A breach of contract is a material non-compliance with the terms of a legally binding contract.
Enforcement of contracts is a necessary part of any legally binding contract: each party expects to obtain the benefit of the deal agreed by the contract.
If a party doesn't receive the benefit of the contract by reason of the other party's breach, the innocent party has a legal right to recover compensation for their loss in damages.
Business agreements are the centrepiece of commerce. Without contracts, there is no business.
It pays to know how they work, and when they’re breached.
Breach of Contract Claims
There are a whole lot of moving parts when it comes to suing for breach of contract claims and obtaining a remedy.
When you're on the other side - in breach of contract and receiving threats of litigation - taking advantage of mistakes by your counterpart can be fatal to their claim. Most of the time, the windows of opportunity don't last for long.
It's actually quite easy to mess up a perfectly good legal claim for damages for breach of contract. Some businesses breaching contracts and leaving the innocent party in the lurch count on it.
Remedies for Breach of Contract
In contract law, a breach of contract gives rise to:
- a right to monetary compensation, that is, damages for failures to perform the contract
- if it's serious enough, the right to terminate the contract
- in some cases, specific performance of the contract, or an injunction to restrain further breaches of contract.
Even then though, the terms of a contract can seriously limit or expand the rights of an innocent party to damages and the other remedies which might be available.
When that happens, remedies that:
- would have been available are excluded, and
- might not have been available are accessible to the innocent party.
The consequences of a breach and the consequences of termination are quite different things. The consequences of a breach depends on the terms of contract itself and what the innocent party does when there is a breach of contract.
Breach of Contract Claims: How it Works
- What is a Legally Binding Contract?
- A closer look: Breach of Contract
- Types of Terms of Contracts that can be breached
- Consequences of Breach of Contract
- What's a repudiatory breach of contract?
- Anticipatory Repudiatory breach of contract
- Assessing a repudiatory breach
- What happens after a repudiatory breach?
- Affirmation and Repudiatory Breaches
- Consequences of Affirmation
- Consequences of Termination in contract law
- Alternatives to Repudiatory Breach
- Material Breach
- Fundamental Breach
- Substantial Breach
- Serious Breach
- What about "any breach" of contract?
- What if there's no termination clause at all?
- Remedies for Breach of Contract
- Changes to availability of Remedies (in the contract itself)
- conditions subsequent
- Limitations and Exclusions of Liability
- Sole or Exclusive Remedies
- Liquidated Damages
- Retention of Title
- Time Limitations
What is a Legally Binding Contract?
A contract is an agreement recognised by law as legally binding. Because it is legally binding, legal rights arise if it is breached, and the terms are enforceable against the party in breach.
A legally binding contract is formed when all of these 5 elements are satisfied:
- Offer: One party makes an offer
- Acceptance: The other party accepts the offer
- Consideration: Each party provides consideration to the other. Consideration can be:
- a promise to pay money
- a promise to do something
- a promise not to do something, or
- promise to provide something else of value. That doesn’t mean it needs to be valuable. £1.00 could be valuable consideration. And it doesn't have to be money.
- Intention to be legally bound: Both parties have an intention to be legally bound by the agreement (which is proposed by the offer, and then accepted)
- The parties have contractual capacity: The parties are legal entities recognised by law, such as companies, limited liability partnerships and individuals of at least 18 years of age.
There really is no definition of contract, other than it is (1) an agreement, (2) which is legally binding. A agreement becomes legally binding when it satisfies the criterion listed above. There's more on formation of contracts here.
The form of the contract is irrelevant, other than where statutory requirements dictate that to be enforceable, it must be satisfy named prerequisites. When statute law does have requirements, they are usually that the agreement is recorded in written form, and signed by the one or both of the parties.
For example, transfers of land must be in writing and signed by the parties; assignments of intellectual property and exclusive licences must be signed by the assignor of the property.
You can get a top-up on the basic principles of contract law over here if you need them.
What are the elements of a breach of contract?
- legally binding contract, and
- non-compliance with one of the legally binding terms of the contract.
There are two possibilities for breach of a term. It could be:
- an express term, or
- an implied term of the contract.
A closer look: Breach of Contract
Each party to a contract governed by English law is entitled to "perfect performance" of the terms of the contract by the other party.
A party will be in breach of the contract - or break the contract - when they fail to perfectly perform one of the warranties or conditions (ie the terms of the contract) they have promised to perform.
The most common forms of breaches of contract are:
- defective performance: where the contract is partly performed but not to the standard required by the contract
- delayed performance: where a party does not perform on time, in accordance with the time frames required by the contract
- complete non-performance: a party does not do anything to perform the contract.
The consequences of a breach of contract depends upon the type of term which has been broken.
Types of Breach of Contract
If it is a breach of:
- condition: the innocent party may claim damages for the breach, as well as terminate the contract. This is known as a "repudiatory breach of contract".
Conditions are sometimes referred to as "fundamental terms". They are the same thing.
- warranty: the innocent party may claim damages caused to them by the breach of contract. They are not entitled to terminate the contract.
- "innominate" or "intermediate" term: whether the contract can be terminated depends upon the nature and seriousness of the consequences of breach of the term. "Innominate" and "intermediate" are interchangeable. They’re referring to the same thing.
An innominate term can be a breach of warranty or a breach of a condition. It depends on the terms of the contract and the circumstances of the case. More on that below.
How do you tell which is which?
Differences between conditions, warranties and innominate terms
Why is the difference important?
When you have a breach of condition, it doesn’t matter what the consequences of the breach might be. You can terminate the contract: the gravity or seriousness of the breach and/or the consequences are irrelevant.
That's not the case with warranties. No right to terminate arises. Only a claim for damages.
If it’s an innominate term, whether you can terminate or not … depends. It depends the seriousness of the consequences of the breach of contract.
But before that, here’s an example of an innominate term.
