Breach of contract

This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article discusses the different types of breach of contract that signify the violation of a contract’s agreed-upon terms and conditions.

This article has been published by Sneha Mahawar.

Introduction

A breach of contract is any violation of a contractual contract’s agreed-upon terms and conditions. A breach might range from a late payment to a more serious offence like failing to deliver a promised item. A contract is legally binding and will hold up in court. It is essential to be able to establish that a contract breach occurred in order to effectively pursue a breach of contract claim. When one party to a legally binding agreement fails to deliver according to the terms of the agreement, it is called a breach of contract. A contract violation can occur in both written and oral contracts. In the event of a contract violation, the parties may address the matter among themselves or in a court of law. A minor or material violation, as well as an actual or anticipatory breach, are examples of contract breaches. The article aims to discuss types of contracts and additional information related to the same. 

Understanding the concept of breach of contract

Anyone who enters into a legal arrangement runs the risk of a breach of contract. If you deal with a lot of agreements, from employment contracts to vendor and customer agreements, you are bound to encounter one that doesn’t meet all of the parties’ expectations. Fortunately, because contracts are legally binding agreements, there may be recourse if one party fails to satisfy their contractual commitments. A breach of contract occurs when this happens, and recognizing that a breach has happened is the first step towards reclaiming your contractual rights.

When one party violates the conditions of a contract between two or more parties, it is called a breach of contract. This encompasses situations where a contractual obligation is not met on time, such as when you are late with a rent payment, or when it is not met at all, such as when a renter vacates their flat owing six months’ back rent. The procedure for dealing with a contract violation is sometimes spelled out in the original contract. For instance, a contract could include that if a payment is late, the offender must pay a Rs 5000 charge in addition to the missed payment. If the penalties for a specific breach are not specified in the contract, the parties may resolve the matter among themselves, which may result in a new contract, or by means of adjudication, or another sort of settlement. 

It is also possible that a violation of a contract is in the best interests of society as a whole, even if it doesn’t benefit the parties to the contract. If the entire net cost of violating a contract to all parties is less than the total net cost of sustaining the deal, then breaching the contract can be economically efficient, even if one (or more) parties to the contract are hurt and left worse off economically.

Ingredients of breach of a contract

The elements that must be present in order for a party to a contract to claim damages over a breach of contract are: 

  1. The fact that a contract exists: In order to show the court that the contract was valid, it must be shown that there was an offer, acceptance of the offer, and consideration involved in accepting the offer.
  2. Plaintiff’s performance or some reason for non-performance: Take, for instance, even if the contract’s provisions were not carried out exactly as requested, the defendant obtained services that were basically as requested. The defendant is obligated to pay at this time. For example, if a person painted a room but the receiver didn’t like the colour clarity, he or she will be obligated to pay, even if not the whole sum, at least something. If the colour was a key term in the contract, he or she may refuse to sign it.
  3. The defendant’s failure to execute the contract: The defendant cannot claim that the plaintiff is not entitled to compensation because of his or her own fault. The plaintiff will not be held liable if he or she was unable to fulfil specific tasks because the defendant made them impossible to complete. He or she has the right to make a claim.
  4. The plaintiff’s damages as a result of the defendant’s failure to perform as per their contractual terms: Each party’s pledge should be included in the contract they have entered into. The quality of the contract’s preparation will determine whether or not there is a breach of contract. Therefore, before signing into a contract, having an attorney analyse it is quite beneficial.

Reasons behind the breach of a contract

  1. It is the court that will determine if the violation of a contract had a legal justification or not. The defence, for example, may argue that the contract was fraudulent because the plaintiff misrepresented or suppressed key facts. 
  2. The defendant might also claim that the contract was signed under duress, claiming that the plaintiff used threats or physical force to compel it to sign the agreement. 
  3. In other circumstances, both the plaintiff and the respondent may have committed mistakes that led to the breach.

What are the types of breaches of contract

A contract violation might be classified as minor or material. When you don’t obtain an item or service before the due date, it is referred to as a minor breach. One may, for example, bring a suit to your tailor for custom fitting. The tailor guarantees (in an oral contract) that the altered garment would be delivered in time for your essential presentation, but it arrives a day later. 

When you obtain something that differs from what was specified in the agreement, it is referred to as a material breach. Take for example your company hires a vendor to supply 200 copies of a bound handbook to a convention in the car sector. However, when the boxes arrive at the conference venue, they are filled with gardening brochures. 

