest.--Where the auction sale was conducted by railway
administration, it was not entitled to retain the earnest money, as found by the Arbitrator. Railway
administration is liable to refund it upon first demand, therefore, by the bidder. Nathuni shaw v. Union of
India, AIR 2007 (NOC) 2179 (Cal).

Forfeiture of advance.--An agreement of sale was entered between parties and the appellant had
advanced a sum of Rs. 50,000 towards part payment of the consideration. Before the sale deed could be
executed, a notification under section 4 of the Land Acquisition Act was issued. Parties were aware that
unless and until the notification was set aside, the agreement for sale could not be enforced by either of
them. Respondent could not have forfeited the amount of advance. Thiriveedhi Chnnaiah v. Gudipuda
Venkata Subba Rao (D) by LRs., AIR 2007 SC 2439.

Forfeiture of earnest money.--Forfeiture of earnest money permissible only after concluded contract
comes into being. Yogesh Mehta v. Custodian Appointed under special court, (2007) 2 SCC 624.

S. 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-
fulfillment of the contract.
Illustration
A, a singer, contracts with B, the Manager of a theatre, to sing at his theatre for two nights in every week
during the next two months, and B engages to pay her 100 rupees for each night's performance. On the
sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B is
entitled to claim compensation for the damage which he has sustained through the non-fulfillment of the
contract.

HARDLEY V BAXENDALE [AT PAGE 124 OF BOOK]

The question before the court was:-
 Whether Hardley (the mill owner) could recover damages, including “lost profits” from Baxendale
(who repaired the crankshaft) and caused the delay in delivery ?
 Whether Baxendale knew about the consequences of the failure to deliver on time, as was
contracted, between him and Hardley ?
 Two Rules in Section 73:---
• Arising naturally from breach
• Whether parties were aware of consequential fallout of breach.
• Remoteness or Indirect loss will not attract Sec.73.
Murlidhar Chiranjilal M/s v. Harishchandra Dwarkadas AIR 1962 SC 366.
[Statutory duty= reasonable steps to mitigate loss due to breach]
 M.SHAM SINGH V. STATE OF MYSORE AIR 1972 SC 2440.

CONSEQUENCE OF BREACH OF BOND

 Parties signed a contract: Executed a Bond to secure Scholarship.

 One of the parties, here Mr.X defaulted on the promise and willfully committed a
breach of the bond he executed.
 The other party to the Bond, namely the State Govt filed suit for damages alleging
contravention of the terms of the agreement.
 High Court held that in consequence to deliberate breach the state shall be secured
damages from Mr.X .
 Supreme Court held upheld the finding of the High Court and dismissed the appeal with
costs.

Recollect Again this Section!

PENALTY

Section 74: when a contract has been broken, if the 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, 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.
• Explanation: When a person enters a bail bond, recognizance or other
instrument of the same nature…upon breach…pay the whole sum mentioned
therein.
• Explanation: A person who enters into contract with govt. does not thereby
undertake any public duty or promise to do an act in which public are
interested.
Cases
Fateh Chand v. Balkishan Das AIR 1963 SC 1405.
Oil and Natural Gas Corpn. Ltd v. SAW Pipes Ltd., AIR 2003 SC 2629.
 Remember !

Section 75: A person who rightfully rescinds a contract is entitled to

compensation for damage which he has sustained through the non-
fulfillment of the contract.

Stipulations of penal nature in contracts may make it a penalty: Court to

decide after taking relevant aspects into consideration.

Case.

K.P. Subbrama Sastri v. K.S.Raghavan AIR 1897 SC 1257.

NATURE OF CONTRACTUAL AGREEMENT

Quantum Meruit.
Quasi Contract.
QUANTUM MERUIT.
* The expression quantum meruit means “ the amount he deserves” or what
the job is worth”

* Payment for reasonable value of services rendered.

* Allows for costs, overheads and profits-Often considered the “holy grail”

* Based on law of restitution and flows from principles of unjust enrichment.

* Cannot be made in case of active contract or contract on foot.

 THREE ELEMENTS OF UNJUST ENRICHMENT.

1. Principal must have enriched by receipt of benefit.

2. Benefit must have been gained at the contractors’ expense.

3. Therefore unjust in circumstances to allow the principal to retain the benefit.

HOW DOES A QUANTUM MERUIT CLAIM ARISE?

1. Contract but price not fixed.( Contractor to be paid reasonable price for labour +
materials used)

2. Quasi Contract. ( Contractor to be paid reasonable sum for work done) No

payment where negotiations stipulate expressly exit clause between parties so
negotiating and where principal gains no benefit.)

3. Work outside a contract.(Implied contract forms the basis of this entitlement)

4. Work under a void, unenforceable or terminated contract.

CAUSE OF ACTION FOR QUANTUM MERUIT.

* Void contracts.

* Uncertain contracts.

* Unenforceable contract.

* Contract repudiated by principal.

* Having become unenforceable due to operation of a statute.

 QUANTUM MERUIT

Grey Areas of judicial determination: ----

* In a quantum meruit claim court awards money payment not in reference to a contract.
There must be repudiation of contract.

* Before the Courts, QM claims may not secure costs plus an allowance for profit.

* No clear guideline to arrive at reasonable sum, though contractor must be paid fair
commercial rate for work done. This reasonable sum can be different for the contractor
and the principal.

* Unreasonably terminated or forced terminations have incurred greater compensation.

(10 times contractual obligation in the case of a Californian Company)

* Profit margins have also been rejected in some QM claims cases, namely, Kane v. Sopov
[2005] VSC 237.

* Quasi contract is a term used in civil law, based on the juristic

principle of equity and restitution.

* A quasi contract is the act of a person, permitted by law, by which he

obligates himself towards another, or by which another binds himself
to him, without any agreement between them.

