A breach of contract refers to a legal situation where one of the parties to a valid contract fails to perform their obligations as agreed, without any lawful justification. This failure could involve not performing at all, performing incompletely, or delaying performance in a way that affects the purpose of the agreement.

Example, Amit (the buyer) and Bharat (the seller) entered into a contract where Bharat agreed to sell 100 bags of rice at ₹1,000 per bag, with delivery promised by 1st May. However, on the due date, Bharat delivered only 60 bags and stated that the remaining would be delivered “whenever possible.” This partial and uncertain delivery caused Amit to suffer a financial loss, as he had relied on receiving the full quantity for a critical business deal. Bharat’s failure to fulfill the agreed terms amounts to a breach of contract, entitling Amit to seek remedies for the resulting damages.

Essential Elements For Breach Of Contract

1. There must be a valid contract that creates legal obligations between the parties.

2. There must be a clear breach, meaning one or more terms of the contract have not been fulfilled.

3. The party not at fault, the innocent party, must have suffered or is likely to suffer a loss due to the breach.

4. The breach must not be legally excused or justified; if the law permits the non-performance, then it does not amount to a breach.

Types Of Breach Of Contract

There are two main types of breach of contract: Actual breach and Anticipatory breach. An actual breach occurs when a party fails or refuses to perform their contractual obligations at the time when performance is due. for example, if a seller does not deliver goods on the agreed date. An anticipatory breach happens when one party informs the other in advance that they will not fulfill their part of the contract. For instance, if a contractor tells the client a week before the deadline that they won’t be able to complete the project, it constitutes an anticipatory breach.

We discuss breach of contract in three types of transactions: business deals, employment and service agreements.

Breach of contract in business deals

In this context, a breach of contract refers to a situation where one party fails to fulfill its obligations as outlined in the agreement. Business contracts are essential for the smooth functioning of commercial transactions and usually involve clear terms related to payment, delivery, quality of goods or services, timelines, etc. When one party fails to meet their obligations, it causes disruption, potential financial losses, and can damage business relationships. Breaches can occur in various forms, including non-performance, delayed performance, or defective performance.

Typical causes:

1. Non-payment or Late Payment: One of the most common breaches in business deals occurs when one party fails to pay for goods or services as agreed. Delayed or non-payment can lead to financial strain and disrupt the operation of businesses.

   • Example: A company sells software to another business with a payment due within 30 days. If the buyer fails to make the payment on time, the seller may have grounds for a breach of contract.

2. Failure to Deliver Goods or Services: The seller’s failure to deliver the agreed quantity or quality of goods or services is another form of breach. This could be due to negligence, inability to fulfill the order, or a breakdown in the supply chain.

   • Example: A supplier agrees to deliver 1,000 units of raw material by a set date for a manufacturer’s production, but only delivers 600 units, which leads to a delay in production and financial losses for the manufacturer.

3. Failure to Perform as Per the Contract Terms: A breach also happens when the party performs differently from what was agreed in the contract. This can happen if there is a deviation in the quality or the method of performing the contracted obligations.

   • Example: A company hires a marketing agency to promote a product in a specific way but the agency fails to follow the outlined strategy or does not meet the expected quality, resulting in a failure to achieve desired business outcomes.

Breach of Contract In Employment

A breach of contract in an employment relationship occurs when either the employer or the employee fails to fulfill the terms agreed upon in their employment contract. Employment contracts are binding agreements that specify the roles, responsibilities, duties, compensation, and terms under which both the employer and employee are expected to operate. When one party fails to uphold their part of the contract, it can lead to disputes, claims for damages, and even termination of the contract. It may either be commited by the employer or employee.

Typical causes:

1. Non-Payment of Agreed Salary or Benefits: If an employer fails to pay an employee the salary or benefits as stipulated in the contract, this is a breach. Non-payment can be partial (paying less than agreed) or complete (not paying at all).

   • Example: An employer agrees to pay an employee ₹50,000 monthly, but only pays ₹40,000 or delays payment beyond the agreed date.

2. Violation of Terms Related to Job Duties or Role: Breach of contract can occur if an employer asks an employee to perform tasks or duties outside the scope of the original agreement without consent, or if the employee refuses to perform their assigned tasks.

   • Example: An employee is hired as a graphic designer but is later asked to perform marketing duties that were not part of the initial contract.

3. Failure to Honor the Terms of Termination or Notice Period: Both employers and employees have obligations regarding the termination of the contract. If either party fails to adhere to the notice period or terms of resignation or dismissal, it can constitute a breach.

   • Example: An employer terminates an employee without providing the required notice period or without valid grounds for termination.

4. Failure to Provide a Safe Work Environment: An employer has a legal duty to ensure the workplace is safe and free from hazards. Failing to maintain safety standards, as outlined in the employment contract, can result in a breach.

   • Example: An employer fails to provide adequate safety measures or protective gear for employees working in hazardous conditions.

5. Changes to Employment Terms Without Consent: If an employer unilaterally alters the terms of the contract, such as changing job roles, compensation, working hours, or other agreed-upon terms without the employee’s consent, it can amount to a breach.

   • Example: An employer changes the employee’s job responsibilities without consultation or reduces their salary without agreement.

Breach Of Service Agreements

A service agreement is a legally binding contract between two parties, typically a service provider (such as a contractor, freelancer, or service company) and a client (individual, business, or organization), where the provider agrees to deliver specified services in exchange for payment. Breach of contract in a service agreement occurs when either party fails to fulfill their obligations as set out in the agreement. This can involve the provider failing to deliver the services promised, or the client failing to meet the agreed payment terms, among other violations.

