While going back on an agreement made with a friend can be a little socially uncomfortable, the stakes are much higher when it comes to more formal arrangements, where breach of contract can have serious legal repercussions. Contracts are made every day in commonplace exchanges – when a consumer makes a purchase from a retailer, for example, or when someone formally accepts an offer of employment. This article focuses specifically on contracts between businesses, but the underlying issues are very similar.
So, what is a breach of contract and what should you do if you find yourself in this situation?
Put simply, breach of contract describes a situation where two or more parties entered into a legally binding agreement but one or more has failed to fulfil its obligations, as prescribed in the agreement. A breach of contract can also be said to have occurred when a party expresses the intent to fail their obligations.
What is a contract in the eyes of the law?
A contract is generally said to exist when two or more parties voluntarily enter into an agreement.
It is important to note that a written or signed document does not have to exist for a party to argue that a contract has been made.
It is not always clear when a contract is legally enforceable, and it is advisable to seek professional legal advice if you are unsure.
There are four stages usually present in the formation of a contract:
- An offer – one or both parties must have clearly stated that they will do or provide something.
- An acceptance – this can be given verbally, as well as in writing or even in certain circumstances be implied by action that indicates acceptance.
- Intention to be legally bound – this does not have to be expressly agreed to in writing. It is presumed upon entering into a commercial contract. If both parties agree that it is not to be legally enforceable they must clearly state this.
- Consideration – for a contract to be legally binding, one party has to have made a promise to do something. And in return, the other must promise to give them something of value – usually money but sometimes simply an agreement not to pursue a particular course of action.
When does a breach of contract arise?
A breach of contract can be said to be minor (also referred to as a ‘partial breach’) or material.
A minor breach occurs when one party fails to meet part of the agreement, but in such a small or insignificant way that it does not prevent the parties from completing the rest of the contract. An example might be a plumber using a brand or colour of pipe that was not the preferred choice of the other party. If the pipe fulfils the same function and meets the same standard, then this is likely to only constitute a minor breach. The ‘non-breaching’ party is still obliged to fulfil their part of the agreement in this situation. If the pipe colour or brand was included as a ‘condition’ (i.e. a specific promise) of the contract, however, then this may constitute a material breach.
A material breach is defined as a significant failure on the part of one of the parties to fulfil a major term of the contract, usually one that was of such importance to the party making the claim that they would have been unlikely to enter into the agreement without it. In this case, the aggrieved party can sue for substantial damages and is not obliged to fulfil their part of the agreement. They may even terminate the performance of the contract if the breach is of fundamental importance.
You may also have heard of anticipatory breach of contract. An anticipatory breach can be said to have occurred when one party indicates, ahead of the due date of performance, that they will not be able to fulfil their side of the agreement. If the breach is ‘fundamental’, the other party has the option to terminate the contract and sue for damages as if the breach had already occurred.
Examples of a breach of contract could include:
• A homeowner contracting a building company to create an extension and the building company failing to complete the job or providing a substandard service, particularly where the resulting extension is not fit for purpose.
• A well-known actor or actress agreeing to promote a clothing brand’s new line but refusing to take part in related PR initiatives.
There are certain special situations where the party that has breached the contract will not be expected to pay damages and which can be relied on as a defence should a dispute arise. For example, if a strawberry supplier agreed with a wholesaler that they would sell their entire yield to them, but an unforeseen event such as a fire or locust swarm destroys the field. This makes it impossible for the supplier to fulfil their part of the agreement and, as such, they are likely to be exempt from having to pay damages. To mitigate this kind of risk, business owners should check what is covered by their business insurance policy.
Who can instigate a claim for breach of contract and what should they do?
If one party can show they have suffered loss resulting from a breach of contract, it may be possible to pursue a claim to recoup the losses.
Before initiating claim proceedings, the party making the claim must notify the other party of their intention to take legal action for breach of contract. It is important to send a dated letter that documents the situation and how the contract has been breached. This gives the other party a chance to rectify the situation, but if legal action needs to be taken, the complaint can be heard at a county court (often referred to as ‘small claims court’). If the value of damages is particularly high or there are several parties involved, it may need to be taken to the Commercial Court.
In both forums, the court will need to see that a contract existed between the parties in the first place. The claiming party must explain how the breaching party failed to fulfil their obligations as laid out in the contract. To provide that a breach has occurred, they may use a variety of evidence. Where formally documented contracts don’t exist, this could comprise email correspondence or statements from those who witnessed a verbal agreement being made.
Types of damages
If successful in court, the party making the claim may receive either nominal or substantial damages, depending on the loss they have suffered as a direct result of the breach of contract. Nominal damages are more of a token, awarded when a breach has occurred but no directly correlated financial loss has been proved. To claim substantial damages, it is incumbent on the party making the claim to demonstrate that they have experienced a loss and to quantify that loss.
Compensatory damages are awarded when a loss has been quantified and will cover the costs of that loss. Punitive damages, while much rarer in the case of breach of contract, can be awarded when one party has acted fraudulently or with malice.
The importance of professional legal advice
Contract law is particularly complicated, and the appropriate advice should always be sought before making the decision to take legal action. Specifically, a lawyer will be able to tell you what your chances of success are should you go ahead with a claim, and the kinds of damages you may be entitled to.