part1 termination and damages

7/30/2019 Part1 Termination and Damages

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Chapter 13

T

ime and Place of Contract

Chapter 30 and 31

Termination and Damages

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Case: Power Supply

A company was to supply power to its contractorfor a construction job. The company failed to

provide it. The contractor hired a generator set. Itcost the company 2 lakhs. The contractor isclaiming the money from the company.

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Breach and Damages

On every breach of a term of a contract, thesuffering party has a right to compensation.

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Car Service

Rohan booked a car on the internet from a carrental service to drop him from the MumbaiAirport to the city centre. The followings were the

terms of the contract:

1. Rohan would pay Rs. 500 through credit card atthe time of making of the contract.

5. The driver would be holding a 24 x 12 plasticplacard bearing the name and logo of the companyand the passenger. ..

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cont 6. The company would provide an Inova air-

conditioned car.

7. The car would not have done more than 20,000Km.

10. The car seats would be in white cover.

11. The car would be fully fuelled beforereceiving the passenger.

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cont 5. The driver would be holding a 24 x 12 plastic

placard bearing the name and logo of the companyand the passenger. ..

The driver was holding a big white sheet in hishand with the name of the passenger and the

company written in hand with drawing pen.

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cont

6. The company would provide an Inova air-conditioned car.

The company sent Tata Indica instead. (TataIndica is a much smaller car)

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Principles

Every contract has terms which constitute the coreof the contract. Other terms are subsidiary aspects.A term which is a part of the core of the contract iscalled condition and a subsidiary termwarranty.

For the breach of any term, condition or warranty,

the innocent party has a right to receivecompensation. However, on breach of a condition,

the innocent party gets the option to terminate the

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Principles

The innocent party can elect to continue with thecontract or terminate the contract.

Till the decision to terminate the contract iscommunicated (express or implied), both the

parties are bound by the terms of the contract.

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Contract Clause

1. Rohan would pay Rs. 500 through credit card at the time of making of thecontract.

5. The driver would be holding a 24 x 12 plastic placard bearing the name and

logo of the company and the passenger. ..

6. The company would provide an Inova air-conditioned car.

7. The car would not have done more than 20, 000 Km.

10. The car seats would be in white cover. ..

11. The car would be fully fuelled before receiving the passenger.

18. All the terms of this contract are a condition of thecontract.

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Termination clause

The Contract can be terminated in the following situations:

The Purchaser may terminate this contract in whole or

in part

(a) if the Supplier fails to deliver any or all of the

Goods within the period(s) specified in the Contract

(b) if the Supplier fails to perform any other

obligation(s) under the Contract.

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Case: Union Eagle Ltd.

Time was of essence

If the Purchaser shall fail to comply with any ofthe terms and conditions of this Agreement theVendor may this Agreement

The purchaser was late by 10 minutes in tenderingthe money.

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Case: Cochin Chemical Ltd.

Kerala Government was to advance money 2.5lakhs the Company and the Company was tomortgage its assets in favour of the Government.

Over the next five months the Company was tosupply goods at the prevailing price and balanceout the money given to it.

The Kerala Government failed to pay the money.The Company, however, arranged to supply thegoods.

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cont The company claimed damages. The Government

contested that the government receiving the goodswas contingent on it advancing the money.

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Supreme Court

Breach of contract by one party does notautomatically terminate the obligation under thecontract; the injured party has the option either totreat the contract as still in existence, or to regardhimself as discharged. If he does not accept thedischarge, he may insist on performance. Itcannot, therefore, be said that by refusing to

advance the loan which the State had undertakento advance, the obligation to purchase groundnutcake from the Company came to an end.

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Defective ATM

Sun Bank placed order on Ewan Engineering Ltd.for supplying it three ATM Machines. Under thecontract, it had already paid 50% of the price. It

was to pay another 30% on the first of the monthand Ewan Engineering Ltd. was to supply themachines on 15th of the month.

Sun Bank was only the third bank to buy thatmodel of ATM. It got report from the other two

buyers that the machine had several defects indesign and manufacturing.

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cont Sun bank, citing that the machine delivered to

others was defective and the company coulddeliver them only defective machine, refused to

pay 30% of the 1st of the month and demandedback the 50% contract value paid to them inadvance.

