Entering into contracts is a necessity for all businesses. Occasionally, a party may breach the contract because of financial hardship, technological failures or operational issues. So, what do you do when the other party breaches the contract? While it may be instinctive to sue the other party, this is not always in your best interests. Instead, there may be other steps you can take that will resolve the matter more quickly without substantial costs.
1. Understanding the Breach
Before taking any action, determine what kind of contract breach has occurred, as this may impact how you can resolve it.
Generally, a breach of contract may be considered either:
- a major (or material) breach; or
- a minor breach.
A major breach occurs when a party receives something substantially different to what the contract specified. This is generally due to one party’s failure to perform an essential aspect of the contract. As such, the parties can no longer fulfil the purpose of the contract.
A minor breach, on the other hand, occurs when a party breaches a non-essential obligation under the contract. Thus, the parties may continue with the rest of the agreement without altering the purpose of the contract.
Different remedies are available depending on whether a breach is major or minor. Where a major breach occurs, depending on the severity of the breach, the innocent party may be:
- entitled to terminate the contract;
- excused from performing their obligations under the contract; and
- able to seek damages where loss has occurred.
However, in the case of a minor breach, the innocent party may seek damages for losses that they suffer due to the breach. Alternatively, the court may instruct the breaching party to perform their obligations under the contract where damages are inadequate compensation for the breach.
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2. Talk to the Other Party
Contract breaches happen for all sorts of reasons. Accordingly, discussing the breach and working out a suitable resolution may be in your interest rather than ending the relationship.
For instance, consider a wholesale supplier of goods whose retailer is overdue on payment for recent orders. Consequently, the supplier may terminate the contract and end the relationship.
Although this might resolve the issue, they will lose a potentially valuable customer who may have continued to purchase the goods for years to come.
Accordingly, before taking any formal action, contact the other party. You may discover that the breach resulted from a short-term difficulty which they can quickly. After a breach becomes known, if you wish to assert that a breach has occurred, you should communicate this to the other party as soon as possible.
It is important to note that Australian Federal laws, as well as certain state laws, such as those in NSW and Victoria, require parties to a civil dispute to pursue alternative dispute resolution methods before commencing civil litigation. Such alternative dispute resolution processes may involve more informal processes, such as negotiation or court-based methods, such as arbitration or mediation. Courts and tribunals often encourage parties to use alternative dispute resolution methods to reach an agreement between themselves. This may allow you to save on time and cost.
Continue reading this article below the form3. Amend or Alter the Contract
Although you can amend your agreement verbally, we strongly recommend you record the change in writing. This is sometimes called a ‘deed of variation’. A deed of variation is simply a written and signed document stating how parties have amended the contract.
Let us revisit the above scenario with the wholesale supplier and retailer. Imagine the reason the retailer was overdue on payment was due to a downsizing of the business. As a result, the retailer no longer sells the same quantity of goods initially conceived by the contract between the parties. As a result, the parties may amend the agreement to reduce the amount of the product the retailer must order monthly.
4. Terminate the Contract
Following a breach, you may be entitled to terminate the agreement. This right typically arises when the other party breaches an essential contract term. However, a breach does not always give you this right.
Ensure that you comply with any termination clause in the contract. A termination clause outlines how a party can terminate the agreement and may require satisfying certain conditions, including:
- notification in writing; and
- a notice period before termination.
It makes sense to terminate the contract when there is no way to remedy the breach and continue the working relationship. For example, suppose the retailer who failed to pay for recent orders has also closed her shop. In that case, it is appropriate for the supplier to terminate the contract to avoid further losses because there is no hope of re-establishing a working relationship as she no longer needs or wants the supplies.
Terminating a contract due to a breach does not mean that you have given up your right to claim for any loss or damage caused to you by the breach.
5. Sue for Damages
A breach of contract usually entitles the party not in breach to recover their losses in court. This remedy is known as ‘damages’. The purpose of damages is to put you in the position you would have been in had the breach not occurred.
This may be an appropriate option if the other party’s breach has left you significantly out-of-pocket or has caused you some other loss. For example, let us say the retailer, after closing her shop, owes the supplier $40,000 for several unpaid orders and has refused to pay. The supplier can likely sue the retailer to recover the $40,000 it has lost because of the contractual breach (failing to pay for orders per the contract).
When considering this option, you should be aware of the costs and risks of litigation. In particular, litigation can be costly and time-consuming. Furthermore, there is no guarantee that the breaching party will have the means to pay out any judgement made against them.
Key Takeaways
When faced with a breach by the other party in a contract, think carefully about what option best suits your business. This may not always be termination. However, if termination is appropriate, ensure you comply with any relevant contractual terms.
If you need help with contractual breaches, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A breach of contract occurs when a party bound by an agreement fails to perform their obligations under the terms of that contract without a valid legal excuse. Generally, a contract breach will be considered either major or minor.
If another party breaks a contract, you should immediately seek legal advice on your possible options. Depending on what kind of breach has occurred, you may be entitled to certain remedies, such as a right to terminate the contract, damages for losses incurred by you, an injunction to stop the other party from performing a certain action, or specific performance (requiring the other party to perform their obligations under the contract. Alternatively, you can resolve the matter with the other party through negotiation or mediation outside of court.
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