Once More Unto The Breach
It's happened: the other party is in serious breach of contract but the exact situation is not expressly described in the contract terms. You might be entitled to terminate the contract, but you'd probably rather just receive what you contracted for, in which case termination can look more like a foot wound waiting to happen than a solution to your woes. Discussion and negotiation may do the trick, or the contract itself may provide some mechanism for resolving the dispute, but in truth these things are seldom resolved informally. At times like this it can feel like its paws-in-the-air time, with cries of "what to do?; what to do?" all round. Fortunately there are a number of other avenues which may be open to you.
Once you've decided that the contractual relationship is totally unsatisfactory you'll want to bring it to a close promptly and perhaps enter into a new contract with another party. But before attempting to terminate you must consider whether you are entitled to do so. Not all breaches allow for termination; it will depend on what the contract actually says and the nature of the breach. A breach that goes to the heart of your contract, with a serious effect on the benefit you would otherwise get from it, should give rise to a right to terminate. But if the breach is not so 'material' you may only be entitled to claim for damages. Whether or not the breach is material will be a question of fact and degree in each case.
If express termination provisions set out the grounds on which either party can call a halt to the relationship, does that mean you could simply include a clause that allows any breach, however minor, to trigger termination? Generally speaking, the answer is no. Terms like that, particularly if they are included in a long-term contract and/or one under which one of the parties has invested substantially to meet its obligations, cannot be enforced if to do so would flout common business sense. For example, if the breach is so trivial as to have no material impact, you cannot terminate simply to escape 'by the back door'.
An exception to this general rule does exist in the context of supply contracts and delivery times. If a contract states clearly that for all deliveries "time is of the essence" then any failure to deliver on time, however minor, may allow for termination. It is best to consider at the drafting stage which obligations should have no flexibility in timing, then you can word the contract accordingly.
That said, most contracts do contain some express termination provisions, common examples of which include the following:
Termination for a material breach. Commercial contracts commonly contain a provision entitling one party to terminate when the other has 'materially' breached its obligations. Usually the party in breach has a limited time in which to remedy the situation (assuming that this is possible), but if the breach remains unresolved the contract can then be terminated with immediate effect. Check your contract; "material breach" may be expressly defined as the breach of a particular clause or clauses. This type of provision, if clear and unambiguous, may spare you a trip to court. Typically, however, "material breach" will be left undefined (to allow flexibility) and will need to be interpreted in the light of all the circumstances. Consider what the other party is expected to deliver under the contract. Are they delivering it at all, or are they substantially failing to meet their side of the bargain? How serious is the impact on you? Finally, do you have the evidence you need to substantiate your view?
Termination on notice. Sometimes the parties will have negotiated a right to terminate the contract at will (for reasons of convenience) simply by serving notice on the other. But before you give notice you should first check the contract for any associated pitfalls – an early termination payment for example. Take care to observe the stated notice period and also to send the termination notice to the right address, and person, and in the required form. There is usually a separate 'service of notice' provision governing all this and failure to comply with its requirements could render your notice invalid. One of the strengths of terminating on notice is that it gives certainty because, unlike "material breach", there is no need for you to offer 'proof' which may then be contested. Another advantage is that it does not in itself preclude the innocent party from making a claim for damages. Tactically-speaking it is always wise to make any such claim before, or at the same time as, giving notice; not to do so could jeopardise your prospects of success later.
Termination for specified events. Common provisions in this respect can cover events such as a change of control, insolvency and/or failure to maintain a business relevant to the contract. Given the difficulties frequently encountered in trying to establish any breach, and in the absence of a clear right to terminate for convenience, you may want to consider whether any of these events has occurred. It could be your most assured route to bringing the contract to an end.
Even where no express provisions exist, if the breach is so fundamental that it runs to the very heart of the contract then the party in breach will be deemed to have committed what's known as a "repudiatory" breach. Here the general rule is that the breach must have deprived you of the very benefit intended by the contract. If a repudiatory breach is established you are entitled to treat yourself as having been discharged from your obligations and from accepting further performance under the contract. You will still need to communicate clearly to the other party your decision to bring the contract to an end, and this should be done as soon as possible because failure to act promptly may result in you seeming to "accept" the breach and so forfeit your right to terminate. If the contract allows termination for material breach then it should not be necessary to rely on repudiation, but this fall-back position may be needed when a contract fails to make proper provision for termination for breach.
