Remedies for Breach of Contract: Meaning, Legal Remedies and FAQs

Indian Contract Act, 1872 is a central law, and it validates the Contracts or Agreements between various parties. Contract Act regulates and oversees all the business in case of any deal or an agreement. The Indian Contract Act, 1872 defines the term Contract under Section 2(h) as “An agreement enforceable by law”. Hence, a Contract is anything that is an agreement and enforceable by the law of the land. A Contract might be terminated or broken when one party to the contract fails or refuses to fulfill their part of obligation, or the promise, which was agreed upon under the Contract. Therefore, when a binding agreement is not fulfilled by one or more parties, the agreement may be terminated.

Geeky Takeaways:

• Indian Contract Act mentions all the provisions for the performance of a contract.
• A contract is said to be breached when a promise or an agreement is broken by any of the parties.
• When an agreement is not honored by any of the parties by non-performance of their promise, the agreement is said to be breached.
• Breach of a contract gives termination to an agreement.

What is a Breach of Contract?

A contract involves the performance of obligations and rights between parties who have entered into a contract. A contract is legally binding on the parties to the contract. The binding nature of a contract makes sure that the parties perform their part of obligations, which was agreed at the time of entering the contract, and comply with the agreed terms of the contract. In a case where either of the parties or both of the parties to the contract fails to fulfill the terms of the contract, it would result in a Breach of the Contract. 

Breach of contract may arise in two ways:

1. Actual Breach of Contract: When a party defaults in the performance on the due date, then it is called an Actual Breach. In that case of breach, the other party to the contract obtains the right of action against the one who has committed default in performing his part of the promise. For example, Rahul contracted with Shilpi to supply construction material on 1st April 2023; however, on 1st April 2023, Rahul failed to supply and defaulted on the supply of material. This is an Actual Breach of Contract.
2. Anticipatory Breach of Contract: When the party to a contract defaults before the completion of the due date of performance it amounts to an Anticipatory Breach. Under Anticipatory Breach, the promisor refuses to perform his part of the promise and discloses unwillingness even before the actual time for performance. For example, DLF builders contracted with ACC Cements to supply 20,000 bags of cement for their construction site on 1st Jan 2024. However, on 25th Dec 2023, ACC informed DLF that they wouldn’t be able to supply the cement bags on 1st Jan 2024.

As a precautionary measure to save parties from any damages, there are remedies available for the same. Here, the party at default is required to indemnify the aggrieved party for the damage that has happened due to their default. For example, Drafting a Contract of sale with a provision stating a penalty of 2% of order value in case any of the parties commits a breach.

Legal Remedies for Breach of Contract

Indian Contract Act of 1872 has specified certain remedies which are available to the parties to the contract which they can claim from the defaulting party. Following are the remedies that are available under the Indian Contract Act, of 1872:

1. Suit for Damages:

Section 73 of the Indian Contract Act has specified the rules as to how the amount of compensation will be determined. On the breach of the contract, the party who has suffered from such a breach due to the default of the other party is entitled to receive compensation for the loss or damage (if any) caused to him by such breach of contract. However, the act has specified that no compensation is payable for any remote or indirect loss. The act has specified the following damages:

I. Ordinary Damages: In a case when a contract has been broken, the party who suffers by such default of the party resulting in breach is entitled to receive compensation for the loss or damage that occurred to him, which naturally arose in the usual course of business from such a breach, or which the party knows when he entered the contract, which is resulted from the breach. However, the act has specified that compensation is not required to be given for any remote or indirect loss by reasons of the breach.

For example, A agrees to sell 500 units of mobile phones at a fixed price of ₹10,000 and the delivery is to be made after 4 weeks. However, the price of the mobile phones increased to ₹11,000, and A refused to make the delivery at the earlier agreed price of ₹10,000. Here, in this case, B is entitled to recover ₹1,000 per mobile phone from A.

II. Special Damages: In a case where a party to the contract receives a notice of special circumstances affecting the contract, the party in default will be liable not only for the actual damages arising due to his default but also will be liable for the special damages which were in connection with the contract.

For example, L&T Constructions contracted with Tata Steel to supply them with 1,000 tons of steel, which was to be supplied at their site situated in Jaipur. However, Tata Steel made a significant delay in the delivery due to which L&T Construction lost a government contract. In this case, Tata Steel will be required to pay for the ordinary damages along with the average amount of profit that they could have made from the government contract. However, Tata Steel will not be required to pay for special damages if they were not made aware of such government contract to which this supply was related.

III. Vindictive or Exemplary Damages: Vindictive Damages are awarded when a party to the contract breaches the contract, and the other party is mentally affected due to such breach. These damages are awarded to compensate for the mental stress or injury caused to the aggrieved party due to breach as the other party acted wrongfully. These damages may be awarded only in two cases, which are:

• Breach of promise to marry because it causes injury to his or her feelings causing mental stress.
• When a banker has wrongfully dishonoured a customer’s cheque. Such a case would cause a loss of credit and reputation to him. A businessman whose credit has suffered will get exemplary damages even though he has sustained no pecuniary loss. However, a non-trader cannot get heavy damages in such a situation until the damages are alleged and proved as special damages.

