Breach of Contract under Indian Contract Act

Breach of Contract under Indian Contract Act 1872: Explained

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This article on ‘Breach of Contract under Indian Contract Act: All you need to know’ was written by Madiha Khan, an intern at Legal Upanishad.

Introduction

According to the Indian Contract Act, a contract is an agreement that is enforceable by law. There must be an offer and acceptance of that offer through the free consent of both parties. As it is known, all contracts are agreements but all agreements are not contracts. A contract is also known as a legally binding agreement. So, for there to be a breach of contract there must be a contract and not merely an agreement.

A breach occurs when one of the parties to a contract refuses to perform the obligations that were promised by them at the time of the making of the contract. A breach of contract can be either an actual breach or an anticipatory breach. Breach of contract usually comes under civil wrong. To file a case for breach of contract, it must be proven that a legally binding contract was in place and that it had been breached.

A bench of Justices SA Nazeer and Krishna Murari said the distinction between mere breach of contract and cheating, is a fine one. Generally, a breach of contract gives rise to only civil liability but in case there is intent to cheat the other party then an offense can be filed under Section 405 (Criminal breach of trust.) and 420 (cheating) of the Indian Penal Code, 1860. Section 39- Anticipatory breach talks about the refusal of a party to perform the promise wholly.

To claim damages the following questions need to be looked into – What is a contract? Whether the contract existed? Whether the contract was void-ab-initio? Whether the essentials of a valid contract were followed? Was there indeed a breach of contract?

Essentials of a valid contract

  • Offer and acceptance – a party must make an offer and the other party must accept the offer.
  • Reciprocal promise – both parties intend to form a legally binding contract.
  • Consideration – there must be some sort of exchange either in monetary terms or in any other way.
  • Competent person – the parties must be legally able to enter into a contract, for instance, they shouldn’t be minors or a lunatic.
  • Consent – there must be free consent. Provisions for free consent are from sections 14 to 22.
  • Legality – the contract must be legal, i.e. it must not be illegal.
  • There must be the performance of the contract on time.

When is a contract breached?

A contract is breached when there is a violation of certain terms and conditions stated in the contract. There are various reasons a breach can occur, such as delay in payment, postponement in delivery of the assets, etc. If there is any breach, the Act also gives the remedies for breach of contract. Breach of contract can ensue for both written as well as oral contracts and the parties can resolve it through negotiations among themselves, through court, or through arbitration. The breach can be either wholly or partially in nature. At the beginning of the suit, the court will assess the nature of the breach.

Breach of Contract under Indian Contract Act
Breach of Contract under Indian Contract Act

Types of breaches: 

  • Anticipatory breach – When a party refuses to perform his part of the promise wholly before the performance of the contract, the other party can either, end the contract, i.e. terminate the contract or continue the contract. For instance, A enters into a contract with B for the supply of 5000 notebooks at Rs.60 each on or before the 1st of January 2023. B on 15th December 2022 refuses the delivery of goods to A, i.e. before the due date, this is known as anticipatory breach
  • Actual breach – Unlike the anticipatory breach, the actual breach happens at the time of the execution of the contract. It is either committed at the time of the performance of the contract, meaning on the due date, or during the performance of the contract, like not delivering the goods at the scheduled place. For instance, X enters into a contract with Y promising to deliver 100 bag packs on 1st September 2020. However on the date of delivery X fails to deliver the same, this is an actual breach.  

Where can a suit for breach of contract be filed?

The suit for damages in case of breach of contract is filed at the place where the contract is made or at the place the breach occurred. It can also be filed according to the clause inserted in the breach section of the contract.

Remedies in case of breach

The primary purpose of remedies in cases where the breach is not of criminal nature is to restore the faultless party in the position they would have been in had there not been a breach. It is a way to reimburse the non-breaching party.

List remedies for breach of contract  

  • The recession of Contract – a party can rescind the contract and refuse the performance thereof in case the other party to the contract does not fulfill his obligations. As per section 75, the party who rescinds the contract is entitled to receive compensation for such recession.
  • Sue for Damages – a party can claim compensation for loss suffered by them in the normal course of business, from the other party that has broken the promise. Under section 73 there are two types of damages, liquidated and unliquidated damages.
  • Sue for Specific Performance – in this the party who breached the contract will have to perform his obligation according to the contract. To avail this remedy a decree of specific performance is to be obtained from the court.
  • Injunction – an injunction is a court order to restrain a person from doing a certain act. This availed of stopping a party from doing something which he has promised to not do during the existence of the contract 
  • Quantum Meruit – it means as much as earned. When a party is prevented from finishing his part of the contract by the other party, this remedy is applied to reimburse the party for the work he has done.

In Hadley v Baxendale, it held that the damages can only be claimed for all losses which can be foreseen in the usual course of business. But damages cannot be awarded for those losses that cannot be assumed generally. Thus, Hadley can’t be awarded damages for the loss of profit which Baxendale was not aware of. 

The court cannot order specific performance in some cases. Such as:

  1. When monetary compensation is sufficiently redressed
  2. Where the execution or performance of the contract cannot be overseen by the court.
  3. When personal services are contracted for,
  4. When a minor is a party to the contract.

Suggestions

In case of leave and license agreement any party can give notice of one month or as per the conditions stated in the contract to terminate the contract to avoid breach of contract.

Going for arbitration is a quicker option than going through court proceedings if the contract has an arbitration clause.

Conclusion 

Contracts are meant to be upheld the promise stated. Nevertheless, there are many cases of breach of contract and to mitigate these breaches remedies are provided to the contracting parties. These remedies usually aim to make the breacher perform the contract as was agreed by the parties at the time of entering the contract. It is paramount to thoroughly understand the terms and conditions of the contract to avoid breaching it.

Reference

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