Indian Contract Act, 1872

INDIAN CONTRACT ACT, 1872

Introduction The English Connection: Common law: precedents & customs. Equity: natural justice. Pacta sunt servanda: agreements

must be honored. Stare decisis: settled law should not

be disturbed.

Essential elements of a valid contract: (Sec. 10) Agreement - Offer & acceptance Legal consequences - rights & obligations Capacity of the contracting parties Consideration Legal object Free consent Certainty Possibility of performance Writing & registration Not expressly declared to be void.

Offer: Sec.2(a) Essentials of offer: It must be an expression of the willingness

to do or abstain from doing something. Such expression must be to another

person. Such expression must be made with the

intention to obtain the assent of the other person to such an act or abstinence.

Rules regarding a valid offer: Offer may be express or implied. Must give rise to legal consequences & be

capable of creating legal relationship. Terms must be certain & not vague. May be specific or general. Must not be an invitation to offer. Can be made subject to any terms & conditions. Must be communicated to offeree. Invitation to offer, cross offers & counter offers. Communication of special terms Prescribed mode of acceptance.

Lapse & revocation of an offer: Lapse of stipulated or reasonable time. Acceptance not in prescribed mode. Rejection. Death or insanity of offeror or offeree before

acceptance. Revocation. Non-fulfillment of condition precedent. Subsequent illegality or destruction of

subject-matter.

Acceptance: Sec 2(b) Acceptance must be given only by the person

to whom the offer is made. Must be absolute & unqualified. Must be in prescribed mode or reasonable

manner. Must be communicated. Within reasonable time. Acceptance must succeed an offer. Rejected offers can be accepted only if

renewed.

Consideration: Sec2(d) Essentials of consideration: Consideration must move at the desire of

offeror. May move from offeree or any other person. Stranger to a contract cannot sue; except in

case of trust created, an addressee of an insured article; family settlement.

May be past, present or future. Must be of some value. Must be real.

“No Consideration, No Contract”- Exceptions:

Natural love & affection. Agreement to compensate for past

voluntary service. Payment of time-barred debt. Completed gift. Contract of agency. Contribution to charity.

Capacity of parties: (Sec 11)

Minor : Void & inoperative No restitution Beneficial agmts are valid No ratification on attaining the age of majority. Rule of estoppel does not apply. Minor’s liability for necessaries. Specific performance. Minor partner Minor agent Minor & insolvency

Unsound mind: Sec 12 Usually of sound mind. Usually of unsound mind Causes: idiocy Lunacy Drunkenness Hypnotism Mental decay Effects: Void & inoperative Similar to agreements entered into by minors.

Disqualified persons: Alien enemies Foreign sovereigns & ambassadors Convicts Married women Insolvents

Free consent: Sec 14 Coercion Undue influence Misrepresentation Fraud Mistake

Coercion: Sec 15 Committing or threatening to commit any act

forbidden by the IPC with an intention to cause any person to enter into an agreement.

The unlawful detaining or threatening to detain, any property with an intention to cause any person to enter into an agreement.

The act constituting coercion, may be directed at any person & not necessarily at the other party to the agreement.

It does not matter whether the IPC is or is not in force where the coercion is employed. If suit is filed in India the said provision will apply.

Effects of Coercion:

Voidable Sec 64 The party exercising coercion exposes

himself to criminal liability under the IPC, besides an action in contract.

Burden of proof lies on the party who wants to set aside the contract on the plea of coercion.

Undue Influence: Sec 16 A contract is said to be induced by

undue influence when the relation subsisting between the parties is such that one of the parties is in a position to dominate the will of the other and he uses this position to obtain an unfair advantage over the other.

Presumption of Undue Influence:

In the following cases undue influence is presumed to exist & the burden of proof lies on the party who is in a position to dominate the will of the other:

The person holds a real or apparent authority over the other, e.g., master & servant, police officer & accused.

Fiduciary relationship e.g., father & son, doctor & patient.

The contracting parties mental capacity is temporarily or permanently affected due to age, illness, mental or bodily distress, e.g., old illiterate persons.

Contd.. Undue influence implies mental & moral coercion

in such a way that the consent given is not free. The person in a position to dominate the will of

the other need not be a party to the contract or be benefited by the contract; it is sufficient if the third party benefits as long as he is interested in the third party.

Unreasonable bargains, high prices, high rate of interest etc are instances of circumstances when undue influence is presumed.

