We sometimes get a call from clients with “there’s been a breach of contract what are we entitled to?”
Signing and dealing with contracts is an integral part of running a business. But have you ever considered what would happen if one of these contracts didn’t go to plan? Breach of contract disputes are one of the most common claims brought in courts today so knowing your rights when things go wrong can put you one step ahead of the game. This blog takes a look at breach of contract claims and considers what you can do if you ever find yourself in such a situation.
What is a breach of contract?
A contract is a legally binding agreement between two or more parties. A breach of contract occurs where one party fails to perform an obligation imposed by another party under that contract. Typical examples of breaches of contract include:
- Failing to perform obligations in whole or in part
- Failing to pay for what has been provided
- Failing to provide obligations on time
- Providing defective goods or services
What can I do?
Suing someone for breach of contract is not always an easy process. In order to make a claim you must first overcome a series of legal hurdles. After proving the existence of a contract and that the contract was breached, you must then prove that you have sustained a loss and that loss was a direct consequence of the breach of contract. This is often referred to as the ‘but for’ test, requiring the innocent party to prove that the loss would not have occurred but for the breach.
What am I entitled to?
Once the above has been established, you can go on to consider what you might be entitled to. The basic remedy in English law for a breach of contract is an award of damages. An award of damages is essentially an award of money which aims to put the innocent party in the same position they would have been in had the contract been properly performed. Although there are no rigid rules for the quantification of damages in a breach of contract claim, the assessment of damages is essentially a question of fact. You should consider any revenue or profits you would have earned, any costs that would have been avoided and any non-financial benefit that would have been received, provided it was a major object of the contract.
However, you should also be aware that not all losses flowing from a breach of contract are recoverable. The rules on mitigation, remoteness and contributory negligence may restrict, and in some cases entirely prevent, an award of damages.
The rule of mitigation requires a party who has suffered loss to take reasonable steps to minimise the amount of loss suffered. The question of what steps are ‘reasonable’ is generally fact-sensitive, but an innocent party cannot generally recover for any loss that could have been easily avoided. For example, where a seller fails to deliver goods for which a market substitute is available, the innocent party should attempt to purchase a replacement rather than sit back and attempt to claim for all losses.
Remoteness of damage
As in the law of tort, the law of contract accepts that not all losses flowing from a breach of contract are necessarily recoverable. If the court decides that a loss is too “remote” you will not be able to recover for that breach of contract. The traditional principles of remoteness are set out in the case of Hadley v Baxendale. The main question to ask here is whether the loss was the type of loss within the reasonable contemplation of the parties at the time the contract was made. If not, it is likely to be too remote and as a result not recoverable. So, for example, if I agreed to sell you 500 widgets for £50 and, unbeknown to me you had agreed to sell those widgets to someone else for £500, if I failed to sell those widgets to you, you would not be able to sue me for your loss of £450 because this loss would not have been in the reasonable contemplation of the parties at the time the contract was made (assuming 500 widgets generally sell for around £50!)
A defendant to a breach of contract claim may seek to argue that the loss suffered by the innocent party is partly down to them. If successful, a claim for damages here would be reduced to such an extent as the court thinks just and equitable having regard to the innocent party’s share in responsibility for the damage.
Exceptions to the general rule
In a limited number of cases the court may also award damages which go beyond a strict measure of compensation. Examples of non-compensatory damages include nominal damages, aggravated damages, restitutionary damages and account of profits. Restitutionary damages may be awarded where there is a gain by the defendant but no measurable loss by the innocent party. Nominal damages are small, token sums which may be awarded where the innocent party has suffered no recoverable loss.
Other possible remedies for breach of contract
In addition to claiming damages for breach of contract, the court has discretion to award a non-financial, equitable remedy. Equitable remedies are awarded at the court’s discretion and will only be granted if damages would not be adequate. These non-financial equitable remedies may include an order for specific performance or an injunction. An order for specific performance compels a party to perform its contractual obligation and an injunction compels a party to refrain from doing something that would be a breach of contract.
Be careful not to waive the breach
Before pursuing a breach of contract claim, you need to make sure that you have not unintentionally waived the breach. Waiving a breach essentially means giving up your right to claim any sort of remedy and can be demonstrated by something as simple as your behaviour. Unfounded delay or waiting to bring the claim at a convenient time may be enough to constitute a waiver.
If you are thinking “there’s been a breach of contract what are we entitled to?” the first thing you should do is take legal advice. It’s important that you do not take steps that could jeopardise your claim or which could even put your own business in breach of contract. If you have any questions on breach of contract claims or dispute resolution more generally please contact Joanna McKenzie.