Learn the meaning, types, consequences, and remedies for breach of contract, with reference to the provisions of the Indian Contract Act, 1872.
A contract creates binding obligations on the parties. Each party is expected to perform what he has promised. When a party fails or refuses to perform his contractual obligation without any lawful excuse, it results in a breach of contract. Breach of contract not only brings the contractual relationship to an end but also gives rise to certain legal remedies in favour of the aggrieved party.
Meaning of Breach of Contract
Parties to a contract are bound to perform their respective obligations. If any party fails or refuses to perform the obligation imposed upon him, he is said to have committed a breach of contract.
Thus, breach of contract means failure or refusal of a party to perform his obligation under a contract without any lawful excuse.
The breach of contract may be of the following types:
a) Actual breach of contract
b) Anticipatory breach of contract
Actual Breach of Contract
Actual breach of contract is also known as present breach. It occurs when a party fails to perform his obligation either during the performance of the contract or at the time when performance is due.
Circumstances of Actual Breach
Actual breach of contract occurs:
(a) when, during the performance of the contract, one party fails or refuses to perform his obligation, or
(b) when, at the time performance is due, one party fails, refuses, or neglects to perform his obligation.
Actual breach discharges the contract and gives the aggrieved party the right to sue for damages.
Example:
A agrees to deliver 5 tons of sugar to B on 5th July. A fails to deliver the sugar on that date. A has committed an actual breach of contract.
Anticipatory Breach of Contract
Anticipatory breach of contract is also known as constructive breach. It occurs before the time fixed for performance of the contract.
Circumstances of Anticipatory Breach
Anticipatory breach occurs:
(a) when a party repudiates his liability before the time for performance is due, or
(b) when a party, by his own act or conduct, disables himself from performing the contract.
Illustrations:
- A agrees to marry B on a future date. Before the agreed date, A marries X. This is anticipatory breach by conduct.
- X contracts to supply goods to Y on 1st June. Before that date, X informs Y that he will not supply the goods. This is anticipatory breach by express refusal.
Anticipatory breach does not automatically discharge the contract. The contract is discharged only when the aggrieved party accepts the repudiation. If the aggrieved party does not accept it, the contract continues and may still be performed.
Consequences of Breach of Contract (Section 73)
Section 73 of the Indian Contract Act provides that when a contract is broken, the party who suffers is entitled to receive compensation from the party who has broken the contract.
Compensation for Loss or Damage
Compensation is payable for:
- Loss or damage which naturally arose in the usual course of things, or
- Loss which the parties knew, at the time of contract, was likely to result from the breach.
Compensation is not payable for remote or indirect loss or damage.
Obligation Resembling Contract
When an obligation resembling those created by contract is not discharged, the injured party is entitled to the same compensation as if it were a breach of contract.
Duty to Mitigate Loss
While estimating damages, the means available to reduce or mitigate the loss must be taken into account.
Illustration (A):
A hires B’s ship to carry cargo. B’s ship does not go to Bombay, but A arranges another ship with similar terms. A is entitled to compensation only for the trouble and extra expense incurred.
Illustration (B):
A contracts to carry jute for B. Delay causes fall in market price. Compensation equals the difference between the expected market price and actual market price on arrival.
Compensation Where Penalty is Stipulated (Section 74)
When a contract specifies a sum payable on breach or contains a penalty clause, the aggrieved party is entitled to reasonable compensation, whether or not actual loss is proved.
However, compensation shall not exceed the amount named or penalty stipulated.
Illustrations:
(a) A agrees to pay ₹31,000 if he fails to pay ₹500 on a given date. The court may award reasonable compensation not exceeding ₹31,000.
(b) A agrees not to practise as a surgeon in Calcutta, failing which he will pay ₹5,000. On breach, reasonable compensation not exceeding ₹5,000 may be awarded.
Exception
In case of bonds for performance of public duty, the whole amount mentioned may be recovered on breach.
Party Rightfully Rescinding Contract (Section 75)
A person who rightfully rescinds a contract is entitled to compensation for any damage suffered due to non-fulfilment of the contract.
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Remedies for Breach of Contract
When a contract is breached, the aggrieved party may avail one or more of the following remedies:
- Suit for rescission of the contract
- Suit for damages
- Suit upon quantum meruit
- Suit for specific performance of the contract
- Suit for injunction
1. Suit for Rescission of the Contract
Rescission means cancellation of the contract. When one party commits a breach, the other party may treat the contract as rescinded.