No presumption of undue influence: In the following cases law does not

presume undue influence & the burden of proof lies on the party alleging that undue influence existed:

Mother & daughter Grandson & grandfather Husband & wife Creditor & debtor Landlord & tenant.

Effects of Undue Influence: Voidable Sec. 64: Court has the discretion to

direct the aggrieved party to refund the benefit in part or in whole or set aside the contract without any direction for refund of benefit.

There is no criminal liability in case of undue influence.

Misrepresentation: A representation means a statement of fact made

by one party to the other either before or at the time of contract, relating to some matter essential to the formation of the contract, with an intention to induce the other party to enter into a contract.

It may be expressed by words spoken or written or implied from the acts or conduct of the parties.

In law, a representation when wrongly made without an intention to deceive the other party is known as misrepresentation.

Sec 18: Positive assertion of unwarranted statements

of material facts believing them to be true. Where a statement when made was true but

subsequently before it was acted upon, it became false to the knowledge of the person making it , then a duty is cast upon the person to disclose the change of circumstances to the other party.

Causing mistake about the subject matter innocently.

Effects of misrepresentation: Voidable May choose to rescind the contract or Affirm the contract & insist that he be put

in a position in which he would have been, if the representation made had been true.

The remedy is lost if the other party had sufficient means of discovering the truth with ordinary diligence.

Fraud: Sec 17 Fraud means & includes any of the following acts

committed by a party with an intention to deceive or induce the other party to enter into a contract:

1. A false statement made intentionally is fraud2. Active concealment of a material fact by a person

having knowledge of the fact is fraud. However, mere non-disclosure is not a fraud, if there is no duty to disclose.

3. A promise made without an intention of performing it.

4. Any cat or omission declared by law to be fraudulent.5. Any other act fitted to deceive.

Silence & fraud: Mere silence as to facts likely to

affect the willingness of a person to enter into a contract is not fraud, unless:

1. Such a person is under a duty to speak or

2. Silence is in itself equivalent to speech.

Effects of fraud: Right to rescind the contract. Affirm the contract and ask for restitution,

i.e., to be put in a position, he would have been, if the statement made had been true.

The aggrieved party can also claim damages.

Fraud by a stranger to the contract does not affect the contract.

Action for fraud: Fraudulent statement must be

instrumental in inducing the party to enter into a contract.

The plaintiff must have been actually deceived by the fraudulent statement.

No action will lie if the plaintiff does not sustain any loss or injury.

The contract is not Voidable if the party had enough means at its disposal to discover the truth with ordinary diligence.

Loss of right of rescission: Affirmation: where the aggrieved party after

becoming aware of his right to rescind the contract, chooses to affirm it, either by express words or through his conduct, which shows an intention to affirm it, loses his right to rescind the contract.

Restitution not possible: where the party seeking to rescind the contract is not in a position to restore the benefits received under the contract, cannot exercise his right of rescission.

Contd.. Lapse of time: where the aggrieved party

fails to exercise his right of rescission promptly, may lose his right to rescind the contract.

Right of third parties: where third parties acquire bona fide rights in the subject matter of the contract, before it can be rescinded, then such rights are valid against the aggrieved party and the right to rescind will no longer be available.

Mistake: Mistake of law:1. Mistake of law of the country.2. Mistake of foreign law.

Mistake of fact:1. Bilateral mistake2. Unilateral mistake

Mistake of law: Mistake of law does not give right to the

parties to set aside the contract & hence such a contract is not Voidable. This is based on the maxim “Ignorantia juris non-excusat” . Hence no relief can be granted on the grounds of mistake of law.

However, if one of the parties makes a mistake of law, through the inducement, whether innocent or otherwise, of the other party, then the contract may be avoided.

Mistake of foreign law: Mistake of foreign law stands on the

same footing as mistake of fact. Here the agreement is void in case of bilateral mistake only.

Bilateral mistake: Where the parties to an agreement

misunderstood each other & are at cross purposes, there is a bilateral mistake.

In this case there is no agreement as there is no consensus and hence the agreement is void.

In case of bilateral mistake of an essential fact, the agreement is void ab initio.

Essentials of bilateral mistake: The mistake must be mutual, i.e., both the

parties must misunderstand each other so as to nullify consent.

Mistake must relate to some fact and not an opinion.

The fact must be essential to the agreement: mistake as to the existence, identity, title, quantity, quality of the subject-matter of the contract.

