A Step By Step Guide to Managing a Breach of Contract
- Making law easy for you -
In today’s fast-paced world of business, contracts are the backbone of commercial relationships, outlining the rights and responsibilities of each respective party. All parties to a contract are obliged to perform their duties. Unfortunately, breaches of contract occur more often than one would expect, likely resulting in financial losses, strained relationships and reputational damage. Responding effectively to a breach of contract is imperative, and we are here to help you.
Step 1: Is there a legally binding contract?
It is first necessary to determine if there is a contract in existence between the parties. A contract is a legally binding promise (written or oral) by one party to perform an obligation to another party in return for consideration. A basic contract must, therefore satisfy five key elements:
- Offer;
- acceptance of the offer;
- consideration;
- Certainty as to terms; and
- intent to create legal relations.
Step 2: Identify the breach
If there is a binding contract between the parties, the next and arguably most important step is to identify whether a breach has indeed occurred. It is essential to consider the terms of the contract carefully to determine:
- What are the obligations of the breaching party;
- How was that obligation breached (often an instance or action, but it could also be a failure to act);
- Have you suffered a loss as a result of the breach; and
- When did the breach occur (is it within the limitation period for bringing a claim for breach of contract).
If you are not able to identify any specific written or verbally agreed term that has been breached, there is a possibility that there may be an implied term of the contract that may have been breached. Such terms can be implied by statute, by custom and usage or by fact. If you believe that there may have been a breach of contract but you are unable to identify a specific term that has been breached, we can advise you in respect of whether there may be an implied term in the contract that has been breached.
Step 3: Gather evidence
Evidence is crucial in substantiating a breach of contract. As the affected party, it would be in your interest to collect documents such as copies of the original contract, relevant correspondence, general records, photographs and witness statements if necessary. This is not an exhaustive list; however, the more evidence you are able to gather will strengthen your position in negotiating a settlement of the dispute or in issuing legal proceedings if efforts to resolve the dispute amicably fail.
At this stage, you may wish to consider reserving your rights. This has the effect that any action you take is not intended to either affirm or terminate the contract. This can protect your position whilst investigating and considering your options. At this stage, you should seek legal advice to avoid accidentally undermining your position, as further actions could result in enforcement or termination of the contract.
Step 4: Review the contractual remedies
Written contracts can include clauses addressing potential breaches which you would need to be aware of, such as:
- Remedy Periods: Time allowed for the breaching party to rectify the issue;
- Termination clauses: Permitting contract termination in specific circumstances; and
- Dispute Resolution Mechanisms: Steps such as mediation or arbitration before legal action.
Understanding the remedies available in the contract can help guide your next steps. Aside from any contractual right to terminate for breach of contract, you may also have a common law right to terminate for a repudiatory breach of contract. Therefore, if you wish to terminate the contract as a result of the breach, legal advice should be sought as to the contractual and common law rights you may have to terminate and how these should be exercised.
Step 5: Attempting Amicable Resolution
You may wish to consider resolving the breach amicably by:
- Communicating clearly: Send a formal notice to the breaching party, outlining the breach, referencing the contract, and specifying the required action to remedy the situation; and/or
- Negotiating: Engage in discussions to reach a mutually agreeable solution, such as amending the contract or receiving compensation.
However, you should be aware that a common law right to terminate the contract may be lost if you affirm the contract, so we would recommend that you obtain legal advice before communicating with the other party in respect of the breach.
Step 6: Mitigate your losses
As the non-breaching party, you have a duty to mitigate losses resulting from the breach. This means taking reasonable steps to minimise the financial impact, which can include: sourcing alternative suppliers or service providers (subject to any statutory provisions allowing a supplier or service provider a right to repair or replace, and depending on whether any expert evidence may first need to be obtained before instructing an alternative provider to carry out work) and redirecting resources to other projects.
Please note that this is not an exhaustive list. Each breach of contract is individual and subject to its own facts. It will be necessary to keep detailed records of costs incurred as a result of the breach.
Step 7: Assessing your legal options
If the breach is not resolved amicably, it may be necessary to consider issuing a claim for damages for breach of contract, which we would be happy to assist you with. The usual process consists of:
- Preparing and sending to the breaching party a letter before action compliant to the relevant protocol or the Pre-Action PD clearly setting out the terms of the contract, the details of the breach and the action required to avoid a claim for breach of contract being made against the breaching party, which will usually include a requirement to pay a sum of money in respect of losses suffered as a result of the breach of contract;
- Under the Civil Procedure Rules, parties are expected to make appropriate attempts to resolve the matter without recourse to litigation and to consider the use of Alternative Dispute Resolution (ADR) such as mediation, arbitration, early neutral evaluation and ombudsmen schemes, which can prove to be a cost-effective and less adversarial alternatives to litigation;
- Should the letter before action or ADR prove unsuccessful, a claim can then be issued by filling the required documentation with the appropriate court;
- The breaching party will have a specific timeframe to acknowledge the claim and submit their defence. If a settlement has still not been reached between the parties, the Court will set a hearing date. Sometimes, the breaching party will omit to defend the claim, which allows you to obtain judgment in default without having to wait for the hearing date; and
- Having obtained a judgment following the hearing or in default, the unsuccessful party must pay the sum due within a specified time frame. Unfortunately, it is not always as straightforward as that, and various alternative methods to recover the monies are available, such as charges over property, bailiffs etc…
Step 8: Prevent Future Breaches
Having resolved the breach of contract, it is never too early to take steps to reduce the risk of future breaches by:
- Strengthening Contracts: Work with our Corporate and Commercial Team to draft robust agreements with clearer terms and remedies;
- Regular Monitoring: Implement processes to monitor compliance and performance and periodically review standard terms and conditions to consider if any amendments may be required as a result of changing practices or processes; and
- Foster Good Relationships: Strong communication and trust can reduce misunderstandings and disputes.
How We Can Help
Handling a breach of contract dispute, while challenging, is manageable with the right approach and professional support. By understanding your contractual rights and obligations and taking proactive steps to address issues, you can minimise disruption and protect your business’s interests.
Here at Rix & Kay, we can help you:
- Assess the validity of the contract, identify the breach and the impact caused;
- Navigate legal remedies efficiently and advise in respect of strategic approach;
- Protect your business’s interests and reputation; and
- Reduce the possibility of future breaches.
We provide tailored advice and representation to businesses facing contractual disputes in England. Our experienced dispute resolution team is here to guide you through every stage of the process, ensuring the best possible outcome for your business and making the law easy for you!
