If you’re a business owner, it’s likely that you’ve had to sign dozens of contracts before. However, it’s unlikely that things have ever gone wrong.
But, what happens when they do?
Just imagine: you’ve hired a developer to finish a component of your world-changing app. It was meant to take three months but it’s now been eight. The developer is now refusing to continue working on the app or even release the code.
They have been contracted to work with another client and keep on saying that they have no time. You’re out thousands of pounds and still do not have a finished product.
The initial contract, all emails and every message clearly stated that the work would be completed months ago. I bet you’re wondering:
- What do I do?
- Can I sue?
- Can I recover the full amount of the loss?
Breach of contract disputes are the most common lawsuits in today’s courts and can prove particularly harmful to SMEs. Knowing your rights, legal options and potential remedies can make all the difference.
What Is A Breach Of Contract?
A breach of contract is the failure of any party to fulfil the terms of a contract without a lawful excuse. However, not every breach is created equal.
The four main types of contract breach are:
This describes a partial breach. For argument’s sake let’s say you hire a friend to build a website for your business. Although they get the site completed by the deadline, there are still a few errors. You may not be able to sue your friend for actual performance, as they met the deadline, but you do have the option to sue for monetary damages or have the ability to force them to make corrections.
This describes a breach so serious it allows the other party to not only sue for damages but also terminate the performance of the agreement. Let’s say you’ve just signed a new lease for your business. However, when you show up on moving day you find out that someone else is still using it as their workspace. The landlord is in fundamental breach of the lease contract. Here, you could sue for damages and to make him provide the space to you under the original agreement.
This describes a failure of either party to perform one’s duties as set out in the contract and is considered one of the most serious. If a serious clause has been breached it allows the claimant to seek damages. An example of this would be if a client did not pay a contractor after the work has been completed. The contractor was supposed to collect his payment when he finished the job. He did his part, but the client didn’t follow through with his end of the deal.
- Anticipatory Breach
This describes the situation when one person is able to say the contract is broken before it is actually breached. A party is able to deem an anticipatory breach when it becomes clear that other parties to the contract will not execute their end of the deal within a specific timeframe. Let’s say you hire a consultant to complete a project by October 1. By September 30th they still haven’t started. You could try to collect monetary damage because there’s no way they could get the job done in time.
Typical Examples Of Breaches Of Contract
- Failure to provide services on time or in full
- Defective work or goods
- Breaches of warranties
How To Prove A Breach Of Contract?
Regardless of what kind of breach has taken place, every legal argument takes off from establishing a few things. You must verify:
- The contract existed
- The contract was broken
- You incurred losses
- The person or business you’re challenging was responsible for these losses
Writing A Before Action Breach Of Contract Letter
Before commencing legal action, one of the first steps in dealing with a breach is to write a letter. The Before Action letter is the opening act in many legal proceedings and lays out your claim. This letter is often an extremely cost-effective way to resolve disputes. In fact, in a majority of cases, a well-written Before Action letter can resolve the matter. You must avoid errors, inconsistencies and ensure the letter itself is thorough. It is HIGHLY advised this letter is written by a specialist lawyer.
Every Breach Of Contract Letter Should Include:
- Include details of the breach of contract
Traditionally, it is acceptable to ask the party to remedy the breach within a reasonable time frame. In order to comply with the Civil Procedure Rules, a period of at least 14 days must be given to remedy the breach.
- Include claims of interest
Some parties wish to charge interest on amounts they’re owed. If you wish to include this, you must reference the interest rate stated in the contract or the applicable interest rate set by the Court Service.
- Comply with the pre-action protocol
The Pre-action Protocol is a set of guidelines referring to how parties should act before starting legal action. Before issuing the letter, you should ensure that it complies with the protocol as courts may impose penalties if it is not.
- Your claim
Here you must lay out the contract you entered into and the consideration for entering into the contract. After this, you detail the breach and the losses you’ve incurred as a result of the breach.
- Further legal action
You must highlight a lack of action on their part to remedy the breach will result in the start of legal proceedings.
The Legal Remedies
Some of the potential remedies you are able to pursue may be explicitly excluded in the contract. Before initiating court proceedings it is worth having a look at the initial contractual agreement to see what options are open to you.
Some of the most common monetary remedies include:
- Compensatory damages
The defendant pays money to reimburse costs and compensates for any losses incurred.
- Consequential and incidental damages
This type of remedy is awarded when everyone involved was aware of potential losses in case of a breach when the contract was still signed or accepted.
- Liquidated damages
If a number is specified in the contract then this type of reward gives the claimant this amount.
- Punitive damages
This is a rare type of damages to be granted in breach of contract cases. Traditionally they’re awarded for offensive behaviour or actions from the defendant.
Sometimes there is more for a court to consider than just money. These cases tend to be resolved by one of three ways:
- Specific performance:
Here a court will order for each party to the contract to follow through with the original agreement.
Here a court may order the contract is cancelled and any money is returned. It basically makes it seem like the matter never took place in the first place.
This is a do-over. The contract will be re-written to better reflect the original intentions of entering into the agreement.
Nowadays parties can agree to have a mediator review a contract dispute or may agree to binding arbitration. These out-of-court options are two methods of “alternative dispute resolution.”
In England and Wales, the victim of the breach has a responsibility or ‘duty to mitigate loss’. Basically, the victim of the breach should not actively make the situation worse.
They should take reasonable steps to ensure the loss does not increase. Any calculation of damages aims to put the innocent party in the same position as if the contract had been properly performed, i.e. if the victim has benefited through the breach of contract then the benefit will likely reduce damages owed.
Although the duty to mitigate loss is a voluntary duty, courts can take into account the fact some losses the ‘breacher’ of the contract may not be responsible for. If you want the highest reward possible you need to ensure you have prevented losses from being exacerbated by your own actions or lack of actions.
If you need any further details or advice relating to a breach of contract, book a call with our legal team and we’ll guide you through every stage of your legal needs.