Unilateral mistake:

Where only one of the contracting parties is under a mistake, as to the matter of fact essential to the contract, it is a unilateral mistake.

In case of unilateral mistake the contract is:1. Valid: if the mistake is caused due to ones own neligence

or lack of reasonable care.2. Voidable: if the mistake is caused by fraud,

misrepresentation, etc.3. Void ab initio: where the mistake is with regard to the

identity of a person & where such identity is crucial to the agreement or the mistake is with regard to the nature of a written document

Lawful object & consideration ‘Object’ means the design or purpose of

the contract. ‘consideration’ is said to be unlawful if it

involves an act or price which is unlawful. “Illegal” or “unlawful’” means a transaction

not enforceable by courts. It does not necessarily refer to a punishable offence, unless it is expressly punishable by any criminal or special legislation.

Circumstances under which object & consideration is held to be unlawful:

Forbidden by law: an object or consideration is said to be forbidden by law when it is a punishable by the criminal law of the country or by any special legislation or regulation made by a competent authority under the powers derived from the legislature.

If it is of such a nature that, if permitted it would defeat the provisions of any law, that is it would indirectly lead to the violation of law.

If it is fraudulent.

Contd.. Where it implies or involves injury to

the person or property of another. If court regards it as immoral:

immorality extends to: 1. Sexual immorality2. Furtherance of sexual immorality3. Interference with marital relations4. Acts against good public morals.

Contd.. If court regards it as opposed to public

policy: public policy is an illusive concept & is generally governed by precedents. Some of the following cases have been held to be opposed to public policy:

1. Trading with an alien enemy: as such trading tends to aid the economy of the enemy country and is hence considered unlawful. However such contracts can be entered into with the special permission of the govt.

Contd..2. An agmt. interfering with the course of justice3. Agmts. for stifling criminal prosecution: any agmt.

which seeks to prevent the prosecution of a guilty party is opposed to public policy & hence void. The court cannot give effect to an agmt. Which attempts to take away the administration of law out of the hands of the judges & put it in the hands of private individuals. However there is an exception in cases of certain compoundable offences under the CrPC which can be compromised & agmts. For the compromise of such offences is valid.

Contd..4. Traffic in public offices: an agmt. for sale or

transfer of public offices or appointments to such offices in consideration of money is void; cause if permitted it would result in inefficiency & corruption.

5. Agmts creating an interest opposed to duty.6. Agmts unduly restraining personal liberty.7. Agmts interfering with parental duties8. Agmts which tend to create monopolies.

Object or consideration unlawful in part:

Where an agmt contains several distinct promises to do certain legal things & also certain illegal things; then, if the legal part cannot be separated from the illegal part, i.e., there is a single consideration for several distinct promises, then the entire agmt is treated as illegal & hence void.

Where there is separate consideration for distinct promises & the legal part can be separated from the illegal part, then the legal part is valid contract & hence enforceable.

Contd.. In the case of alternative promises, where

one branch is legal & the other branch is illegal, then the legal branch alone can be enforced.

Transactions which are collateral or incidental to illegal contracts are also tainted with illegality & therefore not enforceable, provided the parties to the collateral transactions had knowledge of the illegal design of the primary agmt.

Effects: Void No restitution.

Void Agreements: Agreements in restraint of marriage [Sec. 26] Agreements in restraint of trade [Sec. 27] Agreements in restraint of legal proceedings

[Sec. 28] Agreements the meaning of which is uncertain

[Sec. 29] Agreements by way of wager [Sec. 30] Agreements contingent on impossible events

[Sec. 36] Agreements to do impossible acts [Sec. 56]

Void Agreements: Agreements in restraint of marriage [Sec 26]: Exception : an agreement restraining the marriage

of a minor is valid. Agreements in restraint of trade [Sec 27]: any

kind of restraint of trade, whether reasonable or not is void; however agreements restraining freedom of action necessary for carrying on a business are not void.

Exception: Sale of goodwill (provided the restraint is reasonable in case of time & space), partners agreements, trade combinations, negative stipulation in service agreements.

Contd.. Agreements in restraint of legal proceedings

[Sec 28]: i. A party absolutely restricted from taking usual legal

proceedings , in respect of any rights arising from a contract.

ii. An agreement which limits the time within which a party can enforce his rights under a contract, without regard to the time allowed by the Limitation Act.

iii. An agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified period, without regard to the time allowed by the Limitation Act.

