Sound legal advice on key issues such as possible right to terminate, damages, mitigation, loss.
We have significant and wide ranging experience of breach of contract issues. Such issues are rarely as straightforward as they seem and making the wrong move or decision, even in circumstances where you are an innocent party, can have catastrophic legal consequences.
If you need advice on a breach of contract claim please do get in touch.
It is a feature of many contract disputes that one or both of the parties will claim that the written contract does not deal with all the agreed terms or that what was agreed in writing was varied thereafter. In this context, it is important to recognise the difference between business to business contracts and business to consumer contracts (see below on this) and to bear in mind that the law does in some circumstances allow terms to be implied into contracts (and especially employment contracts), for a variety of reasons.
With contracts between business and consumers there are some statutes which specifically imply terms into such contracts, regardless of what a written contract provides, in order to protect consumers. Statutes which any business dealing with consumers need to know about are the Supply of Goods and Services Act 1982 and the Sale & Supply of Goods to Consumers Regulations 2002 and the Unfair Contract Terms Act.
In contrast, with contracts between 2 businesses the courts are generally far more reluctant to imply terms, for the simple reason that businesses are expected to be in a better position to negotiate, may well have taken legal advice and partly as a matter of legal policy. Certainly, the bigger the businesses involved in a contract the less likely a court will be to interfere. Having said this, the law may imply terms if necessary to create business efficacy or where the parties have acted in a way which has clearly indicated a change to the terms originally agreed.
In the event of a dispute, the English courts can imply terms which differ from the written terms where either or both parties conduct is inconsistent with the written agreement. For example, if A sells B goods, and the contract says that B must pay within 14 days of delivery, if B has bought goods over a period of time via numerous different orders and has sometimes paid within 14 days but at other times has paid only after 20 or 30 days, the courts may well imply that time was not of the essence.
Using that same example, in the unlikely event that the contract did not include time for payment, in the event of a dispute, it may well be implied, based on the conduct of the parties, a length of time based on how the parties have acted thus far.
Another way in which terms may be implied by law is, where a contract is silent or unclear on certain issues, whether there are clear standards relating to that issue found in similar contracts within the industry, sector or type of business dealing in question. An example might be construction contracts where there are clearly defined industry standards for certain contractual issues.
A very common mistake is to assume that, having a contract in writing is the whole story and that, if the other party does not stick to the written contract, you will almost certainly succeed with a breach of contract claim.
Contracts get varied in any number of ways – such as where the parties do not stick to the terms, by subsequent conversations or communications by email, or by a course of dealings inconsistent with the original terms or waiver of a breach.
It is common for a defendant to a breach of contract claim to raise an allegation that the contract was varied and all too easy to say there was a verbal conversation to change the terms. At the very least, this can cause delay and mean it will be very difficult, for example to get a summary judgment from the court, since evidence of an alleged verbal variation would have to be tested by cross examination at trial.
Right to terminate the contract – fundamental or repudiatory breach
It is a common misconception that if a contract is breached the other party can necessarily treat the contract as terminated. Contracts always include obligations by both parties. In simple cases, one party pays, the other party provides goods or services. However, many contracts involve ongoing promises to deliver from both parties. A payment may not be a single payment, but an ongoing series, such as lease payments or an ongoing retainer service, such as an IT contract for services. In those situations, determining whether a breach of contract is sufficient for termination is crucial.
The key issue to understand is that most breaches do not give the right to immediately terminate. Typically only a fundamental or repudiatory breach will allow the innocent party to cancel the contract. With other breaches, it is generally necessary to allow the party in breach an opportunity to correct, or remedy the breach. Failure to give the party in breach the opportunity to remedy the breach may result in the initially innocent party then being in breach with severe consequences.
Where there has been a repudiatory breach it is the choice of the innocent party as to whether he or she would like to terminate the contract or whether to affirm the contract (i.e. to continue the contractual relationship). Affirming the contract does not however preclude the innocent party from making a claim for damages and whether the innocent party actually realises the fact that the contract can be terminated or affirmed is key.
If a breach of contract cannot be or is not remedied the idea of damages under English law is to put the innocent party in the position he/she/they would have been in had the breach not occurred. Whilst with some contracts it is possible to claim damages for loss of enjoyment and/or inconvenience, English law generally is loss rather than compensation based.
Often contracts also includes restrictions on liability or attempts to completely exclude liability. The interpretation and effect of such clauses tends to be very different if the contract is between a business and consumer as opposed to business to business.
Proving loss – consequential loss
One of the most common mistakes or misunderstandings following a breach of contract arises in connection with proving loss. In many scenarios, clients believe that as the innocent party, they will have no trouble claiming for all losses they believe they have sustained. In legal terms, things are not nearly as straightforward.
You cannot simply assume that you will be able to claim whatever you want as being a consequential loss caused by the breach. In fact, many breach of contract claims result in very significant financial claims being reduced by the court in value terms based on the rules for claiming damages.
Losses must be consequential from the breach. When determining what amount to award for damages the Court will consider:
Types of loss that might not be recoverable
These will only apply if the defaulting party is aware of the “special circumstance” when the contract was made. However, if the defaulting party can prove that they were not aware of the special circumstance then these damages may not be recoverable as they will be too remote. These can also include:
In addition to claiming damages for breach, in a court claim, especially where damages will not offer an adequate remedy or where there is an urgent requirement, the court has discretion, in addition to making orders for damages, to make orders for :-
Liquidated damages and penalty clauses
This is where the parties make a prior agreement as to the amount payable by either party should they breach the contract. This seems straightforward enough but is not always so – a mistake can be to include an amount in the contract for damages which has no relation to the potential loss and which cannot be justified for other reasons.
In such as case, a party in breach, notwithstanding that he/she/they breached the contract, might successfully argue that they do not have to pay the liquidated damages as it constitutes a penalty, which is not permitted under English law. A type of liquidated damages clause which is more likely to be acceptable would be for example a fixed term contract which is terminated early, and where the claim is for the balance payable for the rest of the term. The type of clause which is more dangerous, however understandable in ethos, would be a typical inclusion of a very high fixed damages amount for breach of a confidentiality agreement.
The best way to avoid such a scenario is obviously to obtain good advice when a contract of any kind is drafted but if you have not done so, it is worth getting advice at the time of breach and not just to assume that a liquidated damages clause will be enforceable.
Waiving a breach of contract
Another aspect of responding to a breach of contract by the other party is to be careful not to waive the breach. This can occur by delay or other conduct and may result in a finding by a court that rights to take action have been lost. See our in-depth page on this issue for further assistance.
Using a breach of contract as a method of renegotiating the contract
In some situations, where there is a longstanding or otherwise fruitful relationship of value or where the innocent party has other business reasons for being unhappy with the contract, it may be possible to use the breach as a tool for generally renegotiating the terms of the contract in a more advantageous way. This can make sound business sense but does require a careful approach so as to avoid the possibility of waiving the breach.
In a contractual situation, English law provides that the innocent party does have a duty to take reasonable steps to minimise loss. What is reasonable is generally a question of fact, but it is not safe, legally, to assume that doing nothing will be considered reasonable or to take action to remedy a breach without due regard to all available options, their suitability and cost involved.
It is worth noting that under English law the burden of proof is on the Defendant to prove that the innocent Claimant has failed to mitigate loss.