The reality is that business doesn’t always run smoothly however much time and energy you have devoted to your commercial contracts. That’s why at the drafting stage of a contract your commercial solicitors should carefully address remedies for breach of contract in case there is a future breach and commercial contract dispute.
This article looks at the typical remedies open to you if a breach of contract occurs and offers tips on your options to minimise the risk of contract dispute litigation.
We'll examine:
- What is a breach of contract?
- Limiting business liability
- Damages for breach of contract
- How to calculate damages for breach of contract
- Remedies for breach of contract
- What is recission for breach of contract?
- What is contract rectification?
- What is specific performance for breach of contract?
- Injunctions as a remedy for breach of contract
- Advance payments and breach of contract
- Can you terminate a contract for a breach of contract?
- Time limits for remedies for breach of contract
- Agreeing remedies for breach of contract
What is a breach of contract?
A breach of contract occurs when an obligation in a contract is not fulfilled in accordance with the contractual terms. Many alleged breaches of contract are not clear cut, with one party disputing the breach. Normally, there is a dispute between the contracting parties over:
- Whether the action or lack of action amounted to a breach of contract
- Whether the breach of contract is material or not. For example, whether a warranty has not been complied with or there has been a fundamental breach of contract
- The impact of the breach of contract
- The remedies for the breach of contract
A commercial contract solicitor should discuss and assess the vulnerabilities of your business and the impact of a breach of contract to help you ensure that the remedies for breach of contract are tailored to your business needs. For example, if your contract is breached by the other party, you may be concerned that payment of damages by the party in breach would be unaffordable. This issue could be resolved by a clause requiring the other party to take out an agreed minimum level of insurance coverage and to provide a copy of the insurance policy on request.
Limiting business liability
If you are worried that you are more likely to be the one found to be in breach of contract then your commercial solicitors must understand your concerns and address them. For example, if you are worried about supply chain issues affecting your ability to perform your side of a commercial contract then there may be ways of limiting your business liability so you are either not in breach of contract or to make sure the consequences of a breach of contract are not as severe.
One example of commercial contract negotiation and limiting business liability is to look at delivery clauses and whether timing can be made more flexible in case you run into supply chain issues or the carefully worded product specifications and guarantees, or look at whether your liability, in some circumstances, can be capped.
For a more detailed look at limiting business liability take a look at Limiting liability in contracts | Clauses to minimise risk.
Damages for breach of contract
Subject to the wording of a commercial contract, if the contract is breached then you have the right to claim 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 incurred in engaging someone else to fulfil the contract as well as loss of profit arising from the breach.
How to calculate damages for breach of contract
Calculating damages for a contractual breach is rarely straightforward. The key point is that the onus is on the claimant to prove their losses. That involves establishing causation as well as assessing whether appropriate attempts were made to mitigate the loss.
For example, if your company has been let down by a delivery company and the delivery company is therefore in breach of contract, it isn’t as simple as saying you want the delivery company to compensate you for your loss of profit and the loss of your ongoing relationships with the companies you were supplying your products to. Are your goods non-perishable? If so, could you could sell them, even with a discount for late delivery? Could you obtain alternate delivery quotes and arrange for another delivery company to deliver the goods? It is important to retain all your paperwork so you have evidence of causation and the steps taken to mitigate your loss.
Remedies for breach of contract
There are alternatives to damages for breach of contract as damages will not always adequately compensate for a breach of contract. These equitable remedies are not available of right unless contained in the contract or they are granted at the court’s discretion based on fairness.
Equitable remedies include:
- Recission
- Contract rectification
- Specific performance
- Injunction
What is recission for breach of contract?
Rescission for breach of contract is where one party to the contract elects to rescind it. Recission is available where one of the following occurred:
- Misrepresentation
- Mistake
- Duress
- Undue influence
- Breach of a fiduciary duty
The effect of a contract being rescinded is that the contract is set aside. For recission to work as a breach of contract remedy it must be possible to restore the parties to their pre-contract position.
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 agreed to. The parties to a contract can agree to the correction and enter into a deed of rectification.
