Breach of Contract

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Breach of Contract

Introduction

Breach of contract is the central trigger for civil enforcement in commercial and private law. It converts a bundle of private commitments into justiciable rights and remedies — damages, restitution, equitable relief — and dictates the procedures lawyers must adopt from pleading to execution. For Indian practitioners, mastery of breach law is not merely academic: it shapes drafting, dispute-avoidance, interim relief strategy, valuation of claims, and tactical litigation choices in courts and arbitral tribunals.

Core Legal Framework

Primary statutory anchors in India:

  • Indian Contract Act, 1872
  • Section 37 — Duty of parties to perform or offer performance of promise.
    • Key principle: parties must perform obligations except where law excuses performance.
  • Section 39 — Effect of refusal to perform or to accept performance.
    • Key excerpt: “When a promisor to a contract refuses to perform, or disables himself from performing, the promise wholly, the promisee may put an end to the contract…”
  • Section 55 — (governs consequences where promisee opts to rescind and claim damages in certain contracts; relevant when time or performance conditions are present).
  • Section 73 — Compensation for loss or damage caused by breach of contract.
    • Key excerpt: “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 him thereby, which 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 where penalty stipulated.
    • Key excerpt: Where a sum is named in the contract as payable on breach, the party is entitled to reasonable compensation not exceeding the amount named; courts assess whether the sum is a genuine pre-estimate or a penalty.

  • Section 75 — (restitutionary consequences where void agreements confer advantage).

  • Specific Relief Act, 1963

  • Governs equitable remedies: specific performance, permanent and temporary injunctions and declaratory relief — the principal non-monetary remedies for contractual breaches.

  • Civil Procedure Code, 1908; Arbitration and Conciliation Act, 1996

  • Procedural law for enforcing contractual rights in courts and arbitration; interim measures, execution remedies.

  • Limitation Act, 1963

  • Governs limitation period for suits arising out of breach (practitioners must note the starting point — date of breach or date of repudiation).

  • English authorities (e.g., Hadley v. Baxendale) and Supreme Court precedents interpret remoteness, mitigation and measurement of damages.

Practical Application and Nuances

This section focuses on how breach operates in litigation and transactional practice, with concrete examples and checklists.

  1. Types of breach and practitioner’s immediate options
  2. Actual breach (failure to perform when performance is due)
    • Options: accept breach and sue for damages; insist on performance and seek specific performance/injunction; claim restitution.
  3. Anticipatory breach (repudiation before performance is due)
    • Under Section 39, the promisee may treat the contract as terminated or wait until the time for performance and then sue. Practical step: issue a formal notice recording repudiation, reserve rights, and elect remedy; preserve evidence that the other party unequivocally repudiated (emails, board minutes).
  4. Partial or divisible breach
    • If contract is divisible, claimant can enforce the parts performed; otherwise consider rescission and damages.

  5. Fundamental/repudiatory breach vs. minor/innominate breach

    • Test: does the breach go to the root of the contract and deprive the innocent party of substantially the whole benefit? If yes, treat as repudiatory.

  6. Pleadings and proof

  7. Core pleadings must plead: existence of valid contract (attach contract), precise term breached (clause + page), nature of breach, date(s) of breach, notice(s) sent, election of remedy, and quantum calculation.
  8. Evidence checklist:
    • Original executed contract and amendments; invoices; delivery receipts; bank statements; correspondence; internal project documents; expert valuations (for future loss/profit); market evidence (for cover/mitigation); witness statements from persons handling performance.

  9. Documentary foundational proof beats oral assertions. Contemporaneous communications (notices, emails) are critical on repudiation and mitigation.

  10. Measurement of damages

  11. Primary rule: Expectation principle under Section 73 — place the claimant in the position he would have been in had the contract been performed.
  12. Types of recoverable loss: direct loss, consequential loss (if within parties’ contemplation at contract formation per Hadley v. Baxendale), loss of bargain, and pre-contractual expenditure (reliance damages in limited situations).
  13. Key defences: remoteness (loss was not foreseeable), mitigation (claimant failed to take reasonable steps to reduce loss), causation.

  14. Quantum exercises: compute actual loss, then adjust for mitigation and foreseeability. For loss of profits proffer detailed contemporaneous business records and expert testimony.

  15. Liquidated damages vs. penalty

  16. Section 74 governs clauses fixing damages. Courts will examine whether sum is a genuine pre-estimate of loss or a deterrent/penalty. If genuine, enforceable up to the stipulated sum; if penalty, court awards reasonable compensation (not automatic sum).

  17. Practical drafting: describe method of computation, tie the pre-estimate to objective variables (eg. per diem loss), and avoid language of “penalty”.

  18. Equitable relief

  19. Specific performance is available where damages are inadequate (e.g., sale of unique immovable property or other unique subject matter). For purely monetary loss, damages are the norm.

  20. Injunctions (interim and permanent) are critical in breaches involving proprietary or non-compete obligations.

  21. Interim remedies

  22. Apply for interim injunctions under Order 39 CPC (or equivalent in arbitration) where damages are inadequate and irreparable harm is feared.

