The consequences of breach of contract can be very severe and often involve expensive financial damages. However, there will always be times when you need to terminate or extricate yourself from a contract so in this blog we examine the grounds you can use to terminate a contract.
What is a breach of contract?
A breach of contract arises when one party doesn’t comply with the terms of a legally binding contract whether the terms in question are warranties, conditions, or innominate terms.
Options for terminating a contract are limited, dependant on which of the three are breached. Should a condition or innominate term be breached this may justify terminating the contract. Breaching a warranty would not.
The most common reasons for breach of contract are:
- Defective performance (the contract is partly performed but not to the standard required by the contract)
- Delayed performance (one party does not meet their obligations within the timeframes set out in the contract)
- Complete non-performance (one party does nothing to meet their obligations)
The reparative and restorative consequences will depend on the reasons for the breach and the impact of the breach. However, in order to take a breach to court to make these decisions you will need to prove that:
- A contract existed (either orally or in writing and the legal requirements to form a contract have been met)
- This contract was broken
- Money was lost, or some other damage occurred.
- The violating party was responsible for that loss
What happens when you breach a contract?
If a contract has been breached, the court will decide how the breach should be remedied (put right) for the non-breaching party.
The innocent party should be careful of their actions following a suspected breach. Dependent on the degree of the breach (whether because of a condition, warranty or innominate term), there may still be a requirement to continue the performance of the contract prior to seeking a remedy. Failure to do so may amount to a breach itself!
The remedies could be:
- Compensatory damages (steps to make it as though the breach never happened for the non-breaching party)
- Punitive damages (the non-breaching party is awarded a reparative payment far in excess of the amount lost)
- Nominal damages (a token financial award even though the non-breaching party did not suffer significant monetary loss)
- Liquidated damages (the damage amount is based upon a reasonable estimate of actual damages)
How can you terminate a contract following a breach of contract?
Many contracts include provisions that permit a party to terminate the contract under certain circumstances, or with a specified notice period.
Exercising these provisions always provide the most straightforward way to terminate a contract. This means it’s essential such terms are included in a contract so both parties have the required protection should a reason for terminating the contract earlier than expected arise.
It is interesting to note that the innocent party will not always need to wait for the breach to occur. If you are notified in advance that the other party will fail to meet the terms of the contract, the innocent party may rely on the principles of an anticipatory breach to terminate the contract early, or may still wait for the breach to occur. The benefits of this are dependent on individual circumstances.
In many cases, a breach of contract will also offer the innocent party a lawful opportunity to terminate the contract but breaching a contract all too often leads to prolonged, expensive and stressful litigation, so it may be better to explore other options first. These options include termination by consent and termination by expiry.
If you are at risk of breaching the contract, you need to be aware there could be serious consequences unless you can prove you have a clear contractual right to terminate the contract and/or the facts around the breach are uncontested.
While many believe one party’s non-payment or their delay in meeting their obligations will make the breach incontestable, this may not be the case.
You need to carefully follow any procedural stipulations set out in the contract, for example notice periods or service/delivery timeframes. If you don’t adhere to these terms, this too could also be a reason for you to be judged as being in breach of contract.
There may also be additional circumstances in which a contract may be ended by an innocent party, such as cases of misrepresentation where the contract becomes voidable. An innocent party may need to consider not only a breach of the contract terms, but the very basis of the terms themselves.
When you are considering the grounds upon which you can terminate a contract, the best practice rule is to make sure all your contracts include terms that set out the grounds upon which you can terminate a contract.
We’d always suggest you make sure your lawyer ensures any contract they draft or review for you clearly sets out your rights including your right to terminate.
Should you feel you are at risk of breaching a contract or have been on the receiving end of a breach of contract it is always best to seek professional legal advice before taking any further action, especially if you are considering terminating the contract.