A Contract aften has several provisions and terms agreed between the parties, depending upon purpose and the type of the Contract. The parties involved in the Contract must adhere to all the terms outlined in the contract. In a contract, both parties make promises to one another and failing to meet these obligations is regarded as a breach of contract. Each side promises to carry out a specific obligation, whether it is payment, delivery of goods, or services. When one party does not fulfil their end of the contract—in other words, they “fail to perform”—that party (known as the “breaching party”) has breached the contract.
There are two types of breach of contract:
- Material breach– which occurs when the contract is irreparably broken, and
- Immaterial breach– which is also known as a minor breach or simply a breach
While both types of breaches represent one party’s breach of the contract, only a material breach can result in actual damages or contract termination. In other words, the non-breaching party to a contract can only recover from a material breach. However, a significant difference exists between a minor oversight or failure to meet a small contractual detail and a complete [1]failure to fulfil any part of the contract. A major failure to perform is known as a material breach, while a failure to meet a more minor contractual obligation is considered a non-material breach.
A breach is considered material if its inability to perform is fundamental to the contractual contract[2]. When the purpose of the contract is not met and the contracting party does not receive the product or service for which they bargained and negotiated, this is considered a material breach.
The judge examined the concept of material breach in the case of National Power Plc v. United Gas Company Ltd (1998), [3]The court defined it as “a serious violation of any of the guilty party’s responsibilities.” Additionally, the judge ruled that failure to address a material breach within seven days would result in the termination of the contract.
On the contrary, a non-material breach occurs when a failure to perform is related to an irrelevant aspect of the contract, but the contract’s fundamental purpose has been fulfilled.
Examples of a Material breach
For instance, you own an event management business. Plans were in place for the catering crew to arrive early that day to set up for your Saturday night fundraising [4]dinner event. As per the terms of your contract, the caterer was to arrive at 4 p.m. and as a result, most of the food would have been ready for the dinner scheduled at 6 p.m. The caterers were unreachable and nowhere to be found when Saturday afternoon rolled around. When the company doesn’t respond and there’s no food, you decide to call off the fundraising event.
In this case, the contract was materially broken by the catering company. The quality of dinner served that evening made or broke your fundraiser. The caterer failed to show up, so you were forced to call off the event. The original intent behind entering the contract was thwarted by the catering company’s non-compliance.
Example of a breach/immaterial breach
A minor breach of a contract is called an immaterial breach. This kind of violation usually consists of a minor infraction that has no appreciable impact on the relationship. Although the other party may not have received what they had anticipated and the breach may be somewhat inconvenient, the variation does not nullify the contract or cause significant harm.
Let’s use the example of our fundraiser dinner from earlier. Let’s say, once more, that you hire a catering business to supply the food for a dinner fundraiser. According to the contract, the company must have the food mostly prepared by the time it arrives at 4 p.m. for the 6 p.m. dinner. The catering company informed you in the afternoon to let you know they’re running late and won’t be able to get to the event space until 5 p.m. However, the company guarantees that there won’t be a delay of more than fifteen minutes for dinner. The scheduled dinner is served at 6:15 p.m., and the caterer does arrive at 5 p.m.
Most likely, this breach would be regarded as unimportant as the caterers arrived late, so dinner was served later than scheduled. You were still able to conduct your event, and the dinner was still fully catered to all other specifications. Even though the situation was stressful, nothing significant changed in the end.
Consequences of a Material Breach
The consequences of a material breach of contract are significant and can have far-reaching implications. Legal implications for the party failing to perform include.
Lawsuits: The non-breaching party can sue for breach of contract. This could lead to a court case where the breaching party is held legally accountable for their failure to perform.
Court orders: Depending on the case, the court might order the breaching party to fulfill their contractual obligations, pay damages, or face other legal consequences.
Moreover, Section 73 of the Indian Contract Act, 1872 states that every party that breaches the terms of a contract need to compensate the non-breaching party whose rights have been affected as a consequence of the actions of the breaching party.