In certain circumstances you may also (or instead) wish to consider a claim for damages. Generally speaking, damages are intended in this context to compensate for your loss, not to punish the other party. A court may award damages where you have suffered a real loss, but it will make only a nominal award where there is no loss at all, even if the other party has acted badly. Furthermore, you will recover damages only if your loss is not too 'remote', in other words if:
- the loss was a natural consequence of the breach, the
type and extent of which a reasonable person would accept in
the circumstances; or,
- at the time the contract was entered into the loss was
fairly and reasonably contemplated by both parties as the
probable result of a breach (this would cover the more
unusual types of loss due to special circumstances known to
the parties from the outset).
As for the level of damages, this is for a court to determine and it will usually be done with the objective of returning you to the position you would have held had the contractual responsibilities been properly performed (in so far as any award of money can do this). This is known as the 'expectation' measure of damages; ie, the loss suffered is the gap between what was expected to happen had the contract been performed satisfactorily and what actually happened when it was not.
Sometime the courts will use an alternative measure of damages, known as the 'reliance' measure. Where loss of expectation is difficult to prove, or where the damages assessment would be too speculative, the 'reliance' measure seeks to restore you to the position you were in before the breach occurred, enabling you to claim, for example, for expenditure wasted as a consequence of relying on the contract.
In exceptional cases you may be entitled to a 'restitutionary' award. When the party in breach has been unjustly enriched by their actions they are forced to pay you a sum of money in respect of that gain. For example, if a musician performs no service at all, you may be able to seek the return of any payments you made to him.
But remember, damages will not be awarded for any part of a loss which could have been avoided by taking reasonable steps in mitigation. Always try within reason to minimise your loss, and never be tempted to take unreasonable steps to increase it.
But what happens if the usual remedy of damages is inadequate? For example, what if the subject matter of the contract is unique in that a replacement could not be bought with any amount of damages? In such circumstances the equitable remedy of 'specific performance' may be available under which a court compels the party in breach to perform its contractual obligations after all.
Unlike damages, which are available as of right, the court has broad discretion over an order of specific performance. In exercising this discretion it takes into account a number of factors, the most important being whether or not damages would be an adequate remedy, whether or not an award of money would permit the recipient to purchase a satisfactory substitute, and the balance between the benefit an order would give to one party versus the cost it would impose on the other.
An injunction is a bit like the opposite of a specific performance; it is an equitable remedy, awarded at the discretion of the court where damages would not adequately compensate the claimant and, in exercising its discretion, the court considers the same factors. However, unlike specific performance, which requires a positive action, an injunction imposes an obligation to refrain from doing something.
It is important to bear in mind that your right of action is also affected by the simple passage of time. Any action based on breach of contract must be brought within six years of the date on which the breach occurred (the time limit for an action based on a deed is extended to 12 years).
Service credits and liquidated damages
Service credits can provide a relatively quick and easy way to resolve a dispute triggered by the other party's failure to perform to contractually-agreed service levels, but these need to be considered and negotiated at the pre-contract stage.
By accepting a service credits regime the other party is agreeing to pay pre-determined sums as compensation for failing to perform to the standards specified in the contract. These amounts are then deducted from the total value of the payments you would otherwise have made under the contract.
The advantages of this approach include not only the ready calculation of the amount involved but also, since the payment is not fault-based, the fact that the regime can function without acrimony. Service credits also bring with them the benefit of enabling you to avoid the heavy cost in time and money of enforcing your contractual rights by suing. They also provide a handy incentive for the other party to perform to the required standards. With this in mind, it is important to ensure that any service credits written into your contract are linked to service levels that can be objectively measured and monitored. Service levels that are subjective or impossible to measure reliably can undermine the value of a credits regime.
And finally, beware of inadvertently providing your contractor with excuses. Contractual obligations can be waived and waivers can be inferred from something you have done, or not done, such as a repeated failure on your part to enforce an obligation. The loss of rights under such a waiver (and the resultant closing off of remedies for breach) may have significant financial consequences. To ensure that any (deliberate or inadvertent) failure on your part to enforce your contractual rights swiftly does not result in any diminution of these rights, make sure that the contract includes an express provision stating that any failure or delay on your part does not amount to a waiver of the associated obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.