Introduction 

• Chapter VI of the Indian Contract Act, 1872 deals with the provisions for the consequences of breach of contract. 
• There are majorly two types of breach of contract: 
  • Actual Breach 
  • Anticipatory Breach 
• When contracts are breached in India, the law provides clear, fair, and practical ways to solve the problem. 
• The courts can look at each situation and decide what's the fairest solution.  
• Sometimes paying money is enough to fix things. Other times, the court might need to order someone to do exactly what they promised in the contract.

Consequences of Breach of Contract

• Section 73 of the Contract Act 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.

Penalty and Liquidated Damages  

• Section 74 of the Contract Act 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.  
• 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.

Landmark Judgements 

• Hadley v. Baxendale (1854):  
  • Types of damages were laid down in the above case as: 
    • 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.
• Kailash Nath Associates v. DDA (2015): 
  • In this case 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:

Conclusion 

The consequences of breach of contract under Indian law represents a sophisticated and balanced approach to addressing contractual failures. The framework provides clear guidance while maintaining sufficient flexibility to accommodate diverse commercial situations. Understanding these consequences is essential for effective contract management and dispute resolution in the modern business environment. As commercial relationships continue to evolve, the principles underlying these consequences remain relevant and adaptable, ensuring their continued effectiveness in promoting contractual compliance and providing appropriate remedies when breaches occur.