Legal approaches to resolving a breach of contract
An aggrieved party will generally be entitled to compensation for its losses caused by a breach of contract. However, the appropriate response may vary depending on the specific circumstances.
When a party to a legal contract fails to comply with its contractual obligations, it is likely to be in breach of contract. There are several potential remedies available to an aggrieved party, and the response will depend on its priorities and objectives.
In this insight, we consider some of the potential remedies and options available following a breach of contract.
1. Claim damages
Generally, a party will be entitled to compensation (‘damages’) where it has suffered a loss resulting from a breach of contract by the counterparty.. In most cases, damages are awarded for financial losses, i.e. those that can be quantified mathematically, such as a loss of business profits.
The claiming party must adhere to its common law duty of mitigation. Compensation will not be awarded for losses that should have reasonably been avoided. Proactive steps should therefore be taken to minimise the impact of the breach, and failure to do so may lead to certain losses being unrecoverable through litigation.
2. Liquidated damages
Where a contract includes a ‘liquidated damages’ clause, the value of damages recoverable following a specified breach of contract is agreed in advance. The amount recoverable will be either fixed or ascertainable, and this provides a greater degree of certainty as to the sums payable in the event of a breach. The level of recoverable damages is therefore less likely to be disputed. It follows that a liquidated damages clause is likely to reduce the risk of litigation.
As damages are meant to compensate for loss, rather than punish a party in breach, care should be taken not to include a liquidated damages clause that provides for payment of an excessive sum. Damages payable under a liquidated damages clause must be proportionate to protect the legitimate interests of an aggrieved party. Where a liquidated damages clause purports to impose the payment of an unconscionable and extravagant amount, this may be judged as a ‘penalty’ and be unenforceable.
3. Unliquidated damages
Damages that are neither fixed nor ascertainable are ‘unliquidated’. Broadly, unliquidated damages require the court to determine the amount payable following a breach of contract. As unliquidated damages are not fixed by a contractual provision, there is less certainty and a greater risk of dispute over the damages payable.
4. Terminate the contract
Repudiatory breaches
Where a breach of contract is very serious, this may give the aggrieved party the right to terminate the contract. Such a breach is known as ‘repudiatory’. Generally, a minor breach (such as a delay in payment) does not create the right to terminate a contract. Whether a breach is sufficiently serious is not an exact science but, broadly, a breach that deprives another party of substantially all the benefits they were intended to receive under the contract, is repudiatory.
However, a contract is not automatically terminated in the event of a repudiatory breach. Instead, the aggrieved party may decide either to ‘accept’ the repudiation or ‘affirm’ the contract.
Acceptance
Where a repudiatory breach is accepted, the contract terminates, and the parties are released from further performance of their primary obligations under the contract. Acceptance must be communicated as soon as possible to avoid inadvertent affirmation of the contract.
Affirmation
Alternatively, where a party decides to affirm the contract, the parties’ contractual obligations continue. As with acceptance, affirmation must be communicated (in writing, spoken words, or through actions consistent with the contract remaining in force). It is worth noting that, typically, a party may still claim for damages for losses it has suffered as a result of the breach of contract, even if it affirms the contract.
How to handle a repudiatory breach is a largely commercial decision which depends on the specific circumstances. It may be more profitable, or otherwise beneficial, to allow the contract to continue, for example.
5. Equitable remedies
Equitable remedies are founded fundamentally on the principles of fairness and justice and may be awarded at the discretion of the court; a claimant is not entitled to an equitable remedy. The court has developed several equitable remedies, two of which are considered below.
Specific performance
An order by the court for specific performance compels a party to perform its positive contractual obligations. In other words, a party will be ordered to do what it agreed to do under the terms of the contract. A claim for specific performance must be based on a valid, enforceable contract. Further, specific performance is available only where damages would not provide an adequate remedy, for example where the nature of the contract is unique and could not be found elsewhere. Such circumstances are unusual, so an order for specific performance is rarely a viable option in a commercial context.
Injunctions
An injunction requires a party to act in a certain way. Injunctions are either ‘prohibitory’ or ‘mandatory’.
A ‘prohibitory’ injunction imposes a negative obligation and requires a party to refrain from doing a specified act(s). For example, a prohibitory injunction may be used to prevent company directors unlawfully competing with a company.
A ‘mandatory’ injunction imposes a positive obligation and requires a party to do a specified act(s). For example, a party may be ordered to deliver up goods that are in breach of a third party’s intellectual property rights.
As with an order for specific performance, an injunction may only be ordered when damages would not provide an adequate remedy, and therefore injunctions are relatively rare in a commercial context.
Considerations for businesses
Where a breach of contract has occurred, there are several factors that businesses should consider, including the following:
- What losses have been suffered, and were these caused by the breach? Further losses should be mitigated.
- Does the contract contain a liquidated damages clause relating to the specific breach in question? If so, is the clause enforceable (i.e. not a ‘penalty’)?
- Is the breach repudiatory (i.e. very serious)? If so, would it be more beneficial to accept the breach or affirm the contract?
- Would damages provide an adequate remedy, or could/should an equitable remedy be sought?
Should you have any queries in relation to exercising and determining your rights and remedies for a breach of contract, please do not hesitate to contact our Commercial Team who would be happy to assist.