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07 May 2024

Understanding Breach of Contract: Types, Causes, and Implications

07 May 2024
Understanding Breach of Contract: Types, Causes, and Implications

Contracts are, indisputably, a foundation block in any partnership, collaboration or association between individuals or companies which provides with a clearer perspective to the duties, rights and obligations dispersed to all the parties. The significance of a legally binding document such as a contract is fetched beyond enumerating obligations on both parties, it also encircles the consequences that may arise in an instance where either of the parties lag behind or fail in fulfilling such duties. Such a non-fulfillment can be caused due to various and versatile reasons- which in legal and commercial landscape is termed as ‘breach of contract’.

This article dives deep into the legal landscape surrounding breach of contract, the different types, distinctive nature of the types, causes, implications and the potential consequences. It also explores remedies available to the non-breaching party and the penalties that can be imposed by the court in case the dispute is elevated.

What is Breach of Contract?

A contract is breached or broken when any of the parties fails or refuses to perform its obligations or duties either partially or completely as originally agreed under the contract. Breach of contract is a legal cause of action in which a binding agreement is not honored by one or more parties by non-performance of its promise. A contract involves mutual obligations and rights between parties who have entered into such a contract. A failure, by either of the parties or both, to fulfill the terms of the contract results in a breach of contract.

Some examples of a breach of contract can be:

(a) A contract to perform in a classical music festival is breached if the performing artist does not come to the venue on the day of the performance.

(b) A agrees to buy 100 coconuts from B on a particular date. The contract is breached if A refuses to buy the coconuts on the agreed date or B fails to deliver the promised number of coconuts.

In India, the Indian Contract Act, 1872 (“the Act” hereinafter) governs disputes arising out of instances where a legally binding agreement and contract is breached, and when the terms initially agreed in the contract are not adhered to. Although the Act does not provide for an explicit definition of ‘breach of contract’, it effectively enumerates the particulars of a breach of contract through its focus on obligations and consequences of non-performance. If a party fails to fulfill their contractual obligations, and this failure causes the other party to suffer a loss, it can be considered a breach of contract under the Act. These consequences can include:

  • Right to Claim Damages: The non-breaching party can claim compensation for any financial loss they suffer as a direct result of the non-performance.
  • Specific Performance: In certain situations, a court order can compel the breaching party to fulfill their obligations exactly as agreed upon.
  • Termination of Contract: Depending on the severity of the breach, the non-breaching party may have the right to terminate the contract.

Sections 73 to 75 in the Act enumerate the consequences of the breach of contract such as compensation for loss or damage caused by breach of contract (section 73); compensation for breach of contract where penalty is stipulated (section 74) and instances when a party is rightfully rescinding contract and is entitled to compensation (section 75). The Act addresses breach of contract through several key provisions, following are the particulars of the provisions:

  • Section 73: This section deals with compensation for loss or damage caused by a breach. It allows the non-breaching party to claim financial compensation for losses that naturally arise from the breach. These losses must be foreseeable and the plausible effects that can be anticipated by parties at the time the contract was formed. This section is based on the rule laid down in Hadley v. Baxendale[1]. In this case, the court established the principle that a breaching party is only liable for damages that are reasonably foreseeable at the time of entering the contract.
    This section states that compensation for a breach of contract cannot be given for any remote or indirect loss or damage sustained by reason of the breach. However, compensation can be awarded for:
  1. Loss or damage which the parties knew at the time of the contract was likely to result from the breach.
  2. Loss or damage which follows according to the usual course of things from such breach.
  • Sections 74 & 75: These sections deal with pre-determined compensation. Section 74 allows for ‘liquidated damages’ where the contract specifies a fixed amount payable in case of a breach. Section 75 covers situations where the contract is rescinded (canceled) due to a breach. Here, the non-breaching party can claim compensation alongside canceling the contract.

In the case of Fateh Chand vs. Balkishan Das (1963)[2], the court interpreted section 74, which says that “the contract contains any other stipulation by way of penalty,” was interpreted by the Court. In accordance with the judicial pronouncement, the applicability of this section extends to any contract that includes a penalty. It also applies to instances where there was a delay in payment for money or property delivery due to a contract breach, as well as instances in which the right to receive payment was forfeited for previously delivered property.

Types of Breach of Contract

While the Act doesn’t explicitly list breach types, courts consider factors like the severity of non-performance (material vs. minor breach), timing (actual vs. anticipatory breach) in order to categorize the types of breaches of contract.

