How Breach of Contract Claims Work in Indian Commercial Law

A supplier fails to make the delivery on time, a customer refuses to pay, or a contractor walks out of the project. All these scenarios involve a breach; however, litigation might not be the answer every time.

An organisation should determine what contract obligation was violated, the loss incurred and the desired result. Compensation, termination and specific performance can play very different roles in the process and have varying requirements.

When Is a Breach of Contract Occurring?

What Should the Law Say?

According to section 37 of the Indian Contract Act, 1872, performance of the promises should take place unless there are exceptions established by law. The existence of a breach will depend on the agreement, sequence of obligations and any valid modification.

How Can an Organisation Detect a Breach?

Let us say that a manufacturing company has promised to provide 1,000 units of some parts by 30 September but supplied only 600. The buyer may have a claim. However, the position could change if the buyer approved the sample late, accepted a revised schedule or failed to make a payment due first.

 

Sections 51–54 address reciprocal promises, the order of performance and defaults affecting performance. Section 67 concerns a promisee’s failure to provide reasonable facilities needed by the other party.

 

A breach of contract under the Indian Contract Act claim should therefore begin with the actual obligation and each party’s conduct, rather than the assumption that every commercial disappointment amounts to a legal breach.

What Types of Breach Arise in Commercial Deals?

Common types of breach of contract include:

●       Non-performance: Goods are not supplied or agreed performance is renounced.

●       Defective performance: The goods or services are not in conformity with the contract requirements.

●       Delay: Delay in performance hampers production or fulfilment of promises made to customers.

●       Repudiation: A party renounces its performance or shows an unwillingness to fulfil its promise.

 

The effects on business will be considered while deciding upon a course of action. In case of delay, it could be possible to adjust the schedule provided the goods are still useful. Defective parts that pose a danger to safety may need prompt replacement.

 

Section 39 deals with one party’s refusal to perform its promise in full or disables itself from performing its promise in full. Unless acceptance of continuing the contract has been made by word or conduct, the other party can terminate the contract.

How Can a Business Prove Its Claim?

The first step in proving a breach of contract is knowing what the contract entailed, what really took place, whether the claimant has satisfied its contractual obligations and the consequences of the breach.

1. Prove the Obligation and Gather the Evidence

Analyse the signed contract, purchase order, statement of work, and the related schedules. The particular term of payment, delivery date, quality requirement or service obligation not fulfilled should be determined.

 

Gather documents related to the dispute:

●       Failure of payments: Contracts, invoices, delivery and payment reminders.

●       Late delivery: Contractual schedules, dispatch notes and communications.

●       Faulty products: Specifications, inspection reports, test findings and notice of rejection.

●       Partial services: Statement of work, progress reports and incomplete deliverables.

 

Verify whether email or other written modifications have been made to the contract. A timeline will help identify the party responsible for the problem, especially if both parties caused the delay.

2. Calculate the Loss

Keep the invoices for the cost of replacement, additional labour charges, transportation charges, or rework charges. In case of claiming lost profits, keep the financial documentation to back your claim.

 

For instance, the cost of the contracted goods is ₹10 lakh, but the cost of an alternative is ₹11.5 lakh; the ₹1.5 lakh gap might justify claiming damages. However, the claimant will have to prove causality, satisfy the requirements of law, and mitigate any avoidable loss.

Should the Business Claim Damages or Terminate?

Section 73 of the Indian Contract Act allows damages for losses that can naturally flow from the breach of contract or losses that both parties knew would happen while entering into the contract. Losses that are remote and indirect are not considered.

When Are Damages Appropriate?

Damages are appropriate when the business continues operations and can determine the amount of monetary losses incurred. These include additional procurement costs, proven rework costs, and lost profits.

 

It should be determined if the gain from the claim outweighs the cost involved in pursuing the claim.

When Should Termination Be Considered?

