What is a contract?
A legally binding contract is, put simply, an agreement between two or more parties under which money (or money’s worth) is paid in return for the provision of goods or services. There must be an intention that the terms of the agreement are binding, and performance of the contract must have begun or taken place. A legally binding contract can be verbal and written, though it is easier to prove and rely on if set out in writing.
Contracts form the basis of virtually all business, and business/consumer arrangements, as well as many dealings between individuals. Where one party breaches the terms of the contract, a dispute can arise and the innocent party may be able to claim for damages.
What constitutes a breach?
The terms of the contract dictate how the contract is to be performed by each party. The terms may be express (ie, stated in clear terms in the contract) or implied (whether by conduct or by law). The law may imply a term into the contract if it necessary for the purposes of business efficacy.
Performance of the contract that falls short of what has been agreed in the contract terms will constitute a breach of contract.
What is the nature of a breach of contract?
The nature, and therefore the consequences, of a breach of contract depend upon the term/s that have been breached. If the breach is of a condition going to the very heart of the contract, this will be a ‘repudiatory breach’ and the other party can terminate performance of the contract.
However, if the breach is of a warranty (obligations that are not critical to the performance of the contract), the breach of contract will be treated differently. Whether a term is treated as a condition or a warranty depends on the wording, its context and the intentions of the parties.
What are the consequences of a breach?
Where there is a repudiatory breach of the contract, the innocent party has the right to terminate performance of the contract and claim damages suffered as a result of the breach.
Where a warranty is breached, the innocent party can only claim damages that directly result from the breach – and the contract as a whole remains in place. The amount of damages is assessed in the context of the case as a whole and having regard to other terms of the contract.
The general rule is that the damages awarded aim to place the innocent party in the same situation had the contract been performed according to the original terms. A claim for more than nominal damages will be subject to the ordinary rules of remoteness, mitigation and penalties.
Are any other remedies available?
Equitable remedies are civil remedies that would be fair in the particular circumstances of the case. In some breach of contract cases, damages will be an inadequate remedy and an application may, therefore be made for alternative remedies such as specific performance or injunctions. These orders are, however, awarded at the discretion of the court and can be costly to obtain.
An order for specific performance is an order requiring the other party to perform its obligations under the contract or act in a certain way. Injunctions are an order prohibiting a party from acting in a certain way, for instance from acting in a way that amounts to a breach of the contract.
What if the breach is ‘affirmed’?
If a breach of contract has occurred, but the other side ‘affirms’ this breach either verbally or by conduct (ie by continuing with their performance of the contract), any claim against the party that has breached its terms may be nominal. Note that a party cannot affirm a contract following a repudiatory breach unless it has a full understanding of the facts leading to that breach and is aware of its right to choose between acceptance (and treat the contract as ended) and affirmation.
Following affirmation, the innocent party can still claim damages for loss suffered as a result of the breach of contract.