Breach of contract may be actual or anticipatory, material or minor. In case of any breach of contract, the affected party can claim the damage from the court by forcing the other party to perform as promised. Remedies for breach of contract include suit for damages, suit for specific performance, canceling the contract, stopping the other party from doing something, suit upon quantum meruit (which means compensation for work done and services carried on before the breach took place). Following is a better explanation for the types of breach of contract and what they entail:

  1. Actual Breach: This occurs when one of the parties fails to meet contractual duties and obligations within the specified time period for performance. In such cases, the other party is not obligated to fulfill their obligations and can hold the defaulting party liable for the breach of contract. In such a case, the decision to enable the defaulting party to complete the contract would be based on whether the contract’s objective revolved around a stipulated time or the duration as decided in Venkataraman vs. Hindustan Petroleum Corporation Ltd[3]. Examples include non-payment for delivered goods, incomplete services, or receiving faulty products.
  2. Anticipatory Breach: Anticipatory breach of contract is a declaration made by one of the contracting parties of his intention not to fulfill the contract. And proclaim that he will no longer remain bound by it. The entire contract is rejected or canceled in the event of an anticipatory breach of contract. In an anticipatory breach of contract, the aggrieved party can rescind or cancel the contract and file a lawsuit for damages without having to wait until the contract’s due date. This breach occurs before the due date of a contract hits. The case of Hari Shankar vs. Anant Ram[4], is an instance in which the court determined an anticipatory breach of contract when the defendant refused to complete a sale of property, hence declaring his intention to not fulfill his duty of participating in the completion of the sale.
  3. Material Breach: A material breach is a serious breach of the terms entailed in a contract. It’s not just a minor inconvenience; it significantly impacts the core purpose of the contract entered by parties. The word “material” emphasizes the seriousness of the breach. It allows the non-breaching party to potentially terminate the contract and seek significant compensation for losses incurred. In the case of State Bank of India vs. Mula Sahakari Sakhar Karkhana Ltd[5], the court determined that the defendant’s failure to repay a loan was a material breach, entitling the bank to enforce its security interest.
  4. Minor Breach: A minor breach, also known as a partial or immaterial breach, occurs when a party receives what they were owed under the contract, but with a slight delay or imperfection. While the breaching party didn’t completely fulfill their obligations, the other party still receives the main benefit of the contract.

The UK Court of Appeal had decided in Rice (t/a the Garden Guardian) v. Great Yarmouth Borough Council (2000), that a clause stating that the contract could be terminated “if the contractor commits a breach of any of its obligations under the contract” should not be taken literally. It was deemed contrary to business norms to allow any breach, no matter how minor, to be grounds for termination.

Difference between Material and Minor Breach

Minor Breach Material Breach
Impact on Non-Breaching Party Causes minimal inconvenience or harm Deals with the objective and purpose of the contract, making it difficult or impossible for the non-breaching party to receive the benefit of the bargain
Example Delivering a product a few days late Delivering a completely different product than what was agreed upon
Remedies – Non-breaching party may seek to:

a)      Withhold payment until the breach is cured.

b)      Demand the breaching party fulfill their obligations

–          Non-breaching party may seek to:

a)      Terminate the contract

b)      Sue for damages

c)      Withhold payment

Termination Generally not grounds for termination May be grounds for termination
Meaning Relatively unimportant deviation from the contract Serious deviation that undermines the purpose of the contract

Generally, the cause of action for breach of contract claim has four main elements:

  1. The existence of a contract: The existence of a contract, whether it be written or oral, is the first and most important component of a breach of contract.
  2. Performance by the plaintiff or some justification for nonperformance: Secondly, the plaintiff needs to prove that they fulfilled their end of the bargain. There might not be any compensation if both parties assert that the contract was broken, unless one party’s violation was more serious than the other.
  3. Failure to perform the contract by the defendant: Thirdly, the plaintiff needs to demonstrate which clause or condition of the agreement the defendant violated and how the the violation of contract happened.
  4. Resulting damages to the plaintiff: Lastly, In the event that the plaintiff demonstrates all three of these elements, they will also need to demonstrate the extent of the injury.

