It’s inevitably the case that wherever there’s a rule, somebody, sometime, will break it. Breach of contracts happen regularly, but they don't need to be a big issue if they are managed correctly.
Rules require enforcement, because a freedom of choice, laissez-faire approach to rules is not a viable option for a smooth-running, productive society, organisation or family.
It’s a similar situation with contract obligations. They are effectively the rules of a contract. They specify the various elements of an agreement between the parties to a contract for achieving some purpose.
Failure to comply with any contract obligations, breaking the agreed rules of the game, is a contract breach and can lead to a dispute. As with other societal rules, there are consequences for such actions.
In this article, we’ll cover:
- How contract breaches occur
- Categories of contract breach
- Common remedies for contract breaches
- Factors in the decision to sue for breach
- Common defences against a breach of contract claim
How a Breach of Contract occurs
A breach of contract is most commonly caused by non-performance of an obligation by the relevant party within a stipulated time. This can occur due to accidental or intentional failure, by refusal, through negligence or as a result of interference by another party.
Non-performance may be in whole or in part, or in a manner less than required to meet applicable standards, express or implied warranties or other agreed levels of some kind of performance.
Where non-performance causes the non-breaching party to suffer a loss of some kind, the breaching party may be required to pay full compensation for that loss.
If the parties want to limit or apply specific liabilities or remedies in respect of certain types of breach, they can do so in the contract.
However, if they don’t do this, there may be external, default rules that can result in unlimited liabilities for the breaching party. In most countries the legal system has provisions for dealing with breaches of contract that are not expressly dealt with in the contract. These provisions can visit a world of hurt on the breaching party.
Four Common Breach of Contract examples
Four common types of contract breach can be categorised according to two fundamental attributes.
This attribute reveals the relative ‘when’ of a contract breach:
- Actual breach of contract. A contract breach has already occurred – the service was not provided on the agreed date - or is in progress – unauthorised work is under way somewhere on the premises
- Anticipatory breach of contract. A contract breach will occur, according to advice received from the responsible party before the time agreed for performance of the applicable obligations – the parts will not be delivered next week as promised.
This attribute classifies the actual, expected or possible ramifications of a contract breach:
- Material breach of contract. A contract breach with significant, serious downsides. Such breaches are typically related to non-performance of an essential or fundamental term of the contract, one so important that its breach might be explicitly covered in the contract, and its occurrence can be considered as a failure to perform the contract at all. A party’s failure to deliver the order to the ship before it sailed might be considered as a material breach if that deliverable was critical and the knock-on effect would be devastating.
- Minor breach of contract. Any contract breach not considered material, but still concerning. A party’s failure to pay an invoice by the due date might be considered as a minor breach that results in interest being charged on the outstanding amount until the payment is received.
Common remedies for breach of contract
As mentioned above, a contract might expressly deal with certain types of breach of contract. The breaching party might be required to remedy the breach within a fixed period or face agreed consequences up to and including contract termination.
Alternatively, a specific remedy for a more generalised ‘material breach’ might allow for the immediate termination of the contract.
Litigation is the final option, where the non-breaching party sues the breaching party for breach of contract. If a court finds the breach proven, there are several remedies it can apply.
Amounts that the court has determined need to be paid to the non-breaching party by the breaching party are known as damages.
A claim for damages ultimately relies on the availability of evidence of the non-breaching party’s loss, a link between the loss and the breach of contract, and the non-breaching party’s efforts to minimise the loss after the breach occurred.
A loss can involve relevant expenses incurred by the non-breaching party, or benefits it provided to the breaching party in the unmet expectation of compensation.
Note that any contribution to the breach made by the non-breaching party will be considered in determining the level of damages awarded.
There are several types of damages that can be awarded, depending on the legal jurisdiction involved. The most common types of damages include:
- Compensatory: damages awarded as compensation for the loss suffered. In legal terms, the aim of this award is to place the non-breaching party in the same monetary situation as if the breaching party had performed the required obligations.
- Liquidated: damages that are agreed in the contract between the parties, payable under the breach circumstances specified. If it establishes that there was such a breach, and that the amount of liquidated damages is a realistic estimate of the loss sustained and not a penalty for that breach, the court is relieved from the burden of determining the amount of damages that should be awarded.
- Loss of opportunity: damages awarded in recognition of a proven lost opportunity for the profits the non-breaching party could have expected to receive if the breaching party had performed their obligations under the contract.
- Nominal: a low level of damages awarded in acknowledgement that although the contract was breached, it did not cause any real harm to the non-breaching party.
- Reliance loss: damages awarded to cover the non-breaching party’s expenses incurred in expectation of fulfilment of the breaching party’s obligations.
A court can release a judicial order in the form of an injunction:
- Restraining the breaching party from beginning or continuing an action that threatens or invades the legal right of the non-breaching party, or
- Compelling the breaching party to carry out a certain act such as making restitution to the non-breaching party.
An injunction is typically a temporary remedy sought to maintain the status quo until the larger legal issues can be heard by the court.
The court’s full coercive powers can be brought to bear on the breaching party for any infraction of the terms of the injunction. Those powers can involve financial and custodial measures.
