Most important question (unit 5) of Indian contract Act ,1872 Business law CA foundation

 

Question 1

An anticipatory breach of contract is a breach of contract occurring before the tine fixed for  performance has arrived.” Discuss Stating also the efect of anticipatory breach on contracts.

Answer:  An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. When the promisor refuses altogether to perform his promise and signifies his unwillingness even before the time for performance has arrived, it is called  anticipatory breach.

Section 39 ofthe Indian Contract Act, 1872 deals with anticipatory breach of contract and provides  as follows:  "When a party to a contract has refused to perform or disable himself from performing. his promise in its entirety, the promisee may put an end to the contract, unless he has signified. by words or conduct, his acquiescence in its continuance.' 

Effect of anticipatory breach:  The promisee is excused from performance or from  further performance. Further he gets an option:

 (1) To either treat the contract as rescinded and sue the other party for damages from breach of contract immediately without waiting until the due date of performance; or 

(2) He may elect not to rescind but to treat the contract as still operative, and wait for the time of performance and then hold the other party responsible for the consequences of non- performance. But in this case, he will keep the contract alive for the benefit of the other party as well as his own, and the guilty party, if he so decides on re-consideration, may still perform his part of the contract and can also take advantage of any supervening impossibility which may have the effect of discharging the contract.

Question 2 

 M Ltd., contract with Shanti Traders to make and deliver certain machinery to bem by 30.6.2017 for Rs. 11.50 lakhs. Due to labour strike: M Ltd. Could not manufacture and deliver the machinery to Shanti Traders. Later, Shanti Traders procured the machinery from onother manufacturer for Rs. 12.75 lakhs. Due to this Shanti Traders was also prevented from performing a contract which it had made with Zenith Traders at the time of their contract with M Ltd. and were compelled to pay compensation for breach of contract. Advise Shanti Traders the amount of compensation which it can claim from M Ltd., referring to the legal provisions of the Indian Contract Act, 1872. 

Answer:  (1) Section 73 of the Indian Contract Act. 1872  provides for consequences of breach of contract. 

2, According to it, when a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the 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 the contract, to be likely to result from the breach of it. 

Note:  Such compensation is not given for any remote and indirect loss or damage sustained by reason of the breach. 

3. It is further provided in the explanation to the section that in estimating the loss or damage 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.

Conclusion

 a. Applying the above principle of law to the given case, M Ltd. is obliged to compensate for the loss of Rs. 1.25 lakh (i.e., Rs. 12.75 minus Rs. 11.50 = Rs. 1.25 lakh) which had naturally arisen due to default in performing the contract by the specified date.

b. Regarding the amount of compensation which Shanti Traders were compelled to make to Zenith Traders, it depends upon the fact whether M Ltd., knew about the contract of Shanti Traders for supply of the contracted machinery to Zenith Traders on the specified date. If so. M Ltd is also obliged to reimburse the compensation which Shanti Traders had to pay to Zenith Traders for breach of contract. Otherwise, M Ltd is not liable.

Question 3: 

X' entered into a contract with Y' to supply him 1,000 water bottles @ Rs 5.00 per water bottle, to be delivered at a specified time. Thereafter. X° contracts with Z’ for the purchase of 1,000 water bottles @ Rs, 4.50 per water bottle, and at the same time told Z that he did so for the purpose of performing his contract entered into with.Y’,Z' failed to perform his contract in due course and market price of each water bottle on that day was Rs. 5.25 per water bottle. Consequently,'X,could not procure any water bottle and Y’rescinded the contract Calculate the amount of damages which X' could claim from Z’ in the circumstances?What would be your answer if Z' had not informed about the Y's contract? Explain with reference to the provisions of the Indian Contract Act, 1872. 

Answer:  Provision same as above(section 73) i.e., Point l and Point 2. 

