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Case Analysis | Aug. 1, 2024

CASE ANALYSIS on BREACH OF CONTRACT : Karsandas H. Thacker vs. The Saran Engineering Co. Ltd.

Karsandas H. Thacker vs. The Saran Engineering Co. Ltd.

 

Facts of the case

1. In July 1952, the appellant, Karsandas, and the respondent entered into a contract for the supply of 200 tons of scrap through correspondence. Karsandas subsequently entered into a contract with M/s. Export Corporation to supply them with 200 tons of scrap. However, the respondent was unable to supply the agreed amount of scrap and communicated this inability via a letter on January 30, 1953.

 

2. The appellant then sued the respondent for a sum of Rs. 20,700. This amount was calculated based on the difference between what the appellant had to pay and what they would have received under the contract, as interpreted according to Section 73 of the Indian Contract Act, 1872 (The Act).

 

3. The respondent denied owing the claimed damages, arguing that no complete contract had been formed between the parties and that the appellant did not suffer any damages since the price of scrap in July 1952 was the same on January 30, 1953. The respondent also argued that the appellant did not face any monetary damages as the contract was based on the preceding deal's principal amount. Additionally, the respondent was not informed about the export of the scrap supply.

 

4. After examining the case facts, the Trial Court ruled that a completed contract existed between the parties as of October 1952. However, it found that the respondent was not responsible for the breach of contract because the appellant had failed to inform the respondent about the export of the scrap. Furthermore, since the appellant did not suffer any losses, the court dismissed the suit, deeming it unnecessary.

 

5. The High Court granted the necessary certificate under Article 133(1)(a) of the Constitution, allowing the case to be appealed to the Supreme Court of India.

 

Principle
 

Section 73 of  the Indian Contract Act, 1972

Section 73 of the Indian Contract Act specifically deals with the award of damages. It states:

“Compensation for loss or damage caused by breach of contract. When a contract has been broken, the party who suffers from 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 a breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.”

A breach of contract occurs when one party fails to fulfill the agreed-upon terms and conditions of the contract. In such cases, the non-breaching party can sue for monetary compensation. Alternatively, they can request the court to compel the breaching party to fulfill their contractual obligations.

Breach of contract is of two types:

1. Anticipatory breach of the contract
2. Actual breach of the contract.

An anticipatory breach of contract occurs when one party indicates, before the performance is due, that they will not fulfill their contractual obligations. This can happen in two ways:

1. Expressly, through spoken or written words.

2. Impliedly, through the conduct of one of the parties.

Anticipatory breaches are typically committed by the party who has made the promise.

Actual breach refers to refusing to fulfill the promise on the scheduled date. When one party breaches the contract by refusing to perform their promise on the due date, they have committed a breach. Consequently, the non-breaching party has the right to take legal action against the party that has breached the contract.

 

 

Remedies for Breach of Contract

1. Suit for damages
2. Suit for specific performance
3. Eliminate the contract
4. Stop the other party from doing something.
5. Suit upon quantum meruit (compensation for work done)

Suit for Damages 

A party can seek compensation for the loss or damage caused by a breach of contract. The most common remedy available to the injured party is damages, which can include ordinary damages, special damages, exemplary damages, nominal damages, damages caused by delay, and pre-fixed damages.

The "Hadley vs. Baxendale" rule is significant in cases of suits for damages. It states that, in the absence of prior notice about special damages in the contract, the injured party can only sue the other party for ordinary damages.

Suit for Specific Performance

When monetary compensation is insufficient to cover the loss resulting from a breach of contract, the injured party can request the court to compel the breaching party to fulfill their contractual obligations as originally promised.

Elimination of Contract

When a contract is breached, the promisee can cease their performance and seek compensation from the promisor.

 

Rescission of Contract

The promisee can restrain the breaching party from further actions until the case is resolved.

Suit for Quantum Meruit

This involves suing for the amount of money owed to the injured party for the work completed up to the point of the breach.

Section 74 of the indian contract act,1972

Section 74 of the indian Contract Act, 1872, provides that, “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 other party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be the penalty stipulated for.”

 

Therefore, the amount stated in the contract is not awarded as compensation in India. The court is left to assess the real loss or fair compensation and to grant the same, which would not, however, exceed the amount stated in the contract.

Ratio decidendi by Justice Raghubar Dayal

Because the appellant did not have to pay a higher price than what was agreed upon with the respondent, he did not suffer any consequential loss due to the breach. The actual loss incurred by the appellant resulted from his contract to sell 200 tons of scrap iron to the Export Corporation. Since the respondent was unaware of this contract, he could not have anticipated the likelihood of the actual loss.

 

Summary 

Issue raised in the case

Damages are to be paid under section 73 or 74 of the Indian contract act?

Judgment of the case 

The Supreme Court ruled in favor of the respondent and upheld the High Court's decision. After analyzing the facts, it was clear that the respondent was not at fault. The appellant's failure to inform the respondent about the export supply deal was the primary issue.

The court referred to Section 73(k) of The Act, which states that if a party breaches a contract, they are liable to pay the difference between the contract price of the agreed-upon goods and the amount the other party had to pay to obtain similar goods due to the breach. However, the breaching party is not liable for compensation that the second party had to pay to third parties if the breaching party was not informed at the time of the contract that the goods were intended for delivery to those third parties. In this case, the appellant did not suffer any monetary damages.

The respondent sent a letter to the appellant before the expiry of both deals. If the appellant had chosen, he could have supplied the scrap to the third party by purchasing it from the market at the same rate, but he did not do so. Therefore, claiming damages from the respondent was deemed unreasonable.

The court concluded that when a party suffers indirect or remote loss or damages due to a breach of contract, they are not entitled to compensation. Consequently, the appeal failed and was dismissed with costs.

 

Analysis of the case

According to Section 73 of the Indian Contract Act, when a party breaches a contract, they are obligated to compensate the other party for the difference between the contract price of the agreed-upon goods and the amount the other party had to pay to purchase similar goods due to the breach. However, the breaching party is not required to pay any additional compensation that the non-breaching party may owe to third parties, as long as the breaching party was not informed at the time of the contract that the goods were being purchased for delivery to those third parties.

This means that the compensation is limited to the direct loss suffered by the non-breaching party, specifically the cost difference incurred to secure a substitute for the undelivered goods. Any additional losses or damages that are indirect or consequential, particularly those involving third parties, are not the responsibility of the breaching party unless they were explicitly made aware of such potential losses at the time of forming the contract. The purpose of this provision is to ensure fairness and clarity in the assessment of damages, focusing on foreseeable and direct consequences of the breach while excluding unforeseen or indirect losses.