13533 execution of contracts and legal remedies available for breach of contract by kailash k. dagar and dhanraj p. dagar 3
les Artic Execution of Contracts and Legal Remedies available for Breach of Contract Kailash K. Dagar, FCS, Hindustan Aeronautics Ltd., Bangalore and Dhanraj P. Dagar, Bangalore. e-mail : The focus of this article is to give an overall idea about execution of Contracts and email@example.com the various legal remedies available to the aggrieved party against the defaulting parties.Background parties are required to be legally competent to enter into the agreementIn today’s modern business world execution of numerouscontracts is an indispensable business activity. Contracts parties must have exercised free consentbetween parties have always been there since trade began. there must be lawful object and considerationHowever, execution of contracts is a complicated process as the agreement must not be otherwise void.numerous laws, regulations, unforeseen event, consequencesof default have serious bearing on the business activities of Thus the basic but essential requirements of a contract are 3Csthe contracting parties. Therefore, the parties need to i.e. Capacity, Consent and Consideration. A contract in whichunderstand the intricacies involved in contract formulation, one or more of the 3Cs are absent is not a valid contract. It isinterpretation, review, performance, enforcement, negotiation only thereafter the questions as to whether such contract isas well as remedies in case of its breach. Similarly there is legal or illegal, enforceable or unenforceable would arise.need to know the strengths, weaknesses, risks and the missing The main objective of the law of contract is to facilitate theterms before execution of contract so that the final agreement working of the contracts and its enforcement. In every contract,is effective and enforceable. parties undertake to perform certain obligations or agree toThus management of ongoing business contracts is a daunting refrain from doing something. Therefore it should containtask, requiring knowledge, skill and the experience. The parties provisions for providing relief to a party who may be aggrievedneed to know the rights, remedies and duties regarding the as a result of any omission or commission by the other partyperformance and enforcement of legal and contractual rights. to the contract.Each parties executing contract must note the consequencesof breach of contract. A proper understanding of the law will Standard Form of Contracthelp the parties to decide as to whether they should use the The impact of industrialization in the realm of contract islaw as a shield or a sword. felt mostly through the process of standardization. For example, a seller selling two sets of the same model of TVDefinition of “Contract” cannot sell them at different terms to two customers at aA “Contract” is an agreement between two or more free and given point of time. The terms of sale are standardized forconsenting minds. An agreement enforceable by law is all possible customers. Any variation in terms is treated ascontract. According to Section 10 of the Indian Contract Act, Unfair Trade Practice. Standard form of contract is,1872 (hereinafter referred to as ICA), the following conditions therefore, one where terms of contract are all standardizedmust be fulfilled by an agreement to make it a contract :- and generally printed. The basic idea behind standard form
lesExecution of Contracts and Legal Remedies available for Breach of Contract Articof contract is that a trader of uniform goods cannot (a) Renunciation or Repudiationdiscriminate between his customers. Renunciation takes place when one of the parties shows theThe best example of Standard form Contract is Insurance intention not to go on with the contract. This amounts toPolicy. When a person wants to insure his life, he has to accept repudiation of contract by renouncing his obligation underthe terms and conditions specified by the Insurance Company. the contract. If there is an express and unqualified refusal, theHe himself cannot make any changes in the contract. It is a intention will be clear and obvious. But when it is implied bytake it or leave it contract, i.e. there is no compromise or conduct, then the establishment of such intention is importantspecial considerations for anyone, and, even if some of the that the party has acted in such a way as to lead a reasonableconditions result hardship to the person he cannot complain. person to the conclusion that he does not intend to fulfill hisSome other examples are a clock room ticket, a laundry bill part of the contract. Only then it will entitle the other party toetc. treat himself as discharged from any further performance ofStandard form contract has certain basic principles :- his obligations. Otherwise, it will not justify the other party in repudiating his part of the contract. Knowledge presumed Notice of Exemption (b) Anticipatory Breach Exemption clauses are strictly interpreted and should The repudiation may be explicit or implicit even before the not be unreasonable performance is due. A breach of contract, by repudiation before Exclusion from fraud, misrepresentation