Contd.. Agreements the meaning of which is

uncertain [Sec 29]. Agreements by way of wager [Sec

30]: The term ‘wager’ means a ‘bet. The essence of a wagering agreement is that, one party is to win & the other to lose upon a future event, which at the time of contract is of an uncertain nature. If the event turns out one way ‘A’ will lose & if it turns out the other way ‘A’ will win.

Essentials of wager:1. There must be a promise to pay money or

money’s worth.2. The promise must be conditional on an event

happening or not.3. The event must be an uncertain one. If one of the

parties has the event in his own hands, then it is not a wager.

4. Each party must stand to win or lose under the terms of agreement.

5. No party must have proprietary interest in the event. The stake must be the only interest which the parties have in the agreement.

Exception: “This sec. shall not be deemed to

render unlawful a subscription, or contribution, or an agmt. to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of 500 rupees or upwards, to be awarded to the winner or winners of any horse race.”

Agreements contingent on impossible events: [Sec. 36]

Such contracts can be performed only if the contemplated event takes place. The performance of the contract depends on the happening or non-happening of an event. Such an event should be of an uncertain nature. The event must be incidental to the contract, there should be a direct correlation between the event & performance of the contract. If the event becomes impossible, the contract becomes void.

If the contingent contract is to be performed within a stipulated time & if the contingent event does not take place within the stipulated time, the contract becomes void.

Agreements to do impossible acts: [Sec 56] An agreement to do an act impossible

in itself is void.

Effects: Void No restitution : no restoration of

benefit received is allowed in the case of agreements, expressly declared void under the Indian Contract Act.

Quasi contracts: [Sec 68-72]

In case of quasi contracts there is no offer, acceptance or consensus; in fact there is no intention on the part of either parties to enter into a contract; still the law, from the conduct & relationship between the parties, implies a promise, imposing obligation on one party & conferring a right in favor of the other party. Thus under certain special circumstances, obligations resembling those created by a contract are imposed by law although the parties have never entered into a contract.

Doctrine of unjust enrichment: A quasi contract rests upon the doctrine of

unjust enrichment which declares that a person shall not be allowed to enrich himself unjustly at others expense.

A suit for damages for the breach of contract can be filed in the case of a quasi contract in the same manner as in the case of a completed contract.

Quasi-contractual obligations: A claim for necessaries supplied to a person

incapable of contracting [Sec. 68] A person who is interested in the payment of money

(in order to protect his own interest), which another person is bound by law to pay, and who therefore pays it, is entitled to be reimbursed [Sec. 69]

Obligation of person enjoying non-gratuitous act [Sec. 70] : the act must have been done lawfully in good faith; the act must be non-gratuitous & the person for whom the act is done must have enjoyed benefit of the act.

Contd.. Responsibility of finder of goods [Sec.

71]: law implies an agreement between the owner & the finder of goods. It casts duties upon the finder of the goods.

Liability of a person to whom money is paid, or goods delivered by mistake or under coercion [Sec. 72]

Contingent Contracts: [Sec. 31] It is a contract, the performance of which depends

upon, the happening or non-happening of an uncertain event, collateral to such a contract.

A collateral event is one which does not form part of the consideration of the contract, and is independent of it.

An ordinary contract can be converted into a contingent contract, if its performance is made dependent on the happening or non-happening of an uncertain event, collateral to such contract.

Essentials of contingent contract: The performance of such a contract

depend on the happening or non-happening of a future uncertain event.

The future uncertain event is collateral or incidental to the contract.

Rules regarding performance of contingent contracts: Contingent contracts to do or not to do any

thing, if an uncertain future event happens, cannot be enforced by law unless & until the uncertain event occurs. Where such an event becomes impossible, such contracts become void.

Contingent contracts to do or not to do any thing, if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible & not before.

Contd.. Contingent contracts to do or not to do any thing, if

a specified uncertain event happens within a fixed time, becomes void, if, at the expiration of the time fixed, such event has not occurred or before the time fixed, such event becomes impossible.

Contingent contracts to do or not to do any thing, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired & such event has not occurred, Or, before the time fixed has expired, it becomes certain that such event will not happen.

Performance of contract: Under a contract legal obligations are created, which

both the parties to a contract are under a duty to fulfill. Fulfilling of such legal obligations, or performance of the promise under a contract by both the parties is known as performance of a contract.