This may come as a surprise:
Paying punctually under a commercial contract is an innominate term, not a condition unless special circumstances are satisfied.
That’s because time is not of the essence in respect of obligations to pay unless it’s expressly stated, or it’s drawn from the circumstances of the contract.
And that's rare. They usually aren’t in commercial and business contracts.
In the meantime, let’s look at the differences between between the types of terms.
The starting point is that a term is innominate unless it is clear that it is intended to be a condition or a warranty.
That’s the default position: it’s an innominate term unless you can show otherwise.
Most of the time, it’s hard to tell.
So it makes sense to know what conditions and warranties actually are first. You’ll know what innominate terms aren’t.
Conditions are the most important terms of a contract. They are major ones.
But then, there’s no fixed definition of what amounts to a condition.
However, conditions of contracts are:
- "essential stipulations" which the party guarantees will be performed. Performance of the term is essential to compliance with the contract
- said to "go to the root of the contract".
That is, they are terms that were essential for the contract to be formed in the first place.
The expression "condition" describes the seriousness required to give rise to a right to terminate for breach of the condition.
You’ll get a better sense of the expression in a moment.
- breach of the contractual term would frustrate the commercial purpose of the contract for one of the parties.
It comes to this:
The innocent party would lose substantially the whole benefit they expected to derive from the contract.
Conditions will vary from contract to contract. The sort of factors which point towards a term being a condition include:
- Whether the innocent party thought the term would be strictly complied with
- The likely effects of any breach of the term
- How important it was to the innocent party
A series of legal factors have been developed over time to help decide when a term of a contract is a condition or not.
Breaches of conditions are so serious, that it justifies the innocent party ending the contract altogether. When the innocent party ends or cancels the contract, it is known as "termination" of the contract: it's one of the 4 ways to end a contract.
So conditions are a fundamental part of the deal that was agreed by the contract.
Next up, warranties.
Warranties are lesser or minor terms of the contract. They're collateral to the main purpose of the contract.
This lesser status of importance means the innocent party can only claim damages when a warranty is breached, but not terminate the contract. That's the technical meaning of a warranty in law: it's a term of the contract which does not entitle the innocent party to terminate for its breach.
The definition of a warranty is a negative definition: if the term of the contract is not a condition and not an innominate term, it's a warranty.
The most frequent type of term found in contracts are innominate terms.
Innominate terms are also known as "intermediate" terms.
They are different to conditions and warranties.
Whether or not a party can terminate the contract depends on the seriousness of the consequences of the breach of the term. Not the status or importance of the term itself (as with warranties and conditions).
The seriousness of the breach is assessed at the time of the termination, having regard for:
- what happened leading up to the breach of the term, and
- what's likely to happen next, if the contract is not terminated.
Business Case Example: Innominate Term - Payment Clause
A contractor was entitled to be paid £50 per hour for consultancy services, plus expenses. He paid expenses out of his own pocket and was reimbursed by the company.
The contract was the contractor’s only contract. It was the only means of support beyond the use of savings. Both parties knew it. The contract was quite important to the contractor.
None of the contractor's invoices were paid on time. And delays in payment increased over time. Payments were made between 1 and 9 months after their due date.
The contractor knew that his work for the company was being paid for on time (by the ultimate customer). He made it clear he knew that he was being used as an overdraft facility.
When the contractor moved to another company, the company paid up, so that it could claim on a restrictive covenant.
The judge said he suspected that the consultant was seen as a soft target by the company.
The breaches of payment provisions were held to be substantial, persistent and ... cynical. It was a repudiatory breach.
In this illustration, it goes the other way:
The customer paid its supplier for facilities services late on a number of occasions. Payment was required within 90 days of invoice.
The delays to payment in full were relatively short: between 2 and 20 days. On average, 8 days a piece. The reason for the lateness was known to the suppliers: the purchasers were paying from the receipts made by onward sale of the goods delivered.
The suppliers well knew and understood the reasons why payments were late.
The supplier also had no doubt that they would receive payment in full. The loss suffered by the suppliers was marginal, and recoverable.
That belief (that the they would be paid in full) was one of several factors taken into account to decide that the late payments didn’t add up to a repudiation of the contract.
Consequences of Breach of Contract
When the defaulting party does not comply with the contract, the innocent party can terminate for:
- breach of a condition of the contract, which automatically qualifies as a repudiatory breach
- repudiatory breach: breach of an innominate term where the consequences are so serious that it justifies ending the contract for the bad conduct
- anticipatory repudiatory breach: that is, where the defaulting party makes it clear to the innocent party that it:
- will not perform the contract at all
- will commit a breach of a condition in the future, or
- will comment a breach of an innominate term in the future,
and the consequences will be so serious that it will justify termination.
(You can also have an anticipatory breach of warranty. You just can’t terminate for it.)
Anticipatory breaches are also called "renunciatory breaches" of contract. It's different lingo for the same thing.
When a repudiatory or anticipatory breach takes place, it is said to be a "repudiation of the contract".
Different consequences can follow from a breach of contract:
- a breach of warranty limits the innocent party to claim damages, that is a legal obligation to pay money for the loss caused by the breach
- the contract itself may set out the potential consequences for any breach, or a particular type or class of breach
- the remedies available to the innocent party may be limited or extended by the term of the contract itself.
What's a repudiatory breach of contract?
The most authoritative and frequently applied test to ascertain whether a repudiatory breach has taken place is that "the breach must go to the root of the contract".
It applies to breaches of innominate terms (and it's assumed for conditions of contracts).
But what does it mean?
The expression "the breach must go to the root of the contract" describes a breach which takes account of:
- the nature of the contract
- the legal relationship the contract creates
- the nature of the term breached
- the kind and degree of the breach, and
- consequences of the breach for the other party.
