What is a breach of contract?

Contract law governs all types of everyday transactions, from buying a pint of beer to concluding multimillion pound finance deals. Despite this, contract law is by no means a straightforward area of law and, even where a written contract exists, parties frequently find it difficult to enforce them; resulting in breach of contract.

Breach of contract occurs when a party to a contract fails to fulfil their obligations under that contract. The first hurdle in any case of breach of contract is to prove that a contract actually exists between the parties.

Establishing the existence of a contract

In most cases a contract need not be a paper document, signed by all parties and written in legalese. Indeed, an oral agreement may prove to be as equally binding as one made on paper. There are, however, three essential elements which must be present in a legally enforceable contract.

There must be an agreement in place
There must be the intention between the parties to create legal relations
There must be consideration for the contract

(1.) Agreement

An agreement is reached by the parties when a party makes an offer which is then accepted by the other party.

For example, in the case of a builder building a wall around a garden the parties would:

Agree on the work which has to be done
Negotiate the important elements, such as the type of stone to be used, and the price
And, eventually come to some kind of agreement.

(2.) Intention

The parties must intend to form a legally binding arrangement for a contract to exist. The law will usually assume that in commercial contracts the parties intend to be legally bound unless it is expressly stated otherwise. Contrastingly, in the case of contracts between family members, the law will usually require written evidence to show the intention to form legal relations.

It is worth noting however, that some contracts must be made in writing; principally contracts for the sale of land or long leases of property; consumer credit agreements and mortgages.

(3) Consideration

This means something of value is given in exchange for a promise; this most often constitutes money. For example, payment in return for a promise to deliver goods.

Breach

Having established that a contract exists, the next step is to consider whether a breach of that contract has occurred. In most cases this is fairly obvious.

If one party fails to meets its obligations under the contract then it has acted in breach of contract. In some cases, however, a breach may not already have occurred but it becomes very obvious that it will and a business or individual needs to take steps to either prevent that breach, or make alternative arrangements.

This situation is known as anticipatory breach. There must be an unequivocal indication that the breach will occur. A mere suspicion would not be adequate.

For example, if a company (A) agrees to fulfil a large order for the delivery of cakes and sandwiches to company (B) on a particular day and then (A) informs (B) that it is no longer able to provide the sandwiches and the cakes will be more expensive than agreed, (B) could sue for the non-performance of the contract even before the date that performance was due.

What is in the contract/ terms of a contract.

Legal arguments in breach of contract cases frequently surround what the parties have and have not agreed: the terms of the contract. This is especially true in contracts made verbally. Terms may be express or implied within a contract.

Express terms are those specifically agreed at the time of drawing up the contract or those contained within other documents such as a set of standard terms and conditions used by a company or even in common use in the same industry.

Example

A recruitment business charges a business a fee for finding a new Finance Director. After two months in the role the new Finance Director resigns and the company refuses to pay the fee due to the recruitment company. Even though there is nothing in the contract between the recruitment business and the company governing such an occurrence, because the recruitment business is operating under its normal Terms and Conditions which state that ‘the fee is payable immediately on the candidate commencing work’ it could sue for breach of contract because this was an express term.

Implied terms

These are those terms which are not contained within a contract but which the courts will construe as having been there. They could come about from the ‘officious bystander test’ in which had an ‘officious bystander’ been standing by when the parties entered into their negotiations they would have pointed out the missing term and the parties would have replied ‘of course’.

Secondly, the terms can be implied in the contract through ”business efficacy” in that the contract would have been unworkable had the term not been in it. This covers situations in which the term is almost too obvious to include.

Example

A contract for the installation of a swimming pool may not include a term stating that it must not leak, but this expectation would be implied within the contract.

Remedy

The basic remedy for breach of contract is damages. This is a sum of money fixed by a court which puts the party into the position they would have been in had the breach not occurred.

The aggrieved party must show that they have actually incurred losses because the courts will not seek to punish the defendant in any way. The aggrieved party must also take steps to mitigate, or in other words, reduce the level of their loss.

For example, in a case relating to employment law, an employee whose employer has acted in breach of contract must take steps to find a new job as an Employment Tribunal would expect them not to continue to remain unemployed and claiming damages.

The remedy for a breach of contract depends upon how serious the breach is. If the breach is minor it will only be possible to sue for any damages incurred, if the breach is material or in other words, serious, then it will be possible to recover the costs of correcting the breach.

The other aspect of loss to consider is ‘remoteness’. This means that the court will only award damages for losses which flowed naturally from the breach of contract. So if a company lost a valuable contract as a direct result of the defendant’s breach then it could claim for that loss.

In normal circumstances the courts will only award damages for financial losses and will not consider any distress that has been caused to the aggrieved party. However, if the contract was to promote happiness and enjoyment then the court will consider awarding damages for distress. For example, in the case of contracts relating to the purchase of holidays or leisure activities.

In addition to damages, the courts have equitable remedies at their disposal. These are used by the courts when damages would prove inadequate.

It is possible for a court to grant an order for ‘specific performance’ forcing the party to fulfil its obligations under the contract.

Alternatively, the court may grant an injunction. For example, a court may grant a mandatory injunction for the removal of a line of trees which have been planted in breach of contract.

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