CONSEQUENCES OF BREACH OF CONTRACT

by | Nov 11, 2023

CONSEQUENCES OF BREACH OF CONTRACT

Contracts are the backbone of business transactions, ensuring that parties involved uphold their agreed-upon obligations. However, there are instances when one party fails to fulfil their contractual duties, resulting in a breach of contract. In such situations, the Indian Contract Act outlines the consequences that may follow –

  1. Damages : One of the primary consequences of breaching a contract is the payment of damages. Damages serve as compensation for the losses suffered by the non-breaching party due to the contract breach. The Indian Contract Act categorises damages into two types: ordinary damages and special damages. Ordinary damages refer to the direct and natural consequences of the breach, while special damages encompass indirect or specific losses that can be proven.
  2. Specific Performance : In certain cases, the court may order specific performance as a remedy for a breach of contract. This means that the party in breach may be compelled to fulfil their contractual obligations as specified in the agreement. Specific performance is often sought when monetary compensation alone is insufficient to rectify the harm caused by the breach.
  3. Injunctions : Another consequence of a contract breach is the issuance of an injunction. An injunction is a court order that prohibits the breaching party from engaging in certain actions or activities mentioned in the contract. Injunctions are sought to prevent the breaching party from causing further harm or damage to the non-breaching party’s interests. 
  4. Liquidated Damages : In some contracts, parties may include a liquidated damages clause. This clause stipulates a predetermined amount of damages that the breaching party must pay in the event of a breach. The purpose of including this clause is to simplify the process of assessing damages and avoid lengthy legal disputes or trials.
  5. Termination and Rescission : When a contract is breached, the non-breaching party may choose to terminate the contract or seek rescission. Termination involves ending the contractual relationship and releasing both parties from their obligations. Rescission, on the other hand, allows the non-breaching party to cancel the contract and seek restitution for any losses suffered. 

RELEVANT PROVISIONS – 

SECTION 73 (Compensation for loss or damage caused by breach of contract) : Under the Indian Contract Act, when one party fails to fulfil their contractual obligations, the other party is entitled to compensation for any loss or damage they have suffered as a result of the breach. This compensation is meant to restore the aggrieved party to the position they would have been in if the contract had been performed as agreed. 

(Compensation for failure to discharge obligations resembling those created by contract) : In certain situations, obligations may arise that resemble those created by a contract, even if there is no formal contract in place. If a party fails to fulfil these obligations, the injured party is still entitled to compensation for any loss or damage suffered as a result. 

SECTION 74 (Compensation for breach of contract where penalty stipulated for) : If a contract includes a specific penalty clause for breach of contract, the party who suffers the breach is entitled to receive compensation as stipulated in the penalty clause. This compensation is in addition to any other damages that may be awarded based on the actual loss or damage suffered.

SECTION 75 (Party rightfully rescinding contract, entitled to compensation) : If a party rightfully rescinds, or cancels, a contract due to the other party’s breach, they are entitled to compensation. The compensation will be based on the loss or damage suffered as a result of the breach, and it aims to restore the rescinding party to the position they would have been in if the contract had never been entered into. 

Breach of contract can have significant consequences under the Indian Contract Act. Whether it’s the payment of damages, specific performance, injunctions, or termination, understanding these consequences is crucial for both parties involved in a contractual agreement. 

REFERENCES:

https://main.sci.gov.in/supremecourt/2018/39310/39310_2018_Judgement_27-Feb-2019.pdf – SUPREME COURT OF INDIA

https://indiankanoon.org/docfragment/20087258/?formInput=cases%20on%20breach%20of%20contract – INDIAN KANOON

 

Written By Nancy Sharma

I am Nancy Mahavir Sharma, a passionate legal writer and , a judicial service aspirant who is interested in legal researching and writing. I have completed Latin Legum Magister degree. I have been writing from past few years and I am excited to share my legal thoughts and opinions here. I believe that everyone has the potential to make a difference.

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