Page 34 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 1: Laws of Contract

Notes
Examples:

1. A, a builder, contracts to erect and finish a house by the first of January, in order that B may
give possession of it at that time to C, to whom B has contracted to let it. A is informed of
the contract between B and C. A builds the house so badly that before the 1st of January
it falls down and had to be rebuilt by B, who in consequence loses the rent which he was
to have received from C, and is obliged to make compensation to C for the breach of his
contract. A must make compensation to B for the cost of rebuilding the house, for the rent
lost and for the compensation made to C.
2. A delivers to B, a common carrier, a machine to be conveyed without delay to A’s mill,
informing B that his mill is stopped for want of the machine. B unreasonably delays
the delivery of the machine and A, in consequence, loses a profitable contract with the

government. A is entitled to receive from B, by way of compensation, the average amount

of profit which would have been made by the working of the mill during the time that
delivery of it was delayed. But, however, the loss sustained through the loss of the
government contract cannot be claimed.
3. X’s mill was stopped due to the breakdown of a shaft. He delivered the shaft to Y, a
common carrier, to be taken to a manufacturer to copy it and make a new one. X did not
make known to Y that delay would result in a loss of profits. By some neglect on the part of

Y the delivery of the shaft was delayed in transit beyond a reasonable time. As a result, the
mill remained idle for a longer time than otherwise would have been, had the shaft been
delivered in time? Held, Y was not liable for loss of profi ts during the period of delay as
the circumstances communicated to Y did not show that a delay in the delivery of the shaft
would entail loss of profits to the mill.

4. Where A contracts to sell and deliver to B on the 1st of January certain cloth which B
intends to manufacture into caps of a particular kind for which there is no demand except
in that season. The cloth is not delivered till after the appointed time and too late to be
used that year in making caps. B is entitled to receive from A only ordinary damages, i.e.,
the difference between the contract price of the cloth and its market price at the time of

delivery but not the profits which he expected to obtain by making caps, nor the expenses
which he has incurred in making preparation for the manufacture of caps.
Whether Payment of Interest at a Higher Rate Amounts to Penalty?

Whether an agreement to pay interest at a higher rate in the case of breach of a contract amounts
to penalty shall depend upon the circumstances of each case However, following rules may be
helpful in understanding the legal position in this regard.
(i) A stipulation for increased interest from the date of default shall be a stipulation by way
of penalty if the rate of interest is abnormally high. A gives B a bond for the repayment of
` 1,000 with interest at 12% p.a. at the end of six months with a stipulation that in case of
default interest shall be payable at the rate of 75 per cent from the date of default. This is a
stipulation by way of penalty and B is only entitled to recover from A such compensation
as the court considers reasonable.
(ii) Where there is a stipulation to pay increased interest from the date of the bond and not
merely from the date of default; it is always to be considered as penalty.
(iii) As regards compound interest, it is not itself a penalty. But it is allowed only in cases
where the parties expressly agree to it. However a stipulation to pay compound interest at
a higher rate on default is considered as a penalty.
(iv) An agreement to pay a particular rate of interest with stipulation that a reduced rate will
be acceptable if paid punctually is not a stipulation by way of penalty. Thus, where a bond

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