What To Do When Another Business Breaches A Contract Between You

Contracts are the lynchpin of the commercial world.  Robust business to business contracts provide stability and assurance for every aspect of commercial relationships.  They regulate the supply of goods and services, set out how much you have to pay and how payment is made, state when and where products will be delivered and remedies available if a service, such as an IT system, breaks down.

However, unfortunately, if you are in business, it is likely you will have to deal with a breach of contract at some point.  No matter how carefully the provisions of a contract are drafted, disputes can and do arise.  However, a well-drafted contract will minimise such occurrences.

In addition, despite the intentions and promises of the parties at the start of any relationship, there will be a change in their views on the commercial background to the contract and, for sale of goods and supply of services, faultless service or perfect products are not realities.

If you are involved in a breach of contract dispute, the first thing you should do is try and sort the situation out informally.  The nature of business is things change, and for some reason, the person you have a contract with may be unable to fulfil their obligations temporarily.  Few people ever intend not to honour their commercial contracts. Negotiating an interim agreement with the other party will provide the best chance of preserving the relationship, and save you time, money and stress.

Unfortunately, there are times when you will have no choice but to take legal action for a breach of contract.  In such situations, there are several points you need to bear in mind.

Has there been a breach of contract?

A breach of contract can be defined as the failure, without legal excuse, to perform a promise that you were supposed to perform under the agreement.  It can include not performing the work required or performing it poorly, failing to pay on time, not delivering the goods or services, or delivering them late.

Breaches are usually defined as minor, material, or fundamental.  A minor breach is one that does not go to the heart of the agreement and can usually be remedied without involving solicitors.  For example, a builder may use their own materials instead of the ones specified in the contract, but this does not result in any harm to the other party.  Technically this is a breach of contract; however, few would consider it cost-effective to pursue a claim.

A material breach of contract is more serious and can cause serious damage or adversely affect the outcome of the contract.  An example of a material breach is where a builder is weeks or months late with finishing a house, thereby holding up the entire development project.  In this type of situation, damages can and should be sought.

A fundamental breach goes to the heart of the contract and is so serious it can justify termination.  An example would be if the builder failed to complete the work or refused to repair defects.

There can also be an anticipatory breach of contract.  This is where one party realises it cannot complete their obligations and notifies the other party.  The injured party may have the right to terminate the contract and sue for damages.

 

Are you within the limitation period to bring a claim?

Under the Limitation Act 1980, you have six years from the date of the breach of contract to bring a claim.  Note, time runs from the date of the breach, not when you suffered damage. The ancient case of Battley v Faulkner (1820) provides an illustration of this point –  in an action for breach of warranty or condition against a seller of goods, the cause of action accrues when the goods are delivered, and not when the defect is discovered at a later date.

Was the damage you suffered caused by the breach of contract?

The three main remedies for breach of contract are injunctions, specific performance (where the court makes an order the defaulting party must perform their duties under the contract), and damages.  Damages are designed to compensate a party for any loss sustained sue to the breach.

The overriding aim of an award of damages arising from a breach of a contractual obligation is to put the innocent party ‘so far as money can do it…in the same situation…as if the contract had been performed’[1].

Damages are assessed as at the date the contract was breached.

To be awarded damages for breach of contract, you must prove, on the balance of probabilities, that there is a causal connection between the breach of contract and the loss you sustained, and this connection is not too remote.

The test for remoteness comes from the famous case of Hadley v Baxendale (1854).  In this case, the claimants were millers and mealmen who cleaned grain, ground it into meal and processed it into flour and bran.  When a crankshaft of a steam engine at the mill broke, the claimants arranged for it to be replaced.  To construct the new crankshaft, the broken part had to be sent to the manufacturers for measurement.  The claimants engaged the defendants to deliver the broken crankshaft to the manufacturers.  The defendant was late making the delivery.  The claimants lost business and sued for loss of profits.  A jury at first instance awarded the claimants a sum of £25 (around £2,500 in today’s money).  The defendant appealed, stating he did not know the late delivery would cause the claimant to suffer damages.

The court agreed with the defendant and allowed the appeal.  It concluded a claimant can only recover losses in a breach of contract that were genuinely foreseeable.  Sending an item to be repaired would not lead to the defendants knowing that late delivery would lead to a loss of profits.

In making his decision, Baron Sir Edward Hall Alderson set out the following test for remoteness of damages:

Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract…”

In summary

Breach of contract can result in the affected party suffering anything from a minor inconvenience to the collapse of their own enterprise.  If a contract you are party to has been breached, it is vital to act quickly.  Often the inability of an organisation to meet its contractual obligations is a sign of deeper problems, such as being on the brink of administration.

With sensible, experienced legal advice, a breach of contract can be remedied, leaving you to move on with your commercial activities.

Bennett Griffin are award-winning Solicitors based in West Sussex. From our office in central Worthing our experienced and specialist Solicitors offer a comprehensive service and will work with you in an honest, considered, and practical manner. Our commercial department is able to advise and assist you in relation all business contract matters.  Please contact us on 01903 229 999 or by email at info@bennett-griffin.co.uk for more information.

The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.

[1] Robinson v Harman [1843–60]