Causes of Breach of Contract

Contracts clearly define the obligations and expectations of each party, ensuring a smooth exchange of goods, services, or money. However, despite their best intentions, unforeseen circumstances or internal missteps can sometimes lead to a breach of contract. Ranging from an ambiguous linguistic built of the contract to force majeure event, the most common cause that build the foundation a breach of contract are as follows:

  1. Unclear or Ambiguous Contract Terms: The language of a contract must be as transparent as possible. It should not be ambiguous or cryptically knitted to stipulate different interpretations. If two clauses in a contract contradict or if a phrase has more than one reasonable interpretation, the contract is deemed ambiguous.
  2. Failure to meet deadlines: Even if a contract sets a deadline without explicitly stating that time is of the essence, missing the deadline is still considered a breach. It does not, however, grant the party the right to terminate the contract.
  3. Force majeure events: Lastly, indeterminate, unpredictable calamities like pandemics, wars, or natural disasters may also result in a breach of contract. Companies should think about putting words about force majeure in their contracts. In the case of unforeseen events, these clauses may offer relief.
  4. Non compliance with contract terms:  Non-compliance with contract terms refers to a situation where a party to a contract fails to fulfill their obligations as outlined in the agreement. This can take various forms, such as delivering a faulty product, missing deadlines, or not completing the agreed-upon service at all.
  5. Incapacity to fulfill a contract: A contract’s validity can be challenged if a party lacked the legal capacity to form the agreement. This could be due to factors like being a minor, mentally incompetent, or under the influence of substances at the time of signing. Additionally, unforeseen circumstances may render performance impossible, or frustrate the contract’s purpose to the point of impracticability.

 

Void vs Voidable

A breaking of contract generally does not make the contract become void or voidable automatically.  In most cases, the contract remains valid, but the non-breaching party has options.

Here’s a breakdown:

  • A void contract is essentially never a valid contract. It’s like it never existed from the beginning, and neither party has any obligations under it. This typically happens if the contract involves illegal activity or if it’s impossible to perform from the start.
  • A voidable contract is initially considered valid, but the non-breaching party can choose to cancel it due to certain issues, like fraud, mistake or misrepresentation or lack of capacity or undue influence or more.

Legal Remedies and Penalties

Entering into a contract is a solemn act, establishing a set of expectations and obligations for both parties. However, unforeseen circumstances can disrupt these expectations, leading one party to fail in fulfilling their contractual duties. This constitutes a breach of contract, and the aggrieved party is not left without recourse. The act provides a legal framework for seeking remedies and, in some cases, penalties for such breaches. Hence, sections 73, 74, and 75 specifically address the concept of penalties and compensation for breach. Below is a breakdown of these legal provisions:

  • Section 73: Compensation for Loss or Damage

This section establishes the general principle that compensation awarded for a breach of contract cannot include any remote or indirect loss or damage. The focus is on compensating the non-breaching party for the actual financial losses they suffer as a direct consequence of the breach.

  • Section 74: Penalty (Unreasonable) Not Recoverable

This section discourages the use of excessive penalties in contracts. If a contract includes a penalty clause that the court deems unreasonable or unconscionable, the court has the power to reduce the amount payable by the breaching party.

  • Section 75: Party Rightfully Rescinding Contract Entitled to Compensation

This section applies when a party rightfully rescinds (cancels) the contract due to a breach by the other party. Even after rescission, the non-breaching party can still claim compensation for any loss or damage they have already suffered due to the breach.

Several remedies can be sought by the aggrieved party in India. The act allows you to claim financial reimbursement for losses suffered due to the breach. However, there are limitations. This compensation only applies to losses that were natural consequences of the breach, foreseeable by both parties when signing the contract, and directly caused by the broken agreement. Remote or indirect losses are not covered under the act. Legal Remedies, for the counter-effect of a breach of contract may include:

  1. Recession of Contract
  2. Sue for Damages
  3. Sue for Specific Performance
  4. Injunction
  5. Quantum Meruit

1] Recession of Contract

When one of the parties to a contract does not fulfill his obligations, then the other party can rescind the contract and refuse the performance of his obligations. As per section 65 of the Act, the party that rescinds the contract must restore any benefits he got under the said agreement. And section 75 states that the party that rescinds the contract is entitled to receive damages and/or compensation for such a recession.

2] Suit for Damages

Section 73 clearly states that the party who has suffered, since the other party has broken promises, can claim compensation for loss or damages caused to them in the normal course of business.

Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary course of business. There are two types of damages according to the Act,

  • Liquidated Damages: Sometimes the parties to a contract will agree to the amount payable in case of a breach. This is known as liquidated damages.
  • Unliquidated Damages: Here the amount payable due to the breach of contract is assessed by the courts or any appropriate authorities.

3] Suit for Specific Performance

Specific performance is a remedy developed by the principle of equity. A party to a contract who is damaged because the contract is breached by another party has the option to file a suit for specific performance compelling to perform his part of contract. Before an equity court will compel specific performance, however, the contract must be one which can be specifically performed. So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree of specific performance and is granted instead of damages. For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can order B to perform his duties under the contract and sell the land to A.

