performance of contracts: contractual obligations in business law

In legally binding contracts, each party is entitled to expect the performance of the contractual obligations which have been agreed in the contract. That's the purpose of legally binding agreements. They’re the contract requirements.

Legal principles apply to performance of contracts, irrespective of the content or nature of the contract. It's that way because the law has a policy that business law should be predictable and increase certainty of the application of the law.

If legal  obligations under a contract aren’t performed as agreed, the party is in breach of their obligations. A right to damages arises against the defaulting party. Other remedies may be available, such as an injunction or specific performance.

What is Performance of a Contract?

Performance of a contract is:

• the doing of the acts, or 
• refraining from doing the acts
• which are required by the express or implied terms of the contract
• in accordance with those terms.

The standard, quality and timing of performance of contacts are able to be agreed by the parties before the contractual obligations start.  

That's in keeping with principles of freedom of contract.

 

Performance Requirements

Courts don't have power to reshape contracts into a form the court thinks more reasonable or fair where subsequent events have rendered one side’s situation more favourable... or unfavourable.

It makes sense to get B2B contracts and business to consumer contracts rights the first time.

The approach promotes legal certainty between the parties and diminishes the potential for disputes. The parties are on the same page. Misunderstandings should be avoided. And the more the contract worth, the more sense it makes.

When a contract expressly states what you are meant to do, and how you're meant to do it, it's usually pretty straightforward. 

But then the way the contract is to be performed may not be specifically mentioned in the contract. In those cases established rules of contractual interpretation allow the court to decide the missing terms: to fill in the gaps.

Here are some of the main ones...

 

Standard and Quality of Performance

• Performance must be:
  • complete; and
  • precisely in accordance with the terms of the contract in order to be paid.
• Where two or more ways are available to supply goods or services, the supplier may elect which way the goods or services will be supplied.

 

Compliance with a Contractual Specification

• In a business to business (B2B) contract for the sale of goods, the seller is under a strict duty to deliver exactly the quantity he has agreed to sell, neither more nor less
• A supplier under a contract is not entitled to substitute performance of a contract which is different to, or better or worse than that specified in the contract.
  It has been said:

  Equivalent products or services is unsustainable to resist a claim for breach of contract and irrelevant as a matter of law

• Commercial performance does not necessarily amount to performance at law. When a contract specifies how a promise is to be performed, it must be performed in that manner.

For example, in a contract for production of staves (ie long sticks) to a specified width, only 15% of the staves delivered were of the specified width mentioned in the contract.

All of the staves supplied were saleable by the buyer. They were fit for the purpose the buyer intended. The buyers were entitled to reject all staves which were not of the specified width. 
In that case, the Court said this:

"if the seller wants a margin he must, and in my experience does, stipulate for it".

That’s the level of detail and precision that contractual obligation operate. It doesn’t take much to be in breach of contract.

• A promisor does not need to perform an obligation which is solely for its own benefit.

 

Proof of Terms

Where a contract has been reduced to writing and has been signed by one or both of the parties, it is well established that the party signing will ordinarily be bound by the terms of the written agreement whether or not they:

• have read them 
• understand the precise legal effect of the contract
• know what the contract requires them to do.

But it does not follow from that that the document will represent all the terms of the contract: it may be partly oral, and partly in writing.

Furthermore, many contracts are made solely by word of mouth or are contained in or evidenced by documents which have not been signed by the party affected.

In those cases, it will be necessary to prove which statements, or stipulations, were intended to be incorporated as terms of the contract or to have contractual effect.

 

Notice that Performance is Required

• When a contract specifies that notice is required for the performance of an obligation, there is no requirement to perform until notice has been supplied.
• If only one party has the knowledge that conditions have been met to perform a contract, then that party is required to give notice to the other to perform.

 

Requirement not to perform an act

A contract may provide that a person is required not to do some act. Put another way, parties are able to contract that one of them agrees to the non-performance of a particular act.

They’re known as restrictive covenants. The principles of freedom of contract still apply.

However, the common law operates to limit what parties may agree between themselves with restrictive covenants. For example, take the case of non-competition clauses. These clauses aim to prevent an employee or consultant from working with a competitor after termination of a contract with their current employer.

The common law will respect (and enforce) the terms of the restrictive covenant, provided the restrictions protect the legitimate business interests of the party relying on the restriction, and go no further.

 

Prevention of Performance

It is a long-accepted principle of law that it's not a basis for a party to not perform a contract where to perform the contract has become more economically more burdensome to perform.

