BREACH OF CONTRACT

DEFINITION:-

Breach of contract is said to have occurred when one of

the parties to the contract fails to fulfill his part of

the obligations ( or responsibilities) under the

contract due to which the complete performance of the

contract becomes impossible and the contract breaks.

CLASSIFICATION:-

Breach of contract is classified into following two types:-

i)Fundamental breach of contract.

ii)Breach due to frustration / Force majeure.

Contd

Fundamental Breach of Contract:-

These are the breaches of contract due to the occurrence of an

event / situation / circumstance which are brought about by the

acts/defaults of one of the contracting parties and to which they

can be held responsible.

In this case the party responsible for the Breach of contract is liable

to pay compensation to the other party.

Contd

Breach due to frustration or Force Majeure:-

Occurrence of an event/ situation/ circumstance which are

unforeseeable/ inevitable that makes the execution of the

contract totally impossible and these events / situations /

circumstances being brought about NOT by the acts/ defaults

of any of the contracting parties is described as Force Majeure

or Frustration.

The reasons for termination of the contract under the

circumstances cannot be attributable to any of the contracting

parties and thus NO COMPENSATION will be payable to any of

them.

Contd

Fundamental Breach of contract:-

In common usage unless specifically termed Force

Majeure or Frustration. This Breach of contract occurs

when one of the party refuses or does not perform his

part of the contract before the stipulated date for

performance of the contract.

The defaulting party may break the contract either by

declaring his intention in words/ writing or his actions /

inactions indicate his intention that he does not want to

perform his part of the contract.

contd

In such an event the party suffering the loss has the

following two options:-

i) take immediate actions against the defaulting

party without waiting for the agreed date for

completion of contract and initiate the process for

claiming the compensation for the loss.

ii) wait till agreed date for completion of the contract

and then initiate the process for claiming the

compensation for the loss.

COMMON BREACHES BY THE PRINCIPAL:-

The breaches of contract that are attributable to the Principal

can be classified into following three categories:-

1. starting of the work is prevented / not facilitated.

Example: i) not giving possession of site, not obtaining

necessary sanctions, permissions.

ii) not furnishing necessary plans, designs,

drawings, specifications etc..

Contd

2. performance of the contract is delayed:-

Example :

i) timely supply of materials specified in schedule of materials in

required quantities and quality is not done.

ii) bills / other claims are not being processed in time.

iii) undue delay giving necessary instructions clearances,

certificates.

Contd

3. wrongful termination of the contract when it was under

performance and the contractor have partly performed the

contract.

COMMON BREACHES BY THE CONTRACTOR:-

The breaches of contract that are attributable to the contractor can

also be classified into three categories as follows:-

1. contractor fails to complete the work and / or abandon the contract.

Example:-

(i) not setting up and running site organization

[ project execution team, site offices, stores, staff, and labour colony,

arrangements for construction water, power, lighting, roads]

ii) procurement of materials is not done, labour and equipments not

deployed.

iii)subcontractors work is not being coordinated and monitored.

Contd

2. contractor fails to meet the quality requirement or the

contract is excessively delayed

Example:-

work is not being executed in compliance with plans/ drawings,

designs and specifications or according to time schedule.

3. the work executed is defective or substandard, either in whole

or in part and the contractor fails to rectify it.

ASSESSMENT OF THE LOSS AND CLAIMS

Claims for loss by the Principal:-

The loss to the Principal due to breach of contract by the

contractor is assessed by considering the following

aspects:-

i) extra expenditure required for completing the abandoned

and / or incomplete works under the contract.

ii) extra expenditure required for verifying or redoing the

defective / substandard work.

Contd

iii) extra expenditure due to escalations in cost of materials and

labour.

iv) extra expenditure due to loss of time cost of overheads.

v) loss of profit / loss of value.

vi) cost towards measurable inconvenience and discomfort.

Action that can be taken by Principal:-

The Principal is entitled to take following actions when there is

breach of contract by the contractor.

i) Forfeiture of security deposit paid by the contractor ( security

deposit can be up to about 10% to 15% of the contract value)

ii) Forfeiture of performance bond which the contractors have to

provide in contracts of value more than about 15 to 25 lakhs.

