This article has been written by Gauri Atreja pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Zigishu Singh (Associate, Lawsikho) and  Ruchika Mohapatra (Associate, Lawsikho).

Introduction

The following article discusses the consequences of breach of contract. A contractual agreement is the foundation of any country’s business and trade. Any country that encourages commercial interactions has seen expansive growth in trade and, as a result, increased GDP. Contractual agreements are based on trust; which means that both parties must believe that the other will fulfil the contractual responsibilities that are expected of them.

The timely fulfilment of contractual agreements is an important part of any commercial transaction, and if one party breaches the contract’s terms, that party not only loses the other party’s trust, but it also has to pay a penalty for the breach of contract, which is predetermined during the contract’s drafting. Sections 7375 of the Indian Contract Act deal with the consequences of breach of contract. In other words, what will be the liability and what will be the process of action if either party breaches the contract.

Now, it is possible that a breach has occurred, but it is not due to the fault of either party, but due to the actions  of some external factors over which neither party has control or could have predicted the occurrence. The law has also provided guidance on what to do in such a situation. 

What is breach of contract?

Assume you have been hired by a customer to finish a project. Consider this scenario: you do the project, but the customer never pays you for it. Your customer has breached your contract, and you are no longer in possession of the funds you were promised. This is an example of a contract breach. Whether you own a small business or provide services as an individual, you should expect to be subjected to breach of contract on occasion.

Contracts are documents that are used to formalise a connection between two or more people. Contracts will specify a set of conditions and obligations, as well as a number of requirements:

a)     Technical specifications, such as the duration of a construction project.

b)     Demands for service.

c)     Requirements for reporting or information.

d)     Legal standards must be met.

e)     Financial constraints.

A breach of contract occurs when one of the contracting parties fails to meet a condition. Suits for breach of contract are fairly common in small claims court. A breach occurs when a contract is violated because the terms have not been met without justification.

In some situations, forcing the other party to fulfil their contractual duties may not be realistic for the person who has been affected by the violation. Instead, the party who has been harmed may decide to pursue other options.

When one party fails to complete their duties on time, in the manner specified in the contract, or does not fulfil their obligations at all, a breach occurs. A breach has occurred, for example, when a co-worker fails to fulfil their required part of a project or when an employee engages in behaviours prohibited by their contract.

When a contract is breached, the law has numerous remedies from which you can decide which is more appropriate , and the specific remedy you decide  can influence the amount of monetary damages that must be paid. The plaintiff may be awarded monetary damages if you entered into a contract falsely, for example. This, however, is an unusual course of action. It  is important to consult an attorney after getting harmed by a breach of contract to ensure you’re pursuing the most advantageous legal remedy.

Default event vs. contract breach

When a contract is breached, it might result in a variety of outcomes, including a default event. A default occurrence occurs when one or more of the contract’s key responsibilities are breached. The contract can be cancelled if a default event occurs. A default occurrence is almost always the outcome of repeated violations and breaches of important contract responsibilities.

Breach of contract and effect on small businesses

A breach of contract can cause substantial harm to both individuals and small enterprises. Breach of contract can squander time, effort, and money, in addition to producing a great deal  of frustration. However, not all security breaches are equal; some are more dangerous than others. A contract violation can arise in a variety of ways, and many of them will be minor.

The most serious type of contract breach is a significant breach. In each of these instances, someone has failed to fulfil their contractual obligations. When this happens, the harmed party might file a civil suit for damages. A substantial breach occurs when a contractor completes a project but is not paid.

Another sort of contract breach that could result in a lawsuit is a fundamental breach. A party who has been harmed by a fundamental violation has the right to promptly terminate the contract and bring forward a lawsuit. A fundamental breach has occurred if, for example, you leased an apartment and the landlord put someone into the apartment before you.

An anticipatory breach occurs when it becomes evident that one party will be unable to complete their obligations within the time frame specified in the contract. For example, if you hire someone to paint your house and they don’t start until the day before i ir issupposed to be finished, you may be able to sue for damages because the project would be impossible to finish by the date specified in the contract. 

What are the types of breach of contract?

Contractual breaches can take many forms:

a) Material breach of contract;

b) Anticipatory breach of contract;

c) Fundamental breach of contract;

Let’s take a look at each one separately

Material Breach of Contract

A material breach is the most serious of the three categories of breaches.

A material breach is a violation of a contractual party’s responsibilities, such as a failure to perform a service, negligence, or other significant failures.

Anticipatory Breach of Contract

When a party is unable to perform their contractual duties and the violation is obvious, it is referred to as an anticipatory breach.

An anticipatory breach occurs when a person lacks the capacity to carry out their responsibilities and it is evident that they are straining to do so.

Fundamental Breach of Contract

Another sort of contractual breach that allows the non-breaching party to cancel the contract and seek damages is a fundamental breach.