cannot be made the time for performance, is ‘anticipatory breach’. The innocent party is entitled to treat the contract as repudiated and sue for No fundamental breach can be covered up by an the damages immediately. It is also open for him not to treat exemption clause. the contract as repudiated until the time for performanceAs mentioned above, a signatory to contract cannot argue that arrived. If he does not, the contract is subsisting. The statusthe contents of the agreement have not been communicated, quo ante remains means the Contract will remain subsist tillor that these were not read or explained like in case of signing the time limit to perform obligation lapse.the loan agreement. It is knowledge presumed. However, a Section 39 of ICA embodies the principles of ‘anticipatorystandard contract can not contain a clause excluding liability breach’. It lays down that when a party to contract has refusedof any party arising out of fraud, misrepresentation or to perform or disabled himself from performing his promisefiduciary obligations. in its entirety, the promisee may put an end to the contract, unless he has signified, by words of conduct, his acquiescenceBreach of Contract in its continuance”.In all contracts, breach often occurs due to failure of onecontracting party to fulfill its contractual obligations. In law (c) Restitutionthe party which commits breach of contract is required to pay When there is an anticipatory breach, the aggrieved party maydamages to the other party. put an end to the contract. He may sue for breach. However,Breach of contract is one of the various ways in which a contract the aggrieved party may have received some benefits undermay be discharged. However, discharge by breach gives rise the contract by way of part performance. In such case, theto remedial rights resting on the fundamental juridical principle aggrieved party is required to store any benefit received therebased on latin maxim ‘Ubi jus, ibi remedium’ means “where a under from the defaulting party as per Section 64 of ICA. The doctrine of restitution will apply only when there is anright is broken, there must be remedy”. This breach of contract unjust enrichment.gives rise to remedies for the innocent party. (d) Actual breachTypes of Breach of Contracts Failure of performance (total or partial) is the most commonBreach of contract may arise in 4 ways :- ground for the discharge of a party by breach. Failure of (a) Repudiation performance obviously can occur only during performance. (b) Anticipatory (a) A party by his own acts making it impossible that he (c) Restitution and should fulfill his obligations under the contract. (d) Actual Breach (b) A party may fail to perform what he has promised.
les Artic Execution of Contracts and Legal Remedies available for Breach of ContractREMEDIES FOR BREACH OF CONTRACT Thus the remedy of rescission is available to a party who is entitled to avoid or put an end to the contract. The remedy ofA contract would be of no value, if there would be no remedies rescission is subject to certain important limits.to enforce the rights arising there under. Generally the mostcommon form of remedy available is a right to claim According to Section 27(2) of ICA, the Court may refuse tocompensation. A flow chart is given at Annexure 1 showing rescind the contract in the following cases :-types of breach of contract and remedies available. Various Where the plaintiff has expressly or impliedly ratified/remedies are available to the aggrieved party under the different affirmed the contract.acts, mentioned here under :- Where owing to change of circumstances, which has(A) Contractual Remedies taken place since the execution of contract, the parties(B) Statutory Remedies can not be substantially restored to the position in which they stood when the contract was made.(C) Equitable Remedies Where the third parties have, during the subsistence of(A) CONTRACTUAL REMEDIES contract, acquired rights in good faith for value withoutVery often the parties to the contract stipulate the remedies in notice.the event of breach of contract by specifically mentioning in Where only a part of the contract is sought to be rescindedthe agreement the consequences of breach of contract and and such part is not severable from the rest of contract.remedy available to the aggrieved party against the defaultingparty i.e. the rights and duties of the parties in case one party (b) Liquidated damagescommits breach. This is called contractual remedy. Liquidated damages is the actual sum specified in the contract, which the parties have themselves calculated would be fairContractual remedies shall include compensation, for breach of the contract. As per Section 74 (a) Rescission of Contract i.e. Right to rescind the contract of ICA when a contract has been broken, if a sum is mentioned by the other party at a definite situation of breach of in the contract as the amount to be paid in case of such breach, contract. the party complaining of the breach is entitled, whether or not (b) Liquidated Damages i.e. Quantum of damages or the actual damage/loss is proved to have been caused thereby, to method of calculation of damages. When the