All you need to know about Breach of Contract

A Contract is an agreement that is enforceable by law. When a party to a contract fails to perform its obligations under the contract, it is referred to as a “ Breach of Contract” .

The minute we hear the term “ Contract” , we instantly see an image of numerous stamp papers containing countless legal terms and conditions. And yet, most of us enter into contracts throughout our lives and are governed by them. When you click on “ I agree” at the end of the terms and conditions every time you update your phone, that's a contract. When you order an item over Flipkart or Amazon, that's a contract. When you give your clothes to the dry- cleaner and they undertake to clean the same in return for a pre-decided sum, that's a contract.

Consult: Top Breach of Contract Lawyers in India

The Essentials of a Contract

In India, all contracts are governed by the provisions of The Indian Contract Act, 1872. If broken down, a contract is:

1. Offer and Acceptance: for there to be an agreement between two parties, one party must offer to perform or abstain from performing a certain act, and this offer must be accepted by the other party. Only when an offer is validly accepted, an agreement is formed. The Acceptance by the second party must be clear, unconditional, and out of free will [We'll get back to that in some time.]

2. Consideration: A consideration is an actual motivation for entering into the contract. It is a set of reciprocal promises that the parties undertake to perform. For example, in a contract for the sale of a house, the consideration for the buyer is the house, whereas the consideration for the seller is the money.

3. Lawful Object: In order to be enforceable by law, a contract must be for a lawful object, by lawful means. Thus, any contract, the performance of which involves the commission of an illegal act, or any contract where the purpose itself is illegal or unlawful, is void under the law[ specifically under Section 24 of the Indian Contract Act.].

4. Capacity: A party must be fit to enter into a contract- thus, minors or people under intoxication, people who, due to a mental incapacity do not have an understanding of the consequences of their actions, cannot enter into legally enforceable contracts. Similarly, a person cannot enter into a contract on behalf of another person, unless he has been expressly authorized to do so.

Thus, if an agreement fulfills all the aforementioned essentials, it becomes a legally binding contract. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void.

Breach

As we have discussed earlier, every legally enforceable contract involves the performance of reciprocal promises by both parties. When either party refuses to perform or fails to perform its obligations under the contract, it is referred to as a breach of the contract. It flows logically that under such circumstances, the party which has performed its obligations in good faith is entitled to be compensated for any losses accrued to them. This is precisely what the law says too.

Consult: Top Breach of Contract Lawyers in India

Remedies in case of a Breach of Contract

Where a party suffers from a breach of Contract, they have two types of remedies available to them. These are:

1. Damages under the Indian Contract Act 2. Specific Performance of Contract

When faced with a situation where the other party to the contract has breached the same, the suffering party must first elect its remedy. The party must choose whether they want financial compensation in the form of damages, or if they want the law to step in and ensure the due performance of the contract as decided between the parties [through the remedy of specific performance.]

1. Damages in case of breach of contract:

Where a party elects to settle for financial compensation for the loss suffered by them due to the non-performance of the contract, they must ask the court to provide them with damages. Section 73 of the Contract Act provides for damages to the other party in case of breach by one party in the following words :

“ When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.”

Thus, in case of the breach of a contract, the non-breaching party is entitled to receive compensation from the breaching party for any losses suffered by them. This compensation is referred to as damages. However, to be eligible for the same, the party claiming damages must establish the following:

• A clear breach: the party claiming damages must clearly establish that the other party willfully chose not to perform its obligations. In such cases, if the breaching party can establish before the court that it was, due to some reason, incapacitated from performing the contract, or that due to certain reasons outside their control, the contract could not be performed [a situation referred to as frustration of contract], then they will not be liable to pay any damages.

• Actual loss or damage: Under section 73 of the Indian Contract Act, the law aims to put the non-breaching party into the same position it would have been, had the contract not been breached. Thus, a person is monetarily compensated where they have actually suffered a loss or inconvenience due to the breach.

• Arising in the natural course of action as a result of the breach: The loss as claimed by the non-breaching party must have occurred as a direct result of the breach, in the natural course of actions. Thus, if the loss occurred due to certain circumstances which could not have been reasonably foreseen by either party or would not have occurred in the natural course of events, then the non-breaching party would not be entitled to any damages. Similarly, any loss that may have occurred but cannot be reasonably attributed to being a result of the breach, is not liable to be compensated.