Performance of all the obligations arising out of a contract, by all the parties to a contract is the normal & natural mode of discharging a contract.

Rules regarding performance: Only the promisee can demand performance of the

promise under a contract, a third party cannot demand performance, even though it was made for his benefit.

A contract involving personal skill, taste etc., must be performed by the promisor itself. Where it appears from the nature of the contract, that the parties intend that the promise of the contract should be performed by the promisor itself; then it must be performed by the promisor only.

Contd.. Where a contract is of an impersonal nature, then

either the promisor himself or his agent may perform the contract.

Where death of the promisor occurs, before the performance of the contract, then in such case the liability of performance falls on his legal representatives; unless a contrary intention appears from the contract.

Where a promisee accepts performance of the promise from a third person, however afterwards he cannot enforce it against the promisor.

Performance of joint promises: Where several joint promisor’s with a single

promisee. Where a single promisor makes a promise with

several joint promisee’s. Where several joint promisor’s make a promise

with several joint promisee’s .

Rules regarding joint promises: Unless a contrary intention appears from the contract,

the right to claim performance rests with all the promisees jointly & a single promisee cannot claim performance.

Unless a contrary intention appears from the contract, all promisors must jointly fulfill the promise.

In the absence of an express agmt. to the contrary, the promisee is entitled to compel any one or more of the joint promisors to perform the whole of the promise.

Contd.. Where one of the joint owners is made to perform the whole

contract, he may realize equal contribution from other joint promisors, unless a contrary intention appears from the contract.

Where any one of the joint owners fails to make a contribution, then the remaining joint promisors must bear the loss arising from such failure, in equal shares.

In case of a joint promise, if one of the joint promisors is released from his liability by the promisee, his liability to the promisee ceases, but this does not discharge the other promisors from their liability; neither does it free the joint promisor so released from his liability to contribute to the other joint promisors.

Assignment of contracts: Assignment of contract means transfer of the

rights & liabilities arising under a contract, to third party, with or without concurrence of the other party to the contract.

An assignee can bring an action on his own initiative, against the other party, without making the assignor a party to the suit.

Contracts involving personal skill, taste etc., cannot be assigned.

Time & place for performance: Where time & place is prescribed by the

promisee, the performance of the contract must be at the specified time & place.

Where it is not prescribed, then it must be within a reasonable time & at a proper place

Failure to perform within stipulated time:

Where time is the essence of the contract & there is a failure to perform a contract within the stipulated time, the contract becomes voidable at the option of the promisee.

Where the promisee chooses to affirm the delayed contract, cannot claim compensation for the loss caused by the delay afterwards, unless, at the time of affirming the delayed performance, he has given notice to the promisor of his intention to do so.

Contd.. Where time is not the essence of the contract,

failure to perform the contract within the specified time does not render the contract voidable. However the promisee is entitled to claim compensation for any loss caused to him by the delay. However, if the promisor delays the performance beyond reasonable time then the contract will become voidable at the option of the promisee.

Mode of performance: The promise must be performed by the promisor

in the manner prescribed by the promisee. Such performance must be in strict accordance with the mode prescribed.

Contracts which need not be performed:

If parties to a contract agree to ‘alteration’, ‘novation’ or ‘rescission’ , the original contract need not be performed.

Where the parties to a contract agree to remit the performance of the promise, either wholly or in part, the original contract stands discharged.

In case of a Voidable contract, if the party who has the option, chooses to rescind the contract, then the other party need not perform his promise.

Contd..

Where there is neglect or refusal to provide the promisor with reasonable facilities for the performance of his promise, by the promisee; then in such a case the promisor is excused for the non-performance of the contract.

Discharge of contract: Discharge of a contract refers to a

process, by which the rights and obligations arising out of a contract come to an end. Thus, discharge of a contract means termination of a contract.

A contract may be discharged in any of the following ways:

Contd..

1. By performance

2. By mutual consent or agreement

3. By subsequent or supervening impossibility or illegality

4. By lapse of time

5. By operation of law

6. By breach of contract.

Discharge by mutual consent or agreement:

Novation: when a new contract is substituted for an existing contract, either between the same parties or different parties, the consideration for such contract being the discharge of the old contract.

Where the contract is between same parties, then the nature of the obligations must be altered substantially or else it shall amount to alteration & not novation.

Novation cannot be compulsory, it has to be with the mutual consent of all the parties.

The new contract must be valid & enforceable, if it suffers from any legal flaw, then the original contract shall revive.