That includes where a change of circumstances or market conditions since the contract was agreed renders performance:

• more expensive
• commercially impossible
• uneconomic, and/or
• less profitable.

To be entitled to not perform the contract, clear and unequivocal terms must be set out in the contract which permit that to take place. In the absence of the clear terms, the party is not relieved of the duty to perform the contract. They're not entitled to say that they can refuse to perform.

Even then, in one case the wording, "should retain its contractual right to purchase the [product] in question in a commercially reasonable time and in a commercially reasonable manner” was found to be too vague, unworkable and the antithesis of the unequivocal terms required.

Likewise, hinderances and obstacles to delay performance are likely to be inadequate unless performance of required obligations:

• has become literally impossible to perform. That is the province of the law of frustration, or
• some illegality in formation of the contract exists, or has arisen during performance of the contract

Increases in the cost of performance may well be expected to be borne by the seller of the products or services in the transaction.

Time for Performance

• When the time to perform a contract is not agreed, performance must commence within a reasonable time.
  A "reasonable time" is decided after taking into account all the circumstances of the case at hand.  There are always arguments whether the time should be shorter or longer.
• When times are specified in a contract, not performing by the at time will be a breach of contract.
  It will not be a repudiatory breach of contract unless:
  • an express term of the contract says that time is of the essence, or
  • a term is implied that time is of the essence,
  • the contract is of the sort that time is expected to be of the essence, such as leases, sales of shares where prices are likely to change.

Then, clauses which expressly state thsat time shall be of the essence or the context of the contract implies that some is of the essence means that dates and times specified in the contract must be complied with. If performance has not been completed by time specified, it is an instant breach of a condition entitling the innocoent party to terminate the contract for repudiatory breach.

Payment

1. Performance by a supplier gives rise to the right to be paid, subject to the terms of the contract
2. Time is not of the essence for payment of a contractual debt, unless it forms part of the contract
3. If a time is not specified for payment, a reasonable time is permitted for the debtor to pay, having regard for all of the circumstances of the case.

 

Completion of Performance

When performance is complete by both parties, the parties are discharged from further performance of the contract. Technically, it's known as termination of contract.

Contracts may also be terminated in these ways:

• by agreement, that is:
  1. a new contract between the parties discharging one another from further performance under the contract
  2. where the contract itself contains a provision to terminate the contract, such as:
     1. force majeure, or
     2. termination for convenience,
  3. satisfaction of a condition subsequent

     In effect, that’s cancellation of a contractual obligation by agreement.

The new contract must be supported by fresh consideration to be legally binding.  In the context of repayment of debts, that’s the rule in Foakes v Beer.

• by repudiatory breach of contract, which is accepted by the innocent party

  Non-performance or defective performance which deprives the innocent party of substantially the whole benefit of the contract or is a breach of a condition is a repudiatory breach, which entitles the innocent party to:

  1. sue for damages for the breach of contract, and
  2. terminate the contract for that repudiatory breach or affirming the contract, regardless of that choice.
• by frustration, where intervening events prevent the contract being performed at all, or fundamentally change the nature of the performance of what was agreed.
• for force majeure, where the parties have agreed that named intervening events will permit non-performance and/or termination

 

Post-Termination Obligations

Many commercial contracts contain express provisions which continue after termination of a contract. These continue to be effective after termination.

The post-termination terms might include:

• a requirement to delete documents and/or confidential information, or
• a mandatory obligation to assist transfer the services to a new, incoming service provider

Even without those provisions - often contained within a termination clause or consequences of termination clause - the secondary obligations continue.

Those secondary obligations would likely include obligations of confidentiality, and post termination restrictive covenants. Some clauses don't make sense in the contract unless they are to apply after termination. In business to business contracts, post termination contractual obligations can appear in consequences of termination clauses, and create express rights which apply after the contract ends.

 

Need Help on a Business Contract?

Failing to perform a contract is a risky business.

It leads to complaints, increased administration and effort, degraded commercial relationships and lost profits.

We're contract law solicitors advising on B2B contracts.

We advise businesses on:

• how to terminate contracts in a way that won't come back to bite the business
• when contracting partners are in breach of contract
• what you can do about it
• legal remedies for breach of contract in business law 
• the legal claims for loss of profits they're likely to be exposed to.

Have an enquiry about a business to business contract? Call us to speak to a business law lawyer contact us at contact@hallellis.co.uk.