IV. Nominal Damages: Nominal Damages are awarded when the plaintiff has proved that there has been a breach of contract but the party has not suffered any real damage. It is awarded just to uphold the right to decree for the breach of contract. The amount in such cases may be a rupee or even 10 paise.

V. Damages for Deterioration caused by Delay: In a case where damages have been caused due to deterioration caused to goods by delay, damages can be recovered from the carrier even without notice. The act has specified that the word ‘deterioration’ not only implies physical damages to the goods but it can also mean loss of special opportunity for sale.

VI. Pre-Fixed Damages: In some cases, the parties to a contract stipulate at the time of its formation that on a breach of contract by any of the parties, a certain amount shall be payable as damage.

2. Recession of Contract:

In a case when the contract is broken by one party, the other party may treat the contract as rescinded. Here, the aggrieved party is free of all his obligations under the contract and is entitled to receive compensation for any damages that he might have suffered due to the breach.

For example, Arjun promises Karan to deliver 500 bags of rice on a certain day. Karan agrees to pay the amount on receipt of the goods. Arjun failed to deliver the rice on the appointed day. Karan is discharged from his liability to pay the price.

3. Suit for Specific Performance:

In some cases, damages may not be an adequate remedy for the case of breach of contract. The court may at its discretion on a suit for specific performance direct the party in default to carry out his promise according to the actual terms of the contract.

For example, Karan and Arjun agree to enter a contract where Arjun agrees to buy the property of Karan. However, later Karan refuses to sell the property to Arjun. The court ordered Karan to perform the sale, which was agreed upon earlier and perform the contract with Arjun.

4. Suit for Injunction:

An injunction order is a decree for specific performance but issued for a negative contract. An injunction is a court order preventing a person from doing a particular act. In some cases, the court may grant an injunction to stop a party to a contract from doing something which he promised not to do. In a Prohibitory Injunction, the court stops the performance of an act, and in a Mandatory Injunction, the court orders to stop the continuance of an act that is considered unlawful.

For example, Arjun owns mines in Kota, and he contracted with Karan to excavate the mines on lease. However, Live Green, an NGO, approached the court stating the unfair practice of deforestation. The court ordered a Mandatory Injunction and prohibited the excavation of the mine.

5. Suit upon Quantum Meruit:

Quantum Meruit refers to “as much is earned”. In some cases where one party of the contract is prevented from finishing his part of the obligation of the contract by the other party, he can claim quantum meruit for the breach of contract. The aggrieved party must be paid a reasonable remuneration for the part of the contract which has been already performed. The defaulting party has to reimburse the aggrieved party for the value of the work he has already done. Damages are compensatory; whereas the quantum merit is restitutory. Application of this doctrine can be established only when the two conditions are fulfilled:

• It is only available if the original contract has been duly discharged.
• The claim must be brought by a party who is not in default.

The claim may arise in the following situations:

• When the agreement is discovered to be void or it becomes void.
• When something is done without any intention to do gratuitously.
• Where there is an express/implied contract to render services but no agreement as to remuneration.
• When one party abandons/refuses to perform the contract.
• When a contract is divisible, and the party who is not in default has enjoyed the benefit of part performance.
• The party at default can claim lumpsum less deduction for bad work if the contract is indivisible but is performed completely though badly.

Conclusion

In case of a breach of contract, the affected party has the right to go to court to secure the performance of the contract or seek compensation for the default of the party who has breached the contract. The act has specified that the aggrieved party is required to be compensated by the defaulting party, and the court shall refer to the terms of the contract, the performance done by either party under the contract, the non-performance, and other circumstances. Parties now also add the penal provision in their contract to minimize the damages that can occur due to a breach of contract.

Frequently Asked Questions (FAQs)

1. What is a Breach of Contract?

Answer:

The binding nature of a contract makes sure that the parties perform their part of obligations which was agreed at the time of entering the contract and comply with the agreed terms of the contract. In a case where either of the parties or both of the parties to the contract fails to fulfil the terms of the contract, it would result in a breach of the contract.

2. How many types of breach are there?

Answer:

When a party defaults in the performance on the due date then it is called an Actual Breach and when the party to a contract defaults before the completion of the due date of performance it amounts to an Anticipatory Breach.

3. How many remedies are available for a breach of contract?

Answer:

Remedies available are as follows:

• Suit for Damages
• Recession of Contract
• Suit for Specific Performance
• Suit for Injunction
• Suit upon Quantum Meruit

4. What is Quantum Meruit?

Answer:

Quantum meruit refers to “as much is earned”. In some cases where one party of the contract is prevented from finishing his part of the obligation of the contract by the other party, he can claim quantum meruit for the breach of contract.

5. What are Vindictive Damages?

Answer:

Vindictive damages are awarded when a party to the contract breaches the contract and the other party is mentally affected due to such breach. These damages are awarded to compensate for the mental stress or injury caused to the aggrieved party due to breach as the other party acted wrongfully.