Examples of breaches which go "to the root of the contract" include where the defaulting party:
- indicates an intention to abandon and altogether refuse performance of the contract
- shows an intention no longer to be bound by the contract
- intends in fact to fulfil the contract, but may be determined to do so only in a manner substantially inconsistent with its obligations
- intends to deprive the innocent party of substantially the whole benefit that the innocent party should obtain from the further performance of the defaulting party's own contractual undertakings
- deprives the innocent party of a substantial part of the benefit to which it is entitled under the contract, so that the consequences of the breach would be unfair to the innocent party to hold it to the contract and leave the innocent party to the remedy of damages.
But these are only a few of the ways which courts measure the seriousness of a breach of contract. There are many more.
Why are there so many tests for breach?
Cases for breach of contract are so fact-sensitive that some tests are better suited to particular types of cases and particular types of breaches.
Basically, the different tests suit different types of cases.
So what’s the magic potion to work it out?
Courts decided long ago that it would be a mistake to formulate a fixed rule or formula to decide whether a breach was repudiatory or not.
The law uses these open-textured expressions like those listed above to decide whether the innocent party can argue successfully that they are justified to terminate the contract.
So the formula for assessing breaches of contract is set out in the descriptive tests above.
What does a repudiatory breach look like?
Examples of Repudiatory Breach of Contract
These could well be repudiatory breaches. The outcome also depends on the other factors mentioned above, such as the written terms of the contract:
- Guaranteed overnight courier services:
The implication here is that time for delivery goes to the essence of the contract. If package is not delivered overnight, without any intervening events outside the control of the courier, it's probably a repudiatory breach
- Website hosting company says that it has a 99.8% up-time per month:
Your website goes down for 5 continuous days
- You order a red dress from a dressmaker. You specified the colour. You receive a blue dress
- Internet service provider: The specification of the minimum bandwidth available at any given time is not met
- Supplier of steel: You order 40 foot lengths of steel from a supplier of steel. They deliver 10 foot lengths.
- Phone supplier: You order an Android phone, and you receive an Apple phone.
Anticipatory Breach of Contract
Conduct renounces a contract if it shows an intention to commit a repudiatory breach. The party doesn’t intend to perform their future contract obligations when they fall due.
So if before the time arrives to perform, a contracting party expresses an intention to break the contract, they commit an anticipatory breach.
When that happens, the innocent party is entitled to jump first, and terminate the contract.
It’s not limited though to situations where a defaulting party says that they intend to breach the contract. It also applies:
- when the defaulting party disables itself from performing an obligation which must be performed in the future; and even where
- the obligation to be performed at a future date is a contingent obligation.
The communication of the intention may be by words, writing or by conduct.
Examples of Anticipatory Breach
Showing the intention that a party no longer considers themselves bound by the contract would probably be satisfied by circumstances such as:
- Denying access to property required for the innocent party to perform the contract
- A supplier saying that goods won’t be supplied when the time to deliver goods arrives
- A party becomes unable or incapable of performing the contract, despite genuinely saying, "I want to perform it", or "I would like to perform it but cannot".
These expressions translate in law to "I will not perform"
- A party says that it intends to perform the contract in a way inconsistent with the terms of the contract
- A party wishes to impose additional terms on performance, where there is no legal entitlement to do so. That is, the additional terms don't form part of the contractual relationship.
In one case, the purchaser of goods agreed to pay cash on delivery of the goods.
After a few deliveries, the purchaser said that in future, it would only pay for the product, on delivery of the next batch of product.
Basically, the purchaser tried to convert a cash transaction into a credit transaction... after the (legally binding) contract had been agreed.
That was an attempt to alter the substance of the agreement, and a repudiatory breach.
What are the legal rights for anticipatory breach?
The threat not to perform the contract must be sufficiently serious.
Threats to breach a warranty in the future will leave the innocent party with a claim damages for the expected breach (if it materialises), rather than being entitled to terminate.
Threats or behaviour which go to the conditions of the contract give rise to ... (wait for it) a "repudiatory anticipatory breach of contract". When that happens, the innocent party will be entitled to:
Alternatively, the innocent party may choose to wait for the time for performance to arrive. That is, wait for the defaulting party to actually default on the contract.
- If the defaulting party does not perform, the innocent may elect to terminate the contract at that time, and sue for damages.
- This provides the defaulting party an opportunity to change position in the intervening period, and perform the contract when it is required to.
- If the party threatening breach does perform with the terms of the contract, the right to terminate is lost. The contract continues in force, as if there had been no threat of the anticipatory breach.
Assessing a repudiatory breach
To decide whether it is a repudiatory breach, courts take into account a host of factors:
- the nature and effect of the breach
- the effect of the breach, on the facts: the difference between promised performance and the performance which in fact occurred
- the parties' knowledge about the likely effect of a breach.
This test factors in the overall assessment could be the likely future events, judged by reference to the facts as they stood at the date of repudiation.
- If it does amount to a repudiatory breach, the innocent party is entitled to terminate.
- If it doesn’t, it is treated in the same way as a warranty and the innocent party has no right to terminate and can only sue for damages.
Cumulative Effect of several breaches of contract
Let’s say you have a series of minor breach of contract, whether of warranties or innominate terms. Do they all add up to a repudiatory breach?
The cumulative effect of the breaches needs to be serious enough to justify the innocent party to bring the contract to a premature end. "Serious" in this context means severe.
The history and accumulation of past breaches paints the picture for to show what might or is likely to happen in the future.
When deciding whether or not a contract has been breached and whether it is entitled to terminate, the innocent party does well to:
- identify the precise term(s) of the contract which the defaulting party has not complied with, and
- have a clear assessment of why the events amount to a breach of contract, and
- identify when, where and how the defaulting party was in breach in each case.
Doing so reduces the scope of contract disputes.
What happens after a repudiatory breach?
Acceptance of Repudiatory Breach
To terminate the contract, in the vast majority of cases, the innocent party must tell the defaulting party that it "accepts" their repudiatory breach.