Furthermore, a breach of contract can be classified as either an actual breach (when one party refuses to completely implement the contract’s obligations) or an anticipatory breach (when one party declares in advance that they will not be delivering on the contract’s terms).

Material breach of contract

In essence, a material breach takes place when “all the circumstances are wholly or partly remediable and are, or are likely to become, serious, in the wide sense of having a serious effect on the benefit which the aggrieved party would otherwise derive from the performance of the contract in accordance with its terms.” ‘The scale of the breach’ is strongly tied to the word ‘material.’ The scale of a breach in a business contract might be presumed to relate to the commercial repercussions of the breach if it is not corrected.

Justice Colman had analysed the terminology ‘material breach’ while referring to “a serious violation of any of the guilty party’s responsibilities,” enabling termination of the contract if the remedy of such breach had not been initiated within seven days, in National Power plc v. United Gas Company Ltd. (1998). The judge ruled that the fact that a material breach could be remedied was the factor responsible for distinguishing it from a repudiatory breach and that a clause restricting the innocent party’s common law rights in relation to a repudiatory breach made no commercial sense, so ‘material breach’ must refer to a non-repudiatory breach.

Application of a material breach of contract

When one party obtains considerably less advantage or a significantly different result than what was stipulated in the contract, it is considered a serious breach. Failure to execute the contract’s responsibilities or a failure to perform are examples of material breaches. A good application of the breach is when someone is looking to buy a property. A substantial breach of contract occurs when a buyer completes the necessary documentation and pays the seller before closing, but the seller suddenly decides not to sell or refuses to hand over the deed and keys to the house. 

Difference between breach and material breach of contract

A contract violation might be classified into ‘material’ or ‘non-material’ breaches. The less serious of the two is a non-material violation. 

A non-material violation is one that involves a minor or peripheral contract element. A non-material violation might arise, for example, if a homeowner and an electrician agreed that the electrician should wire the residence with yellow wire but the electrician instead used blue wire, the same results in a non-material violation since it has nothing to do with the contract’s core terms. Although the wire’s insulation has a different colour, this is only a tiny difference that has no bearing on the wire’s operation. Furthermore, because the cables are buried within the home’s walls, the colour difference isn’t even evident.

A material breach of contract is a more serious sort of contract violation. A major breach reduces the contract’s worth and is deemed a failure to execute a contract’s fundamental part. Take, for example, there was an agreement between a house owner and an electrician to install copper wire since it is more reliable and durable. However, in order to save money on materials, the contractor opts for aluminium wire, which is more prone to failure and requires extra attention if future electrical work is carried out. Thus the same results in a material breach of the contract since the deficiency in the performance of the same affects the electrical system’s performance, longevity, and safety, or put simply, the ‘heart of the matter.’

Legal implications of a material breach of contract 

When a material breach of contract occurs, the non-breaching party may be excused from completing their contractual obligations, and may even be forced to stop doing so as soon as a breach is detected. They may also file a lawsuit against the other party to collect any damages.

Termination of a material breach of contract

When there is a genuine basis to terminate the contract before the performance has been finished, it is regarded as a legal termination of a contract. The most fundamental way to end a contract is to terminate it. A contract can be legitimately cancelled by providing justifiable grounds, under the Indian Contract Act, 1872, for instance, by means of frustration, a violation of contract, or a prior agreement. If termination is deemed as unjust, it might be considered a breach of contract in and of itself.

Minor breach of contract

A minor breach of contract, also known as a partial breach of contract or an immaterial breach of contract, occurs when the contract’s deliverable is eventually received by the other party, but the party in breach fails to fulfil some element of their commitment.

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 common sense to allow any breach, no matter how minor, to be grounds for termination.

Material vis a vis minor breach of contract

A minor breach of contract happens when one of the contracting parties fulfils the majority of the contract’s conditions. The party may breach a minor contract provision that has no substantial impact on the other contract conditions.

A material breach of contract, on the other hand, is deemed a serious violation of the contract’s provisions. A minimal violation of contract normally does not prohibit the deal from being completed in a timely and satisfactory way. A major breach, on the other hand, makes achieving a satisfying result difficult or impossible.

Anything less than complete performance is considered a significant breach of contract in some countries. Any breach in such jurisdictions releases the non-breaching party from the contract. In other words, the contract’s non-breaching party has no further performance obligations and may claim for damages.

However, some states’ laws require a judge to decide whether a minimal breach of contract has occurred and if any remedies are necessary. Even if there was a slight breach of contract, damages may or may not be given if the non-breaching party obtained the same result, as was guaranteed by the contract. Also, the non-breaching party will be compelled to fulfil the contract’s requirements.