parties receive reasonable compensation not exceeding the amount so determine the quantum of damages to be paid by the mentioned or penalty stipulated for, from the defaulting party. other party committing breach, it is known as liquidated The words in section 74 “whether or not actual damage/loss is damages. proved to have been caused thereby” should not mislead to think that actual loss is not necessary. The Supreme Court in (c) Liquidated Penalties i.e. Parties may even determine and stipulate a penalty clause in the contract. In such cases “Maula Bux v. Union of India” 1970 (1) SCR 928 said, if no penalty becomes liquidated penalty. loss is proved, both sections 73 & 74 are not attracted. The above referred words in section 74 are confined to cases in(a) Rescission of Contract which it is not possible to prove the monetary value of the loss and therefore reasonable compensation even as fixed byWhen a contract is breached by one party, the other party may the parties may be allowed. Where the loss in money can behave the right to rescind the contract and treat himself as determined, it must be proved.absolved from his obligations and hold the defaulting partyliable in damages. The remedy of rescission may also available The Supreme Court in the case of ONGC v. SAW Pipes Limitedin a contract, which is voidable at the option of one of the JT 2003 (4) SC 171, after considering the judgment of Maulaparties. Bux (1970), Fateh Chand v. Balkishan Das 1964 (1) SCRAccording to Section 27(1) of ICA, on a suit for rescission of 515 laid down the following propositions of law with regarda contract, the court may adjudge such rescission in any of the to liquidated damages ….following cases :- (1) Terms of the contract are required to be taken into where the contract is voidable or terminable by the consideration before arriving at the conclusion whether plaintiff, the party claiming damages is entitled to the same. where the contract is unlawful (2) If the terms are clear and unambiguous stipulating the
lesExecution of Contracts and Legal Remedies available for Breach of Contract Artic liquidated damages in case of breach of the contract unless According to section 73 of ICA, damages by it is held that such estimate of damages/compensation is way of compensation may be allowed in Quasi unreasonable or is by way of penalty, party who has contract on the same basis as in contract. committed the breach is required to pay such Tax elements in Damage :- As damages are to compensation and that is what is provided in Section 73 compensate for actual loss and no more, the of the Contract Act. liability of the plaintiff to pay tax may have to (3) Section 74 is to be read along with Section 73 and, be taken into account. therefore, in every case of breach of contract, the person Remedies under Law of Sale of Goods :- There aggrieved by the breach is not required to prove actual are various remedial rights provided to the loss or damage suffered by him before he can claim a Buyer against the Seller in breach i.e. Suit for decree. The Court is competent to award reasonable damages, specific performance, recovery of compensation in case of breach even if no actual damage price and interest etc. Similarly various remedial is proved to have been suffered in consequences of the rights are available to the unpaid Seller against breach of contract. the buyer in breach i.e. Suit for price, interest, (4) In some contracts, it would be impossible for the court damages for non-acceptance and repudiation to assess the compensation arising from breach and if of contract before the due date etc. the compensation contemplated is not by way of penalty (iii) Un-liquidated penalty or unreasonable, court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable Un-liquidated penalty means penalty not compensation. ascertained(fixed) in the contract. Un-liquidated penalty is compensatory in character. This is(c) Liquidated penalty ascertained with the fundamental consideration to place innocent party in the position he would haveIn India, many cases on penalty have arisen in stipulations for occupied, had the contract been performedinterest. Where a loan is provided @ 12% interest and in case according to its terms. The payment of un-liquidatedof default the interest rate is prescribed @ 24%, it is a penalty. penalty depends on the various circumstance of theIn case of K.P. Subbarama Sastri and Ors. v. K.S. Raghavan default and awarded at the discretion of the court.and Ors. 1987 (2) SCR 767, where a sum of Rs. 16,000 wasadvanced and a sum of Rs. 28,000 had to be paid back in (C) EQUITABLE REMEDIESinstallments under a chit fund scheme, and on a single defaultthe whole was payable, the Supreme Court held it a penalty. Equitable remedies are available under the Specific Relief ActHowever, in Rampur Distillery Company Limited v. CLB and (SRA), 1963. This is “An Act to define and amend the lawAnr. 