Contd

iii) Recover liquidated damages to the maximum extent specified

in the contract (liquidated damages can be up to about 10% to

15% of the contract value)

iv) Forfeiture of retention money, if any, that has been recovered

from contractors bills.

v) Forfeiture of any amount due to the contractor towards value

of work done but that has not been paid.

vi) Recover expenses and charges towards removal of plants,

equipment, machinery deployed at the site by the contractor, if

he has not done so.

Contd

vii) Recovering expenses and charges towards site clearance of

the contractor has not done so.

viii) keep the registration of the contractor for a specified no. of

years ( about 3 years or more) from the date of contract.

If there are measurable (or quantifiable) losses that exceed

the total of the amounts of S.D, performance bond, L.D,

Retention money etc.

Then, the same can be claimed through Arbitration or other

dispute settlement processes specified in the contract or

filing a civil suite against the contractor in a court of law .

Contd

Documentary evidences as regards the assessment of the

value of the losses and their estimation have to be submitted

to support the claim for the compensation.

Arbitration / litigation however, is a time consuming

expensive process and can result in excessive delay in

completing the work through other agencies. Also it is possible

that the contractor can declare himself bankrupt and has no

assets in his name to pay the compensation amount.

contd In the earlier days, provisions were being made in the contract to

execute , either in full or part, the work abandoned by the

contractor by employing other agencies and the expenses

incurred were being charged to the contractor. But such a course

of action can result in a lot of problems.

The contractor can file cases claiming that while getting the work

done through other agencies at his cost, excessively high rates

have been paid or the procedure adopted in employing other

agencies were not proper.

Thus, now a days, it is preferred to terminate the existing contract

on a breach by the contractor and then take steps to complete the

project under a new contract independent of the existing contract.

PROCEDURE FOR TAKING ACTION:-

If the contractor neglects or fails to proceed with the work with

due diligence or if he violates any provisions of contract and his

actions / defaults constitute the breach of contract then,

Engineer-in-charge shall give written notice to the contractor

stating clearly efficiencies shortcomings in his performance and

demanding that the stated necessary corrective measures be taken.

Contd

It should also clearly state that the notice is being given

under the provisions of the clause on breach of contract and

that if he fails to take the stated corrective measures, action

will be taken in accordance with provisions of the clause on

breach of contract.

Usually about 10 days is given to the contractor to initiate the

corrective measure even after 10 days period, Engineer-in-

charge can take the actions deemed to be appropriate.

Contd

After a notice being served on the contractor for breach of

contract he cannot remove any of the plants equipments

machinery tools etc. deployed at the site. They will be held in lieu

to the Principal / Owner, till the deficiencies have been corrected or

the amount due to the Principal has been recovered.

The Principal is entitled to recover the shortfall in the amount

due to him from the sale of any or all of the plants, equipments,

machinery, tools, that had been deployed at the site by the

contractor.

CLAIMS FOR LOSS BY THE CONTRACTOR:-

Assessment of loss to the contractor:-

The loss to the contractor due to breach of contract by the

principal is assessed by considering the following aspects:-

i) Loss of productivity idleness of labour, plant and equipments

machinery, materials etc

ii) Loss of profit

Contd

iii) Cost of mobilization and demobilization

iv) Expenditure towards on site overheads

v) Expenditure towards off site overheads

vi) Expenditure towards overheads at head office.

CLAIMS BY THE CONTRACTOR FOR COMPENSATION:-

The contractor can claim compensation under section 74 of the

Indian Contracts Act or as Quantum Meruit.

Section 74 of the Indian Contracts Act states as follows:-

When a contract has been breached, if a sum is specified in the

contract as the amount to be paid in case of such an event or if the

contract contains a stipulation (or method) for determining the

compensation.

The party suffering the loss is entitled to receive a reasonable

compensation not exceeding the amount so specified in the

contract or the amount has arrived at by way of stipulation (or

method) in the contract for determining compensation.

QUANTUM MERUIT

Definition :- claims of payment for work which is done

but not covered in terms and conditions of contract or

claims for payments of compensation not stipulated in

terms and conditions of contract, the payment of which

the contractor claims as a matter of natural justice /

fairness are termed extra contractual payments or

Quantum Meruit.

