Contracts are a common tool used throughout our lives to create legal relationships between parties to define their respective obligations and rights.
If you have entered a contract with another party, you are obligated to abide by the terms and conditions of the contract. Any failure to perform an obligation required by the contract, including if you don’t complete an obligation within a time limit set by the contract, will be a breach of contract.
If a breach of contract occurs, what happens next can depend on the type of term breached and other laws that might apply to the specific contract.
What is a breach?
A breach of contract occurs when one of the parties to the contract fails to abide by a term of the contract (which can be express or implied).
Express terms of a contract are those which the parties have agreed to incorporate into their contract. As the parties are aware (or ought to have been aware) of their rights and obligations under the express terms, any breach of an express term of contract is usually easy to detect.
An implied terms on the other hand, are those which the law recognises and implied to all contracts, a particular class or type of contract, or a specific contract. As these terms are not the terms that the parties have specifically agreed upon, they may not be aware of the existence and/or breach of such terms. For example, the duty to exercise reasonable care is an implied term in all professional services contract.
Remedies
The remedies that may be available for a breach of contract depends on whether the term being breached is a “condition”, a “warranty” or an “intermediate term”.
A term is:
- a condition, if the contract says that it is a condition, or if it is of such importance that a party would not have entered into the contract unless that party had been assured of a strict or a substantial performance of that term;
- an intermediate term, if a breach of such term can deprive the non-breaching party of substantial or the whole benefit that that party is entitled to under the contract; and
- a warranty, if it is neither a condition nor an intermediate term.
A breach of a condition normally will entitle the non-breaching party to terminate the contract and/or seek damages from the breaching party. A breach of an intermediate term will also entitle the non-breaching party to seek damages but not a termination of the contract unless the breach has deprived the non-breaching party of substantial or the whole benefit it is entitled to under the contract. A breach of a warranty will not entitle the non-breaching party to terminate the contract and the remedy for such a breach is usually damages.
The non-breaching party may also be entitled to a specific performance if damages are inadequate to provide remedy for the breach. This remedy is discretionary, and a court will only order a specific performance if the breached contract remains on foot. Hence, the non-breaching party will lose their entitlement to a specific performance if they elect to terminate the contract. In addition, an order for specific performance will not be available if:
- It forces the parties to maintain a personal relationship, such as with employment contracts.
- The obligations under the contract are unclear.
- Specific performance would result in unconscionable hardship for the defendant.
If the non-breaching party instead elects to affirm the contract (i.e. continue to treat the contract as if it is valid and on foot), then they will forfeit their right to terminate the contract.
Whether one should affirm or terminate is a very complex area of law and depends on the circumstances. One should therefore consult a solicitor before making any decision.
Conclusion
Contracts are frequently used to set out the terms and conditions of an agreement reached between one or more parties. A breach of contract occurs when one of those parties fails to uphold a promise they have made under the contract. In such cases, the remedy available will depend on a number of matters including the type of the term of contract being breached and the circumstances.
This information is for general purposes only. If you believe somebody has breached a contract that you have entered, or if somebody has alleged that you are in breach of a contract, we recommend obtaining legal advice.
If you or someone you know wants more information or needs help or advice, please contact us on [email protected] or call 02 8005 6577 for a no-obligation discussion and for expert legal advice.