1970 (2) SCR 177, the Supreme Court did not allow the relating to certain kinds of specific relief”. It is a remedy,security deposit to be forfeited holding that it was penalty. which aims at the exact fulfillment of an obligation through Civil Courts. Under the Act, one can move to a Civil Court(B) STATUTORY REMEDIES seeking injunction for the specific performance of the obligations under the Contract.Statutory remedy shall include :- The Equitable remedies available under SRA includes :- (i) Reasonable compensation (a) Injunction (ii) Other statutory remedies (b) Specific Performance(iii) Un-liquidated penalty (a) Injunction (i) Reasonable Compensation In simple words injunction is a judicial process whereby a Where a sum is mentioned in the contract as amount party is ordered to refrain from doing a particular act/ thing to be paid for breach, whether it’s a penalty or not, OR to do a particular act/thing. It is a discretionary remedy. the injured party is entitled to receive reasonable An injunction may be issued in favour of plaintiff against the compensation but not exceeding the named amount. defendant, whether an individual or a company or a state. The (ii) Other Statutory remedies most of rules of injunction have been codified in Specific A compensation in Quasi-Contract :- Relief Act, 1963 and some rules are found in Code of Civil
les Artic Execution of Contracts and Legal Remedies available for Breach of ContractProcedure, 1908. Injunctions will not be issued, where damages land of his neighbors up to three inches. The court allowedare the appropriate remedy and where the contract cannot be the neighbor, compensation instead of an order for demolitionspecifically enforced. of the building.In Adhunik Steels Limited v. Orissa Manganese & Minerals When Perpetual Injunction can be refused :- According toPvt. Limited 2007 (8) SCR 213, the Supreme Court held that Section 41 of SRA, perpetual injunction will be refused by“injunction is a form of specific relief. It is an order of a court the court in the following circumstances, inter-alia :requiring party either to do a specific act or refrain from doing (a) To prevent breach of contract, the performance of whicha specific act either for a limited period or without limit of would not be specifically performed.time. (b) To prevent a continuing breach in which plaintiff hasInjunctions may be : acquiesced. (a) Temporary or Perpetual (c) To restrain any person from prosecuting any proceeding (b) Preventive or Mandatory in a criminal matter.Section 37(1) of SRA defines a Temporary Injunction as one (d) When equally efficacious relief can certainly be obtainedto continue until a specified time, or until further order of the by any other usual mode of proceeding, except in casecourt and that may be granted at any stage o suit (interlocutory of trust.injunction) and are regulated by the Code of Civil Procedure, (e) When the plaintiff has no personal interest in the matter.1908. (f) Where the conduct of the plaintiff disentitled him to theSection 36 of SRA states that preventive relief is granted at assistance of the court. (He who comes to equity mustthe discretion of the court by temporary or perpetual injunction. come with clean hands is the principle in this clause).For example when a party agreed to perform an act for onlyparticular party for a particular specified period and if party (b) Specific Performancemakes default by agreeing to perform the act for any other Specific performance is an equitable relief which may be givenparty during that specified period, then the court may restrain by the court in suitable cases of breach of contract by athe defaulting party by granting an injunction in favour of judgment that the defendant is to actually perform the contractother party. The power of Court to grant injunction is or a part of the contract according to the terms of stipulations.discretionary. The Court may order such injunction on such Section 10 of SRA states that, at the discretion of the court,terms including duration as the court thinks fit. Disobedience the specific performance may be enforced when there existswill entail attachment of property, civil prison, sale of property no standard for ascertaining actual damage caused by the non-and/or compensation from the proceed to the other party. performance of the act agreed to be done or when compensationSection 37(2) of SRA defines a perpetual injunction as one in money, for the non performance, would not afford adequatewhich can only be granted by the decree made at the hearing relief.and upon merits of the suit, enjoining the defendant perpetually Section 10 also explains that, unless and until the contrary isfrom the assertion of the right, or from the commission of an proved, the court shall presume that –act, which would be contrary to the rights of plaintiff. (i) the breach of a contract to transfer immovable propertySection 38 of SRA specifies the circumstances in which cannot be adequately compensated in money andpermanent injunction can be granted. It provides that, subjectto the other provisions in this regard, a perpetual injunction (ii) the breach of a contract to transfer movable propertymay be granted to the plaintiff to prevent the breach of an can be so compensated except where –obligation existing in his favour and when such obligation It is not an ordinary article of commerce or ofarises from contract, the court shall be guided by the rules and special value of interest to the plaintiff or consistprovisions contained in Section 9 to 25 of the Act. of goods which are not easily obtainable in theSection 40 of the SRA provides that the plaintiff in a suit for market. For example, B agrees to buy and S agreesperpetual/mandatory injunction may claim damages either in to sell a rare painted picture. B may compel S toaddition to or in substitution for such injunction. For example specifically perform the contract.In an Indian case, Tilok Chand v. Dhundiraj AIR 1957 Nag 2, It is held by defendant as the agent of trustee of thea person happened to raise his building to encroach on the plaintiff. 314 (A - 97) MARCH 2011