• No Compensation for indirect or remote loss: damages or monetary compensation is only to be paid for the losses that occurred in the natural course of events, as a direct result of the breach. Thus, there must be a cause- and effect relationship between the breach, and the loss sought to be compensated against. No loss, no damages.

  Consult: Top Breach of Contract Lawyers in India

The Concept of Liquidated Damages and Penalties:

In many cases, especially commercial contracts, the parties themselves stipulate the number of losses that may be reasonably caused in case either party breaches it. In such cases, when a breach does actually occur, the amount of damages has already been fixed. Such damages are referred to as “ Liquidated Damages” and have been provided for under Section 74 of the Contract Act, which states :

“ When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”

2. Specific Performance in case of Breach:

• In many cases, monetary compensation might not be the right remedy in case of a breach of contract. In such cases, the non-breaching party has the right to approach the court and ask for the due performance of the contract by the breaching party.

• The Specific Relief Act, of 1963 is a law that provides remedies for persons whose civil or contractual rights have been violated due to the non - performance of contractual obligations.

According to Section 10 of the Specific Relief Act, the specific performance of any contract may, in the discretion of the court, be enforced-

• when there exists no standard for ascertaining actual damage caused by the non-performance of the act agreed to be done or

• when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief.

Thus, in cases where monetary compensation can put the non-breaching party back to the position in which it would have been prior to entering into the contract, the court will order damages, and not a specific performance of the contract. However, where such a solution is not possible, and the non-breaching party has suffered and/ or will continue to suffer losses due to the non-performance of the contract, the court will order specific performance. Some cases might be :

• Where the contract is for the sale of an immovable property

• Where the property is not an ordinary article of commerce or is of special value or interest to the plaintiff, or consists of goods that are not easily obtainable in the market

In such cases, the court may order Specific Performance of the contract, that is to say, the court will order the breaching party to make good their part of the bargain. However, a party must choose between monetary compensation and specific performance. As a rule, where the court feels that monetary compensation is an adequate remedy, it will not order specific performance of the contract.

Thus, while choosing the kind of remedy that is to be pursued, one must keep in mind the nature of the contract, the nature of the losses suffered, and whether monetary compensation will be an adequate remedy.

Consult: Top Breach of Contract Lawyers in India

Steps for the enforcement of your rights:

1. Requirements :

While it is not necessary that all contracts be put on paper, where the terms of a contract have been reduced to writing, the court will prefer the same to any other kind of evidence. Thus, in order to establish a valid contract, all documentary proof of the existence of the same is of prima facie value. These are the documents that will be examined by the court and so, one must try to attach all kinds of documentation related to the contract.

• In contracts relating to immoveable property, the agreement for sale or any other land-related documents must be attached.

• Similarly, all documents which will help the court ascertain the value of the loss suffered must be attached.

2. Process :

Once all your documents are in order, the next step would be to approach the court, with the help of a lawyer. Since the breach of contract is a civil wrong, the correct way to approach the court is to file a civil suit.

One must remember that time is of the essence when seeking any kind of legal remedy. The Limitation Act, 1963 is the law in India that deals with the time durations within which any kind of legal remedy may be sought for.

3. Where to file :

Where immovable property is involved, suits will be filed at the court within whose territorial jurisdiction the property is situated. For example, for a property situated in East Delhi, the civil district court for East Delhi will have jurisdiction. However, in cases of moveable property or money, different rules will apply. The amount of money involved, the subject matter of the contract, and where the other party resides, all these factors will have a bearing. Having decided to pursue a legal remedy, the best course of action would be to seek professional legal help.

4. Who can file :

Any person who is a party to a contract can file a civil suit. In case of the death of the original party, their legal representatives have the right to file on their behalf. In cases of a company or a registered co-operative body, their authorized signatories/ directors, etc. may file, as the case may be. In the case of representation of any corporate body, due authorization will be required. [Remember, a company is a separate legal entity in the eyes of the law.]