In cases where there is a breach and the contract's commercial objective is thwarted or termination is specifically provided for within the terms of the contract, termination may be worth exploring.

 

Before taking action, you should consider the following:

●       If there is a legal right or a contractual right to terminate the contract due to the breach.

●       Whether there is a need to issue written notice or give the other party a chance to cure.

●       Whether there is anything that can be done to replace the supply so as to prevent further loss.

●       Whether there is a risk of being counter-claimed against.

 

Clause 75 allows a party that has the right to terminate a contract due to breach of contract to claim damages as a result of the non-performance of the contract. There must already be a right of termination independent of Clause 75.

When Is Specific Performance Worth Considering?

Specific performance is a remedy that requires a party to fulfil its contractual obligation rather than simply pay compensation. It may be worth considering when the promised performance has commercial value that money alone cannot adequately address.

When Might Specific Performance Be Suitable?

Consider this remedy when:

●       A suitable substitute is unavailable: The promised asset or performance is difficult to replace.

●       The goal of the contract is still reachable: Being given the performance promised will fulfil a significant commercial purpose.

●       A claim for damages will not be enough: Money will not make up for the losses suffered by a failure to perform.

 

For instance, a company that wants a certain piece of land or contractual asset that is unique and special may want to seek specific performance instead of claiming money damages. Availability of remedy will depend on the contract and the laws governing the same.

What Are The Applicable Legal Criteria?

Sections 10, 14, and 16 of the Specific Relief Act, 1963 should be considered together:

●       Section 10: This section covers specific performance within the limitations provided by the Act.

●       Section 14: This section lists the types of contracts that are exempted, and these include certain types of contracts that entail continuous duties which are hard to supervise by the court.

●       Section 16: This section provides personal bars to relief, and these include situations where the performance or readiness and willingness to do the performance have not been proven.

 

What Should a Business Assess Before Proceeding?

Before pursuing this remedy, consider:

●       Enforceability: Does the contract qualify for specific performance under the applicable law?

●       Your own performance: Can the business demonstrate compliance with its essential obligations or readiness and willingness to perform them?

●       Timing: Will the promised performance still be useful when the dispute is resolved?

●       Practical alternatives: Could a replacement supplier or a damages claim resolve the problem sooner?

●       Cost and disruption: Are the likely benefits proportionate to the time and expense of proceedings?

 

Specific performance is generally more compelling when actual performance remains necessary and legally enforceable. If a substitute can meet the business’s needs and the loss can be measured, damages or settlement may be more practical.

When Can Settlement Be the Sensible Choice?

Settlement may be preferable when both parties want to preserve the relationship or litigation costs would be disproportionate to the likely recovery.

What Settlement Options Are Available?

Examples of possible settlements may be as follows:

●       New deadlines: Arrange for a new delivery deadline or milestones for the project.

●       Substitute or correct work: Arrange for defective items to be substituted or incomplete work to be completed.

●       Staged payment: Make payments depend on performance.

●       Reduced price: Lower the price in consideration of an agreed upon deficiency.

●       Termination: Settle payment disputes and agree on the disposition of other claims.

How Should the Settlement be Documented?

List all the obligations of each party, the deadlines and what happens in case of failure to meet those deadlines. Indicate whether there are any remaining claims after settlement and check whether there is an arbitration clause.

 

In cases where a contract specifies a certain amount payable for breach of a contract, under Section 74, reasonable compensation can be made that will not exceed the specified sum or penalty.

What Is the Limitation Period?

As per Article 55 of the Limitation Act 1963, generally a period of three years is provided to claim compensation in case of breach of contract. The date will depend on whether it is an ordinary, successive or continuing breach of contract.

It should be noted that reminders or any discussions regarding settlements do not necessarily extend the time limit.

Selecting the Correct Remedy to Solve the Commercial Issue

The remedy selected by the business should depend upon whether the need is for compensation, performance of the contract, exiting the contract in accordance with law, or reaching an agreement with a minimum of disruption.