The Fundamentals Of Breach Of Contract
A well-drafted contract can often prevent or resolve a dispute before the parties take their dispute to court. But when both parties cannot resolve their issues, and resort to litigation, it is important to understand the rules governing the breach of contract claim.
While some breaches are avoidable with detailed negotiations and well-drafted document, others are not. Poorly drafted documents and oral contracts frequently lead to disputes. It is always in your best interest to draft clear and comprehensive written contracts.
Definition Of Breach Of Contract
A contract is a valid and binding legal agreement, which could be made orally or in writing. A breach of contract occurs when one party fails to perform his or her obligations under the contract, without lawful excuse.
The pitfalls that many individuals face is that we go about our day without knowing that in one way or another, we are constantly living in a ‘contractual’ world. Some simple examples would be the way we go about our employment, the way we deal with goods and services and/or companies and even between family and friends.
Breach Or No Breach?
What happens when there is a valid and binding legal contract and you ‘think’ someone has breached a contract or you ‘think’ you have breached a contract?
The first question to ask brings us back to the definition of a breach of contract, which is when one party fails to perform his or her obligations under the contract, “without lawful excuse”.
Thus, a breach of contract, in general, could be said to constitute two (2) crucial elements:
- Defaulting party must have failed to perform a contractual obligation; and
- There must be no lawful excuse for the defaulting’s party’s failure to perform.
“Lawful Excuse”
Therefore, there may not be a breach of contract under the following circumstances (i.e. lawful excuse):
1 – Discharge By Agreement
As parties are free to agree to bind themselves to a contract, they are free to negotiate with each other to release themselves from the obligations of that contract. Some examples of these are in the contracts themselves such as notice of termination or entering into a subsequent contract of release thereby releasing parties from their obligations.
There are also situations where the obligation which has not been performed is conditional upon the prior occurrence of certain specified events.
Alternatively, parties may contractually provide for non-performance of contractual obligations following certain events not amounting to a breach, for example, in the form of a ‘force majeure’ clause.
2 – Discharge By Frustration
Where failure of performance of contractual obligations lies in events beyond the control of the contracting parties and which neither party could have reasonably foreseen, the contract is said to be ‘frustrated’.
Examples include destruction of the subject matter of the contract or even death. However, there are statutory rules or law which may govern such ‘frustrated’ contracts.
These are some limited scenarios which may constitute a lawful excuse. In the absence of a lawful excuse, failure to perform contractual obligations usually results in a breach of contract, which may carry consequences.
“Failure To Perform A Contractual Obligation”
A contract obligation is usually written down in the contract and it is known as an express term.
Before determining if there is a failure to perform the obligation, one must first know what the express term required the defaulting party to do or not do. Through contractual interpretation, the court ascertains the meaning of the express term as intended by the contracting parties.
Once the meaning of the express term is ascertained, the issue of whether there has been a failure to perform the obligation can then be determined based on the evidence available.
Express terms may include late performance, defective performance or simply not performing what the party has contracted to do.
Aside from express terms, there are other sources of contractual obligations such as Acts of Parliament (e.g. Sale of Goods Act) or Implied terms. Implied terms refer to terms that are “read” into the contract by the Court to fill a gap in the contract.
Remedies For Breach Of Contract
1 – Monetary Compensation
The common remedy for a breach of contract is of course monetary compensation, also known as damages. In most circumstances, a breach entitles the innocent party to damages for losses suffered as a result of the breach.
However, there are laws governing damages such as remoteness of the damage, whether the innocent party has taken reasonable steps to mitigate their losses and whether parties are claiming for reliance loss or expectation loss.
2 – Contract Termination
A breach of contract may also entitle the innocent party to terminate the contract. However, unlike damages, not every breach of contract entitles the innocent party to terminate the contract.
The right of termination depends on whether how the term that was breached is classified by law or whether certain situations provided by the Courts when met, allows the innocent party to terminate the contract.
Hence, it is important for innocent parties to note that termination is not an automatic entitlement and jumping the gun may land you in more legal troubles.
3 – Specific Performance
Another remedy used in certain circumstances is specific performance. As the name suggests, it requires the defaulting party to perform the contractual obligations. This remedy is usually implemented in scenarios where monetary compensation is an insufficient or inadequate remedy, common in disputes relating to property or land.
To Sue Or Not To Sue?
This is is the all-important question all innocent parties face. To put it simply, the decision is yours. Nevertheless, as this article suggests, there are multiple complex factors to process and understand before commencing legal action.
Thus, it is important to consult a lawyer when facing a legal issue such as breach of contract.