If there is a dispute over contract rectification, the onus is on the party seeking rectification to establish the true intention of the parties and, in the absence of agreement, they will need to apply to the court for an order for rectification.
What is specific performance for breach of contract?
Specific performance as a remedy for breach of contract is a requirement to perform obligations under the contract. Specific performance is a discretionary remedy and a court will only grant an order for specific performance if it is ‘just and equitable’. Generally, specific performance will not be ordered if damages would be a suitable way to resolve the contractual dispute. If the contract involves unique property, such as land or design rights, specific performance is more likely to be ordered.
For more information on the remedy of specific performance take a look at our article What is specific performance of a contract?
Injunctions as a remedy for breach of contract
Like specific performance, injunctions as a remedy for breach of contract are available when damages would be an inadequate resolution. 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 is subject to the contract. Injunctions can either be:
- Mandatory – ordering a party to do something or
- Prohibitory – ordering a party not to embark on a particular course of action
Advance payments and breach of contract
Advance payments are commonly (but not exclusively) used in the construction sector. Advance payment is made to a contractor before work begins so the contractor does not have to pay for materials or have the hassle of chasing payment at each stage of the construction process.
If after receiving an advance payment the contractor doesn’t carry out the work, the money should be returned. However, if the person paying the advance money has not fulfilled some other element of the contract they may not be entitled to repayment. Recovery of the advance payment may depend on a careful construction of the contract and the purpose for which the payment was made. If the advance payment was a deposit, then the contractor should repay it. If the sum is interpreted as part payment of the whole amount due under the contract in advance, then recovery is less certain.
Can you terminate a contract for a breach of contract?
If a contract is breached your immediate reaction may be to end the contract. That may be a mistake for a whole host of reasons. For example, you may have no right to terminate the contract under the agreement you signed until the other party has been given a reasonable opportunity to remedy the breach. Alternatively, if you terminate the contract, you may not find another supplier who will match the previous contract price or be as reliable as the original supplier.
Whilst it is understandable to want to act to end a contract it is best to check the commercial contract and your rights and options to terminate so you only end the contract after reflection and only if it is in your best interests and you have the grounds to do so.
For more information on terminating commercial contracts take a look at our guide to terminating a contract.
Time limits for remedies for breach of contract
Under the Limitation Act 1980, you have six years from the date of the breach to bring a claim for breach of contract. Commercial dispute resolution solicitors recommend early legal advice to consider:
- Causation - is there a sufficient link between the loss 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 sustained
- Mitigation - your company has taken reasonable steps to mitigate or reduce the effects of the breach of contract
Agreeing remedies for breach of contract
Ideally, remedies for breach of contract should be considered before a contract is finalised as part of the negotiation and drafting of the contract. That is a positive step as things can and do go wrong with any commercial contract. Time spent on addressing potential issues and how to avoid them, or agreeing on remedies before the contract is finalised, can save your business considerable time and money. In addition, if remedies are agreed upon in advance, it is more likely that you will be able to maintain a working relationship with the other party to the contract, even if one of you breaches the agreement.
Remember that contracts can and should be reviewed as part of your contract life cycle management. Contract reviews should look at ways to minimise your business liability and ensure that remedies for breach of contract and preferred dispute resolution methods remain fit for purpose.
For more detailed information on contract reviews take a look at:
- Contract lifecycle management: what you should be doing
- Why you should regularly update your commercial contracts
- How to successfully negotiate a commercial contact | Best practice tips
Your contract negotiations should also address your preferred means of contract dispute resolution because if a breach of contract does occur then, with the right contract dispute resolution method, you may be able to reach a speedy agreement. For example, commercial mediation may be your preferred option, or international arbitration may be your best option if the contract involves multi-jurisdictional aspects.
For additional information on commercial contract dispute resolution have a read of:
- Contract dispute resolution | How to resolve a contract dispute
- What Is Alternative Dispute Resolution | Expert Legal Advice
- Types of alternative dispute resolution (ADR) methods for your business
