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BREACH OF CONTRACT

Updated: Feb 20, 2022

Written by: Kethana Tamminaina


INTRODUCTION


A contract is breached or broken when one of the parties fails or refuses to fulfil its contractual obligations. Breach of contract[1] is a legal cause of action in which one or more parties fail to honour a contractual agreement by failing to execute on his commitment. If the other party chooses to terminate the contract, the contract is said to be broken and amounts to breach of contract by the party not fulfilling or refusing to fulfil its promise under the contract. This is called repudiation[2].

Section 37[3] of the Indian Contract Act,1872 states that the parties to the contract are required to fulfil or offer to perform, their respective promises under the contract, unless such performance is dispensed with or excused by the terms of the Indian Contract Act or of any other law.

There are several ways in which a contract breaking may occur such as inability of an associated party in finishing a job, inability to deliver products as promised, not paying on time, missing the deadline, sharing confidential information, or any intentional or unintentional activity which indicates that they will not do their share of work as per the contractual agreement.


TYPES OF BREACH OF CONTRACT:


Breach refers to a party’s failure of perform his or her contractual obligation. Breach of contract can occur in two ways.


ANTICIPATORY BREACH OF CONTRACT[4]:


An anticipatory breach of contract is a breach of contract that occurs before the time fi­xed for performance has arrived. When the promisor refuses to execute his promise and expresses his unwillingness even before the time for performance has arrived, it is called Anticipatory Breach. Anticipatory breach of a contract can occur in one of the following two ways:

(a) Expressly by words said or written, and

(b) Impliedly by the conduct of either parties.

Example 1: Where A contracts with B on 15th July, 2020 to supply 10 bales of cotton for a speci­fied sum on 14th August, 2020 and on 30th July informs B, that he will not be able to supply the said cotton on 14th August, 2020, there is an express rejection of the contract.

Section 39[5] of the Indian Contract Act addresses anticipatory breach of contract and states that: “When a party to a contract has refused to perform or has disabled himself from executing his promise completely, the promisee may put an end to the contract, unless he has expressed by words or actions, his acquiescence in its continuance.”

Effect of anticipatory breach: The promisee is exempted from performing further. Then he gets a choice:

(1) To either treat the contract as “rescinded and claim the other party for damages from breach of contract directly without waiting till the due date of performance; or

(2) He may choose not to rescind but rather to accept the contract as still in effect, and wait until the time of performance and then make the other party liable for the consequences of non-performance. However, in this situation, he will keep the contract alive for the advantage of the other party as well as his own, and the guilty party, if he so decides on re-consideration, may still fulfill his part of the contract.


ACTUAL BREACH OF CONTRACT:


In contrast to anticipatory breach, it is a case of reluctance to execute the promise on the specified date. The parties to a legally binding contract are obligated to fulfill their respective promises. But when one of the parties breaks the contract by failing to fulfill his obligation, he is said to have committed a breach. In such an instance, the other party to the contract has the legal right to sue the person who has failed to execute his promise.

Example: A agrees to deliver 100 bags of sugar to B on 1st February 2021. On the said day, he failed to supply 100 bags of sugar to B. This is actual breach of contract. The breach has been committed by A at the time when the performance becomes due.


MATERIAL BREACH OF CONTRACT


A material breach occurs when one party obtains considerably less advantage or a considerably different result than what was stated in a contract. Material breaches can include an inability to meet the responsibilities outlined in a contract or a failure to fulfill contracted obligations on time. When a material breach occurs, the other party may seek damages related to the breach and both its direct and indirect consequences.


MINOR BREACH OF CONTRACT


Also known as Partial Breach of Contract or an Immaterial Breach of Contract, a Minor Breach of Contract refers to instances where the deliverable of the contract was eventually obtained by the other party, but the party in breach failed to fulfill some part of their obligation. In such circumstances, the person who suffered the breach may be entitled to seek a legal redress only if they can show that the breach resulted in financial losses. A late delivery, for example, may not have a remedy if the breached party cannot prove that the delay resulted in financial consequences.


ELEMENTS OF BREACH OF CONTRACT:


If one party fails to keep a promise, the other party may be entitled to claim for breach of contract. To win a breach of contract action, the plaintiff must establish three elements, which are also known as essentials of breach of contract. They are:


(1) Existence of a Valid Contract

For there to be any breach at all, there must first be a valid contract. The contract does not have to be in writing. Oral contracts are enforceable if a party can prove their existence. To prove the existence of an enforceable contract, a party have to prove three elements:

· Offer – this might be as simple as an intention to enter a contract. However, not every agreement of future deals will be offers. For example, an advertisement will unlikely to be considered as an offer.

· Acceptance – this implies that the parties have truly agreed to all of the contract's essential conditions. This is a part of the law where written contracts are preferable over oral contracts. Written contracts tend to be a more precise expression of the essential conditions each party has agreed.

· Consideration – this implies each party must have given and received something of worth. Usually, a unilateral promise is unlikely to be an enforceable contract; neither is a contract based on prior services.