A fundamental breach is a form of breach that is more serious than simply breaking contract terms. Fundamental breach occurs when one of the parties in the agreement does not keep their part of the deal by failing to complete a contractual term that was essential to the agreement so much so that another party could not complete their own responsibilities in the contract. In some jurisdictions, a fundamental breach may not be feasible. For example, in Tercon Contractors Ltd v. British Columbia (Transportation and Highways), the Supreme Court of Canada used a three-step approach to examine the violation rather than the concept of a fundamental breach.

What happens if a contract has been breached?

When a contract is breached, depending on the nature of the breach, the breaching party may be regarded in default of its obligations, allowing the contract to be terminated by the non-breaching party. An event of default is an occurrence that is either contractually specified or undefined by the parties that results in a party’s inability to fulfil its contractual obligations. In some situations, the default event is so significant and material that it causes the other party to suffer damages and gives the other party the clear right to cancel the contract. On the other side, there are times when a party repeatedly breaches a contract. Each event of default is not material or significant in and of itself, but when taken together, it is evident that a party has failed to fulfil its contractual obligations sufficiently.

What are the repercussions of a contract breach?

The most apparent effect of a contract breach is that the non-breaching party suffers damages or injury as a result of the breaching party’s acts or omissions. The legal ramifications of a contract breach will be determined by numerous factors: 

a)     Contractual terms and conditions.

b)     The type of contract.

c)     The contract’s legal framework.

  • Contractual terms and conditions

Individuals and businesses sign contracts primarily to protect themselves from a potential breach. Both parties will agree to bind themselves legally to the terms and conditions of a binding contract. In a commercial setting, businesses have the freedom to enter into contracts after thoroughly weighing the benefits and drawbacks. As a result, they will be held liable for any contract violations.

  • The type of contract

The penalties of a breach can also be influenced by the type of contract.

  • In certain jurisdictions, for instance, if a person has engaged into an adhesion contract, the court may reject abusive clauses or even the entire contract if the duties are unreasonable.
  • A contract of adhesion is one in which one party dictates the terms and conditions to the other, who has no significant power to negotiate them.
  • A consumer contract will also be handled differently than a commercial deal.
  • When a merchant breaches a contract, a consumer is protected by law and will benefit from far stronger protection.

The contract’s legal framework

The applicable legislation is crucial in identifying the actual consequences of a contract breach. The same contract, between the same parties, with the same event of default resulting in a breach, can be handled differently in different jurisdictions.

For example, the state of Florida in the United States has a 5-year period of limitation under its statute of limitations for most breach of contract claims, although other jurisdictions, such as Quebec, Canada, have a 3-year period of limitation under its statute of limitations.

In Quebec, a lawsuit filed in the fourth year will be time-barred, however in Florida, the same person can bring a claim for damages within the statute of limitations time frame.

Is breaching a contract a crime?

Breaching a contract is not, in general, a crime as defined by criminal statutes. A contract is a civil transaction between two or more people. Entering into a Contract by dubious means, on the other hand, can lead to criminal charges. Contracts entered into, for example, as a result of fraud, force, threat, bodily damage, ransom, or other criminal conduct as defined by criminal statutes will result in criminal charges.

What happens if both parties to a contract breach it?

Both parties may be in breach of their contracts. The court will consider the parties’ total obligations, the losses sustained by both parties, the attribution of blame, and the property recompense or remedy available to each. It’s possible that one party broke the contract to a greater extent than the other.

If a party suffers a loss as a result of another contracting party’s breach, the party who suffers damages can normally seek reimbursement. However, if the party seeking compensation also caused harm to the other party, the latter can expect to be compensated as well. This is the point at which the courts must assign blame to each party and determine who may be eligible for compensation. For example, even though both parties have breached the contract, if one party suffers Rs. 50,000 in damages and causes Rs. 50,000 in damages to the other, the parties will not receive anything.

In actuality, the figures are not  always that apparent, and the parties may or may not seek monetary damages. Depending on the breach, even though each party was accountable for 50% of the damages, one party may be sentenced to pay punitive damages, resulting in one party receiving recompense while the other receives none.

Conclusion

A contract is the starting point for a correlative set of rights and obligations between the parties, and it would be worthless if there was no statutory provision for the reimbursement of the aggrieved party’s damages or losses. The Indian Contract Act, 1872, gives a remedy to the non-defaulting party to a contract in the form of compensation for harm or loss caused by the other party’s violation of contract. Section 73 of the contract provides for reimbursement from the party who has breached the contract for genuine harm or loss. Without proof of loss, reasonable liquidated damages are payable.

Contracting parties may agree that in the event of a breach, the defaulting  party will pay a certain sum to the other, or that in the event of a breach by one party, any payment given to him will be forfeited, according to Section 74. It may be referred to as a ‘penalty’ if the amount is not a genuine pre-estimate of the loss, but rather an amount intended to assure contract performance. However, merely stipulating something does not entitle you to compensation in the form of a penalty. For loss or damages caused by a violation of contract, proof must be produced.

References


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