Breach of Contract

What is Breach of Contract?

A **breach of contract** occurs when one party to a legally binding contract fails to fulfil their obligations as promised, without any lawful justification. The breach gives the aggrieved party (the innocent party) the right to seek legal remedies, including compensation for the loss suffered as a result of the breach.

In simple terms, when two parties enter into an agreement and one party does not do what they promised — whether by not performing at all, performing late, or performing defectively — a breach of contract has occurred.

Legal Definition and Framework

Breach of contract and its remedies are governed by **Sections 73 to 75 of the Indian Contract Act, 1872**, along with the **Specific Relief Act, 1963** for equitable remedies.

Key Legal Provisions

- **Section 73 — Compensation for loss or damage caused by breach:** When a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss or damage caused to them that 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.

- **Section 74 — Compensation for breach where penalty is stipulated:** When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled to receive reasonable compensation not exceeding the amount so named.

- **Section 75 — Party rightfully rescinding contract entitled to compensation:** A person who rightfully rescinds a contract is entitled to compensation for any damage they have sustained through the non-fulfilment of the contract.

Types of Breach of Contract

1. Actual Breach

An actual breach occurs when a party fails to perform their obligation on the due date of performance. This can take two forms:

- **Breach at the time of performance:** The promisor fails to perform when the time for performance has arrived. For example, a supplier does not deliver goods on the agreed delivery date.

- **Breach during performance:** The promisor begins performance but fails to complete it fully or performs defectively. For instance, a contractor builds a house but uses substandard materials contrary to the specifications in the contract.

2. Anticipatory Breach

An **anticipatory breach** (governed by Section 39) occurs when a party indicates before the date of performance that they will not perform. The aggrieved party can either treat the contract as broken immediately or wait for the date of performance. (See the detailed glossary entry on anticipatory breach for more information.)

3. Material Breach

A material breach goes to the root of the contract and substantially defeats the purpose for which the contract was entered into. In such cases, the aggrieved party can treat the contract as terminated and claim damages.

4. Minor Breach (Partial Breach)

A minor breach is one that does not go to the root of the contract. The aggrieved party must still perform their obligations but can claim damages for the loss caused by the partial non-performance. For example, if a seller delivers goods one day late in a non-time-sensitive contract.

Remedies for Breach of Contract

1. Damages (Monetary Compensation)

The primary remedy for breach of contract is an award of **damages** — monetary compensation for the loss suffered.

**Types of damages under Indian law:**

- **Ordinary damages (Section 73):** Compensation for loss that naturally arises from the breach in the usual course of things. These are also called **expectation damages** — they put the aggrieved party in the position they would have been in had the contract been performed.

- **Special damages (Section 73):** Compensation for loss that the parties knew at the time of the contract would likely result from the breach. These must be specifically pleaded and proved.

- **Liquidated damages (Section 74):** Where the contract specifies a sum to be paid in case of breach, the court awards reasonable compensation not exceeding that amount. Indian law does not distinguish between liquidated damages and penalty — Section 74 treats both alike.

- **Vindictive/exemplary damages:** Generally not awarded in contract cases. However, in cases of breach of promise to marry or wrongful dishonour of a cheque by a banker, exemplary damages may be awarded.

The Supreme Court in **ONGC v. Saw Pipes Ltd. (2003) 5 SCC 705** held that if the amount stipulated in the contract is a genuine pre-estimate of loss, the court should award that amount. If it is by way of penalty, the court will award only reasonable compensation.

2. Specific Performance

Under the **Specific Relief Act, 1963 (as amended in 2018)**, the court may order the breaching party to actually perform their contractual obligations. After the 2018 amendment, specific performance is the **default remedy** rather than an exceptional one.

Specific performance is particularly relevant in contracts involving:

- Sale of immovable property (land and buildings)

- Unique goods that cannot be obtained elsewhere

- Contracts where monetary compensation would be inadequate

3. Injunction

The court may grant an **injunction** — a court order restraining a party from doing something that would amount to a breach of contract. This is particularly useful in contracts involving negative covenants, such as non-compete agreements.

4. Rescission

The aggrieved party may treat the contract as terminated (rescinded) and is freed from their own obligations. Under Section 75, the party who rightfully rescinds is entitled to compensation.

5. Quantum Meruit

When a party has performed part of the contract before the other party breaches, they can claim **quantum meruit** — reasonable compensation for the work already done, even if the contract has been breached or repudiated.

When Does This Term Matter?

Commercial Contracts

Breach of contract is one of the most common causes of action in commercial litigation. Disputes over non-delivery of goods, defective services, failure to pay, and non-performance of contractual obligations are heard daily in Indian courts.

Employment Contracts

Breach by either employer or employee — wrongful termination, breach of non-compete clauses, or failure to serve notice period — gives rise to claims for damages and, in some cases, injunctive relief.

Real Estate Agreements

Failure to complete a property sale, deliver possession, or pay the agreed price constitutes breach of contract. Buyers can seek specific performance, while sellers may claim damages and forfeiture of earnest money.

Landmark Judgments

- **Hadley v. Baxendale (1854):** This foundational English judgment (widely applied in India) established the rule that damages must be such as naturally arise from the breach or were in the contemplation of the parties.

- **Maula Bux v. Union of India (1970) 1 SCC 147:** The Supreme Court held that Section 74 does not require the party to prove actual loss — only that a breach has occurred and the sum named is a reasonable pre-estimate.

- **Kailash Nath Associates v. DDA (2015) 4 SCC 136:** The Supreme Court clarified that Section 74 requires proof that loss has been suffered, even if the exact amount need not be proved.

Practical Significance

- **Limitation period:** A suit for breach of contract must be filed within **3 years** from the date of breach under the Limitation Act, 1963 (Article 55).

- **Duty to mitigate:** The aggrieved party must take reasonable steps to minimise losses resulting from the breach.

- **Burden of proof:** The party claiming damages bears the burden of proving the breach and the quantum of loss suffered.

- **Arbitration clause:** Many commercial contracts contain arbitration clauses requiring disputes to be resolved through arbitration rather than court proceedings.

Frequently Asked Questions

Can a party sue for breach of an oral contract?

Yes, in India, oral contracts are valid and enforceable for most purposes (except where the law requires writing, such as sale of immovable property or contracts under the Indian Registration Act). A party can sue for breach of an oral contract, though proving the terms of an oral contract may be more difficult than proving a written one.

What is the difference between liquidated damages and penalty under Indian law?

Unlike English law, Indian law under **Section 74 of the Contract Act** does not distinguish between liquidated damages and penalty. In both cases, the party complaining of breach is entitled to receive **reasonable compensation** not exceeding the amount named in the contract. The court assesses what is reasonable based on the circumstances.

Can a party claim both specific performance and damages?

Yes, after the **2018 amendment to the Specific Relief Act**, a party can claim both specific performance and **damages in addition to or in substitution of specific performance** under Section 21. This ensures that the aggrieved party receives complete relief.

Is a force majeure clause a defence against breach of contract?

A force majeure clause excuses non-performance when it is caused by events beyond the control of the parties — such as natural disasters, wars, or pandemics. If a valid force majeure clause covers the event that prevented performance, the non-performing party may be excused from liability for breach. In the absence of such a clause, Section 56 of the Contract Act (doctrine of frustration) may provide relief.