* Quasi means ‘almost’ or ‘apparently but not really’ or ‘as if it were’.

* Quasi contract is not a contract but an obligation created in the

absence of agreement.
 Quasi Contract
Sections. 68-72
S. 68. Claim for necessaries supplied to person incapable of contracting, or on his account.--If a
person, incapable of entering into a contract, or any one whom he is legally bound to support, is supplied
by another person with necessaries suited to his condition in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person.
Illustrations

( a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be

reimbursed from B's property.
2. A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in
life. A is entitled to the reimbursed from B's property.

S. 69. Reimbursement of person paying money due by another, in payment of which he is

interested.--A person who is interested in the payment of money which another is bound by law to pay,
and who, therefore, pays it, is entitled to be reimbursed by the other.
Illustration
B holds land in Bengal, on a lease granted by A, and zamindar. The revenue payable by A to the
Government being in arrear, his land is advertised for sale by the Government. Under the revenue law,
the consequence of such sale will be the annulment of B's lease. B, to prevent the sale and the
consequent annulment of his own lease, pays to the Government the sum due from A. A is bound to
make good to B the amount so paid.

S. 70. Obligation of person enjoying benefit of non-gratuitous act.--Where a person lawfully does
anything for another person, or delivers anything to him, not intending to do so gratuitously, and such
other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect
of, or to restore, the thing so done or delivered.
Illustrations

( a) A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is
bound to pay A for them.
3. A saves B's property from fire. A is not entitled to compensation from B, if the circumstances
show that he intended to act gratuitously.
Section 70--Notes
A person enjoying the benefit of services or goods supplied by another without intending to do so
gratuitously must restore and/or pay compensation for the benefit enjoyed. It applies to individuals and
government on the principle that a person must not enrich himself at the cost of another. Mahabir
Kishore v. State of M.P., AIR 1990 SC 313; Hansraj Gupta & Co. v. Union of India, AIR 1973 SC 2724;
V.R. Subramaniam v. B. Thayappa, AIR 1966 SC 1034.

Compensation.--A person should lawfully do something for another person or deliver something to him.
In doing so, he must not intend to act gratuitously; and the person for whom something is done has
enjoyed the benefit thereof. When these conditions are satisfied Section 70 imposes upon the later
person the liability to make compensation to the former in respect of or to restore the thing so done or
delivered. State of West Bengal v. B.K. Mondal, AIR 1962 SC 779; Union of India v. J.K. Gas Plant, AIR
1980 SC 1330.
Unjust enrichment applicable to government.--This section prevents unjust enrichment and it applies
to individuals, corporations and the government. Where a contractor constructed hospital buildings in
compliance with the terms of contract entered into by the Dispensary Fund Committee, the buildings were
ultimately taken over by the State Government and subsequently by the municipality in the capacity of
successor-in-interest of the said Committee, the Municipality was bound to make payment to the
contractor at the increased rates in accordance with the terms of the contract. The only reasonable way of
computing the value of the benefit derived by the government is on the basis of the rates agreed upon
including future increases and that would be a fair indication of the value of the work. Pannalal v. Dy.
Commr., Bhandara, AIR 1973 SC 1174; Piloo Sidhwa v. Municipal Corpn., AIR 1970 SC 1201.

Unjust enrichment.--If the demand of octroi from the petitioner for purchase of iron scrap was found
illegal and refund was ordered, it could not be proved that the petitioners had not consumed and used the
iron scrap for its own purpose, but rather sold them out. It could not be accepted that burden of octroi had
passed on to the other party, i.e. the buyers of the petitioners. There was no unjust enrichment. Dilip Jain
v. State of Rajasthan, AIR 2007 Raj 206.

Quasi Contract
Important Cases.

* Nash v. Inman (1908) KB 1. (Case of fancy waistcoats and Cambridge minor.

Question of necessaries supplied and the verdict of the Court.)

* Chapel v. Cooper,(1844) 13 M and W 252( Necessaries are that without which

individual cannot reasonably exist and includes food, clothing, lodging, education
or training in trade and essential services)

* Moses v. Macferlan (1760) 2 Burr 1005.

(Lord Mansfield said that the concept of quasi contract is based on the principle
of unjust enrichment. Theory of unjust enrichment explained as when a person retains
money or benefits, which in justice and equity belongs to another as held by the Court
in L&A Drywall,Inc v. Whitmore Const. Co, Utah, 608 P2d 626,630.

Remember Again!

Three elements of undue Enrichment:--

 A benefit conferred upon the defendant by the plaintiff;
 An appreciation or knowledge by the defendant of the benefit; and
 The acceptance or retention by the defendant to retain the benefit without
payment of its value.
 CASE

Mahabir Kishore v. State of M.P, AIR 1990 SC 313.

The principle of unjust enrichment requires: first, that the

defendant has been ‘enriched’ by the receipt of ‘benefit’, secondly,
that this enrichment is “at the expense of the plaintiff”; and thirdly;
that the retention of the enrichment be unjust. This justifies
restitution. Enrichment may take the form of direct advantage to
the recipient’s wealth such as by the receipt of money or indirect
one for instance where inevitable expense has been saved.

CASE

State of W.B v. M/s B.K.Mondal & Sons AIR 1962 SC 779.

[Case of Ware House.]

* B.K.Mondal & Sons filed a SLP in Supreme Court against

State of West Bengal to claim Rs 19,325 for works done by it
for the appellant and sought relief under Sec. 70 of the
Contract Act.

* Having satisfied that the three conditions of unjust

enrichment existed in the present case, the Court held that the
state government is liable to pay compensation.

* Had the Govt. refused to accept the Ware House, on being

offered by B.K.Mondal & Sons, liability under section 70 of
the Contract Act would not arise.