  23. Preserve assets: attachment before judgment (sec. 51 CPC) or arbitration emergency measures.

  24. Practical examples

  25. Supply contract: Supplier delays delivery of critical components. Remedies: (i) treat as repudiation if supplier unequivocally refuses to deliver; (ii) purchase substitute goods (cover) and claim price difference + incidental damages; (iii) calculate lost production/profits with evidence; (iv) seek injunction only if item is unique.
  26. Construction contract: Contractor abandons site. Remedies: terminate, engage substitute contractor, claim difference and delay damages; preserve site records; call payment/bank guarantees.

  27. Service contract with liquidated damages clause: Employer claims LDs; check whether clause is genuinely pre-estimate; if clause onerous, seek mitigation or reduction.

  28. Tactical steps on receiving repudiation or breach

  29. Immediately secure documentary evidence of breach and communications.
  30. Issue a written notice calling for performance and reserving rights; if anticipatory, send notice treating contract as at an end or demanding assurance of performance (choose strategically).
  31. Mitigate loss and document mitigation steps.
  32. Consider interim injunctive relief if damage is irreparable.
  33. Preserve contractual security: call performance guarantees, bank guarantees, or seek provisional attachment.
  34. Calculate multiple reliefs and plead in the alternative (specific performance / damages and injunction).

Landmark Judgments

  • Fateh Chand v. Balkishan Das, AIR 1963 SC 1405
  • Principle: When a contract is repudiated by one party, the other may accept the repudiation and treat the contract as at an end or refuse the repudiation and insist on performance. Acceptance of repudiation is an election; it can be withdrawn so long as the other party has not materially altered his position in reliance. The case is central on anticipatory breach and the consequences of acceptance/retraction.
  • ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705
  • Principle: Supreme Court scrutinized liquidated damages clauses and held that clauses which are extravagant, unconscionable or operate as a deterrent will be treated as penalties. The court emphasized commercial predictability but preserved judicial power to assess whether a clause is a genuine pre-estimate. The judgment is indispensable when arguing enforcement or mitigation of stipulated damages.
  • Hadley v. Baxendale (1854) 9 Exch 341 (English authority applied in India)
  • Principle: Two limbs for recovery of consequential losses — (i) losses arising naturally from the breach, and (ii) losses reasonably contemplated by both parties at time of contracting as probable result of breach. Indian courts consistently employ this test for remoteness of damages.

(Practitioners should deploy these authorities to argue foreseeability, mitigation, measurement and penal clause challenges.)

Strategic Considerations for Practitioners

  • Drafting to avoid dispute:
  • Make time-of-the-essence clauses explicit where deadlines are critical.
  • Draft liquidated damages with a clear computation basis and avoid punitive terms.
  • Include termination, force majeure, notice and cure periods, dispute-resolution clause (arbitration/mediation), and interim relief waiver (careful: courts may not enforce unconscionable waivers).
  • Early-stage litigation strategy:
  • Preserve evidence and serve notices promptly. A late claim to mitigation will be attacked.
  • Avoid waiver traps: mere silence or acceptance of part-performance can be pleaded as waiver or estoppel — put careful reservation of rights in writing.
  • Plead alternative reliefs robustly: damages, specific performance (if appropriate), injunctions, restitution.
  • Quantum strategy:
  • Build quantum from day one; instruct forensic accountants/experts early.
  • Document mitigation steps. If claimant fails to mitigate, the court will reduce damages.
  • Dealing with liquidated damages:
  • If representing defendant, argue clause is a penalty: show disproportionality and deterrence effect (use Saw Pipes).
  • If representing claimant, show clause is a genuine pre-estimate; present contemporaneous commercial rationale and calculation.
  • Arbitration vs litigation:
  • Select forum based on speed, enforceability of interim measures, technicality of disputes, and enforceability of relief (domestic and foreign).
  • Preserve emergency relief rights even if arbitration clause exists (seek Section 9 CPC relief if necessary).
  • Avoid common pitfalls:
  • Vague pleadings about “breach” without clause-specific pleading.
  • Over-claiming speculative future profits without reliable evidence.
  • Failure to articulate election between remedies (if claimant treats contract as continuing but also seeks damages, opponents will argue inconsistent conduct).
  • Ignoring contractual dispute-resolution timelines and requirements (conditio sine qua non for jurisdiction or arbitrability).

Conclusion

Breach of contract in India is governed predominantly by the Indian Contract Act (Sections 37, 39, 73 and 74 being core), supplemented by the Specific Relief Act for equitable remedies and procedural statutes for enforcement. Practitioners must think in triplets: legal theory (types of breach and remedies), documentary proof (contract + contemporaneous records), and commercial strategy (drafting, mitigation, and choice of forum). Mastery of anticipatory breach principles, measurement of damages, and the penalty/liquidated damages doctrine (see Saw Pipes) converts legal knowledge into client advantage. In litigation or negotiation, precision in pleading the breached term, early evidence preservation, and a clear mitigation and quantum strategy determine success far more reliably than general assertions of “breach.”