Running a business involves navigating various challenges, including contractual disputes that can disrupt your operations. Unfortunately, business disputes are common and as a business owner, you will likely face a dispute due to a breach of contract at some stage of your business journey. This guide explores some of the key options to consider if your business contract is breached.
When drafting your commercial agreements at the outset, it is crucial that you try to anticipate potential breaches and establish remedies to mitigate risks your business might face. If you find yourself in a breach of contract scenario, you should seek urgent legal advice from dispute resolution solicitors on the best course of action to handle the breach.
We'll examine:
What is a breach of contract?
A breach of contract is when a contractual party fails to fulfil their obligations as agreed under the relevant contract.
When a breach of contract occurs, the non-breaching party may pursue different types of remedies depending on matters such as the severity of the breach. For instance, they might seek to end the contract, claim damages, or obtain other remedies.
However, disputes can often arise over whether an action or inaction constitutes a breach, its severity, impact, and the appropriate remedies. Seeking advice from a dispute resolution solicitor can help assess whether there has been a breach of contracts, and which remedies your business could pursue as a result of the breach.
What can your business do following a breach of contract?
If another party breaches your contract, you may be frustrated and want to take them to court to claim damages as a remedy. However, seeking remedies through litigation is costly, stressful, and time-consuming. While courts can help resolve a breach of contract dispute, this should generally be the last resort.
Other informal steps to consider following a breach include trying to resolve the issue informally through negotiation. Commercially and practically, this can sometimes be the easiest resolution and informal negotiations can help preserve business relationships. Or you could engage an independent mediator to facilitate a resolution. Mediation is less formal and cheaper than court, allowing both sides to discuss openly and reach a mutual agreement. Through arbitration, you can present your case to an independent arbitrator whose decision is binding, similar to a court judgment. Arbitration is private, efficient, and often more cost-effective than litigation. Many contracts require arbitration to resolve disputes.
Litigation might, however, be needed for certain breaches of contracts. For instance, where there is a significant amount of money involved or highly complex legal issues to resolve which cannot be resolved informally.
It is also important to remember to first check your written contract in case it specifies specific steps a party needs to follow if there is a breach of contract. For example, a contract may specify that parties need to try to resolve a dispute informally before going to court and seeking remedies.
What remedies are available for breach of contract?
If you wish to seek remedies for a breach of contracts, there are several remedies to consider.
Here are some key remedies a business may be able to pursue:
Claiming damages
If a contract is breached, you may be able to claim monetary damages. The goal here is to put you in the position you would have been in if the breach had not occurred.
Calculating damages can be complex. You must prove your losses, establish that the breach caused these losses, and show you tried to mitigate its impact. As such, you should keep thorough paperwork to document the breach and your efforts to mitigate it.
Equitable remedies
When monetary compensation is not sufficient, there are certain equitable remedies which may be better for your business. However, such remedies are not available of right unless they are in your contract, or the court grants them.
These include:
- Rescission: This means setting aside the contract and returning both parties to their pre-contract position.
- Rectification: This means correcting mistakes in the contract to reflect the true agreement.
- Specific performance: This is a court-ordered fulfilment of the contract terms, generally only used if it is ‘just and equitable’. Specific performance is typically granted only when monetary compensation is inadequate.
- Injunctions: Injunctions can be used to stop an ongoing breach of contract. Obtaining an injunction can be complex and requires a court order, with the court ordering a party to do or stop doing a particular action. For instance, if a company is about to disclose your confidential business information, you might seek an injunction to prevent them from doing so as damages alone would not help you in this case.
These remedies are typically used in specific situations where damages are inadequate. There may also be other remedies you can pursue, such as recovering advance payments, which is common in the construction industry.
Terminating the contract
You may seek to terminate a contract if there has been a breach, but it is crucial to review the contract terms and ensure you have a clear legal basis for termination. Incorrect termination can lead to legal claims, significant financial losses, and damage to business relationships and reputation. You should seek legal advice to confirm that termination is in your best interest and legally justified. For more information, see our guide on terminating commercial contracts.
It is important to give careful thought and consideration to the appropriate remedy to pursue if you are in a breach of contract situation. You will also need to consider the potential costs associated with specific legal remedies, such as legal fees and court fees. A dispute resolution solicitor can guide your business on your options and help you decide on the best avenue to pursue.
Are there time limits for seeking remedies?
You should note that there are specific time limits within which you’ll need to bring a claim. Claimants must file claims within the specific limitation period relevant to their type of claim. If they fail to do so, defendants can completely defend against the claim on the grounds that it is time-barred. As such, understanding limitation periods is crucial.
Under the Limitation Act 1980, there is generally a six-year limitation period from the date of the breach to bring a breach of contract claim for ‘simple contracts’ which are not executed as deeds. However, limitation periods can be longer or shorter depending on the type of claim, specific circumstances, and cause of action. For instance, claims for contracts made under deeds have a 12-year limitation period. The Limitation Act 1980 does also allow for certain exceptions to the general rules. Alternatively, and separate to the Limitation Act, a contract may expressly reduce the time allowed for making a claim, for example from 6 years to 4 years.
If you wish to pursue action you should seek early legal advice from Commercial dispute resolution solicitors on this and to urgently assess the breach, your remedies, any procedural requirements, and time limits you need to comply with depending on the type of claim. As such, it is vital that you act as soon as possible when pursuing a claim to ensure that you are not time-barred. A litigation solicitor can support you with this.
How can negotiating remedies help your business?
Discussing and agreeing on breach of contract remedies from the start during contract negotiations can save your business time and money. Clear dispute resolution procedures in a contract can help your business manage potential breaches more effectively.
Regularly reviewing contracts as part of contract lifecycle management will also help reduce risk and ensure that your dispute resolution methods remain effective over time.
You should also take active steps to prevent breaches of contract from occurring in the first place. For instance, by ensuring that your commercial contracts are drafted carefully and clearly so that both parties understand their obligations and there is less room for mismatched expectations and misunderstandings.
If you are concerned about the implications of your business breaching a contract (for example if you are a supplier), you should seek legal advice. A commercial contracts lawyer can guide you on how to protect your business from risk, for example by including robust limitation of liability clauses in your commercial agreements.
See our articles for further information on contract drafting and dispute resolution:
- How to successfully negotiate a commercial contact: Best practice tips
- Contract dispute resolution: How to resolve a contract dispute
- Types of alternative dispute resolution (ADR) methods for your business
Breaches of your commercial contracts can significantly impact your business, but understanding your legal options and remedies can help you work through these challenges effectively. If you face a breach of contract, you should seek legal advice to explore your options, potential remedies, and the best course of action for your business.