This "acceptance" of the repudiatory breach:
- must be communicated clearly and unequivocally
- doesn’t require any particular form.
Really, all the innocent party needs to do is say the contract is at an end. Communication may be by behaviour. In some cases, not responding to correspondence has been sufficient.
It's the intention to treat the contract as discharged that needs to be communicated: ie, it’s at an end.
It’s pretty stunning how often it isn’t done. Situations can complicate unnecessarily for it.
Not accepting Repudiatory Breach
Not "accepting" the breach means the contract continues in force for the benefit of the defaulting party and innocent party alike.
Each party continues to be bound by their contractual obligations. However, the innocent party retains the right to claim damages for the breach.
Inactivity or acquiescence does not usually amount to acceptance of a repudiatory breach.
But then, there’s no rule of law that says the innocent party must accept a repudiatory breach and terminate.
After all, the innocent party may not wish to bring the contract to an end. For instance, the innocent party may want to apply for specific performance of the contract – to force the defaulting party to perform the contract.
But it’s not exercising the right to do so (by thinking that it happens automatically) that can cause serious, serious problems and complexity for the innocent party, and lead to further contract disputes.
Let me explain.
Affirmation and Repudiatory breaches
There should be no significant delay after the time that the innocent party becomes aware of the breach and communication of termination. If that's what the innocent party wants to do.
The innocent party can't affirm a contract where they have knowledge of the facts which give rise to the repudiatory breach. If you don’t know about the events that allow you to terminate, you can’t affirm the contract.
A tenant of business premises failed to pay rent on time. That failure gave the landlord the right to terminate the lease.
The tenant ended up paying the rent, and the landlord accepted the payment. Afterwards, the landlord purported to exercise the right to terminate.
The landlord affirmed the lease by accepting the rent.
Accepting the rent was an unequivocal affirmation of the continuation of the lease. The lease was affirmed on the subsequent payment date and operated to waive the right to terminate altogether.
Accordingly, when the innocent party doesn't take any steps to accept the breach (or by conduct), and continues with the contract they are likely to be taken to 'affirm' the contract.
That choice is known as an "election": the innocent party "elected" to continue the contract. It chose not to accept the repudiatory breach rather than end it.
But then there are cases which say that delay accepting the breach of contract is an implied affirmation of the contract.
When is too long to wait?
There is that period of time between the repudiatory breach and potential affirmation of the contract.
If the innocent does nothing for too long, there must come a time when the law will deem the innocent party as having affirmed.
It’s a good idea to expressly reserve your rights to treat the contract as repudiated, so that it is clear that your behaviour does not affirm the contract. In most it helps, but it may not be effective. That's because some acts are seen as affirming contracts, and can't be considered as anything else. Such as a landlord accepting late rent under a lease (see above).
During that period of time, the innocent party has a chance to make their mind up whether to "accept" the breach and terminate, or "not accept" the breach and allow the contract to continue.
During this period, the contract continues in force.
Also, events may develop during this period. Such as:
the innocent party puts themselves in repudiatory breach of contract
If that happens, the previously defaulting party can terminate on the (previously) innocent party – and can claim damages for the (previously innocent) party’s breach of contract.
For risk management purposes, it may be simpler:
- to make an election as soon as possible, to maintain control of the situation, and
- for the innocent party remain hyper-cautious to not place themselves in breach of contract during that brief period.
Otherwise, real and valuable legal rights are easily lost. In that decision-making period, the defaulting party might fix or rectify their repudiatory breach: which means that the right to terminate is lost permanently for that breach.
Consequences of Affirmation
When a contract is affirmed:
- the right to terminate for the specific breach of contract can’t be recovered or got back.
It’s lost forever:
The innocent party can't then go back and change their mind at a later date and "un-affirm" the contract.
- a new or "fresh" repudiatory breach is needed to give rise to another right to terminate.
That is, the defaulting party needs to commit another repudiatory breach to give rise to a right to terminate.
One further point.
Some breaches of contract are considered "continuing breaches of contract".
For instance, say a contracting party says that it has power to license use of a software application. But it doesn’t have that power. Usually, that can’t be cured. It’s a continuing infringement by the licensor, and probably a continuing repudiatory breach that can't be affirmed.
Only in very limited cases do contracts terminate "automatically" for repudiatory breach. If the acceptance of repudiation is not communicated in time, most litigants argue that some sort of conduct on their part communicated the "acceptance".
Illustrations of affirmation:
- where the supplier is the innocent party: refusing to deliver goods or services
- where the customer is the innocent party: not accepting goods or services offered for delivery
- in both cases:
- refusing to communicate;
- saying the circumstances were such that the contract automatically came to an end.
Don’t be told terminating a contract is easy
It’s not. Unless you do it by agreement. In writing. Signed by the parties.
What makes terminating for breach of contract difficult - and risky - is this:
- It is not always clear from the facts or the terms of the contract whether the term is a condition or an innominate term.
- When it’s an innominate term, you often can’t tell with real certainty that the consequences of the breach are so serious that it would be considered by a court to be a repudiatory breach.
When it’s not
Let’s say you terminate a contract. You say there has been a repudiatory breach.
Then let’s say that it turns out that it wasn’t a repudiatory breach at all...
Here’s the Message:
By attempting to terminate the contract for a repudiatory breach – which isn't – is itself a repudiatory breach in contract law.
So as we say, terminating a contract before its time is a serious business.
Oh, and then the defaulting party will of course say…
"We weren’t in repudiatory breach and you are in repudiatory breach yourself.
We're entitled to terminate and claim damages and if you don’t within [a short space of time] [do this], [we'll do this legally unpleasant thing] …"
What they’re doing is setting up a counterclaim – a court claim to make against you, if you make a court claim against them.
The better way is to be sure of your ground. Do the job properly. Avoid the counterclaim arguments. Or minimise your business's exposure so much that the counterclaim arguments sound unreal and far-fetched. Sometimes, that’s a "win" in the law.
