Commercial contracts are fundamental to doing business. They establish what each party has agreed to do, when obligations must be performed and what should happen when things go wrong.
But even a carefully drafted agreement cannot guarantee that every commercial relationship will proceed as intended.
A supplier may fail to deliver. A customer may withhold payment. A service provider may fail to meet agreed standards. A business partner may attempt to terminate an agreement unexpectedly or fail to perform an important contractual obligation.
When a commercial contract is breached, the decisions made in the early stages can have significant financial and legal consequences.
Before terminating the agreement, withholding payment or commencing proceedings, it is important to establish exactly what the contract provides and what remedies may be available.
A breach of contract generally occurs when one party fails to perform an obligation it has agreed to under a legally binding contract.
Commercial breaches can take many forms, including:
Not every breach has the same consequences.
A relatively minor breach may give the innocent party a right to claim damages but not necessarily a right to terminate the entire agreement. A sufficiently serious breach may potentially entitle the innocent party to treat the contract as terminated, depending on the contractual terms and applicable law.
That distinction can be extremely important.
The contract itself should normally be the starting point.
Before responding formally to an alleged breach, identify the particular obligation that has not been performed and review the provisions governing that obligation.
Pay particular attention to clauses dealing with:
Payment: What was payable and when?
Performance: What precisely was each party required to provide?
Notice: Does the agreement require formal notice of a breach?
Remedy periods: Is the defaulting party entitled to a period in which to remedy the breach?
Termination: In what circumstances can either party terminate?
Limitation of liability: Does the contract restrict the type or amount of loss that may be recovered?
Dispute resolution: Is negotiation, mediation or arbitration required before court proceedings?
Governing law and jurisdiction: Which country’s law applies and where must a dispute be determined?
A commercial agreement should be considered as a whole rather than relying on one clause in isolation.
In practice, this isn’t always as straightforward as it sounds.
The parties may disagree about what the contract required.
One party might say that a product was required by a particular date, while the other argues that the date was only an estimate. A customer might say that services were defective while the supplier maintains that all contractual specifications were satisfied.
The contractual wording, correspondence between the parties and evidence of how the agreement was performed can therefore become important.
Legal advice at an early stage can help a business determine whether there has been an actionable breach and what rights arise from it.
If a commercial disagreement has the potential to become a formal dispute, relevant evidence should be identified and preserved.
Depending on the circumstances, this could include:
It is also sensible to create a clear chronology of events.
A contemporaneous record can become particularly valuable if the parties later disagree about what happened or when particular decisions were made.
A breach of contract should not be considered solely as a legal problem.
Businesses should also assess its practical consequences.
Ask:
What has the breach cost the business?
Is the loss continuing?
Could further losses be avoided?
Can an alternative supplier or service provider be engaged?
Is the commercial relationship worth preserving?
Could terminating the agreement cause greater disruption than resolving the breach?
The answers can help determine the most appropriate strategy.
This is particularly important.
Discovering that the other party has breached an agreement does not necessarily mean that you can immediately terminate it.
The right to terminate may depend on the seriousness and nature of the breach and the wording of the contract. The agreement may also require a particular notice procedure or allow the other party time to remedy its default.
Purporting to terminate a contract without having the legal right to do so can potentially put the terminating party in breach itself.
For that reason, businesses should consider obtaining legal advice before taking an irreversible step such as terminating an important commercial agreement.
Court proceedings are not always the best first response.
In many commercial disputes, both businesses have an interest in finding a workable solution.
Depending on the circumstances, that could involve:
A negotiated outcome may preserve an important commercial relationship while reducing the time, management resources, expense and uncertainty associated with litigation.
However, negotiations should be approached carefully so that a business does not inadvertently prejudice its legal position.
Where informal discussions do not resolve the issue, a formal notice or solicitor’s letter may be appropriate.
The exact approach will depend on the contract and circumstances, but correspondence may identify:
Where the contract contains specific notice requirements, these should be followed carefully.
Sending notice to the wrong address, using the wrong method of service or failing to observe a contractual notice period can create unnecessary complications.
The appropriate remedy depends on the contract, the nature of the breach and the loss suffered.
Damages are a principal remedy for breach of contract.
Broadly, their purpose is compensatory rather than punitive. A claimant will generally need to establish that recoverable loss was caused by the breach, subject to the applicable rules governing matters such as remoteness and mitigation.
The contract itself may also contain provisions limiting or excluding certain liabilities, subject to their proper interpretation and applicable law.
Where the dispute concerns an unpaid contractual debt, recovery of the amount due may be the central objective.
This can arise from unpaid invoices, professional fees, goods supplied or other contractual payment obligations.
A sufficiently serious breach or an express contractual termination right may entitle a party to terminate.
However, termination requires particular care because getting it wrong can have significant consequences.
In certain circumstances, a party may seek an order requiring the other party to perform its contractual obligations rather than simply paying damages.
Specific performance is an equitable remedy and is not automatically available simply because a contract has been breached.
An injunction may potentially be sought where urgent court intervention is necessary to restrain particular conduct.
This can be especially relevant where the alleged breach involves matters such as confidential information or contractual restrictions and damages alone may not provide an adequate solution.
The Statute of Limitations 1957 expressly treats claims for specific performance, injunctions and other equitable relief differently from the ordinary statutory limitation rule applicable to simple contract claims.
A business affected by a breach should also consider what reasonable steps can be taken to prevent its losses from unnecessarily increasing.
For example, if a supplier fails to deliver essential goods, it may be appropriate to investigate whether replacement goods can reasonably be obtained elsewhere.
The precise position will depend on the facts, but businesses should avoid simply allowing losses to accumulate on the assumption that every resulting cost will ultimately be recoverable from the other party.
Keep records of the steps taken to manage the situation and the costs incurred.
Before commencing proceedings, review the contract for an agreed dispute-resolution mechanism.
Commercial contracts may require or provide for:
Negotiation between senior representatives.
Mediation, where an independent mediator assists the parties in attempting to reach an agreed settlement.
Arbitration, where the dispute is determined privately by an arbitrator rather than through ordinary court litigation.
Litigation, where proceedings are brought before the appropriate court.
The contract may prescribe particular steps that must be taken before a dispute can proceed to the next stage.
Businesses should not allow a dispute to drift indefinitely.
Under section 11 of the Statute of Limitations 1957, an action founded on a simple contract generally cannot be brought after six years from the date on which the cause of action accrued. Different rules can apply in particular circumstances and to other forms of action.
The Act also contains provisions dealing with matters such as acknowledgment and part-payment, which can affect limitation issues in certain debt claims. For example, section 65 addresses fresh accrual of a right of action following payment in respect of a debt.
Limitation issues should therefore be assessed on the particular facts rather than assuming that every commercial dispute simply has a six-year deadline.
Early advice can be particularly valuable where:
The objective of obtaining legal advice isn’t necessarily to escalate a dispute.
Often, understanding your legal position early creates more options for resolving the problem commercially.
A breach of contract can disrupt cash flow, operations and important commercial relationships. Acting quickly can help a business understand its position, preserve relevant evidence and identify the most appropriate route towards resolution.
Sherwin O’Riordan’s commercial team can advise businesses on contractual disputes, enforcement, negotiation and the options available when a commercial agreement breaks down.
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