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Car Service

The car company called Rohan on his cell phonewhen he was checking in at Delhi for his Mumbaiflight. The company told him that they would not

be able to supply the car as their drivers had goneon strike. Rohan replied, That is your problemnot mine. I booked a car 20 days in advance andyou have to provide it.

Rohan in the arrival lounge paid for a pre-paidtaxi. On exiting, Rohan saw a driver holding thecompanys placard bearing his name.

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Anticipatory Breach

An advance notice of intended breach of condition

is called anticipatory breach. The other party can

elect to accept it. In this case, the contract will beterminated and the innocent party can claim

damages.

A party can reject an anticipatory breach. In this

case, the contract subsists and both the parties are

bound by its terms.

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Damages

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Case: Carriage of Computers

Sudip contracted to transport computercomponents from Mumbai to Bangalore, forPrakash, for a consideration of Rs 2 lakh. On theappointed time, Sudip did not turn up. Prakashfound Akash to do the work for him. However, theconsignment got delayed by two days.

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Consequential Losses

As a consequence of breach, several eventsunfold.

All business contracts contain clauses exemptingthem from consequential losses.

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Specific Performance

As a remedy, should the party be forced to what

he has contracted to do?

Specific performance is awarded in rare case. In

most case, a monetary equivalent is provided to

compensate the party for the breach of the

contract.

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Principle for Compensation

... such money compensation as will put him in theposition in which he would have been but for thebreach... In working out the compensation you

should as nearly as possible get at that sum ofmoney which will put the party ...in the same

position as he would have been in if he had notsustained the wrong.

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Huxley

the law relating to damages for breach ofcontract has developed almost exclusively in a

commercial context, these criteria normally

proceed on the assumption that each contracting

party's interest in the bargain was purely

commercial and that the loss resulting from a

breach of contract is measurable in purely

economic terms.

As a result, the courts award loss of profit as a

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Contract Act: Compensation

73. Compensation for loss or 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 brokenthe contract, 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 thecontract, to be likely to result from the breach of

it.

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cont

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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Case: Carriage of Computers

Raman contracted to transport computercomponents from Mumbai to Bangalore, forPrakash, for a consideration of Rs 2 lakh. It wasagreed that in the case of a breach of contract,

Raman would pay damages worth Rs 50,000. Howmuch should Raman be made to pay in thefollowing different situations:

1. The actual damage came out to be Rs 60,000.

2. The actual damage was Rs. 10,000.

3. There was no damage to Prakash.

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Contract Act: Liquidated Damages

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,

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cont

...whether or not actual damage or loss is

proved to have been caused thereby, to

receive from the party who has broken thecontract, reasonable compensation not

exceeding the amount so named or, as the

case may be, the penalty stipulated for.

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Remoteness of Damage

1. If the parties have provided on the

consequences of breach, by mentioning the

consequences or the amount, the stipulation wouldapply. For example, a courier company may

provide that it is not responsible for any losses

caused due to late delivery of the consignment.

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cont

2. If the contract has not provided, the only

thing we can go with is impliedly, what is

agreed between the parties?

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Supreme Court: Compensation

The Indian courts have adopted the judgement in

the Hadley case. The Supreme Court stated the

principle for awarding compensation thus:

... such money compensation as will put him in

the position in which he would have been but

for the breach... In working out the

compensation you should as nearly as possible

get at that sum of money which will put the

party

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cont

...in the same position as he would have beenin if he had not sustained the wrong.... the rulelaid down as to measure of damage is the same,

namely, the party in breach must makecompensation in respect of the directconsequences flowing from the breach and notin respect of loss or damage indirectly or

remotely caused, which is also the rule inEnglish common law.

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Case: Dwarka Das v. State of MP

Dwarka Das is the contractor and State of MPemployer. The total value of the contract was Rupees

two lakhs. The Superintending Engineer is alleged to

have obstructed the progress of the work. As a result,

the work could not be completed within the timeschedule. Following this, the State of Madhya Pradesh

terminated the contract. Dwarka Das moved the court

claiming that this was breach of contract and loss of

profit at the rate of 10% of the value of the project,amounting to Rs. 20,000, as damages for breach of

contract. The Supreme Court emphasised loss of profit

as the basis for claiming damages. The court ruled:

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cont

The appellant (Contractor) had never claimed Rs. 20,000/-

on account of alleged actual loss suffered by him. He had

preferred his claim on the ground that had he carried out

the contract he would have earned profit of 10% on Rs. 2

lacs which was the value of the contract. damages can

be claimed by a contractor where the government is proved

to have committed breach by improperly rescinding the

contract and for estimating the amount of damages, Court

should make a broad evaluation instead of going intominute details. the contractor is entitled to claim the

damages for loss of profit which he expected to earn by

undertaking the works contract.