You should to be sure of your ground before you start making allegations of repudiatory breach. Or have good reason to take the risk.
Consequences of Termination in Contract Law
Breaches of contract usually result in in loss of money, property or services to the innocent party.
But just because a contract terminates doesn’t mean the entire legal relationship is at an end.
It actually continues in part.
When a contract is terminated for repudiatory breach:
- Each party’s legal right to have the contract performed by the other party comes to an end. Neither the innocent party or the defaulting party is required to perform contractual obligations which remain unperformed.
For example, a buyer is not required to accept goods which a supplier tries to continue to supply. If the buyer does accept the goods, the goods would probably be accepted under a fresh contract (of undetermined terms).
- Neither party is obligated to do anything specified in the contract, with minor exceptions.
In business contracts, "Survival of Terms clauses" state which provisions continue in force after the contract ends. These usually express the intention that confidential information, indemnities, limitations of liability, amongst others, are to continue to force.
The general law applies to continue terms of the contract which would be reasonably supposed to continue after termination: such as rights to payment accrued during the contract (ie before termination).
- The legal right to performance (which ends on termination) transforms into a right to sue for damages.
Damages is the right to recover monetary compensation for financial caused to the innocent party by the breach of contract.
At termination, there is no legal right to have the contract performed, because it has ended.
The transformation of the legal right from performance to damages means that the innocent party can recover what they expected to receive under the terms of the contract.
What is the measure of damages? How do you calculate it?
In short form: it's the amount that the innocent party is worse off, than it would have been, if the defaulting party had carried out the contract properly
- The innocent party can chose between two remedies: a claim damages or an account of profits as the measure compensation to be paid.
An account of profits is calculated differently to damages. Damages are usually the greater sum, due to the rules of law involved.
- Unconditional Rights continue: The legal rights under the contract which were acquired "unconditionally" during the contract continue.
For example, if ownership in say, a car was transferred as part of the contract - the car remains the property of the party which received ownership. That part of the transaction is not "undone".
But then, the terms and conditions of the contract can have a real impact on the consequences which follow from a breach.
What about late payments in business contracts?
Late Payments: Employment Contracts
The truth is that late payment is not always a repudiatory breach of contract. Even in contracts of employment.
Payment clauses are in commercial contracts by default innominate terms, unless the contract says otherwise.
Whether it is or not depends on the seriousness of the breaches on the particular facts of the case.
But then, payments under employment contracts have elevated importance in contrast to business to business contracts: Cantor Fitzgerald v Callaghan & Others  ICR.
Whether the failure to pay salary or wages is a repudiatory breach depends on a series of factors. They include whether:
- it is a temporary fault, say failure of IT systems, an accounting mistake, due to illness, accident or other unexpected events.
- late payment is deliberate
- the failure or delay in payment were repeated, persistent, or unexplained, or worse: cynical.
Courts examine the impact of the breaches in the context of the transaction as a whole in order to decide whether breaches are repudiatory.
When will a term be a condition of a contract?
In a time honoured judgment, Bentsen v. Taylor, Sons & Co. (No.2)  2 QB 274, it was said:
There is no way of deciding that question except by looking at the contract in the light of the surrounding circumstances, and then making up one's mind whether the intention of the parties, as gathered from the contract itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability
It’s in effect a value judgment about the commercial significance of the term in question.
According to C21 London Estates Limited v Maurice Macneill Iona (2017), a term will be a condition of a contract when:
- legislation states that the term will be a condition
- case law says that the type of term will be a "condition"
- the contract itself describes it as a "condition", on a correct reading of the contract
- the innocent party may terminate the contract for breach of the term, no matter what the factual consequences
- it’s intended to operate as a condition as a matter of interpretation of the contract.
They’re the main ones.
But there are other potential factors too, such as:
- whether the innocent party thought the term would be strictly complied with
- the interplay between the term and the other provisions of the contract
- the likely effects of breach of the term
- whether the innocent party would be adequately compensated for breach of the term
- the nature of the contract in in question
- the nature of the subject matter of the contract
- the nature of the term and the obligation which it creates.
Sound complicated? That's because it is....
Alternatives to Repudiatory Breach
You might encounter different phases in business contracts:
And then you have contract which say parties may terminate for "any breach of contract".
Why does it matter?
These phrases may operate to change the standard of breach required to terminate contracts. The alternative wording appears in clauses such as this:
Either party may terminate this Agreement without liability to the other immediately on giving notice to the other if the other party commits a [repudiatory / material / fundamental / substantial / serious / any] breach of any of the terms of this Agreement and (if such a breach is remediable) fails to remedy that breach within 30 days of that party being notified in writing of the breach.
Contracts are read on their own terms. If the contract says "material", "fundamental" or "substantial", that’s what’s required to amount to a breach of contract.
So how is this alternative wording interpreted?
What is a "Material Breach" of Contract?
"Material breach" is usually interpreted as something more serious than a breach of warranty, so it's a "substantial" breach of contract. However, it's less serious than a repudiatory breach: Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland  EWCA Civ 200.
To assess whether a breach is material, relevant factors include:
- the breaches that have taken place in the case
- how the innocent party was affected by the breach
- the contracting partner’s explanation of the breaches
- the express and implied terms of the agreement
- the consequences of holding the agreement:
- as ended, or
- as continuing.
A range of factors are taken into account by a court to decide whether a business agreement has been materially breached.
What is "Fundamental Breach" of Contract?
The term "fundamental breach" is a hangover from the law as it used to be.
"Fundamental breach" is usually read as a reference to a repudiatory breach of contract unless the contract expresses a different intention: Suisse Atlanique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale (1967).
So the breach must "go to the effect root of the contract". If not, it must at least affect the very substance of the contract, or frustrate the commercial purpose of the deal agreed in the contract.
