20 July 2023
A breach of contract occurs when one party fails to fulfill its obligations or commitments identified under an agreement or contract. When a breach of contract occurs, one party would have failed to perform its duties or would have done something that goes against the terms of the contract and impacts or causes loss to the non-breaching party.
This type of breach is significant and goes to the core of the contract as it involves a failure to perform a major obligation that was explicitly stated in the contract. A material breach typically allows the non-breaching party to seek legal remedies, such as suing for damages or terminating the contract.
Also known as a partial breach or immaterial breach, this occurs when a party fails to fulfill a minor obligation or deviates slightly from the terms of the contract. It may still entitle the non-breaching party to seek compensation for any losses suffered as a result.
When one party to the contract clearly indicates or implies, either through its words or actions, that it will not or will not be able to fulfill its obligations in the future. The non-breaching party can then choose to treat this as an immediate breach and pursue legal remedies.
The non-breaching party may have several options for seeking relief, depending on the specific terms of the contract, nature of breach and the applicable laws. The first step the non-breaching party can take, is to issue a notice to the breaching party to cure / rectify the breach and fulfill its obligations as per agreement.
However, the breaching party fails to do so, the non-breaching party can consider the following common remedies:
Damages are the most common remedy for breach of contract and are designed to compensate the non-breaching party for any losses suffered as a result of the breach. There are different types of damages:
At the time of execution of the contract, the parties may agree to a predetermined amount specified as liquidated damages payable in the event of a breach. As these damages are agreed upon in advance, they are an estimate of the potential losses that may be incurred by a party in case a breach occurs later-on. Some courts may not grant liquidated damages if considered excessive or unreasonable.
These aim to put the non-breaching party in the position it would have been in if the contract had been performed as per the agreed terms. It covers actual and direct losses, such as financial losses, lost profits, or costs incurred due to the breach.
These are intended to compensate for indirect losses that were reasonably foreseeable at the time of contract formation but may not be directly caused by the breach itself. For example, if a delayed delivery of goods causes the non-breaching party to lose a significant business opportunity, it may seek reasonable consequential damages.
While less common and subjective on the circumstances, punitive damages may be awarded in cases of extreme misconduct or willful breach, with the purpose of punishing the breaching party rather than compensating the non-breaching party.
In certain circumstances, the injured party can approach the relevant civil court which may order specific performance as a remedy for breach of contract. This means the breaching party is compelled to fulfill their obligations under the contract as originally agreed. Specific performance is typically sought and granted when monetary damages would not adequately compensate the non-breaching party, or in cases involving unique or rare terms of contract.
An injunction order from a court will direct the breaching party to do something (mandatory injunction) or refrain from doing something (prohibitory injunction). It is an equitable remedy aimed at preventing further harm or enforcing specific rights and to maintain status quo until the dispute between the parties is resolved.
A civil recovery suit, also known as a lawsuit for damages, is a legal action that can be initiated by the non-breaching party before civil court having jurisdiction, to seek recovery of any advance paid and monetary compensation for losses & costs incurred due to the breach.
The injured party can file a complaint under the Indian Penal Code, 1860 for Criminal breach of trust, when it is evident that the breaching party had dishonest intentions to not fulfill its obligations and cheat the injured party out of the property entitled to the injured party under the contract. It is a rare remedy sought based on circumstances and available evidence.
Rescission involves canceling the contract and returning the parties to their pre-contract positions. When a contract is rescinded due to a breach, both parties are released from their obligations. Restitution requires the breaching party to return any benefits or payments received from the non-breaching party.
It is essential for the non-breaching party to mitigate its damages, i.e. to take reasonable and proactive steps to minimize its losses resulting from the breach. Its failure to mitigate damages may limit the amount of compensation awarded and remedy granted by courts.
It's important to note that the availability and extent of these remedies can vary depending on the specific circumstances and laws.
For a quick overview of the remedies, please click here.
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