The principle established in the case of Hadley v. Baxendale forms the basis for this section. The case involved a mill owner (the plaintiff) whose operations were halted due to a broken crankshaft. The defendants were transportation providers tasked with delivering a replacement part. Due to the defendants’ delay in delivery, the plaintiff did not receive the crankshaft on schedule.
The court’s ruling established two key principles:
- In the event of a contract breach, the damages recoverable should be those that would naturally arise from such a breach under normal circumstances.
- If a party seeks to claim special damages, they must demonstrate that the other party was made aware of the potential for such specific losses at the time the contract was formed.
This decision set a precedent for determining the extent of damages recoverable in contract law, particularly in distinguishing between general and special damages.
Additionally, Section 74 of the Indian Contract Act, states that if a sum to be paid, in case of a breach, is mentioned in the contract then irrespective of actual damage caused or loss, the breaching party is liable to pay reasonable compensation, not exceeding the amount so mentioned in the contract. Accordingly, various types of damages can be sorted for by the aggrieved party.
Types of Damage
- Compensatory damages compensate non-breaching parties for losses caused by the breach. The goal is to put the non-breaching party in the same position they would have been if the breach had not occurred.
- Consequential damages, also known as special damages, are awarded for losses resulting from a breach, but not directly caused by it. They must be foreseeable and directly related to the breach.
- Punitive damages may be awarded for egregious breaches to punish and deter future misconduct.
Effect on contract performance for the non-breaching party
- Material breaches can significantly disrupt non-breaching parties’ business or personal plans.
- The non-breaching party may incur additional costs to find alternative solutions or mitigate the impact of the breach.
- The non-breaching party loses the benefit they would have received if the contract was completed as agreed.
It is critical for those facing a potential material breach situation to seek legal advice. Legal professionals can advise on the best course of action and help you navigate the complexities of contract law.
Remedies for a material breach of contract:
Legal actions available to the breached party- The party who was violated has the following different remedies at their disposal:
- Filing a lawsuit for breach of contract: If someone breaks a contract and doesn’t fulfil their end of the bargain, the simplest line of action is to sue them.
- Requesting a court order for specific performance: In some circumstances, particularly when monetary damages are insufficient, the non-breaching party may ask the court to compel the breaching party to carry out their obligations under the terms of the contract’s particular remedies, such as the termination of a contract
- Contract termination: In the event of a material breach, the non-breaching party may end the contract. As a result, they are no longer bound by the contract in any way.
- Recission of contract: This remedy voids the contract and attempts to put the non-breaching party back in the same situation as before the contract.
However, before you can terminate the contract or file for bankruptcy, you must give the other party notice that they have breached the contract. In your notice of breach, you should specify the nature of the breach, when it happened, and whether it can be remedied. Depending on the situation, trying to resolve the issue through negotiation may be more beneficial than filing for bankruptcy or terminating the contract.
Seeking payment or imposing obligations on performance:
- Making a damage claim: To make up for the losses brought on by the breach, the non-breaching party may make a compensatory damage claim. These are intended to restore the non-breaching party to the same position that they would have occupied in the absence of the breach.
- Enforcing the original terms of the contract: Where possible, the non-breaching party may pursue legal action to enforce the original terms of the contract if they still wish to see its terms fulfilled. When a significant violation happens, it’s critical to record all supporting documentation and consult a lawyer to determine the best course of action.
Conclusion
In conclusion, understanding the nature and consequences of contract breaches is crucial in business and legal contexts. Material breaches fundamentally undermine the contract’s purpose and can lead to significant legal and financial repercussions, including lawsuits, damages, and contract termination. On the other hand, immaterial breaches, while still violations, do not typically result in severe consequences. When faced with a potential breach, it’s essential to document the situation, communicate with the other party, and consider seeking legal advice. The remedies available to the non-breaching party, such as compensation or contract termination, depend on the breach’s severity and impact. Ultimately, clear understanding and careful handling of contract breaches are vital for protecting one’s interests and maintaining business relationships.
Author: Sanshia Rebello, Christ Deemed to be University
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