5. Duration of the process :

Once you approach a lawyer, they will go through the documents, and draft a plaint. A plaint is the first legal document that will inform the court about the facts of your case, your grievances, and the relief sought by you. If the court finds merit in the matter, it will ask the other party to file their reply to the plaint, which will act as their defense in the matter. This document, in cases of a civil suit, is known as a Written Statement. Once this document is filed, further procedures will commence where the court may ask both the parties to submit more documents, or it may straight away go to the stage of arguments. Taking into account the various procedures, filing of documents, and replies, the process may take anywhere between six months to two years. However, all such questions would be answered much better by a legal professional.

Consult: Top Breach of Contract Lawyers in India

FAQs

1. Can a contract which is not in writing be enforced? Yes, a contract that is not in writing can still be enforced. All transactions where money is exchanged for goods or any services rendered in exchange for a monetary payment are contracts, even when they are not reduced to paper. In such cases, the law will look at the other terms and conditions [for example, the terms printed at the back of a retail invoice], the usual business practices, and the conduct of the parties in order to enforce the rights of the parties.

2. Can a minor enter into a valid contract?

No. According to section 11 of the Contract Act, only a person who has reached a majority under the law he is governed by is competent to contract. Any contracts entered into by a minor will not be legally binding upon him/ her until they attain a majority. Upon reaching the age of majority, a minor may affirm or ratify the contract and therefore make it contractually binding on him/ her. 3. What are voidable contracts? How are they different from void contracts?

Any contract into which a person does not give his free consent is voidable at the option of such person. Thus, according to Sections 14 to 19 of the Contract Act, contracts entered into on the basis of the following are voidable:

• Coercion: where a person is threatened to enter into a contract, by threatening them or their loved ones.

• Undue Influence: Where the relations between the parties are such that one party is in the position to dominate the will of the other party.

• Fraud: Where a contract is entered into by intentionally deceiving the other party.

• Misrepresentation: Presentation of any information in such a manner [however innocently] so as to induce the other party to mistake a fact and induce him to enter into a contract.

In all such cases, the contract is voidable at the option of the innocent party. Simply put, the party may either choose to remain in the contract or may put an end to the same.

On the other hand, a void contract is one that is a legal nullity. It has no value in the eyes of the law and hence cannot be enforced. Thus, where contact is for an unlawful object, or where both the parties are under a mistake related to an essential part of the contract, such contracts are void. 4. What happens in case of miscommunication between the parties to a contract?

Mistakes under contract law are of two types:

• Mistake of fact: Where the parties are under a mistaken belief with respect to a key aspect of the contract. In such cases, if both the parties are under a mistaken belief, the contract is void. However, if only one party is suffering from such a mistake of fact, the contract still subsists.

• Mistake of Law: Not being aware of the correct law is not a defense. The contract is still valid.

5. What does “ Rescission” of a contract mean?

In cases of a voidable contract, as has been defined above, the innocent party, which entered into the contract due to coercion, undue influence, fraud, or misrepresentation, may decide to terminate the contract. In such cases, clear communication to the same effect must be sent to the other party, that the first party is exercising its right to terminate or rescind the contract. 6. Can one enter into a contract without consideration?

No. According to Section 25 of the Contract Act, agreements without consideration are void, unless :

• Such agreements are in writing and registered, and are entered into on account of natural love and affection between the parties

• It is to compensate for an act that the other party has already done for the first party

• It is a promise to pay a debt that is time-barred [An acknowledgment of a debt].

7. What are agreements in restraint of trade? Any agreement by which a party is restrained from practicing a lawful profession, trade, or business of any kind, is an agreement in restraint of trade. Such agreements are void. However, there are certain exceptions to the same. 8. What does the term “ frustration of contract mean” ? When a contract becomes incapable of being performed, without the fault of either party and due to circumstances outside the control of both the parties, such a contract is said to be frustrating. In such cases, both the parties are discharged from the performance of such contract, and the contract is automatically terminated.

Consult: Top Breach of Contract Lawyers in India

Advocate Chikirsha Mohanty

4.0 | 2+ user ratings Greater Kailash - 1, Delhi
5 years

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