Your business is shaped by the commercial contracts it’s a party to. And commercial success is often dictated by the way these legal agreements work in practice. When you enter a contract, you’ll often be embarking on a new business relationship and focusing on how to make it work in the most advantageous way possible. And while we all want our contracts to run smoothly, the reality is that disputes will arise from time to time.
That’s why – at the drafting stage of a contract – an experienced commercial contract solicitor should always be alert to how a breach of the contract will affect you, and the remedies that might be available – whether you or the other contracting party are in breach.
This guide looks at the typical remedies open to the innocent party when a breach of contract occurs. You might find it useful to read it in conjunction with some of our other articles on commercial contracts in our Advice Centre, including our guide to terminating commercial contracts.
- What is considered a breach of contract?
- When should you seek remedies for breach of contract?
- What are the damages for breach of contract?
- How to calculate damages for breach of contract
- What are advance payments?
- When can you terminate a contract?
- Equitable remedies for breach of contract and self-help remedies
- Types of equitable remedies
- Can I agree remedies before I enter a contract?
What is considered a breach of contract?
The question of whether a breach of contract has occurred will often be disputed – even in relation to the most carefully drafted, finely tuned contracts.
Technically, a breach of contract arises when an obligation under the contract is not fulfilled in the way the contract envisaged. The breach is usually material or important in the context of the contract as a whole. Typically, performance may be defective in some way or delayed to a significant extent as a result.
When we look at the remedies for breach of contract available to the innocent party, we must also consider the type of contract term that has been breached. For example the options open to the innocent party will differ if a contract condition (a fundamental term) is breached compared to the situation where it is a warranty under the contract that has not been fulfilled.
You should note that it’s possible – within the contract itself – to limit your liability for a future breach of contract through a limitation or exclusion clause.
We discuss how you can agree available remedies for breach of contract with the other party further below. For now, it’s worth emphasising that you cannot rely on a limitation or exclusion clause that is unreasonable or overrides statute or the general law. For example it’s not possible to exclude liability for death or personal injury caused by the breach.
When should you seek remedies for breach of contract?
Under the Limitation Act, 1980 you have six years from the date of the breach to bring a claim.
Before taking legal action you should also establish that:
- There is a sufficient link (causation) between the losses for which you are seeking compensation and the breach. You are unlikely to succeed in your claim if the breach of contract and its effects are considered too remote from the loss you have actually sustained.
- Your organisation has taken reasonable steps to mitigate or reduce the effects of the breach.
What are the damages for breach of contract?
When there is a breach of contract the innocent party can sue for monetary damages. This is the most common way to settle a breach of contract claim.
However, for some losses financial compensation won’t be appropriate and in these situations, you may be better advised to seek an equitable remedy. We discuss these in separate sections below.
Returning to monetary damages, in principle you are entitled to an amount in damages that places you in the position you would have been if the other party had not breached the contract. This will include costs you incur engaging someone else to fulfill the contract as well as your loss of profit arising from the breach.
How to calculate damages for breach of contract
Calculating damages caused by a contractual breach is rarely straightforward. But it’s up to the claimant to prove losses and this will often involve answering many hypothetical questions, including how third parties would have behaved if the breach hadn’t occurred and how events would have unfolded without the breach of contract. In addition, the claimant will have to show causation and lack of remoteness as well as mitigate the damage to be successful in any claim (see above).
What are advance payments?
Advance payments are commonly (but not only) used in construction contracts. A payment is made to a contractor before work begins so the contractor doesn’t have to fund the works. If after receiving the monies the contractor doesn’t carry out the work, the money should be returned. But if the person paying the money doesn’t fulfil some other element of the contract after making the advance payment he or she may not be entitled to repayment. Recovery will depend on a careful construction of the contract and the purpose for which the payment was made. If paid as a deposit the contractor should repay it. But if the sum is interpreted as part payment of the whole amount due under the contract in advance recovery will be uncertain.
When can you terminate a contract?
We’ve produced a guide to terminating a contract that highlights the fact that there are more grounds for termination than breach of contract alone. For example you can end a contract by:
Giving notice: Standard commercial contracts usually contain an express notice period. If there is no such provision you can give the other side reasonable notice of termination
Lawful termination: The contract should contain provisions detailing the grounds on which the contract can be lawfully terminated, for example for a material breach, in exercise of a break clause or because of the insolvency of one party
If relying on the other side’s breach to terminate the contract you should comply with any provisions in the contract that you are required to follow. For example, are you obliged to give the party in breach an opportunity to remedy the breach before you terminate?
Equitable remedies for breach of contract and self-help remedies
Financial damages will not always adequately compensate the innocent party in a case of breach of contract. So, you may also wish to consider equitable remedies or self-help remedies.
Unlike the remedy of damages or financial compensation, equitable remedies aren’t available as of right. They are granted at the court’s discretion and only on basis of fairness.
Types of equitable remedies
What is recission?
Rescission is a self-help remedy to the extent that it’s up to one party to elect to rescind. You can seek rescission if, when you entered the contract there was one of the following:
- Undue influence
- Breach of a fiduciary duty
When a contract is rescinded it is effectively set aside so restoration of the parties to their pre contract position must be possible.
What is contract rectification?
Contract rectification amounts to correcting a mistake in the way the original contract was drafted. The mistake must render the contract an inaccurate reflection of what the parties really agreed to. Sometimes the parties will agree to the correction and it is simply a matter of entering a deed of rectification. If there is a dispute however it will be necessary for the party seeking rectification to establish the true intention of the parties. An application to court will be necessary for an order for rectification.
Can I get an order for specific performance?
Courts will grant an order for specific performance if it is ‘just and equitable’. In doing so the courts oblige a party to perform its obligations under the contract. It is a discretionary type of remedy and generally specific performance won’t be ordered if damages would be a suitable way to resolve the issues between the parties. If the contract involves unique property, such as land or design rights specific performance is more likely to be ordered.
Read more about specific performance.
Can I get an injunction?
Like specific performance and other equitable remedies, injunctions are available when damages would be an inadequate remedy. For example an injunction may be granted to ensure a party does not disclose confidential commercial material or to prevent a party from disposing of property that’s subject to the contract. Injunctions may be mandatory – ordering a party to do something or prohibitory – ordering a party not to embark on a particular course of action.
Can I agree remedies before I enter a contract?
As we have seen a breach of contract normally leads to litigation for damages or an application for some type for equitable remedy. However it’s not uncommon – particularly in large-scale commercial contracts and construction agreements – for the parties to contractually limit the amount of damages payable in the event of a breach or restrict the types of remedy available in such a situation. This can provide the parties with certainty as to their liabilities in the event of a breach of contract and, by avoiding lengthy litigation, can help preserve commercial relationships.
One way to do this is to include a liquidated damages clause in the contract that stipulates the amount payable by one party to the other in the event of a breach. For the liquidated damages clause to be enforceable, the parties must ensure that the sum specified is a reasonable approximation of the cost to either side of a breach.