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Maula Bux v. Union of India

It is true that in every case of breach of contractthe person aggrieved by the breach is not requiredto prove actual loss or damage suffered by him

before he can claim a decree and the Court iscompetent to award reasonable compensation incase of breach even if no actual damage is provedto have been suffered in consequence of the

breach of contract. But the expression "whether or

not actual damage or loss is proved to have beencaused thereby" is intended to cover differentclasses of contracts which come before the Courts.

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cont

In case of breach of some contracts it may be

impossible for the Court to assess compensation

arising from breach, while in other casescompensation can be calculated in accordance

with established rules. Where the Court is unable

to assess the compensation, the sum named by the

parties if it be regarded as a genuine pre-estimatemay be taken into consideration as the measure of

reasonable compensation,

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cont

but not if the sum named is in the nature of a

penalty. Where loss in terms of money can

be determined, the party claimingcompensation must prove the loss suffered

by him.

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ONGC v. SAW Pipes Ltd.

Through a tender, SAW got in a contract with theONGC to supply it casing pipes for offshore oilexploration and maintenance. Due to strike in Italy,from where SAW was procuring the pipes, the

pipes could not be delivered on time. The contracthad a liquidated damages clause which stipulatedthat damages, at the rate of 1% of the contract price

per week, would be payable. There was no dispute

on this amount. The arbitrator, however, did notallow damages as it was not proved that the ONGChad indeed suffered damages. The case came beforethe Supreme Court.

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Judgement: Supreme Court

when a contract has been broken, the party whosuffers by such breach is entitled to receivecompensation for any loss which naturally arise inthe usual course of things from such breach. These

sections further contemplate that if parties knewwhen they made the contract that a particular lossis likely to result from such breach, they can agreefor payment of such compensation. In such a case,

there may not be any necessity of leading evidencefor proving damages, unless the Court arrives atthe conclusion that no loss is likely to occur

because of such breach.

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cont

Further, in case where Court arrives at the conclusionthat the term contemplating damages is by way ofpenalty, the Court may grant reasonable compensationnot exceeding the amount so named in the contract on

proof of damages. However, when the terms of the

contract are clear and unambiguous then its meaningis to be gathered only from the words used therein. Ina case where agreement is executed by experts in thefield, it would be difficult to hold that the intention of

the parties was different from the language usedtherein. In such a case, it is for the party who contendsthat stipulated amount is not reasonable compensation,to prove the same.

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if the parties have pre-estimated such loss after clearunderstanding, it would be totally unjustified to arriveat the conclusion that party who has committed breachof the contract is not liable to pay compensation. It

would be against the specific provisions of Sections73 and 74 of the Indian Contract Act. There wasnothing on record that compensation contemplated bythe parties was in any way unreasonable. It has beenspecifically mentioned that it was an agreed genuine

pre-estimate of damages duly agreed by the parties. Itwas also mentioned that the liquidated damages arenot by way of penalty.

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The Supreme Court, in summary, mentioned thefollowing principles:

(1) Terms of the contract are required to be taken

into consideration before arriving at the

conclusion whether the party claiming damages is

entitled to the same;

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cont

(2) If the terms are clear and unambiguousstipulating the liquidated damages in case of the

breach of the contract unless it is held that such

estimate of damages/compensation isunreasonable or is by way of penalty, party whohas committed the breach is required to paysuch compensation and that is what is provided

in Section 73 of the Contract Act.

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cont

(3) Section 74 is to be read along with Section73 and, therefore, in every case of breach ofcontract, the person aggrieved by the breach is

not required to prove actual loss or damagesuffered by him before he can claim a decree.The Court is competent to award reasonablecompensation in case of breach even if no

actual damage is proved to have been sufferedin consequences of the breach of a contract.

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cont

(4) ... it would be impossible for the Court toassess the compensation arising from breachand if the compensation contemplated is not by

way of penalty or unreasonable, Court canaward the same if it is genuine pre-estimate bythe parties as the measure of reasonablecompensation.

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part1 termination and damages

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