(2) Breach of the Contract's Terms

In general, a breach occurs when a contractual promise is broken. However, not every provision of the contract must be taken literally. Only a breach of contract that reduces the value of the non-breaching party can warrant a lawsuit. Such instances are referred to be material breaches.


(3) Damages for Breach of Contract:

To recover for breach of contract, a party must establish that the other party harmed them in some way. This is referred to as damages. Damages involve not just monetary loss, but also time wasted. In general, the breaching party must pay for any cost incurred as a result of violation. Additionally, the breaching party may be required to pay punitive damages. If the contract is broken, in addition to what a court awards, the terms on that contract must be satisfied. If possible, the guilty party might be required to fulfill contractual obligations. On the other hand, the guilty party may ask the court to void the contract and restore the guilty party’s status as it was before entering the contract.


DEFENSES FOR BREACH OF CONTRACT[6]:


(1) The Contract is not in Writing

Many contracts can be made verbally, but certain agreements must be in writing. The statute of frauds requires certain types of contracts to be in writing. If the contract falls under one of these categories and is not in writing, then it is not enforceable:

· Contracts involving the sale or transfer of land

· Promises to pay someone’s debt obligations

· Contracts that cannot be finished within one year of their making, according to the terms of the contract

· Contracts for the sale of items worth more than $500

· Contracts that will last longer than the life of the person involving in contract.

(2) The Contract is not the Intended Agreement

In few cases, the contract may not represent the party’s original intention. In such cases, a breaching party may be able to avoid liability if:

· They prove that other agreements were made outside the contract

· The outside agreements change the essence of the contract

This defence usually works well if the contract does not include a merger clause.


(3) One Party Was a Minor

In general, minors cannot enter into contracts because they lack legal capacity. In most states, someone is a minor if he or she is under 18. Thus, if someone enters into a contract with someone under the age of 18, that agreement can be easily breached without any consequences. For this reason, it is a good idea to have the minor’s parents sign the agreement in order to guarantee that it is enforceable.


(4) Mental Capacity

Similar to entering into an agreement with a minor, a contract may be unenforceable if one of the parties lacks mental capacity. Determination of mental capacity differs from state to state. Sometimes, courts will look at whether the individual understood what they were doing at the time of contract creation

.

(5) Duress or Undue Influence

Duress or undue Influence occurs when a dominant party puts excessive pressure on a weaker party to sign a contract. These defences are highly state specific and can be quite complicated.


(6) There is a Mistake in Creating the Contract

A mistake happens when parties enter into a contract with a mistaken assumption about a fact. If only one party is mistaken, it is a unilateral mistake, and contract performance is not excused, and breaching may have consequences. In a bilateral mistake situation, both parties are mistaken, and the contract will be void.

If one party misleads the other party, the unilateral mistake rule does not apply. Unilateral mistakes can also void a contract if one side fails to reveal information which is only known to that party and which a reasonable person could not find on their own.


(7) The Contract is Unconscionable

A contract is void if it is unconscionable. "Unconscionable" simply indicates that the contract is clearly one-sided, to the point that no reasonable person would accept to such conditions. Thus, the court will presume that one party was either ill-informed or coerced into signing the contract because no reasonable person would otherwise.

(8) Circumstances Change

When something happens that makes it impossible to fulfill contractual obligations, parties may be excused from performance. Still, circumstances that merely make performance more difficult do not make the contract impossible. A party may be able to excuse performance when a vital overriding event has frustrated the purpose of the contract.


CONCLUSION:


Breach of contract is a legal cause of action and a sort of civil wrong, in which one or more parties fails to honour a binding agreement by non-performance or interference with the other party's performance. Breach occurs when a contracting party fails to execute its promises, whether partially or entirely, as specified in the contract, or communicates an intention to fail the obligation or otherwise appears to be unable to fulfill its promise. When there is a breach of contract, the resulting damages must be paid by the party breaching the contract to the aggrieved party. A court must examine the contract to decide whether or not it has been broken. To do so, they must review: the existence of a contract, the requirements of the contract, and if any modifications were made to the contract. Only then can the judge make a ruling on the existence of a breach. Additionally, for the contract to be breached and the judge to find it worthy of a breach, the plaintiff must establish that there was a breach in the first place and that the plaintiff held up its side of the contract by completing everything required. Additionally, the plaintiff must notify the defendant of the breach prior to initiating an action.

[1] Steven J. Burton, “Breach of Contract and the Common Law Duty to Perform in Good Faith”, 94, JSTOR 364,(1980). [2] Dr. Avtar Singh, Law of Contract 458, (Eastern Book Company, 12th edition, 2017) [3] Section 37 of the Indian Contract Act, 1872. [4] Paul A. Moses, “Anticipatory Breach of Contracts”, 6, The Virginia Law Register, 266, (1901). [5] Section 39 of the Indian Contract Act, 1872 [6] K. M. Johnson, “Defences of Breach of Contract”, 7 Westlaw Asia 21 (2016).

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