Alteration: Alteration of a contract refers to change in one or

more of the material terms of a written contract. Where such alteration takes place with mutual

consent, then the original contract is discharged & the new altered contract comes into existence.

The alteration should be material & alter the legal effect of the contract, mere correction of clerical errors does not amount to alteration.

Contd.. Where such alteration is made by one party,

without the consent of the other party, then such alteration will render the entire contract void & none of the parties can maintain an action upon it.

Unlike novation, here there is no change of parties, the parties to the contract remain the same, only the material terms of the contract are altered.

Rescission: Rescission of a contract means cancellation of an

existing contract without substituting a new contract in its place.

A contract is said to be discharged by rescission, when the parties come to an agreement, before the date of performance, that the contract is no longer binding on them.

The consideration for such an agreement is abandonment of their respective rights under the contract, thus releasing each other of their contractual obligations.

Contd.. An agmt. for rescission of contract is to be

distinguished from agmts in restraint of legal proceedings which are void under the Act. An agreement for rescission is an agmt. out of mutual consent to excuse performance of contractual obligations. Thus, an agmt to excuse performance is valid, where as an agmt not to sue for breach is void.

Remission: It is the acceptance of a lesser sum or

lesser fulfillment of the promise made. A promisee may remit either entire or a part

of the promise made to him and a promise to do so is binding even though there is no consideration for it.

An agmt to extend the time for the performance of the promise does not require consideration either.

Waiver:

The deliberate abandonment of a right which a party has acquired under the contract, where upon the other party is released from his obligation is ‘waiver’.

Subsequent impossibility or illegality: A contract to do a particular act, which becomes

impossible or illegal, due to an event which the promisor could not prevent, becomes void and stands discharged.

The impossibility should be beyond the control of the promisor and not be self induced.

In order to render an act impossible, it is sufficient if it has become impractical, useless or extremely hazardous.

Cases not covered under supervening impossibility: Difficulty of performance: increased difficulty or

expense. Commercial impossibility: when actual loss

becomes certain. Default of third party: failure on the part of a third

party on whom the promisor relied. Strikes & lock-outs: the former is manageable &

the latter is self-induced. Failure of one of the objects

Lapse of time: Where time is the essence of contract & one of

the party fails to perform his promise within the stipulated time, the other party is discharged from performing his promise & can claim damages.

Where there is failure to perform the promise by both parties to the contract for a long period, the contract stands discharged.

Operation of law: Death: contracts involving personal skill or of a

personal nature, stand discharged with the death of the promisor.

Insolvency: when the insolvency court passes an order of discharge, the contract stands discharged.

Merger: where an inferior right contract merges with a superior right contract, the former stands discharged automatically.

Unauthorized material alteration: renders the contract void and hence it stands discharged.

Breach of contract: Breach of contract brings an end to the

obligations arising out of a contract, and hence the contract stands discharged.

The aggrieved party can sue for damages. Breach of contract may be anticipatory or

actual.

Anticipatory breach: Such a breach occurs before the time stipulated for

performance has arrived. Anticipatory breach may be express or implied. The aggrieved party may sue the other party for

breach, immediately or wait until the due date arrives and then sue.

Where he chooses to wait until the due date, the contract remains in operation and the other party may either perform his part of the contract or take advantage of any supervening impossibility.

Actual breach: Actual breach occurs when a party fails to

perform his obligations upon the date fixed for performance of contract.

There can be no actual breach so long as the time for performance has not yet arrived.

The aggrieved party may sue for damages.

Remedies for breach of contract:

Rescission of contract Suit for damages Suit upon quantum meruit Suit for specific performance Suit for an injunction

Suit for damages: Monetary compensation awarded to the

aggrieved party for the loss suffered by him, caused by the breach of contract by the other party is known as ‘damages’.

The award of damages is based on the principle of compensation & not punishment.

The purpose of damages is to put the injured party in the position he would have been, had there been no breach.

Contd.. Damages are awarded to the aggrieved party only

if actual loss is proved. The loss suffered must not be remote or an

indirect result of the breach. While estimating the loss caused to a party by

breach, the inconvenience caused should also be considered.

Special damages should also be taken into account.

Kinds of damages:

Ordinary or compensatory damages Special damages Exemplary or punitive damages Nominal damages

Ordinary Damages:

Ordinary damages are restricted to direct or proximate consequences of breach of contract.