- the surrounding circumstances of the contract, and
- how the term in question affects the transaction that the contract was intended to carry out.
What is a "Substantial Breach"?
A reference to a substantial breach of contract is likely to be taken as a reference to a repudiatory breach: Crane Co v Wittenborg A/S  All ER(D) 1487, or depending on the interpretation of the contract in the case something slightly less than a repudiatory breach.
What is a "Serious Breach"?
When judges refer to "serious breach" in the case law, their use of the term equates it to a repudiatory breach.
There's no question that there will be blue sky between a breach of warranty and a serious breach.
It will be required to be a significant breach of contract, and at least as significant as a material breach or a substantial breach.
What about "any breach" of contract?
Take a deep breath.
Historically, references to "any breach" have been interpreted as references to repudiatory breaches.
However subsequent decisions have found that "any breach" meant exactly that: ie a reference to a warranty or an innominate term (with regard for the effect of the breach of the innominate term).
How do you decide?
Business contracts are interpreted with business commonsense.
It usually doesn't make commercial sense for a party to terminate a contract for any breach, no matter how trivial: University of Wales v London College of Business Ltd  EWHC 1280.
It has been said "any breach" is less likely to literally mean "any breach" where:
- it's the sort of contract where a wide variety of minor breaches are likely
- the duration of the contract runs for many years
- the contract is for a high value over its term
- the consequences of many types of breaches are likely to be trivial
- commercial commonsense requires the contract to be understood as giving a right to terminate only for a serious breach
- there is an opportunity to remedy the "any breach"
- the consequences of reading the contract in that way results in an unreasonable, uncommercial and in total contradiction to the whole purpose of the contract.
Contracts are not read to have commercially unrealistic outcomes. They are interpreted so as not to defeat the commercial purpose of the contract.
But these days, Courts give contracts their literal meaning, provided that words used are unambiguous. If that approach to interpretation is adopted that means the words "any breach" in a contract will be read as literally, "any breach" and a reference to a warranty or innominate term.
What if there's no termination clause at all?
Don't be fooled.
Just because a contract doesn’t contain a termination clause doesn't necessarily prevent a party terminating the contract under the general law for repudiatory breach.
It is likely to require clear words to prevent a party from exercising their general law rights to terminate for repudiatory breach. That's an application of the clear words principle.
Remedies for Breach of Contract
Termination as a Remedy
Termination is itself a remedy for breach of contract.
When the defaulting party breaches the contract, the innocent party may have no intention of claiming damages, specific performance or any of the other remedies.
There's no compulsion or legal requirement to sue for damages.
Getting out of the contract itself is sometimes enough.
Aim of the Remedies for Breach
Other than termination, the remedies for breach of contract are designed to give effect to the deal or transaction which were voluntarily agreed by the parties by entering the contract.
The overarching policy of the law when deciding which remedies should be granted, is to substitute the performance agreed between the parties with such legal remedies as may be available to enforce what was agreed.
That way, the innocent party obtains a substituted performance of the contract - primarily and most often with a payment of damages.
But then if the contract has not been terminated, the remedies of specific performance or an injunction may be available to the innocent party to prevent future breach of contract.
First though, damages:
Damages: Basic Principles
The basic remedy for breach of contract is an award of damages. it's by far and away, the most common legal remedy for breach of contract.
Damages is the the legal right substituted for performance, when the defaulting party fails to perform the contract, as referred to above.
It’s not a discretionary remedy, as some remedies for breach of contact are.
It’s a right.
Courts often put it like this (this is from a case from 1848):
where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position as if the contract had been performed
And the amount of compensation for the breach of contract is:
the measure of damages is to be, as far as possible, that amount of money which will put the injured party in the same position he would have been in had he not sustained the wrong
Damages as a remedy is primarily a compensatory remedy.
Generally speaking, damages:
- is not a punitive remedy. The compensation awarded isn’t designed to punish the defaulting party for breach
- provides fair compensation for a wrong done to the claimant caused by the breach
In most cases, that measure of damages is the amount of money required to to put the innocent party into the position it would have been in, had the breach of contract not been committed.
"But For" test
To arrive at that result, courts:
reconstruct events which in fact never happened, but would have happened but for the wrong.
That’s the “but for” test: the innocent party is entitled to recover the loss suffered, “but for the breach”: the test for causation of loss.
This legal test embodies the way courts calculate the measure of damages for a breach of contract. In simple terms, you:
- assume that the breach didn’t take place
- work out what would have happened under the contract if the breach of contract did not take place, and was properly performed
- work out the lost profit to the innocent party which was caused by the breach of contract.
That way, the difference between:
- what did happen under the contract (as at the time of the breach), can be contrasted to
- would have happened if the breach had not taken place (and the contract was performed).
Beyond these fundamental rules of for awards of damages, calculations to arrive at the measure of damages can get complicated. The law of damages is a mature area of law, which arises from 100s of years of contested disputes.
The calculations involve factors designed to make award of damages fair to both parties, in the circumstances of the case:
- remoteness of damage: the damage must be reasonable, assessed as at the date of the contract
- mitigation of loss: the innocent party can’t just sit back and allow damage to accrue at the expense of the defaulting party. It must take reasonable steps to mitigate their loss. When the innocent party doesn't those damages won't be recoverable
- terms of the contract: what the contract itself says to exclude or limit liability to the other parties.
These days, written contracts can materially affect the remedies available, but also the amount of damages which can be claimed.
We come onto terms of contracts which affect recovery of damages below.
Injunctions and Specific Performance
An award of damages is assessed by reference to financial loss. It’s not always 'adequate' or sufficient as a remedy to compensate the innocent party for a breach of contract.
That’s when injunctions come into play to restrain further breaches of contract.
But injunctions aren't available when the innocent party terminates the contract for repudiatory breach: because termination brings the contract to an end.
