Breach of Contract in the Supply Chain: Legal Recourse for Indian Businesses

author Apoorva Mishra , Manish Gusain

calender October 4, 2024

Breach of Contract in the Supply Chain: Legal Recourse for Indian Businesses

In this article we will evaluate the breaches of Contracts in Supply Chain with focus on legal recourses available to Indian Business.

What is Supply Chain?

A supply chain is a network of companies/firms/proprietary concerns and individuals that are involved in the production and delivery of a products or services. The components of a supply chain include producers, vendors, warehouses, transportation companies, distribution centres, and retailers. Since, all the above are inter-dependent on each other therefore, any kind of disruption at any end be it procuring raw materials, production, storage or supply affects the whole supply chain. It is, therefore, necessary to safeguard the interests of the parties of such supply chain by delivering goods or providing services in a timely manner and in accordance with the terms and conditions of the respective Contracts under which the party is performing its respective obligation.

What is Breach of Contract?

A breach of Contract means violation of or failure to abide by either party to the pre-agreed terms and conditions and other obligations stipulated in the Contracts. The said violation of the pre-agreed terms in relation to “Supply Chain Contracts” may be failure to deliver the goods/articles in a timely manner, failure to make the payments under the invoices, failure to take appropriate care of the goods/articles, delivering good in a defective conditions and/or refusal to fulfil obligations stipulated in the Contract or doing any act in contravention of the agreed stipulated terms and conditions. Though, there are different kind of breaches of Contracts, however, a non- defaulting party can always avail legal remedy either to rectify the breaches or to claim any damages that it might have suffered due to such breach.

Types of Contract Breaches

There are several types of Breaches of Contracts which can broadly be classified as under:

  1. Material– A material breach is a substantial violation of the terms and conditions of a Contract. In a legal sense, material refers to “important information, generally significant enough to determine an issue.” In case of material breaches, the court may upon finding that the failure of a party is so grave and severe, direct the breaching party to pay either damages, issue injunction or perform the Contract in a manner so as to fulfil the terms and conditions of the Contracts.
  2. Anticipatory– An anticipatory breach of Contract is a self-induced impossibility for the performance of obligations under the Contract. The defaulting party, through his conduct, creates such circumstances that it would become obvious to any reasonable person that the Contract has become impossible to be performed on or till the actual date of its performance. In such cases, the non-defaulting party can approach the court for seeking damages even prior the date stipulated for actual performance of the Contract.
  3. Actual Breach- In contrast to the anticipatory breach, this comes after a given performance is expected, rather than prior to the above-stated event.
  4. Mutual Breach- This breach of Contract occurs when both parties choose to break the terms of a Contract. This may occur after a substantial change in circumstances surrounding an agreement.
  5. Minor or immaterial or partial - A minor or immaterial or partial breach of Contract means when the non-breaching party is merely entitled to the actual damages resulting from a breach.

How to avoid breach of Contracts?

Breach of Contract and consequential disputes can be avoided by undertaking following things before signing any Contract:

  1. The language of the Contract should be very clear and unambiguous. A bare reading of the terms and conditions of the Contract or its clauses should not create any confusion in the minds of the reader to ensure that everyone understands their roles and expectations under the Contract.
  2. The parties should understand the expectations it outlines in the Contract and should know that they are able to fulfil them. The parties should not be dependent on future circumstances or anticipate about the performance of them because those circumstances might not ever arise.
  3. The Contracts should be legally binding meaning that the place where it signed, such Contract should not be illegal. If parties are unaware of the laws and other factors that might jeopardise their interest, then in such cases they should contact a lawyer who specializes in Contract Law and then only proceed ahead with signing of the same.
  4. One can also avoid breach of Contract by carefully selecting the people or companies that they work with and should be aware about their reputation and legal history. If a company/individual has time and again breached Contracts with different companies/ individual, then there would be least chance that one would wish to do business with them.

Legal Recourse for Indian Businesses.

Once a Contract has been breached by a party, there may be various types of legal remedies available to a non-breaching party including but not limited to a suit for damages, injunction or specific performance of the Contract and further depending upon the nature of breach.

Other than the above civil remedies available, if a party commits any breach of the terms and conditions of the Contract in a manner which is against the public policy, then a criminal liability may also be fastened upon that party. For example, if a party “A” by inducement or by way of deceit enters into an agreement with party “B” with an intention of only defrauding the party “B” to part with its money then in such cases, a criminal action may also be taken against such party “A”.

It is imperative to state here that the time period for filing any civil lawsuit is three years from the period when the breach of Contract takes place or when the breaching party refuses to perform its part as in cases of anticipatory breach. There are various legal remedies available to a non-breaching party, however, only few common remedies are discussed as under:

  1. Recession of Contract:
  2. It is a remedy that allows the non-breaching party to cancel the Contract outrightly. However, the non-breaching party can seek monetary damages, putting the parties back in the original position they would be in if they had never entered into the agreement.

  3. Suit for Damages:
  4. The word damage generally means harm or injury caused to any individual or thing. But in legal sense damages means monetary compensation paid to an individual/party for losses caused to him. Once there is a breach by any of the party to Contract, a non-breaching party may institute a suit for damages before the appropriate court having jurisdiction seeking either liquidated damages or the actual damages which a party suffers. The suit for damages would ordinarily lie to a place where breaching party ordinarily resides or carries on business.

  5. Suit for Specific Performance of the Contract:
  6. A suit for specific performance of the Contract is an equitable relief which a non-breaching may prefer to seek specific performance. However, to get such a relief of specific performance, it is incumbent upon the non-breaching party to show that a normal remedy of damages is inadequate. In a suit for specific performance, the non-breaching party can seek a prayer from the Court to direct the breaching party to perform its part of the Contract.

  7. Remedy of Injunction:
  8. The word “injunction” means an order of the court to do or to restrain from doing anything. It is like a remedy of specific performance however; in injunction the court orders the breaching party not to complete a specific action. For instance, in the case of an alleged breach of a non-compete clause, the court may issue an injunction ordering the accused party to cease that activity while the lawsuit is being pursued.

Conclusion:

Indian business market has seen exponential growth in recent years with growth in various sectors including but not limited to e-commerce, luxury, IT, fintech (financial technology), education, and real estate. The Indian market represents enormous business potential, not only due to its increasing middle class, but also from the 2/3 of the population who still resides in rural areas.

In these circumstances, it is equally important to maintain the supply chain required to cater the needs of the industries/business with utmost sincerity and that would purely depend efficient functioning of the supply chain. The more effective a supply chain function, the more efficiently a business flourishes and therefore, the need to understand the whole concept along with remedies in terms of legal implication for breach of Contracts in supply chain arises. The Indian laws are very well equipped to safeguard the rights and interests of the businesses and a recent example of such legislation in Indian context is Commercial Court Act, 2015 which has emphasized on Commercial disputes along with constitution of Commercial Court to speed up the resolution of Commercial disputes.

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