lesExecution of Contracts and Legal Remedies available for Breach of Contract ArticUnreasonable delay by the plaintiff in performing his part of (4) Where the party has already substantially performed hiscontract operates as a bar to obtain specific performance part of contract or suffered loss, the court may properlyprovided that – exercise the discretion to grant specific performance by time was originally an essential element of contract, or the other party, if the contract is capable of specific performance. [section 20(3)] time was made an essential element by subsequent notice, or (5) The court shall not refuse specific performance to a party merely on the ground that the contract is not enforceable the delay has been so long and unreasonable that it amounts at the instance of the other party. to abandonment of the contract. According to Section 21 of SRA, relief of compensation mayAccording to Section 13 of SRA, when there is a contract for be claimed either in addition to or in substitution of specificthe sale or lease of immovable property but the seller is found performance. If the court is of the opinion that specifichaving no title or imperfect title, the buyer or lessee may performance ought not to be granted, it may awardcompel the seller or lessor to specifically perform the contract compensation. If the court finds that specific performance bywhen he is subsequently in a position to do so in certain itself would not be sufficient relief, it may in addition awardcircumstances. compensation. In awarding compensation the court shall beSection 14 (1) of SRA states the contracts which cannot be guided by the principles specified in Section 73 of ICA.specifically performed, namely – According to Section 23 of SRA, where the parties have fixed (a) a contract for non-performance of which compensation compensation for default, this would be no bar for the relief in money is an adequate relief, of specific performance. The court may allow specific (b) a contract which runs into numerous details or which is performance if the contract did not fix the compensation as an dependent on the personal qualifications of the parties, option to the defaulting party for performance. If specific (c) a contract which is in its nature determinable, performance is granted, the payment of fixed compensation cannot be ordered in the same decree. (d) a contract the performance of which involves the performance of a continuous duty which the court cannot Some important issues/suggestions supervise. While drafting a contract or agreement or while vettingThus a contract of marriage, contracts of employment, personal a draft, the parties need to go through carefully aboutservices, artistic skill and literary skill can not be specifically various obligations, rights, consequence of default,enforced. remedies available etc. Where time is the essence of aSection 20(1) of the SRA provides that the jurisdiction to contract, it is necessary to make a specific mention aboutdecree specific performance is discretionary, and the court is the same. Results to be achieved and time limits thereofnot bound to grant such relief merely because it is lawful to have to be spelt out with sufficient clarity. Where thedo so; but the discretion of the court should not be arbitrary parties intend to enforce specific performance or toand it should be reasonable, guided by judicial principles and restore status quo ante, it is better to provide a specificcapable of correction by court of appeal. The following are clause. Sufficient clarity is required to be added as tothe cases in which the court may properly exercise discretion the mechanism for dispute resolution and jurisdiction ofnot to decree specific performance :- the courts. (1) Where the contract gives an unfair advantage to the A general principle which has a bearing on damages is plaintiff over the defendant. the duty to mitigate damages. A person suffering loss (2) Where the enforcement of the contract would cause from breach of contract must take reasonable steps to unforeseen considerable hardship to the defendant, mitigate the extent of damage. It is not exact to say the whereas no such hardship would be caused to the plaintiff plaintiff is under a legal duty to mitigate his loss, but he by non-performance. can not act unreasonably and hold defendant liable to loss. Whether plaintiff has used reasonable opportunities (3) Where the circumstances of the contract are such that, is question of fact in each case and the burden of proof though they do not make the contract voidable, they is on defendant. render the enforcement by specific performance inequitable. Mitigation often has application in contract for sale or