So if there has been a breach of contract, and it hasn’t been terminated, the innocent party may prefer to continue the contract. For instance, the breach may cause:
- the innocent party to be in breach of other contracts,
- financial loss which is not easily calculated in damages, or
- other serious continuing damage to the business, such as continuing breaches of restrictive covenants.
It's this "inadequacy of damages" which underlies the court's power to grant injunctions and specific performance.
Injunctions: The Usual Form
On one classification, injunctions are either mandatory or prohibitive:
- prohibitory injunctions stop, restrain or prevent behaviour
- mandatory injunctions force or compel behaviour. As the name suggests, a person subject to a mandatory injunction must positively do something to avoid breaching the court order, rather than not do something
Courts prefer to make prohibitory injunctions. It leaves less doubt as to what the person needs to do to comply with the terms of the court order. It’s an important factor, because non-compliance with the court order may lead to a sanction for contempt of court. The possibilities include fines, sequestration (ie permanent confiscation) of property, custodial sentences, and perhaps a visit by the Tipstaff.
When a person is positively told to do something in a court order, all sorts of complaints can arise, including:
- whether the person did what was ordered properly
- whether the person did it in a way which wasn’t intended
And then doing the (specified) act itself may not have the intended outcome.
With a negative stipulation in a prohibitory injunction, it’s far easier to tell whether the order has been complied with or not: Did they do the prohibited act, or not?
In other words, courts take the view that it is better to stop a person from doing specified acts, rather than to force them to do specified acts where that is possible.
The Remedy of Specific Performance for Breach
Specific performance is a form of mandatory injunction.
Contractual obligations most often require a contracting party to positively do something, rather than refrain from doing something.
And that is the nature of most contractual obligations.
Specific performance compels a person to do the acts specified in the court order. Those acts are likely to mirror the contractual terms or will be designed to bring about performance of the contract.
Specific performance, like all injunctions are “discretionary” remedies.
They’re not available as of right, such as the right to damages.
To have a reasonable prospect of success obtaining specific performance, a judge must be satisfied that their discretion should be exercised in favour of the innocent party.
Where those factors not satisfied the remedy of specific performance will not be granted, but the innocent party will still have their right to recover damages for the breach.
Scope of Specific Performance
In summary, the remedy of specific performance:
- is a court order, usually endorsed with a penal notice
- has effect as a mandatory injunction to give effect to the contractual obligations which have been breached
- is designed to require the defaulting party to perform specific contractual obligation(s), to prevent breach(es) of the contract in the future
- will spell out precisely what performance is required of the defaulting party, to give the order effectiveness
This is because a person subject to a mandatory order may be punished by a contempt sanction ought to know with precision what is required to be done.
Availability of Specific Performance
Whether or not a court would be minded to award an injunction for specific performance depends on a series of factors.
In favour of granting specific performance are:
- Damages are likely to be difficult or impossible to calculate
- Damages are an unsuitable remedy on the facts of the case, in that the damages will not adequately do justice between the parties. It’s a strong indication that specific performance a suitable and appropriate remedy
- The breach involves unique property and there is no a readily available substitute, such as:
- intellectual property rights, whether protected by confidential information, copyright, design rights, patents or a trade mark
- unique products or custom-made products
- an overriding “balance of convenience” test weighs in favour of making the injunction.
Financial inability to do the work will not generally be a defence to a claim for specific performance
Restrictions to Availability of Specific Performance
Specific performance is not likely to be granted where:
- Damages Adequate: damages are seen as an adequate remedy.
Specific performance is seen as a “heavy handed nature of the enforcement mechanism”
Specific performance is a significant order for a court to make. If damages are seen to adequate compensate the party, the discretion to grant the remedy won't be exercised in favour of the innocent party
- Unwilling Parties: It isn’t desirable to order unwilling parties to work together, as such an order would interfere with the party’s personal liberty.
Contracts of personal service of consultants and employees are rarely enforced, unless there are exceptional circumstances are required. So specific performance isn't usually available if:
- it would require an employee to carry out work under a contract of employment
- it would require an employer to employ someone in whom they no longer had the trust and confidence
- Supervision: The contract would require:
- constant supervision of a contract by a court
- constant reference to the court to ensure performance of the contract, or
- repeated applications for rulings on compliance
There is a difference between constant superintendence by a court and the supervision of a final result (such as a building contract).
That’s not to say that just because the parties need to come back for further directions the remedy won’t be granted
- Hardship: Severe hardship would be caused to the defaulting party, such as where losses sustained by the defaulting party would be well in excess of the loss suffered by the innocent party
- Clean Hands: The innocent party has acted unconscionably, although not to the extent that he should be deprived of its legal rights (such as damages)
- Own Wrong: The remedy is sought to avoid a set-off which would be available in a claim for damages for their own breach.
For instance, the innocent party:
- acted unfairly in the performance of the contract, or
- induced the party in breach by misrepresentation to enter the contract, such as taking advantage of superior knowledge
- Want of consideration: a gratuitous contractual promise is relied on, whether by deed or nominal consideration
- Vague Contractual Terms: The contract is so vague that it cannot be enforced at all, because the obligation cannot be expressed precisely for a court order.
Changes to Availability of Remedies (by agreement)
A series of clauses and techniques may affect availability of remedies under a contract.
- Conditions Subsequent are express terms of contract which entitle a party to terminate when the specific conditions named in the contract are satisfied.
They usually appear in long term contracts, but can appear in any sort of contract.
If the defaulting party is in repudiatory breach, and has a condition subsequent available to them:
- they may be terminate the contract, and prevent damages which would accrue from increasing, by exercising that right to terminate
That also means that the right to terminate for repudiatory by the innocent party is lost. The innocent , party may retain its right to damages up to the point of termination.
The same applies when the defaulting party has a right available to terminate the contract at will (that is, an unconditional right to terminate).
