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Mon, May 20, 2024

Remedies for Breach of Contract

Ashwin Kumar KC
Ashwin Kumar KC August 9, 2023, 6:07 pm
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More often than not, contractual issues can be tricky, especially when disputes arise. Therefore, understanding the nature of breach of contract, available remedies, and the circumstances under which they apply is crucial. This article aims to shed light on these matters, providing clarity for those facing contractual challenges.

Contracts are legally binding agreements that govern the rights and obligations of the parties involved. Sometimes, when a dispute arises due to various factors, such as misunderstanding, differing interpretations, or failure to fulfil contractual obligations, understanding the remedies available becomes pivotal.

What is breach of contract?

A breach of contract occurs when one party fails to fulfil their contractual obligations. Contracts usually require either party to perform certain actions, refrain from certain activities, or both. A breach can be material, where a substantial obligation is violated, or minor, where a lesser obligation is breached.

What is the remedy when one party is about to carry out an act that is prohibited by the contract?

In cases where one party is about to engage in actions prohibited by the contract, injunctive relief may be sought. Injunctive relief, in general terms, is a legal remedy that aims to prevent harm or maintain the status quo of the contract. It means obtaining a court order that prohibits the other party from performing the prohibited action.

Under Nepali law, Section 541 of the National Civil Code, 2074 (Civil Code) is the enabling provision for issuance of an injunctive order. Section 541 (1) provides that if the performance of contract is not possible because a party to the contract is about to perform any act or conduct which is contrary to the nature of the contract, then such party aggrieved by such action/conduct can file a complaint before the concerned District Court. Section 541 of the Civil Code provides a wide range of scope as it states that injunctive relief under Section 541 can be sought in cases where such act/conduct is ‘contrary to the nature of the contract’. In Lallan Prasad Sah vs. District Development Committee, Parsa (NKP 2066, DN 8228), the Supreme Court of Nepal has further provided clarity by stating that while determining ‘the act/conduct contrary to the nature of the contract’, the courts must look into (a) the terms of the contract and (b) the understanding and intention between the parties.

Under Section 541 of the Civil Code, the type of injunction granted is a prohibitory injunction which prohibits a certain person from doing or continuing to do a certain act. Unlike other parts of the world where a mandatory injunction (injunction which mandates a person to carry out a certain act) can be granted, the wording of Section 541 seemingly does not allow a mandatory injunction to be granted.

What is the remedy when one party does not carry out an act that is required by the contract?

When a party fails to fulfil their contractual obligations, there is not much the other party can do. The aggrieved party can send a notice to the breaching party to remedy the breach and it is up to the breaching party to choose how it acts. In such a situation, the most common as well as the appropriate remedy is often compensation. This involves seeking damages to recover the losses suffered due to the breach.

However, another remedy that is not so often pursued is the remedy of Specific Performance. Specific performance, where a court orders the breaching party to fulfil their obligations, is a less common remedy and not generally awarded by the courts. Section 540 of the Civil Code has provisions relating to specific performance. Unlike the wide range of scope available for seeking injunctive relief under Section 541, seeking specific performance under Section 540 requires much more criteria to be fulfilled.

In order to file a petition for specific performance, two major pre-requisites must be fulfilled as per Section 541 (1); first, actual loss or damage must be suffered by the aggrieved party due to the breach of contract (by the other party), and second, monetary compensation will not be reasonable and adequate for such actual loss or damage suffered. Thus, a party filing for specific performance should be able to prove that loss/damage has occurred due to the breach by the other party and most importantly, the aggrieved party should also be able to demonstrate that compensation or other remedies would not adequately remedy the breach. Even though the aforementioned two criteria can be demonstrated, Section 541 (2) has provisioned further situations whereby specific performance cannot be claimed, for example; if the party claiming specific performance itself is in breach of contract, or if the contract is for providing services of personal ability, skill or knowledge, etc.

Thus, specific performance can be sought only in certain circumstances, and it is a remedy rarely awarded by courts. Damages, in the form of monetary compensation, are typically considered the primary remedy for breach of contract.

Conclusion

When dealing with contractual issues and potential breaches, understanding the complexities involved is crucial. Injunctive relief can prevent prohibited actions while compensation through damages is the primary remedy for non-performance. While specific performance is available in limited situations, it is often more challenging to demonstrate that one’s situation meets the pre-requisites. By navigating the contractual landscape with awareness and utilising appropriate remedies, individuals can safeguard their interests when breaches occur.

 

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APRIL 2024

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