4] Injunction

An injunction is basically like a decree or court order for specific performance but for restraining a party to do an act. An injunction is a court order restraining a person from doing a particular act. So a court may grant an injunction to stop a party of a contract from doing something which is causing harm to the other party and is ultra vires to the purpose enshrined in the contract. In a prohibitory injunction, the court stops the commission of an act and in a mandatory injunction, it will stop the continuance of an act that is unlawful.

5] Quantum Meruit

Quantum meruit literally translates to “as much is earned”. At times when one party of the contract is prevented from finishing his performance of the contract by the other party, he can claim quantum meruit. So he must be paid a reasonable remuneration for the part of the contract he has already performed. This could be the remuneration of the services he has provided or the value of the work he has already done.

Mutually Beneficial Breach of Contract

A mutually beneficial breach of contract occurs when both parties involved in an agreement decide to walk away from, or alter, the terms of the contract because it’s in their best interest. This isn’t the same as simply failing to fulfill the contract – there’s an element of  communication and agreement between the parties. In a typical breach of contract, one party fails to fulfill their obligations as outlined in the agreement, causing harm to the other party. However, in a mutually beneficial breach, both parties acknowledge that adhering to the original terms might no longer be in their best interests.

  • An architect designs a building based on the client’s specifications. However, during construction, a critical safety flaw is discovered in the plans.  In this situation, breaching the contract to redesign the building to meet safety standards would be beneficial for both parties, even though it might cause delays.

Conclusion

Ultimately, a well-crafted contract serves not just as a legal safeguard, but also as a foundation for a productive and resilient partnership between individuals who decide to join hands for a mutual objective. The world of commerce thrives on agreements, with contracts acting as the sheet music that orchestrates a symphony of successful collaborations. However, just like any complex performance, unforeseen circumstances or discordant notes can lead to a breakdown in communication and a potential breach of contract. The true essence of a successful contract lies in fostering trust, transparency and a closely knitted linguistic built so that the possibility of a breach is less and hence, the terms of a contract are respected and adhered to.

Clearly defined terms, obligations, and expectations within the contract leave little room for misinterpretation and potential breaches. It is important to note that a successful contract with no discrepancies fosters a win-win situation, ensuring all parties fulfill their obligations and achieve their goals.


FAQs on Breach of Contract

  1. What is a breach of contract?
    A breach of contract occurs when one or more parties involved fail or refuse to perform their obligations under the contract, either partially or completely. This failure can result from various reasons and can be categorized into actual, anticipatory, material, or minor breaches.
  2. What are the consequences of breaching a contract?
    The consequences include the right to claim damages for financial losses, the option for specific performance where the court compels the breaching party to fulfill their obligations, and the termination of the contract based on its severity.
  3. What legal remedies are available for a breach of contract?
    Available remedies include claiming damages, specific performance, rescission of the contract, injunctions against further breaches, and quantum meruit for services rendered before the breach.
  4. Can a breach of contract lead to the termination of the contract?
    Yes, depending on the severity of the breach (particularly in cases of material breaches), the non-breaching party may have the right to terminate the contract.
  5. What is the difference between a material breach and a minor breach?
    A material breach significantly affects the contract’s core purpose, potentially allowing for termination and significant damages. A minor breach involves a slight delay or imperfection but still delivers the contract’s main benefits, typically not grounds for termination.
  6. How does the Indian Contract Act, 1872 address breach of contract?
    The Act, while not defining “breach of contract” explicitly, outlines the consequences and remedies available for breaches, including compensation for losses (Sections 73 to 75), and specific performance or termination of the contract.
  7. What if I partially breached the contract? Can the other party still sue me?
    Yes, even a partial breach can lead to legal action, especially if it significantly affects the other party’s ability to fulfill their obligations. The impact of a partial breach depends on its nature and severity.
  8. How can ambiguities in contracts lead to breaches?
    Unclear or ambiguous terms can result in different interpretations, leading to breaches if parties fail to meet expectations based on these interpretations.
  9. Are there situations where breaching a contract is mutually beneficial?
    Yes, in some cases, both parties may find it in their best interest to alter or walk away from the contract, known as a mutually beneficial breach, which involves communication and agreement between the parties to deviate from the original terms.
  10. What role do force majeure events play in contract breaches?
    Force majeure events, such as natural disasters or pandemics, can render the fulfillment of contractual obligations impossible, potentially excusing breaches under specified contract clauses.

[1]  (1854) 9 Exch 341

[2] 1964 SCR (1) 515

[3] 1998 AIR (SC) 817

[4] 2000 (1)WLC 351

[5] AIR 2005 BOM 385

Posted by
Treelife
Last updated on
May 07, 2024, 11:55am

Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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