The leading case on this point is "Hadley v. Baxendale"”in which it was decided by the Court that the special circumstances under which the contract was actually made were communicated by the plaintiff to the defendant, and thus known to both the parties to the contract, the damages resulting from the breach of such contract which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from the breach of contract under these special circumstances so known and communicated.

 In the instant case 

X, had intimated to 'Z’ that he was purchasing water bottles from him for the purpose of performing his contract with 'Y'. Thus, Z' had the knowledge of the special circumstances. Therefore, X' is entitled to claim from Z  Rs. 500/- at the rate of 0.50 paise i.e., 1000 water bottles x 0.50 paise (difference between the procuring price of water bottles (Rs 4.50) and contracted selling price to Y  i.e (Rs.5) being the amount of proft X’ would have made by the performance of his contract with 'Y'. 

If X' had not informed  Z' of  Y's contract 

Then the amount of damages would have been the difference between the contract price (Rs. 4.50) and the market price (Rs. 5.25) on the day of de fault. In other words, the amount of damages would be Rs. 750/- (i.e. 1000 water bottles x 0.75 paise). 

Question 4:

 Seema was running a boutique in New Delhi. She has to deliver some cloth to her friend Kiran who was putting up an exhibition at Mumbai. Seema delivered the sewing machine and some cloth to a railway company to be delivered at a place where the exhibition was to be held. Seema expected to earn an exceptional profit from the sales made at this exhibition however she did not bring this fact to the notice of the railway's authorities. The goods were delivered at the place after the conclusion of the exhibition. On account of such breach of contract by railways authorities, can Seema recover the loss of profits under the Indian Contract Act, 1872?

Answer:   As per Section 73 to 75 of Indian Contract Act, 1872,  Damage means a sum of money claimed or at he awarded in compensation for a loss or an injury. Whenever a party commits a breach, the aggrieved party can claim the compensation for the loss so suffered by him. General damages are those which ate arise naturally in the usual course of things from the breach itself. (Hadley Vs Baxendale). Therefore, when breach is committed by a party, the defendant shall be held liable for all such losses that naturally arise in the usual course of business. Such damages are called ordinary damages. 

However, special damages are those which arise in unusual circumstances affecting the  aggrieved party and such damages are recoverable only when the special circumstances were brought to the knowledge of the defendant. If no special notice is given, then the aggrieved party can only claim the ordinary damages.

 In the given case, Seema was to earn an exceptional profit out of the sales made at the exhibition,  however she never informed about it to the railway authorities. Since the goods were delivered |after the conclusion of the exhibition, therefore Seema can recover only the losses arising in the ordinary course of business. Since no notice about special circumstances was given to railways authorities, she could not recover the loss of profits.

Question 5: 

Mr. Murti was travelling to Manali with his wife by bus of Himalya Travels Pvt. Ltd. Due to some technical default in the bus, the driver has to stop the bus ina mid way in cold night. Driver advised the passenger to get the shelter in nearest hotel which was at a distance of only one kilometre from that place. The wife of Mr. Murti caught cold and fell ill due to being asked to get down and she had to walk in cold night to reach hotel. Mr. Murti filed the suit against Himalya Travels Pvt. Lid. for damages for the personal inconvenience, hotel charges and medical treatment for his wife. Explain, whether Mr. Murti would get compensation for which he filed the d suit? 

Answer: Section 73 of Indian Contract Act, 1872 provides that when a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the 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 the contract, to be likely to result from the breach of it.  But such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

 In the instant case, Mr. Murti filed the suit against Himalya Travels Pvt. Ltd. for damages for the personal inconvenience, hotel charges and medical treatment for his wife. 

On the basis of above provisions and facts of the case, it can be said that Mr. Murti can claim damages for the personal inconvenience and hotel charges but not for medical treatment for his wife because it is a remote or indirect loss.

Question 6: 

 What do you mean by quantum Meruit and state the rules relating to such contracts. 