Anticipatory breach of contract

When one party thinks that the other party is not going to keep their half of the bargain, the same is termed as an anticipatory breach. This is usually demonstrated by a firm refusal to fulfil a contract, doing an action that makes it impossible to finish the contract, or when the contract’s subject matter becomes unavailable. In certain cases, the ‘non-breaching’ party has the option to terminate the contract.  An anticipatory breach of contract is an activity that indicates a party’s intention to break its contractual obligations to another party. The counterparty’s responsibility to execute its obligations is terminated in the event of an anticipatory breach. The counterparty can start legal action after demonstrating the other party’s intent to violate the contract. Put simply, an anticipatory breach, also known as repudiation, occurs when one party fails to satisfy its contractual commitments to another. If parties seeking compensation in court assert an anticipatory breach, they must make every effort to limit their own damages. To qualify as an anticipatory breach, the purpose to violate the contract must be a complete unwillingness to perform the obligations. It is worth noting that by claiming an anticipatory breach, the counterparty can take legal action right away rather than waiting for the contract’s provisions to be violated.

Take for example the case of a real estate developer who hires an architecture company to design blueprints for a new building by a certain date. It is not sufficient to establish an anticipatory breach if the developer demands regular updates on the project and is dissatisfied with the current outcomes. While working on the project, the architects may be behind schedule. Even in this situation, the architects may be able to make their deadline provided remedial measures are adopted. An anticipatory breach would occur if the architects took activities that made meeting the deadline difficult. For instance, the architects may put the first project on hold and devote all of their energies on a new project with a different developer.

Explicit and implicit repudiation 

Explicit repudiation occurs when a party expressly breaches a contract by openly refusing or being hesitant to carry out his or her portion of the deal before the contract’s real date.

Implicit repudiation occurs when a party does not expressly refuse to carry out his or her commitment. Rather, his or her failure to execute the promises before the contract’s due date is implied by his or her words or behaviour or the current situation.

Need for compensation consideration in anticipatory breaches

If parties seek compensation before a court asserts an anticipatory breach, they must make every effort to limit their own damages. This might include suspending payments to the party responsible for the breach and promptly investigating measures to mitigate the incident’s impact. It might also involve enlisting the help of a third party to carry out the tasks stipulated in the original contract. 

The requirements for an anticipatory breach

To qualify as an anticipatory breach, the purpose to breach the contract must be a complete unwillingness to perform the obligations. The anticipated breach must only be founded on the presumption that the other party would fail to fulfil his or her duties.

How to determine an anticipatory breach

The two key elements which are used to assess if a case of anticipatory breach of contract exists are provided hereunder:

  1. When a party has made it apparent that they will not perform or fulfil a part of their responsibility, and that performance is at the heart of the contract, renunciation or refusal to execute the contract cannot be subject to any circumstances or conditions. The aversion would then be absolute.
  2. The perspective of a sensible and prudent person would be considered in assessing the position of the aggrieved party and also the decisions about the refusal to be clear and absolute when determining the magnitude of suitable refusal of performance of the responsibilities pursuant to the contract.

Judiciary’s take on anticipatory breach of contract

The Supreme Court of India while deciding the case of Food Corporation v. J. P Kesharwani (1994), had observed that if one party made unilateral modifications without informing the other and subsequently cancelled the contract, this amounted to a violation (repudiation). It can also be plainly stated that any sort of contract can be judged to be violated if one of the parties is unwilling or unable to fulfil their contractual obligations, regardless of when the performance is due to take place. A repudiation to enter into a contract is defined as an unqualified rejection or refusal to enter into a contract.

The respondent in the case of  Aslhing v. S. John  (1983), was a party to an ongoing contract with the government to enlarge the road, and he addressed a letter to the executive engineer informing him that the contract had been cancelled. The appellant claimed that the letter’s substance had no bearing on the contract’s cancellation, the same was maintained as well. However, it was clear from the letter’s specifications that the contractor unilaterally terminated the contract and notified the appropriate authorities, as well as resigning from the PWD Manipur contractor list. Thus, following this message, the contract was repudiated and recognition by the authority of the message was insufficient for the termination of the contract, although the breach may give rise to a suit for damages.

Actual breach of contract

An actual breach of contract refers to a breach that has actually happened, indicating that the breaching party has either refused to fulfil their responsibilities by the due date or has executed their duties badly, or has left them incomplete. When a breach occurs, the opposite party has numerous options for resolving the situation. Take for example on July 21, 2018, Mr. X signs a deal with Mr. Y, pledging to deliver 50 bags of jute to him. However, he fails to provide the same on the designated day. This is a clear case of an actual breach of contract.

