Breach of Contract
David Birks is Head of Our Commercial Disputes and Sports Litigation Team. Here, he takes a look at breaches of contract, what they mean and the five questions you need to ask.
Contracts form the basis of legal agreements in all areas of life. They do not have to be in writing, although most are, particularly when dealing with business matters.
Every valid contract must have four key elements: offer, acceptance, consideration (ie. something of value such as payment) and intention.
What is breach of contract?
Once two or more parties have entered into a valid contract, they are legally bound to comply with its terms. These may stipulate payments to be made, goods or services to be provided or actions to be taken. If a party to a contract fails to do what they have agreed to do under the contract terms, then they are in breach of the contract.
This can include doing work that is defective, not paying for something within the agreed time limit or being late in carrying out a service.
When problems arise, it is vital that you have a well-drafted contract to rely on. In fact, a good contract often prevents disputes from arising in the first place, as the parties will be clear from the outset what is expected of them and what will happen if they breach the agreed terms.
There are a number of different types of breach, including minor, material, anticipatory and repudiatory.
Minor breach of contract.
Where part of the contract is not adhered to, for example where a small change is made to part of the goods or services being provided, a minor or partial breach of contract occurs. An example would be where a builder uses substitute materials which be of similar quality but were not what was stipulated in the contract.
The contract can still be fulfilled, although it may be possible to seek damages if one party has acted to the detriment of the other. If a number of minor breaches have occurred, they may together be significant enough to constitute a material breach.
Material breach of contract.
A material breach is the failure to fulfil an important part of the contract. The effect of a material breach will be serious enough that it has a substantial detrimental effect on the benefit that the innocent party should have received.
The parties to a contract may well disagree over whether a breach is material or not. Sometimes a contract will define certain actions as a material breach. If it is less clear, a court may have to decide what is fair.
Anticipatory breach of contract.
This occurs when one party clearly does not intend to fulfil their contractual obligations. They may communicate their intention, or it may be obvious from their actions, for example by failing to start work.
While the contract has not yet been breached, it can be anticipated that a breach will occur.
Repudiatory breach of contract
A repudiatory or fundamental breach is so serious that the injured party can choose to terminate the contract. An example might be if a builder stopped turning up so that no progress was being made on the agreed work. Damages may be payable, along with the ending of the contract.
To qualify as repudiatory, the breach must go to the root of the contract, be substantially inconsistent with the contract terms, deprive one party of the expected benefit or be unfair to the injured party to the extent that they could not be expected to continue with the contract.
This is the only breach of contract that releases both parties from their obligations. Other types of breach still require the innocent party to adhere to the contract terms, even if they are successful in obtaining damages. For example, if a builder’s work required modifications by a new contractor, the injured party might receive damages, but would still be liable to pay for the work done.
If the work was so poor that it was considered to be a repudiatory breach of contract, then the ending of the contract would mean that neither party had any further obligations, unless ordered by the court.
What happens when a contract is breached.
If one party can show that a valid contract has been breached and that they have suffered loss as a result, they will be entitled to a remedy. If the matter cannot be settled by mediation, then the court can be asked to make a decision.
There are three different courses of action available to the court.
- Firstly, damages may be awarded to put the claimant in the position they should have been in, had the contract terms been carried out correctly.
- Secondly, where the breach is repudiatory, the contract can be terminated. Damages may also be payable.
- Thirdly, the court may make an order for ‘specific performance’, requiring the party at fault to complete their contractual obligations.
Once you are aware of a breach of contract, it is advisable to seek legal advice. Involving a lawyer at an early stage can often help deal with the problem quickly and efficiently. As well as ensuring that the other party understands that the matter is being taken seriously, an experienced solicitor will also be able to suggest the best way forward. Finding a solution that is acceptable to everyone early on not only means that costs are kept as low as possible, but also enables business to carry on without disruption or delay.
The five questions you need to ask when a contract is breached.
A well-drafted contract will clearly explain the circumstances in which the contract can be voided. It can also include a right to end the contract if its terms are breached.
If the contract does not include specific provision for ending it when the terms are breached, then caution is needed. Even if one party has failed to properly meet their contractual obligations, the other party needs to make sure that they do not also breach the contract. The contract is not automatically terminated in the case of a breach, so until you are certain that it has ended, you must proceed in accordance with its terms.
The following five points will explain the dangers that might be encountered.
Is the breach serious enough to justify terminating the contract?
It is not always obvious whether a breach is repudiatory, and therefore serious enough to end the contract. Failure to pay or provide a service may not be considered sufficient, although repeated failures may together amount to a repudiatory breach.
Before assuming that a contract has been ended, you should seek legal advice, to avoid breaching contract terms yourself.
Should you provide the other party with an opportunity to remedy the breach?
The contract may specify that the party in breach is to be given the chance to remedy the situation. Even if this is not set out, the reasonable course of action would be to contact the other party and ask for their proposals or suggest mediation. If you intend to pursue termination of the contract, you should serve notice of this.
Note that failing to give the other party the stipulated notice or chance to remedy the situation may mean that the termination is unlawful.
Does the contract contain a ‘no waiver’ clause?
Some contracts contain a ‘no waiver’ clause, intended to prevent accidental waiver of a party’s rights. The clause will usually specify that contractual rights can only be waived in writing.
If the contract does not contain a ‘no waiver’ clause, then care must be taken not to accidentally waive rights, for example by allowing a delay in exercising rights or seeking a remedy.
Should the injured party terminate the contract, and do they have the right to do so?
Where there is a repudiatory breach of contract, a decision needs to be taken as to whether or not it is preferable to terminate the contract. You have the option to continue with the contract, reserving the right to claim damages, or you can try and renegotiate the terms of the contract.
If you do not terminate the contract, it could be construed that you have accepted the repudiatory breach and you may lose the opportunity to terminate. It may even be held that a new contract has been created, with terms that you may find unfavourable.
If you decide to terminate the contract, be aware that you cannot subsequently change your mind.
Has the contract been terminated correctly?
If the contract contains instructions for terminating a contract, these must be strictly adhered to. They are likely to include details regarding service of notice to terminate. There may also be a requirement for the party at fault to be given the opportunity to rectify the situation. In this case, as much information as possible should be given, including the action steps required.
The party in receipt of the notice to terminate will want to check the contract to see if they have any grounds to reject the notice. This would allow them to request that the contract be carried out or, if not, they may themselves be able to claim repudiatory breach and apply for damages.
If the contract does not include any information about termination, then a court would usually require ‘reasonable’ notice to be given. This would be decided by looking at details such as the length of the contract and the parties’ relationship.
It is always advisable to take expert advice when terminating a contract. An experienced contract lawyer will be able to draft the notice in terms that retain your rights as far as possible, and also advise on what will be considered a ‘reasonable’ notice period. If mistakes are made, they can be costly and far-reaching. Here at McCormicks we are always happy to discuss how we can help you end a contract that has become problematic, while safeguarding your position.
Dealing with a breach of contract can be a complicated process, as parties dispute the severity of a breach and whether it constitutes a repudiatory breach. There is a risk in proceeding on the assumption that a breach is repudiatory; if a court finds to the contrary, then the party initially at fault may try to make a claim themselves, alleging a breach.
A carefully drafted contract is the best starting place for an open and clear business relationship. Once problems arise, communication and mediation are always recommended to try and find an acceptable way forward.
Contract law is a complicated area and far-reaching mistakes can easily and inadvertently be made. It often saves time, effort and money in the long run to seek expert legal advice on the best way to proceed.