 Answer: (1). Meaning: Quantum Meruit means as much as is merited (earned). 

2. Quantum Meruit - Exception to Normal Rule:

•  Unless a party has performed his promise in full, he cannot claim performance from the other party. 
•  To this rule, there are certain exceptions based on "Quantum Meruit". 
• When a person has done some work under a contract, and other party either -(i) repudiates the Contract, or (ii) some unexpected event happens making further performance of contract impossible, then the party who performed the work, can claim remuncration for work done. 

3. When and to whom right arises? 

• (a) The Original Contract must have been discharged, by the breach of a party by non- performance. If the Original Contract exists, the aggrieved party can resort to damages, he cannot claim quantum meruit remedy. 
• (b) The Right to sue on Quantum Meruit lies with the party who is not at fault, i.e. who has performed his part of the Contract.

4.  The claim for quantum meruit arises in the following cases: 

(a) When an agreement is discovered to be void or when a contract becomes void. 

(b) When something is done without any intention to do so gratuitously. 

(c) Where there is an express or implied contract to render services but there is no agreement as to remuneration. 

(d) When one party abandons or refuses to perform the contract. 

(e) Where a contract is divisible and the party not in de fault has enjoyed the benefit of part performance 

Question 7: 

Liquidated damage is a genuine pre-estimate of compensation of damages for certain anticipated breach of contract whereas Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable and has no comparison to the loss suffered by the parties". Explain the statement by differentiating between liquidated damages and penalty with reference to provisions of the Indian Contract Act, 1872. 

 Answer:  Liquidated damage is a genuine pre-estimate of compensation of damages for certain anticipated breach of contract. This estimate is agreed to between parties to avoid at a later date detailed calculation and the necessity to convince outside parties.

 Penalty on the other hand is an extravagant amount stipulated and is clearly unconscionable and has no comparison to the loss suffered by the parties. n tems of Section 74 of the Act “where 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 damages or loss is proved to have been caused thereby, to receive from the other party who has broken the contract, a reasonable compensation not exceeding the amount so named, or as the case may be the penalty stipulated for.

 Explanation to Section 74 :

A stipulation for increased interest from the date of default may be a stipulation by way of penalty. 

In terms of Section 74, courts are empowered to reduce the sum payable on breach whether it is penalty° or“liquidated damages'' provided the sum appears to be unreasonably high.

Sri Chunni Lal vs Mehta & Sons ltd (Supreme Court) 

Supreme Court laid down the ratio that the aggrieved party should not be allowed to claim a sum greater than what is specific in the written agreement. But even then the court has powers to reduce the amount if it considers it reasonable to reduce.  

Question 7:

A & B entered into a contract to supply unique item, alternate of which is not available in the market. A refused to supply the agreed unique item to B. What directions could be given by the court for breach of such contract? 

Answer: Specific Performance:

 (a) For breach of certain contracts, monetary compensation by way of damages may not constitute adequate  remedy. The aggrieved party may not be interested in monetary compensation. 

(b) The Court may, in such cases, direct the defaulting party to carry out the promise according to the terms of the Contract. This is called "Specific Performance" of the Contract. 

Example:  X agreed to sell an old painting to Y fort 50,000. Subsequently, X refused to sell the Painting, Here, Y may file a suit against X for the specific performance of the contract. 

In the instant case:   

A refused to supply the agreed unique item to B, alternate of which is not available in the market. Therefore here, B may file a suit against A for the specific performance of the contract. 

Question 8:

Give the circumstances as to when “Vindictive or Exemplary Damages"”may be awarded for breach of a contract. 

 Answer:  Vindictive or Exemplary damages. These damages may be awarded only in two cases:

• (a) for breach of promise to marry because it causes injury to his or her feelings; and 
• (b) for wrongful dishonour by a banker of his customer's cheque because in this case the injury due to wrongful dishonour to the drawer of cheque is so heavy that it causes loss of credit and reputation to him.