Business

Breach of Contract

In almost every area of life people engage in contracts, whether verbal or written. The most common types of contracts deal with sale of goods, supply of services, business collaborations, agreements for property leasing, hire purchase agreements and marketing.

All contracts specify what each party is obligated to do and, unfortunately, it can regularly occur that not every party lives up to their part of the agreement. This failure can happen in a number of ways including:

  • Failing to carry out a particular action.
  • Producing defective work.
  • Informing the other party that they intend not to complete the agreed work.

Breach of contract can range from relatively minor breaches where no action is warranted, to fundamental breach of contract where it is so serious as to need the contract to be terminated. In the majority of cases where a breach of contract occurs, the most sought after remedy is damages. This is designed to place the affected party in the position that they would have been in had the contract been performed properly.

According to David Swede from Darlingtons Business Solicitors, in order to have any reason to claim for breach of contract it is necessary to first show that a contract exists between the two parties which can be either verbal or in written form. However, with a verbal contract it will be harder to prove what the exact terms are and whether a breach has actually occurred.

Where there is a written contract you should first see if it contains a clause which specifies what to do in the event of a breach of contract. This clause may state what constitutes a major or minor breach, whether any remedy or damages are already set at a specified amount and whether the parties need to enter into formal negotiations before any Court proceedings are issued. By following such a clause it can help to determine if a breach of contract has actually occurred and what next steps need to be taken.

Once you have determined that a breach of contract has taken place it will be necessary to inform the other party that you believe they are in breach and that you will be seeking some sort of remedy. If the breach is admitted then the parties can come to an agreement as to the level of damages payable or whether they will rectify the breach in some other way. If the breach is denied the best course of action would be to try and mediate the matter. However, this does not always work and it may be necessary to start legal proceedings.

Generally one party will be seeking damages from the other due to the breach of contract. There are two types of damages that can be claimed:

1)      Liquidated Damages – this is where there was an agreed amount set between the parties that would become payable should a breach occur.

It should be noted that there is a difference between a genuine estimate of loss which is set between the parties and a ‘penalty clause’. The Court will not enforce a penalty clause especially when deemed excessive and is clearly not a genuine estimate of the loss suffered. Even if the contract is written in a way where it states it is not a penalty clause it could be considered to be one if the stated amount is extravagant in comparison to the loss that would result from the breach, or if the same sum is fixed for every type of breach of contract.

If such an agreement had been made then the Courts will uphold this figure as the award for damages, even if the affected party will receive less than the actual loss he suffered due to the breach.

2)      Unliquidated Damages – These are damages assessed by the Court. Here they will endeavour to put the parties back in the position they would have been in should the breach not have occurred.

Courts will only award damages to compensate the affected party and will not look to punish the one who breached the contract. Furthermore the Courts generally do not award damages for mental distress or loss of enjoyment.

When determining the amount to award for damages the Courts will consider the following:

a)      Did the breach of contract cause the loss being claimed?

b)      Can the loss be fairly and reasonably considered to have arisen naturally from the breach of contract itself? If the loss is too remote then the Courts will not consider it as part of your claim.

c)      Did the affected party do all he could to minimise his losses? If you fail to try and prevent further losses, the Courts could penalise you by awarding less damages than were actually caused.

Should such damages not be a sufficient remedy, the Courts can also make an order for specific performance where they place on the party in breach the performance of a positive contractual obligation. The Courts will not order this where damages alone would suffice or where such an order will cause undue hardship.

A further remedy is that of injunction. This is where the Courts will order the party in breach to either cease to perform an action or to undo an action that they have already taken.

The only exception to claiming for damages where a breach of contract occurs is where the event behind the breach was beyond their reasonable control. Most contracts will stipulate that certain events (such as ‘an act of god’, ‘acts of terrorism’ etc.) which may occur are beyond their control and are therefore not liable. Even if the contract does not contain such a clause, or it is verbal, the contract will merely be frustrated, but neither party will be liable for the breach itself.

Most good commercial law firms will provide a substantive service for clients in this area, including:

  • Advice on drafting breach of contract clauses.
  • Advice on breach of contract claims and what potential damages/remedies you may be entitled to.
  • Advice on mitigating your losses.
  • Taking you through the Court process as proficiently and cost effectively as possible, from start to finish.
  • Where viable, advice on negotiations and possible settlement agreements.