Upon rescission, the aggrieved party is discharged from all obligations and may claim compensation.
Example:
X agrees to deliver a book to Y on 5th January. X fails to deliver the book. Y may rescind the contract and refuse to pay the price.
2. Suit for Damages
Damages are monetary compensation awarded by the court for loss suffered due to breach of contract.
The objective of damages is compensation, not punishment.
This is the most common remedy for breach of contract.
3. Suit upon Quantum Meruit
Quantum meruit means “as much as earned”. It refers to payment in proportion to work done.
A claim on quantum meruit arises when a contract partly performed by one party is discharged due to breach by the other party.
Cases Where Quantum Meruit Arises
a) When a contract is discovered to be void
b) When work is done without intention to act gratuitously
c) When one party refuses to perform the contract
4. Suit for Specific Performance of the Contract
Specific performance means actual performance of the promise, as ordered by the court.
It is granted when damages are not an adequate remedy, such as:
a) Where monetary compensation is inadequate
b) Where actual damage cannot be measured
c) Where compensation cannot be obtained
5. Suit for Injunction
An injunction is an order of the court restraining a person from doing a particular act.
It is generally granted to prevent breach of a negative promise and may be temporary or permanent.
Injunction is a preventive relief, granted at the discretion of the court.
Lesson Conclusion
Breach of contract occurs when a party fails to perform his contractual obligations without lawful excuse. The breach may be actual or anticipatory and gives rise to legal consequences. The Indian Contract Act provides detailed rules regarding compensation and remedies to protect the aggrieved party.
Understanding breach of contract and its remedies is essential for CMA Foundation students, as this topic is frequently tested through theory questions, illustrations, and problem-based questions. A clear grasp of statutory provisions and remedies helps in accurate application of law to practical situations.
Revision Questions
Click the question to reveal the answers.
1. What is the failure or refusal of a party to perform his contractual obligation called?
Ans. Breach of contract
2. What type of breach occurs at the time performance is due?
Ans. Actual breach
3. What is anticipatory breach also known as?
Ans. Constructive breach
4. Which section of the Indian Contract Act deals with compensation for breach of contract?
Ans. Section 73
5. Which section deals with compensation where penalty is stipulated?
Ans. Section 74
6. What is the monetary compensation awarded for loss caused by breach called?
Ans. Damages
7. What does the term quantum meruit mean?
Ans. As much as earned
8. What remedy compels actual performance of the contract?
Ans. Specific performance
9. What remedy restrains a person from doing a particular act?
Ans. Injunction
10. What is the cancellation of a contract called?
Ans. Rescission
Fill in the Blanks
Click the question to reveal the answers.
1. Failure to perform a contractual obligation without lawful excuse is called ____________.
Ans. Breach of contract
2. Actual breach of contract is also known as _________ breach.
Ans. Present
3. Anticipatory breach occurs _________ the time fixed for performance.
Ans. Before
4. Compensation is not payable for __________ or indirect loss.
Ans. Remote
5. Section ____________ of the Indian Contract Act deals with compensation for breach.
Ans. 73
6. Under Section 74, compensation shall not exceed the amount _____________ in the contract.
Ans. Specified
7. The fundamental principle underlying damages is _______________ and not punishment.
Ans. Compensation
8. Quantum meruit allows payment in proportion to work __________.
Ans. Done
9. Injunction is a _________ remedy.
Ans. Preventive
10. A party who rightfully rescinds a contract is entitled to compensation under Section ___________.
Ans. 75
True or False
Click the question to reveal the answers.
1. Breach of contract may be actual or anticipatory.
Ans. True
2. Anticipatory breach automatically discharges the contract.
Ans. False
3. Compensation is allowed for remote and indirect loss.
Ans. False
4. Section 73 requires the injured party to mitigate the loss.
Ans. True
5. Penalty clauses always allow recovery of the full amount mentioned.
Ans. False
6. Actual damage must be proved in all cases under Section 74.
Ans. False
7. Quantum meruit applies only when the entire contract is performed.
Ans. False
8. Specific performance is granted when damages are inadequate.
Ans. True
9. Injunction is a corrective remedy.
Ans. False
10. Rescission releases the aggrieved party from contractual obligations.
Ans. True
You can also test your knowledge and understanding of this lesson by taking advantage of our MCQ Practice Questions (MCQs).
Let us know if you have any questions or doubts in the comments section.
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