When entering into a contract it is easy for both parties to presume that as the contract is legally binding, the obligations on both parties will be met. However, what happens if one party breaches the contract – what recourse will you have?
We have to make sure that the contract is lawfully enforceable. Some contracts are not, agreements between friends or relatives or other types of personal agreements, no matter how detailed may not be enforceable, so we have to decide how to proceed.
Remedies for breach of contract and the type and amount of damages are among the more complex areas of English law – making the wrong move or decision, where you are the innocent victim of a breach by the other party, can result in your position being hugely prejudiced and possibly even mean that you end up in breach and owing the other party.
Considering this at an early stage when the contract is being drafted as well as urgently following a breach of contract, could save your business from making a costly mistake. It is essential to take steps prior to the signing of the contract to ensure you have considered what your remedy will be in the event of a breach. You will need to estimate your likely losses and ensure the contract protects your position as much as possible. We can help you achieve this protection.
As the innocent party, your actions after the breach by the other party will impact on any claim. You may believe that a breach by the other party means you can terminate the contract but this is not necessarily the case. You may also believe that breach by the other party means you can just make a claim for the full value of the contract or alleged loss. Not necessarily the case – it is likely you will need to mitigate your loss.
What type of breach ?
If there has been a breach of contract, the first practical steps you need to establish are :-
- if there is a written contract what does it say ?
- is your contract a business to business arrangement or business to consumer ? If the latter, whatever the contract may stipulate, it may well be overrruled by statute or have terms implied into it.
- check for evidence of any alterations to the written terms in subsequent emails, correspondence or otherwise to be as clear as possible as to the latest agreed terms.
- be alive to the possibility that if you take no action you may be considered to have waived the breach. On the other hand, don’t act too hastily as you may make a mistake that means you are in breach.
- be aware that different contract clauses have different implications – is the breach a fundamental breach ? Does it go the very essence of the bargain. If not, your options and remedies may be different.
There are different categories of damages whether you are making or defending a claim for breach of contract. The main ones are :
- Compensatory damages- which are awarded by the court to compensate for the loss suffered.
- Nominal damages – where there may be a breach of contract but with no loss suffered and the damages are nominal, although costs may still be awarded.
- Account of profits – which the court may award damages of profits enjoyed as a result of the breach. This remedy is only available if compensatory damages are inadequate.
- Non-monetary loss – in cases concerning consumer contracts, contractual claims for damages for distress, anxiety, disappointment and inconvenience have been successful, where the object of the contract was the provision of a non-monetary benefit. For example, where a holiday was not up to the standard promised or where a wedding photographer failed to turn up.
- Liquidated Damages – Where the parties agree the level of damages for a breach and include it in the contract. Important to be aware that if a liquidated damages clause constitutes a “penalty clause”, it may be unenforceable. There are various conditions to meet such as the amount of the liquidated damages must be a genuine pre-estimate of loss. A further condition is that the purpose of the liquidated damages clause should be compensatory and not a deterrent. The benefit of liquidated damages is providing a level of certainty from the outset. Liquidated damages can also be combined with default interest provisions to provide a contractual sanction against non-payment.
Expectation or restitutionary loss?
The party bringing the claim needs to consider whether he is better claiming for expectation loss or restitutionary loss. Expectation loss is the usual way to assess loss as it aims to put the injured party back in the position he would have been in had the contract been performed satisfactorily. On this basis he may have a claim for the profits he would have made.
However, it can sometimes be appropriate to claim for restitutionary loss. Damages calculated in this way are designed to put the injured party in the position he would have been in had the contract never been performed. These damages can only be claimed if there is good reason not to pursue a claim for expectation loss. An example of this would be where it is not possible to say with any certainty what the profits would have been had the contract been performed, but it is possible to say what expenditure has been incurred.
Time of assessment of damages
The general rule is that damages are assessed at the date of breach of contract. However, there are some exceptions and timing can make a big difference.
Recovery of damages – principles
There are many principles involved in determining what alleged losses may or may not be recoverable for breach of contract. Some of the key areas to consider include:
- Remoteness -the loss must not be too remote to be recovered. In other words, losses must arise according to the normal events arising from the breach of contract itself or as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract.
- Causation -the party bringing the claim must prove on a balance of probabilities that the breach caused the loss. The court will usually first consider what would have happened “but for” the breach. If this approach will not result in a certain finding the court may consider the “lost chance” approach which looks at the chances of what might have happened.
- Mitigation -the party bringing the claim cannot recover damages for any part of his loss which he could have avoided by taking reasonable steps. This is referred to as the duty to mitigate. There are two limbs to the duty to mitigate, which arise after the breach has occurred: The party claiming breach of contract must take reasonable steps to minimise his loss (expenses in taking these steps can also be recovered) and he must not take unreasonable steps to increase the loss.
We are frequently asked to advise on jurisdictional matters relating to contracts. We advise on what the jurisdiction clause should specify. It is usual for the clause to specify the same jurisdiction for where the parties agree to submit disputes to the courts to and that the law of that jurisdiction will also be the governing law of the contract. Usually, if you are in the UK it will be much cheaper to enforce in the UK than elsewhere in the world.
So you can see, its not all plain sailing; you need full and accurate advice from a professional lawyer - that's where we come in. We will give you a free opinion and advice and will lay out your various options (yes you have options too).