Breach Of Contract – What Are The Options?

Escalating a business dispute

It is always important to have the right contract in place for any transaction. However, no matter how good the relationship between the parties or the preparation of the paperwork is, sometimes you simply cannot stop a breach of contract by the other party in the agreement.

The first thing a party must identify is whether there has been a breach of contract.

What is a breach of contract?

A “contract” does not have to be a written document in order for it to be breached. A breach can be of a verbal, written (express), or ‘implied’ term of a contract. A breach can occur:

  • If a party refuses to perform the duties set out in the contract
  • If the work carried out is defective
  • Due to not paying for a service or not paying within the specified time limits
  • From a failure to deliver goods or services
  • Due to goods that do not conform to an agreed description
  • From being late with services without a reasonable excuse

The breaches in contract normally fall into any of four categories: minor, material, fundamental (repudiatory), and anticipatory.

A minor breach of contract

A minor (or partial) breach of contract is where, for example, a manufacturer substitutes a part (specified within the contract) for a different part that may work just as well.

A material breach of contract

A material breach of contract is where the breach has serious consequences on the viability of the goods or services supplied; where a party would not have entered into the contract if they could not have guaranteed this term. For example, a manufacturer substitutes a specified part (within the contract) for a different part that is of lesser quality and will not last as long as the part specified within the contract.

A fundamental breach of contract

A fundamental or repudiatory breach of contract (see repudiation below) is where the severity is such that the contract can be terminated instead of the innocent party seeking damages. For example, if a manufacturer were to fail to produce and supply goods that had been ordered the innocent party would have to terminate the contract.

An anticipatory breach of contract

This type of breach is one where a party expressly communicates that they will not be carrying out a term or condition of the contract.

When there is a breach of contract there are various remedies available when this situation occurs.

Repudiatory breach of contract

A party could choose to terminate the contract when there has been a repudiatory breach. This is a breach of a term of the contract, which goes to the heart of the contract, and means that the innocent party is substantially deprived of the absolute benefit of the contract. This enables the innocent party to terminate the contract immediately and claim for damages.

When a repudiatory breach occurs, the innocent party can either:

  • Waive the breach and continue with the contract;
  • affirm the contract and claim damages for the breach. By this the innocent party seeks compensation (damages) for the breach but is prepared to continue with the contract; and,
  • accept the repudiatory breach and treat the contract as being terminated. The innocent party can then claim damages both for the breach and for the premature ending of the agreement.

Damages for breach of contract

Any breach of agreement, whether it is a repudiatory breach or not, will entitle the innocent party to make a claim for damages. The aim is to compensate the innocent party through payment of money with a view to putting the innocent party in the position they would have been in if the contract had been properly performed.

Liquidated damages can also be awarded. This is where a fixed sum of money is agreed between the parties, which is payable upon a contract being breached. If no loss has been suffered by the innocent party as a result of the reach, then nominal damages will be awarded.

Additionally, with a repudiatory breach, the innocent party can also make a claim for loss of profits associated with the termination.

However, the innocent party must carefully look at the contract, to see whether there is a clause that limits the liability of the defaulting party. These clauses will stipulate that in the event a party is in breach, their liability for the breach is limited. These clauses can be deemed to be ‘unreasonable’, if they unfairly restrict an innocent party from access to remedies for a breach. A way to combat this is to provide for a provision in the contract, which provides an adequate remedy to compensate an innocent party in the event of a breach.

Specific performance and injunctions

Where damages are not an adequate remedy, specific performance of an obligation of the contract by the defaulting party might be ordered by the Court. This is an equitable remedy, which is awarded at the Court’s discretion.

Like specific performance, an injunction is also an equitable remedy, ordered at the Court’s discretion. It will be awarded where damages are not an adequate remedy.

An injunction aims to permit or prohibit a defaulting party from doing something, to stop it from breaching or continuing to breach its obligation under a contract.

How to prove a breach of contract

To sue for breaching a contract, you must be able to show:

  1. Prove that there was a contract in existence– It would need to be proven that a legally binding contract was in place and that it had been breached.
  2. Prove that the other party did not perform their part of the contract– The terms and conditions of the contract need to be clarified and compared to what actually took place.
  3. Prove that you suffered a loss as a result– The innocent party must prove there was a loss because of the breach and this loss requires compensation.

It will also be expected that you have taken reasonable steps to ‘mitigate your losses’ to reduce the impact of breaching a contract. This is expressed as a ‘duty to mitigate’ and losses cannot be recovered if they could have been reasonably avoided.

For example, goods that did not comply with their contractual description, may still be saleable at a reduced price. The party in breach may argue that the innocent party has failed to mitigate their loss if the goods have not been sold, in order to obtain some value for them and to reduce losses.

In terms of legal costs, where there are Court proceedings, the general position will be that the loser pays the reasonable costs of the winner. It should be borne in mind that most cases settle before they are determined at a Court trial.

The statutory limitation period for a breach of contract claim is 6 years from the breach (12 years if signed as a deed).

How can Nelsons help?

For further information about the subjects discussed in this article, please contact Simon Key (Partner) or Serena Louca (Trainee Solicitor) in our expert Dispute Resolution team in DerbyLeicester, or Nottingham on 0800 024 1976 or via our online form.

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