lesArtic Execution of Contracts and Legal Remedies available for Breach of Contract purchase of goods. On buyer’s refusal to take delivery, In addition, the risk of additional financial burden due the seller should resell the goods at market price and to efflux of time has also to be borne in mine by the may recover the difference, if any, between the prices parties to the contract. realized and the contract price. Similarly, where seller According to Section 30 of ICA, on adjudication of the breaches, the buyer should buy the goods from any rescission of contract, the court may require the party to alternative sources, if available. However, if alternative whom the relief is granted to restore any benefit which source of availability does not exist, he is entitled to he may have received from the other party and make avail the suitable remedies available. any compensation to him which justice may require. This It is advisable that all extensions of time granted to the provision gives effect to the principle that he who seeks contractor should be against the specific requests, in equity must do equity. In some cases, the defaulting party writing, and should be qualified so as not to prejudice has complied with most of the obligations and to seek the rights of other party to recover liquidated damages some further time to complete their performance they for the delay and/or to cancel the contract and make can take help of this provision of restitution, which may alternate arrangements, at the cost and risk of the be difficult for the aggrieved party and thereby avoid contractor. Similarly such extensions granted should termination of contract. be without any additional financial implications to the Managing legal issues in contracts is essential to guarantee other party. All contract variations, modifications profitability to the organization. Contract management should be only by mutual consent and recorded as is the process which ensures that both parties to a contract minutes signed by all the consenting parties. Further, fully meet up their respective obligations as effectively the party accepting performance after the due date must as possible, in order to achieve business objectives under give notice, while accepting, that the party intends to the contract. claim compensation, otherwise the party is deemed to have waived such right. Conclusion In many cases it is held that the purpose of naming In countries like USA, while drafting a contract, the law is liquidated damages in contract is to compensate the taken as the tool of management of the whole affair. From the aggrieved party for the loss suffered. The aggrieved initial stage of drafting contract itself, parties to contract take party has no right to make a profit out of this. It, the help of specialist lawyers to clearly draft the contract therefore, follows that although parties may have agreed document, in its entire form including all conditionalities, so to a fixed sum payable as damages, if such sum exceeds that parties themselves can solve their problems either directly the actual loss suffered by the aggrieved party, the or through mediators and arbitrators. Only few contracts keep aggrieved party will get nothing more than the actual any space for litigations to landup in the Court because of loss suffered. high cost of litigation and uncertainty involved. It may be noted that the purpose of inserting liquidated But in countries like India, parties entering into the contract damages clause is only to ensure that the parties shall are in the ‘honeymoon’ stage. As such, they keep away their execute the work with due diligence and in a advocates and solicitors by either totally avoiding their workmanlike manner and strive to complete the whole involvement while drafting the contract or by not consulting work as given in the contract within the stipulated time. advocates at the time of finalizing the contract by waiving It must be remembered that the stipulation with regard even important clauses suggested by them. As a result, contract to liquidated damages is not aimed to provide documents are often prepared by lay man with serious loopholes revenue(unjust enrichment) to the other party. It is thus, keeping many issues untouched specially issues arising out of desirable that recourse to imposition of liquidated breach of contract. damages should be taken only in extreme cases and cordial relationship persists between the parties for future Reality of life is that in every contract good relations between business transactions also. If unwanted dispute is raised the parties may not persist forever and under certain by any party, then the parties should be ready to face circumstance differences may develop between the parties. many legal and financial complications. There may be Hence while drafting the contract all necessary steps should an injunction from the Courts retaining the party from be taken care of including remedies available to the aggrieved proceeding the work further pending decision of the case. party.