Typical causes:

1. Failure to Complete Work on Time: One of the most common breaches in service agreements is failure by the service provider to deliver the service on time. Time is often of the essence in many service contracts, and delays can result in significant losses for the client.

   • Example: A contractor fails to finish a construction project within the agreed timeline, causing the client additional costs for delay and inconvenience.

2. Substandard Service Delivery: When the service provider fails to meet the agreed quality or standards outlined in the contract, it constitutes a breach. This includes failure to meet specifications or using inferior materials or methods.

   • Example: A cleaning service company is hired to clean a commercial office, but the service provided is below the expected standard, with missed spots and incomplete tasks.

3. Non-Payment or Delayed Payment: Clients may fail to pay the service provider in full or on time, as specified in the agreement. Non-payment or delayed payment is one of the most common causes of breach from the client’s side.

   • Example: A client refuses to pay a service provider for work completed as agreed, citing budgetary issues or dissatisfaction with the service.

4. Failure to Provide Necessary Resources: For certain services, the client must provide the service provider with necessary resources, information, or tools. Failure to do so can hinder the service provider's ability to perform, thus breaching the contract.

   • Example: A software developer is hired to develop a mobile app but is not provided with the required data, APIs, or access to necessary software for development.

5. Unilateral Alterations to the Agreement: Either the service provider or the client may attempt to change the terms of the agreement without the consent of the other party. If changes are made without mutual agreement, it can be considered a breach of contract.

   • Example: A client decides to change the scope of the project after the agreement has been signed without consulting the service provider, leading to misunderstandings or disputes.

Legal Frameworks & Available Remedies

In India, the concept of breach of contract is primarily governed by the Indian Contract Act, 1872. The Act outlines the legal framework for remedies available to the aggrieved party in case of a breach.

• Section 73 provides for compensation for any loss or damage caused by the breach of contract.

• Section 74 deals with compensation in cases where a specific penalty or liquidated damages are stipulated in the contract.

• Section 75 allows compensation to a party who has rightfully rescinded the contract due to the other party’s default.

Together, these provisions form the legal basis for addressing and remedying contractual breaches. Though the abovementioned categories of breach of contract have different Modus Operandi, the remedies remain uniform.

When a breach of contract occurs, the aggrieved party has several legal remedies available to address the violation and seek compensation or resolution. These remedies aim to put the harmed party in a position as close as possible to where they would have been had the contract been performed properly.

1. Damages (Monetary Compensation)

Compensatory Damages: The most common remedy, compensatory damages aim to compensate the injured party for the loss suffered due to the breach. This includes direct losses (such as lost profits or out-of-pocket expenses) and consequential losses (indirect losses that arise due to the breach). Suppose, If a supplier fails to deliver goods on time, the buyer may claim the cost difference of purchasing from another supplier.

Punitive Damages: These are awarded in cases where the breach is due to malicious, willful, or fraudulent behavior. The purpose is to punish the breaching party and deter future breaches, although they are rarely awarded in contract cases.

Nominal Damages: Awarded when the breach occurred but no actual financial loss is suffered. This recognizes the breach but compensates only a small amount, acknowledging the legal violation.

Liquidated Damages: These are predetermined amounts stipulated in the contract itself, which must be paid if a breach occurs. These damages are agreed upon when the contract is formed.

2. Specific Performance

This remedy requires the breaching party to perform their obligations under the contract as originally agreed. Specific performance is typically ordered in cases where damages are not an adequate remedy, such as when the subject matter of the contract is unique or irreplaceable. In the case of a real estate contract, a buyer may ask the court to order the seller to transfer the property, as the property is unique and cannot be replaced with monetary compensation.

3. Rescission (Cancellation of Contract)

Rescission cancels the contract, returning the parties to their original positions, as if the contract had never existed. This remedy is typically available when there is a fundamental breach, fraud, misrepresentation, or undue influence. It is a way of "undoing" the contract and excusing both parties from any further obligations.

If one party fails to deliver goods as agreed and the contract is essential to the other party’s business operations, the injured party can rescind the contract and seek to recover any payments made.

4. Restitution

Restitution restores the injured party to the position they were in before the contract was made. It involves returning any money or property exchanged under the contract. This remedy is usually sought when the contract is rescinded, and the goal is to prevent one party from being unjustly enriched at the other party’s expense.

If one party paid an advance under the contract, and the contract is rescinded due to a breach, restitution would involve returning that advance.

5. Injunction

An injunction is a court order that prevents a party from doing something (prohibitory injunction) or requires a party to do something (mandatory injunction). This remedy is often used to prevent a breach from continuing or to compel performance, especially when monetary damages are inadequate.

If an employee violates a non-compete clause, an employer may seek an injunction to prevent the employee from working for a competitor.

6. Quantum Meruit

This remedy is used when a party has partially performed their obligations under the contract but the contract is terminated before completion. Quantum meruit allows the injured party to be paid for the value of the work or services provided.

If a contractor has done some work but the contract is terminated before completion, they may claim payment for the work already completed under the principle of quantum meruit.

The remedies for breach of contract are designed to either provide compensation or specific performance of the agreed-upon terms. Whether through monetary compensation, specific performance, rescission, or other forms of legal remedy, the goal is to address the harm caused by the breach and ensure fairness in contractual relationships. The specific remedy chosen depends on the nature of the breach, the type of contract, and the damages or loss suffered by the aggrieved party.