Breach of contract guide
It is a mistake to believe that all breaches of contract mean the other party has the legal right to end the agreement and/or that any breach means you will be entitled to monetary compensation (damages).
In fact, most breaches of contract do not give rise to the legal right to terminate the agreement. As a result, if you have a contract where the other party is in breach, you should check your legal position before deciding your next steps.
If you terminate the agreement or refuse to comply with your obligations in a business agreement based on a breach by the other party, if you have misjudged your legal position, you may well find you are in breach of contract yourself.
What does the contract say?
A well drafted contract will usually have clear clauses defining situations which would lead to the parties having the right to terminate, claim damages or other ways in which the party in breach can be contractually compelled to remedy the breach.
So, always carefully check your contract first.
What is a repudiatory breach of contract?
A repudiatory breach of contract is in simple terms a breach of contract which results in the innocent party having the legal right to terminate the contract. The innocent party has the choice to terminate the contract or not, or to claim damages if losses have been suffered and can be proven.
Where a contract details what amounts to a repudiatory breach, the contract may well also have terms detailing what the innocent party must do if they decide to terminate. Typically, a formal notice of termination will need to be served and there may be other stipulations. Failing to comply with these can also lead to the loss of the right to repudiate.
If you have a contract that doesn’t clearly define the breaches which will be repudiatory, it is far more risky to terminate the agreement, as any decision to terminate may be found to be unlawful by a court and can potentially result in you being in repudiatory breach.
The starting point is to think about which parts of the contract are the most important. Breach of these would be more likely to be found by a court as potentially repudiatory. Examples tend to include time of delivery of goods or services or failure to pay. Delay does not necessarily give the right to repudiate though.
Damages and other remedies for breach of contract
The most suitable option will depend on the specific circumstances of the breach, including the severity of the breach, the financial losses incurred, and the future relationship desired with the breaching party. Here’s a summary of the main options:
- Claiming Damages – This is the most common option, aiming to put the injured party back in the financial position they would have been in had the contract been performed correctly. Damages must be foreseeable and as a natural consequence of the breach and the innocent party must demonstrate that they have taken steps to mitigate their losses. Damages claims can be complex and are often disputed.
- Terminating the Contract – see above.
- Seek an order for Specific Performance – this is what is known as an equitable remedy, which means it is in the discretion of the court but in reality rarely granted. An order for specific performance from the court compels the breaching party to fulfill their contractual obligations.
- Seeking an Injunction – a court order to prevent the breaching party from taking specific actions harmful to the injured party. Useful to stop ongoing breaches or threatened future breaches.
- Negotiating a Settlement – this may or may not be financial or financial only, it can also involve renegotiating the terms of the agreement so that the consequences of any further breach are clear and more damaging to the party at fault.
- Alternative Dispute Resolution (ADR) – methods like mediation or arbitration to resolve the dispute outside the court system. Can be faster and less costly than litigation, but depends on the willingness of both parties to participate unless the contract compels the parties to go to mediation or arbitration
If you need litigation solicitors to advise on your best options following a breach of contract please do get in contact with us. Our team, led by our senior partner Hal Branch would be delighted to assist.