Contd

Claims on the basis of Quantum Meruit can arise and is awarded

when the work done / service is rendered by one party for

another party in circumstances / situations when either there is

no contract or though there is a contract, such an item / event is

not covered in the contract and the party performing it is

entitled to receive a reasonable remuneration / compensation

as a matter of natural justice and fairness.

Quantum Meruit is a remedy which is available in the following cases:-

Where no price is originally fixed

Where there is an implied agreement to pay a reasonable amount.

A reasonable amount becomes payable as a matter of natural justice and

fairness.

Where there is an agreement under which an advantage or a privilege

has been enjoyed by one party and the other party is entitled to receive a

reasonable amount but the agreement has been later discovered to be void.

Where something is lawfully done by one party for the other party for

the other party who has derived an advantage or privilege without

intending to do so as a charity.

Quantum Meruit also provides a remedy when there is a

substantial performance of contract and the performance has

been rejected by the Principal.

Claims under Quantum Meruit are not based on Contract terms

and conditions. Therefore the work done and the reasonableness

of claim amount for it has to be proved in Arbitration or

Litigation.

This can be done only if up to date records are regularly and

properly kept and all the required information is provided

during the hearing of the case. Thus for a successful claim on

the basis of Quantum Meruit up to date and proper

documentation is very important.

FORCE MAJEUR

Occurrence of an event/ situation/ circumstance which are unforeseeable/ inevitable that makes the execution of the contract totally impossible and these events / situations / circumstances being brought about NOT by the acts/ defaults of any of the contracting parties is described as Force Majeure or Frustration.

The requirements for applicability of Force Majeure:-

Event / situation must be a result of a cause not brought about

by the acts / defaults of any of the contracting parties.

The cause must be unforeseen or inevitable.

The cause must make the execution of the contract totally

impossible.

[self-induced circumstances cannot cause / constitute

frustration]

Contd

Events which could have been anticipated/ foreseen or against which

adequate precaution could have been prevented do not constitute

frustration.

Eg :- bad weather, labour problem, breakdown of machinery,

disruption of power supply , water supply etc

Difficulty / inconvenience or material / economic loss do not

constitute frustration.

The party seeking protection of Force Majeure clause is legally bound

to prove that he could not have foreseen the event with due diligence

and that despite all care and caution he could not have control over the

event and that the execution of contract is totally impossible.

FORCE MAJEUR WHEN APPLICABLE:

Occurrence of natural/ man made calamities like occurrence of earthquakes, massive landslides, war, terrorist acts, etc.,

There are events which could have been predicted/ foreseen or even if they can be predicted/ foreseen cannot be guarded against or prevented.

Occurrence of an event after the contract has been made which both the parties could not have foreseen or prevented, that makes the performance of the contract impossible or unlawful.

Eg- changes in laws, changes in permit or license rules, abnormal economic downturn, situation in foreign countries that have direct implications on the contract.

Execution becomes useless or impracticable from the point of view of objectives or purpose which the parties had while entering into the contract.

Eg- ban on exports/ imports, abolition of tax incentives or any such incentives, sanctions imposed by other countries on export of high technologies/ components.

Occurrence/ happenings of un precedent event that makes it impossible to perform the contract the way it was conceived (or planned) or complete it without abnormal delay.

A sudden application/ depreciation of currency, a wholly abnormal rise or fall in prices of unprecedented values/ magnitudes, global recession, obstacles in execution of the works due to war or other events where in foreign countries.

Complete destruction of the subject matter or anything essential to the performance of the contract to which neither party is responsible.

Eg- complete destruction of the works or some major essential equipment/ facilities are to fire/ floods/ cyclones; death/ incapitance of main party in the contract due to illness.

FORCE MAJEUR WHEN NOT APPLICABLE:

Usual/ common incidents of interruptions to the work.

Eg- bad whether, some disruptions in the supply of material/ transport, disruptions in supply of power/ water, labour strikes.

Rise in prices, difficulties/ inconveniences in execution.

Where the performance of the contract was known could have been known to become unlawful or impossible to either one of the parties or both the parties.

Commercial unprofitability.

Increase in costs, difficulties in work.

Events/ happenings are self induced or self generated.

Eg- bankrupts, non compliance of govt. rules/ regulations.

Contract is made expecting the occurrence of certain event than does not happen.