Where damages are an inadequate or inappropriate response to a breach of contract, a court may enforce the terms of the contract, by ordering the breaching party to perform its obligations. This can prove problematic.
The non-breaching party may have no interest in maintaining a relationship or continuing to work with the breaching party or exposing itself to the risk of further breaches of the contract.
The breaching party might be unwilling or unable to perform its original obligations or perform them properly and carefully. Any wilful dereliction in this regard on the part of the breaching party risks provoking the ire of the court. That could prove costly.
Termination of the contract
A material breach can result in contract termination, either by way of an express right specified in the contract, or by court order.
Great care and thoughtful legal advice are needed prior to any action being taken by a non-breaching party with regard to exercising their right to terminate a contract.
This is because the breach may be disputed by the other party, they could argue that there is an excusable reason for the breach, some limitation of their liability for it, or an unexercised window of opportunity exists to rectify it.
There can also be obligations on the non-breaching party that need to be completed in relation to any termination activity. Not only does the non-breaching party need to be sure it can comply with those obligations, to prevent embarrassment and any potential blow-back, it needs to be indisputably the case that the breach is proven and irrecoverable.
Perversely, the non-breaching party’s unilateral decision to terminate the contract could itself be construed as a breach of contract if the court determines that the original breach claim is invalid.
Factors in the decision to sue
Just because the law allows you to sue someone for breach of contract doesn’t mean you can. Or should.
Here’s a few factors to consider.
Can you actually go to court?
Contracts these days often stipulate alternative dispute resolution procedures that either prohibit use of the courts or make them the avenue of last resort after all other measures have been tried. You need to understand exactly what options your contract provides in this regard.
If there are no contractual barriers to going to court, are you within any statute of limitations for applying for a hearing?
It can be beyond embarrassing to issue what turns out to be the empty threat of ‘see you in court’ and be so advised by the breaching party.
There’s hardly a worse meal than eating crow.
Should you go to court?
There are several aspects to this question:
- Have all other avenues been tried? This needs to have been done in accordance with the dispute resolution procedures in the contract, to have any chance of the case being accepted for hearing by the courts.
- Can you afford to go to court? It’s no secret that going to court will cost you. That’s because it’s a big deal. Lots of people need to be involved. Lots of information must be collected about each party’s actions or inactions and their consequences. Attention needs to be diverted from other matters, other contracts, other everything. Do you really need this distraction right now?
- Can you afford to fail at court? While you might be, or have been, convinced that you’ve got a case, the courts may well disagree. It could come down to a point of law, a shortcoming in your case or required actions, perhaps the breaching party had the better lawyer or the court gave the breaching party the benefit of the doubt. Whatever the reason, your costs could go through the roof if things don’t go your way. Many an individual and organisation has been financially broken by an unfavourable outcome from the courts.
At least these factors, and more, should be closely investigated to determine whether or not suing for a breach of contract is a reasonable course of action. The risks can be considerable, as delaying tactics, deep pockets and serial appeals can mitigate against a clean and quick resolution of the matter.
Considering whether the action is worth the risk should be the driving element in any decision about whether or not to sue for breach of contract.
Defending a breach of contract claim
There are many avenues for a party to defend itself against a breach of contract claim. Some of the more common types of defence include:
- Accord and satisfaction: the agreed contract performance has not been delivered but nevertheless accepted as adequate by the parties.
- Fraud: the intentional misleading of the other party about the purpose or conditions of a contract in order to induce them to sign and fulfil it.
- Frustration: the purpose of the contract has become unachievable for some reason.
- Impossibility: the performance of the contract has become impossible due to circumstances beyond the parties’ control.
- Invalid contract: one or more of the fundamental elements of a contract are lacking, such as the requisite capacity and competence of the parties or consideration for the promises made, or are out of bounds, such as an illegal purpose, the application of duress, or the benefits are unacceptably favouring one party.
- Mutual mistake: both parties are mistaken about the purpose or terms of the contract.
- Unclean Hands: both parties have done something wrong, resulting in a breach of contract.
- Unilateral mistake: the contract contains a unilateral mistake that was material to the agreement and the other party knew or should have known of the mistake but said nothing.
A reasonable amount of contract breaches should be expected and allowed for in the normal course of business.
Times of extraordinary uncertainty can lead to desperate times for many. The year 2020 will go down in history as the poster child for such uncertainty.
In accordance with the well-founded notion that desperate times call for desperate measures, the incidence of contract breaches has gone through the roof as organisations everywhere have become increasingly unable to meet their commitments and honour their contracted obligations.
Suing for breach of contract is now often the only resort for many, not the last resort.
There’s likely to be more losers than winners from the current imbroglio. A better understanding of why that’s the case should emerge from the fog over time.
Let’s hope the lessons learned from the experience are well and truly heeded because one thing will be certain: we’ll be going through this again sooner than we expect. We need to be ready.
When it comes to protecting your business from experiencing a breach of contract, effective tracking of obligations is vital. Gatekeeper helps its customers to stay on top of obligations, automate compliance processes and reduce contract risk.
If you would like more information about how to manage breaches of contract, or how Gatekeeper can assist with those activities, then contact us today.