They arise naturally & directly in the usual course of things from breach of contract.

Remote & indirect losses are not considered.

Special damages: They arise on account of special or unusual circumstances

affecting the plaintiff. They are remote in nature & not the natural & probable

consequence of breach. Such damages cannot be claimed as a matter of right, they can

be claimed only if the special circumstances which would result in special loss in case of breach are brought to the notice of the other party.

Such damages must be in contemplation of the parties at the time of entering the contract, subsequent knowledge of the special circumstances will not create any special liability on the guilty party.

Vindictive & exemplary:

The purpose of such damages is to punish the guilty party for breach.

The cardinal principle of contract law is that in case of breach of contract, damages are awarded to the aggrieved party, to compensate for the loss suffered and not to punish the guilty party.

Exemplary damages are hence not recoverable for the breach of contract, as a general rule; however there are two exceptions to this rule.

Exceptions:

Breach of a contract to marry: damages depend upon the extent of injury to party’s feelings.

Dishonor of a cheque by a banker when there are sufficient funds to the credit of the customer: the smaller the amount of cheque, greater the amount of damage.

Nominal damages: Such damages are awarded for namesake.

They are neither awarded by way of compensation to aggrieved party nor by way of punishment to the guilty party.

Such damages are awarded only to establish that a right has been violated by the breach of contract & the aggrieved party has not suffered any actual damage, i.e., it is of insignificant value.

Duty to mitigate damages: It is the duty of the aggrieved party to mitigate the

damages suffered. He must use all reasonable means of mitigating

the damage and act prudently. He cannot recover any part of damage traceable

to his own neglect to mitigate. The burden of proof however, is on the defendant

to show that the plaintiff failed in his duty of mitigation.

Liquidated damages & penalty: Liquidated damages means a sum fixed in

advance, which is a fair & genuine pre- estimation of the probable loss likely to result from breach.

Penalty means a sum fixed in advance, which is extravagant & unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from breach.

Sec 74: It lays down that the courts are not bound to treat

the sum mentioned in the contract (either liquidated damages or penalty) as the sum payable for damages for breach.

The courts allow reasonable compensation to cover actual loss sustained, not exceeding the amount mentioned in the contract.

The amount mentioned in the contract, regardless whether it is liquidated damages or penalty, determines only the maximum limit of liability, in case of breach of contract.

Exception:

When any person enters into any bail bond or other instrument of a similar nature, or under any provision of any law or under the orders of the govt., gives any bond for the performance of any public duty, he shall be liable to pay the whole amount, mentioned therein upon breach of condition of any such instrument.

Stipulation regarding payment of interest:

Unless the parties have made a stipulation for the payment of interest, interest cannot be recovered legally as damages, as a general rule.

Where the rate of interest is reasonable, the may allow it, if it is exorbitant, court may treat it as a penalty clause & disallow it.

Payment of compound interest is allowed only if it is at a reasonable rate.

Suit upon Quantum meruit: The term Quantum Meruit means “ in

proportion to the work done”. A suit for quantum meruit is generally filed

in the following cases:1. Where work has been done in pursuance of

a contract, which has been discharged due to the default of the defendant. In such a case, generally, damages & payment of quantum meruit is allowed.

Contd..2. Where work has been done in pursuance of the

contract, discovered to be void or becomes void, provided the contract is divisible.

3. Restitution4. A party which has committed breach of contract

may also sue on a quantum meruit, provided both the following conditions are fulfilled:

a) The contract must be divisibleb) The other party has enjoyed the benefit of the

part which has been performed, although there was an option of declining it.

Suit for specific performance: Specific performance means the actual carrying

out of the contract as agreed. Such a suit is filed in the court, in order to obtain a

decree from the court, directing the defendant to actually perform the promise made.

Such a suit may be filed in addition to a suit for damages.

Such a decree is not granted for contracts of every description, it is granted only in cases where the legal remedy is inadequate or defective.

Specific performance not granted in the following cases:

Where monetary compensation is an adequate relief.

Where court cannot supervise the actual execution of the contract.

Where contract is for personal services.

Suit for an injunction:

It is an order of a court restraining a person from doing a particular act.

Injunction is a preventive remedy and is appropriate in case of anticipatory breach of contract, where damages would not be an adequate relief.

When a court issues an injunction order, it restrains the defaulting party from committing an act, which he promised not to do under the contract.

BEST OF LUCK FOR YOUR EXAMS