Introduction 

• As per Section 37 of Indian Contract Act, 1872 (ICA) parties are under an obligation to perform their part of the contract. 
• In case a party does not perform it’s part of the contract, the party would be liable for breach of contract. 

Types of Breach of Contract 

• There are two types of breach of contract: 
  • Anticipatory breach 
  • Actual Breach 

Anticipatory Breach 

• This is provided for under Section 39 of ICA. 
• Section 39 provides for the effect of refusal of party to perform promise wholly. 
• Section 39 provides 
  • When a party to a contract has refused or disabled itself from performing his promise in it’s entirety. 
  • The promisee may put an end to the contract. 
  • Unless he has signified by words or conduct his acquiescence in it’s continuance.  

Actual Breach 

• Actual breach happens by non-performance including defective performance of a contractual obligation. 

Consequences of Breach of Contract 

• The law for the same is contained in Chapter VI of ICA. 
• The provisions contained here are under Section 73 to Section 75. 
• Section 73 provides for compensation for loss or damage caused by breach of contract. 
  • Para 1 of Section 73 provides that: 
    • When a contract has been broken 
    • The party who suffers the breach is entitled to receive from the other 
    • compensation for any loss or damage caused to him 
    • which naturally arose in the usual course of things from such breach 
    • or which the parties knew, when they made the contract, to be likely to result from the breach of it 
  • Para 2 of Section 73 provides that: 
    • Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. 
  • Para 3 of Section 73 provides for compensation for failure to discharge obligation resembling those created by contract 
    • When an obligation resembling those created by contract has been incurred 
    • and has not been discharged, 
    • any person injured by the failure to discharge it 
    • is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract 
  • Explanation to Section 73 provides that in estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.  
• The law laid down in Section 73 is the law that evolved from the case of Hadley v. Baxendale (1854). 
• As was laid down in the above case there are two types of damages: 
  • General Damages: These are the ones that arise naturally in the usual course of things from the breach itself. This damage is recoverable. 
  • Special Damages: Special damages arise on account of unusual circumstances. These are not recoverable unless special circumstances are brought to the knowledge of the other party. 

Penalty and Liquidated damages 

•  Section 74 of ICA provides for compensation for breach of contract where penalty is stipulated for. 
• 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 if 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. 
• Explanation to Section 74 provides that a stipulation for increased interest from the date of default may be a stipulation by way of penalty. 
• Exception to Section 74 is 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 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 therein. 
• A landmark case on this is Kailash Nath Associates v. DDA (2015) where the Supreme Court elaborately explained the principles governing Section 74 of ICA.  
• The principles laid down are: 
  • There can be three situations when a liquidated amount to be paid in case of breach is mentioned in the contract: 

• Reasonable compensation will be fixed on well-known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act. 
• Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section. 
• The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with.  
  • It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded. 
• Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application. 

Section 75 

• Section 75 provides that a party rightfully rescinding the contract is entitled to compensation. 
• Section 75 provides that a person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract. 

Conclusion 

• Breach of a contract arises when a party to the contract does not fulfill his part of the contract. The purpose of awarding compensation is to bring the parties to the same condition as they were before the contract was entered into. Thus, Section 73, Section 74 and Section 75 guide the Court in awarding compensation to the party that has suffered a breach.