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.
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.
What are the remedies for a breach of contract?
If a condition of your contract has been breached, you may be able to terminate the contract by ‘repudiation’ and claim compensation for the loss you have suffered. If the breach of contract is a breach of a warranty, compensation is by damages alone.
Damages are used to put the claimant back in the position they would have been in if the terms of the contract had been met as agreed.
You will be entitled to ‘liquidated damages’ if the contract specifies that an amount should be paid if one side breaks the contract. These clauses are often found in manufacturing and building contracts, which often include set charges for late completion of work.
There are two types of damage:
- Special damages – Awarded for quantifiable losses, such as loss of profits
- General damages – Awarded for unquantifiable losses, such as physical inconvenience and loss of amenity
There is no concept of ‘punitive’ damages in the UK, so compensation will only reflect the actual loss you have incurred.
A less common option for breach of contract is ‘specific performance’, in which you can obtain a Court order for the other side to carry out their contractual obligations.
How to prove a breach of contract
To sue for breach of contract, you must be able to show:
- 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.
- 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.
- 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 the breach of 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).