- Limitations and Exclusions of Liability, as their title suggests, these provisions are aimed at limiting liability for damages:
- as a whole under the contract,
- for a specified period, usually for 12 months of the contract term, and/or
- for a specified event or series of events
Whether they're effective in any particular contract depends on a wide variety of factors, but most importantly:
- the terms of the clause itself, and
- the particular facts of the case
- Indemnities are freestanding contractual obligations which promise to pay the other party for damage suffered by the other.
The coverage to pay on an indemnity (depending on the terms of the indemnity):
- doesn't necessarily require a breach of contract, because it’s an express term promising to pay under the contract
- is usually (way) more extensive than what would be recovered by the law of damages.
In commercial contracts, indemnities are often given to support breaches of specified warranties such as infringement of third parties’ intellectual property rights and data protection legislation.
Whether it's a good idea to give an indemnity in the first place is ... another matter (most businesses don't once they know what they mean).
Indemnities introduce significant risk to a contracting party, especially when:
- the circumstances indemnified are outside the control of the party giving the indemnity
- the value that can be recovered under the indemnity is not restricted by limitation of liability clauses
- Set-offs, which reduce the sum payable by the defaulting party to the innocent party. It’s a “cross-claim” by the defendant (the defaulting party to the breach) against the claimant (the innocent party to the breach)
- Sole or Exclusive Remedies clauses limit the remedies for breach which would otherwise be able at general law by:
- excluding general law remedies which are available, altogether
- restricting damages for a specified breach to a formula (ie liquidated damages), and then excluding all other remedies
- Restricting remedies to those stated in the agreement such as:
- a refund of sums paid
- a reduction in sums payable
- replacing offending material at no cost. A classic example is material which infringes a third party’s intellectual property rights in the context of a software licence.
- Liquidated Damages set damages for breach to a pre-agreed amount in the contract itself. The pre-agreed amount can be fixed:
- to a specific sum for the specified breach, or
- by a formula.
The general intention of liquidated damages clauses is that:
- the parties (and a court) are saved the trouble of assessing the actual loss suffered by the breach
- the amount of compensation payable is fixed. It may be greater or less than the damage which was actually suffered
- they avoid entirely arguments as to the amount of compensation should be paid for the breach
- they minimise or avoid situations where specific types of breaches are repudiatory breaches
Liquidated damages clauses are unenforceable when they are properly characterised as penalty clauses.
- Retention of Title Clauses
Retention of title clauses create a security device, so that an unpaid seller can recover goods supplied if they’re not paid for by the buyer.
In contracts for delivery of goods, ownership of the goods passes to the buyer when they are delivered to the buyer. "Delivery" usually means received by the buyer, but it may be an earlier time.
That’s whether the goods are paid for or not.
This means that ownership of the goods has passed, the seller is owned money for the goods. The seller no longer owns the goods.
In ongoing supply agreements, some time can go on before non-payment amounts to a repudiatory breach, to give rise to a right to terminate the contract.
But then the seller would need to sue the buyer for the debt if the buyer refused to pay. Or even can’t pay.
Chasing debts through courts means spending money to get money which is already owed. And then there’s the time element of going through the court process for debt recovery ... more time without money for goods which have already been supplied.
It’s a drain on the business. Particularly when it’s unexpected.
But then, the buyer might never pay for the goods and go into liquidation, administrative receivership or administration. Basically, bankruptcy for companies.
After that, the seller may receive a small number of pence in the pound for the value of the goods which have been delivered. Often creditors get nothing.
With Retention of Title
Retention of title clauses change all that.
They change the default rules so that:
- ownership of the goods does not pass on delivery of the goods
- the seller retains ownership of the goods until the buyer has actually paid for the goods.
In this way, in a liquidation situation, the seller has better title (ie ownership rights) to the goods than a liquidator, administrator or administrative receiver.
The consequence is that the seller of the goods can get the goods back from the purchaser prior to payment.
That means that if a company does become insolvent, the seller:
- can recover the goods from the buyer when they haven’t paid for them
- does not need to sue the buyer for the value of the goods which is owed
- can demand the return of its own property, and if the contract says so perhaps enter onto premises of the buyer where the goods are stored and collect them if they haven't been paid for
In one sense, that makes Retention of Title Clauses in contracts worth the value of the goods which the seller is prepared to deliver to the buyer on credit.
There also referred to as "Romalpa" clauses. The first decision dealing with this sort of clause was Aluminium Industrie Vaasen BV v Romalpa Aluminium Limited (1976) .
- Time Limitations:
Usually the limitation period to sue under a 6 years and for deeds, 12 years from the date of the breach.
It’s set in the Limitation Act.
When legal proceedings are commenced outside the limitation period, an absolute defence is made available to the person being sued.
Time limitations written into contracts reduce the time within which claims may be made.
They're designed to shorten the statutory limitation period:
- to bar or extinguish any right of legal action for the breach; or
- deprive a party of a means of recourse (such as arbitration),
which would apply without them.
Contractually agreed time limitation clauses:
- may be subject to Unfair Contract Terms Act , where enforcement of liability under the contract is made subject to restrictive conditions , or excluding or restricting any right or remedy in respect of the liability
- may be subject to time limitations may be subject to the Misrepresentation Act
Signing Up to Contracts
Businesses are expected to know the legal effect of what they agree to in contracts.
Don’t have time to get caught up in the ins and outs of the legal complexities or not sure what you’re thinking is right?
One of our key skills as UK business lawyers is to convert the law into plain English and explain it as it applies to the facts of your case:
- Is it a breach of contract in UK law?
- What are the possible consequences of a breach of contract
- What remedies are available over and able damages and termination on the facts of the case?
- If a contract is terminated for breach, what are the chances it will come back to bite you? If so, how hard?
- Are there any other options?
- Will damages be payable? If so, how much?
- Should something/anything be done before you do what you’re thinking of doing?
- How much are you up for, for a breach of contract claim? What’s the damages award likely to be?
- Do you not quite get what is said in a letter you have received?
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