Types of an actual breach of contract

  1. Actual breach of contract due to late performance 

This occurs when one of the parties fails to meet contractual duties and obligations within the specified time period for conformance. In such cases, the other party is not obligated to fulfil their obligations and can hold the defaulting party liable for the breach of contract. The defaulting party, on the other hand, may show a willingness to continue with the contract’s performance. In such a case, the decision to enable the defaulting party to complete the contract would be based on whether the contract’s crux was time or the duration. If time is a critical factor, failing to meet contractual duties by the deadline will be considered a breach of contract; however, if time is just a minor factor, or if time is not an important requirement, the aggrieved party may accept performance and seek damages for late delivery.

  1. Actual breach of contract during the course of performance

It refers to a party’s failure or reluctance to carry out their contractual duties during the course of their performance. It can also happen if a party fulfils its responsibilities but refuses or fails to comply with the contract’s key terms and conditions.

Actual breach of contract and its supported case laws

In Bishamber Nath Agarwal v. Kishan Chand (1989), the Allahabad High Court had opined that when an agreement specifies that a specific activities relating to a contract must be completed within a certain period or manner, it must be performed in that manner or period only, and the parties do not have the ‘right’ to perform it in their own way or time.

In the case of Haryana Telecom Ltd. v. the Union of India (2006), the Delhi High Court had observed that even if one of the contracts’ provisions stated that exchanges made after the delivery period had expired, the same did not disenfranchise the party’s right to liquidated damages and that an examination of all the clauses revealed that time was the essence of the contract.

Anticipatory vis a vis actual breach of contract

When one party fails to execute his or her portion of the deal by the due date or performs incompletely, this is referred to as an actual breach. When one party declares his or her intention to not execute his or her share of the deal ahead of the due date for performance, an anticipatory breach takes place. 

The entire contract is rejected or cancelled in the event of an anticipatory breach of contract. The breach might be of a condition, guarantee, or an indefinite term in an actual 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, or they can wait until the contract’s due date and then file a lawsuit against the defaulting party for contract breach. In the event of an actual breach of contract, the injured party has no choice but to file a lawsuit. 

Remedies for a breach of contract 

Under Section 73 of the Indian Contract Act, 1872, when a contract is broken, the party who is aggrieved by the breach is entitled to receive compensation for damages, from the party who has broken the contract. The damages must have naturally arisen in the normal course of things from the breach or which the parties knew when they made the contract to be likely to result from the breach. The damage is only payable if the loss was caused by the breach, according to Section 73 of the Indian Contract Act, 1872. There are no damages if there is no loss as a result of the breach. No loss from the breach automatically leads to any damages. Compensation is not paid for any remote or indirect loss or damage sustained because of the breach.

The Section also adds that ‘in assessing the damage or loss resulting from the breach of contract, the inconvenience caused by the non-performance of the contract must also be taken into consideration’. The difference between the market price and the contract price at the time of the breach is the measure of damages for a breach by the buyer at the time of the breach. 

The repercussions of a contract violation are determined by the laws of the state to which the promisor belongs. If you reside in a state where a minor violation of contract does not result in the agreement being voided, your choices and remedies for breach of contract may be restricted. However, if the other party breaches the agreement materially, you may have the legal right to stop performing your responsibilities and claim for damages. It is essential to contact an experienced contract attorney near you before filing a breach of contract lawsuit. The aggrieved party necessarily doesn’t want to be held liable for failing to execute their responsibilities due to a minor contract violation that does not result in the contract becoming invalid.

Potential legal remedies for breach of contract cases vary depending on different states’ laws and the facts of one’s case, but they may include, but are not limited to:

  1. Rescission (releases the non-breaching party from performance obligations).
  2. A court orders the breaching party to perform the terms of the agreement (specific performance).
  3. Compensatory damages (monetary damages for losses caused by the breach of contract).
  4. Punitive damages (typically only awarded in cases involving fraud).
  5. Restitution (returning the injured party to the position it was in before signing the contract).

Conclusion 

In an ideal world, business contracts would be signed, both parties would earn profit and be satisfied with the outcome, and there would be no disagreements. However, in the actual world of business, delays, financial troubles, and other unforeseen occurrences might obstruct or even block the execution of a written contract, leading to one party suing the other. Therefore, the concept of breach of contract holds relevance in the everyday world. 

References 


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