(a) Discuss the rules which are taken into account by the courts while awarding damages for the breach of contract. Refer to the…

(a) Damages for breach of contract are compensatory, not punitive. The aim is to put the injured party, as far as money can, in the position they would have been in had the contract been performed (the "expectation interest", restitutio in integrum). The rules are found in Sections 73–75 of the Indian Contract Act, 1872, and in case law.

1. Remoteness (Section 73). Compensation is payable for loss that:

• arose naturally in the usual course of things from the breach (general damages); or
• the parties knew, when they made the contract, to be likely to result from the breach (special damages).

No compensation is given for remote and indirect loss. This codifies Hadley v. Baxendale (1854), where a mill's loss of profits from a delayed crankshaft was not recoverable because the special circumstances had not been communicated. Where the defendant knows of a high profit contract, higher damages follow: Victoria Laundry v. Newman Industries (1949); The Heron II (1969).

2. Measure of damages. In a sale, damages are the difference between the contract price and the market price on the date of breach (Sections 56–57 of the Sale of Goods Act, 1930). Damages must be proved; where a breach is established but no loss is proved, nominal damages are awarded.
3. Mitigation (Explanation to Section 73). In estimating the loss, the court takes into account the means that existed of remedying the inconvenience caused by the breach. The plaintiff cannot recover loss they could reasonably have avoided (Murlidhar Chiranjilal v. Harishchandra Dwarkadas (1962); M. Lachia Setty & Sons v. Coffee Board (1980)).
4. No punitive damages, as a rule. Exemplary damages are generally not awarded. The traditional exceptions are breach of a promise to marry and a banker's wrongful dishonour of a cheque. Damages for mental agony are allowed where the contract's object was peace of mind or enjoyment, as in holiday cases (Jarvis v. Swans Tours (1973)) and consumer cases.
5. Stipulated sums (Section 74).

• Where the contract names a sum payable on breach, or contains a penalty, the injured party gets reasonable compensation not exceeding the sum named. Indian law does not draw the English distinction between penalty and liquidated damages (Fateh Chand v. Balkishan Das (1963)).
• A genuine pre-estimate may be awarded without strict proof where loss is hard to prove (ONGC v. Saw Pipes (2003)). However, where loss is capable of proof, it must be proved, and a forfeiture of earnest money must be reasonable (Kailash Nath Associates v. DDA (2015)).

6. Rescission (Section 75). A person who rightfully rescinds a contract is entitled to compensation for damage sustained through its non-fulfilment.

Conclusion: these rules together make damages compensatory, confined to foreseeable loss, reduced for failure to mitigate, and capped by any stipulated sum.

(b) A void agreement is one not enforceable by law (Section 2(g)). A void contract is one that ceases to be enforceable (Section 2(j)). An illegal agreement is one whose object or consideration is forbidden by law, would defeat the provisions of any law, is fraudulent, involves injury to the person or property of another, or is immoral or opposed to public policy (Section 23).

Every illegal agreement is void. If part of the consideration or object is unlawful, the whole agreement is void (Section 24). Examples:

• an agreement to pay for committing a crime;
• a promise to obtain a government job for money (illustration (f) to Section 23);
• an agreement to share the proceeds of smuggling.

But not every void agreement is illegal. Many agreements are void for reasons unconnected with illegality:

• agreements without consideration (Section 25);
• agreements in restraint of marriage, trade or legal proceedings (Sections 26–28);
• agreements that are uncertain (Section 29);
• wagering agreements (Section 30);
• agreements with minors (Mohori Bibee v. Dharmodas Ghose (1903));
• agreements vitiated by mutual mistake of fact (Section 20);
• contracts that become void through supervening impossibility (Section 56), for example the destruction of the subject-matter before performance.

Why the distinction matters: collateral transactions and restitution

• Illegal agreements taint connected transactions. Money lent knowingly to finance an illegal act cannot be recovered, and a collateral agreement is also unenforceable.
• Merely void agreements do not taint collateral transactions. In Gherulal Parekh v. Mahadeodas Maiya (1959), a wagering agreement was held void but not illegal, so a partnership to carry on wagering transactions was enforceable between the partners. Similarly, a loan to pay a wagering debt is recoverable.

Restitution:

• Under Section 65, a benefit received under an agreement later discovered to be void, or a contract that becomes void, must be restored.
• Where the parties know the agreement is illegal, the courts refuse relief under the maxims ex turpi causa non oritur actio and in pari delicto potior est conditio defendentis (Kuju Collieries v. Jharkhand Mines (1974); Immani Appa Rao v. Gollapalli Ramalingamurthi (1962)).
• Exceptions exist where the parties are not in pari delicto, for example where one party was defrauded or coerced, or where the plaintiff repents before the illegal purpose is carried out.

Conclusion: voidness is the wider category. Illegality is its gravest form and carries additional penal consequences for connected transactions.

(c) A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person on that person's default (Section 126). The surety gives the guarantee, the principal debtor is the person on whose behalf it is given, and the creditor receives it.

Secondary nature. The surety's obligation is accessory: it arises only on the principal debtor's default and depends on a valid principal obligation.

• The surety has rights that reflect the secondary position:
• to be subrogated to the creditor's rights and securities once they pay (Sections 140–141);
• to be indemnified by the principal debtor (Section 145).

Co-extensive liability (Section 128). Unless the contract provides otherwise, the surety's liability is co-extensive with that of the principal debtor. It extends to the whole debt, interest and costs for which the principal debtor is liable, but not beyond.

• The creditor may sue the surety without first proceeding against the principal debtor (Bank of Bihar v. Damodar Prasad (1969); State Bank of India v. Indexport Registered (1992)).
• The surety can be sued even though the principal debtor has been discharged by operation of law, for example by insolvency. In Lalit Kumar Jain v. Union of India (2021), approval of a resolution plan for the corporate debtor under the Insolvency and Bankruptcy Code did not discharge personal guarantors.
• A guarantee may be limited in amount or time, and a continuing guarantee may be revoked for future transactions (Sections 129–131).

Discharge of the surety, which marks the limits of liability:

• a variance in the terms of the principal contract without the surety's consent (Section 133);
• release or discharge of the principal debtor by the creditor's contract or act (Section 134);
• composition with the principal debtor, giving them time, or promising not to sue (Section 135), though an agreement with a third person to give time does not discharge the surety (Section 136) and mere forbearance to sue does not either (Section 137);
• any act or omission of the creditor that impairs the surety's eventual remedy (Section 139);
• loss of securities (Section 141);
• a guarantee obtained by misrepresentation or concealment (Sections 142–143).

Conclusion: the surety's liability is secondary in that it is triggered by default and is accessory to the principal obligation. It is co-extensive in amount and enforceability, so the creditor can proceed against the surety at once. The statutory rights of discharge and subrogation protect the surety against prejudice.