If you run a business, you will likely need to enter into many different kinds of contracts. Unfortunately, people do not always stick to their agreements. If the person who has breached your contract is a customer, it can be difficult to know what to do next. This article will outline:

  • the key considerations to think about if you believe a customer has breached their contract; and 
  • how you might be compensated for that breach. 

Is There a Contract?

If your customer has not fulfilled their obligations, the first step is to consider the terms of your agreement. If you have a written contract, this will typically make resolving the dispute and receiving compensation easier. Well-drafted contracts will clearly state when a party has breached the terms and what compensation the other party can receive.

However, It is common for businesses to send invoices without written terms and conditions of sale. Even if your agreement is not in writing, you may still have rights under a breach of contract. A contract can be verbal, so long as you can show that: 

  1. an offer was made by one party and accepted by the other;
  2. You both agreed on key terms (such as delivery time and place); 
  3. you both intended to enter into a contract with each other; and 
  4. some consideration or payment was exchanged for goods or services. 

If you can prove these steps took place, you will likely be able to show that you had a contract. You can then investigate the seriousness of your customer’s breach and what compensation you may be able to recover

How Has the Customer Breached the Contract?

Your options will depend on how the customer has breached your contract. Common types of breach of contract include:

  • material breaches (i.e. the customer has not followed one of the essential terms); 
  • minor breaches (i.e. breaches that you are able to correct);
  • anticipatory breaches (i.e. the customer states that they will not follow the contract before the time comes for them to do so); and
  • actual breaches (i.e. the buyer does not follow the contract by the required date).

Most of the time, buyers of goods and services breach their contracts by failing to pay on time. Failure to pay would likely constitute a material breach, as payment would be an essential term of the agreement.

How Much is The Contract Worth?

You should also consider how much the breach has, or will, cost you. 

For example, your response to a breach of a $2,000 contract will be different from your response to a breach of a $200,000 deal. 

If the contract is for a minor sum, it may be best to seek compensation through:

  • commercial settlement;
  • a payment plan; or 
  • an agreement between you and the buyer. 

This is because legal services and debt recovery can quickly become more expensive than the value of the deal itself. 

If a customer has breached a contract for a relatively small amount, you should provide reminders and attempt to negotiate with them. You should also emphasise your legal rights. 

For example, by using a negotiation discussion to explain the terms of the contract and the customer’s breach, you can demonstrate to your buyer that you are within your rights to pursue the claim.

Sometimes, the threat of legal action on clear, strong grounds is sufficient to jolt the party in breach into action. 

What Should I Do First?

If a customer has breached a contract with you, it is always good to follow up as soon as possible. Consistent reminders may be enough to make a good-willed client pay. Following up reminders via email and phone can help to remind a forgetful customer. Unfortunately, however, this may not always be enough to get a customer to pay.

What if I Do Not Get a Response?

If the customer ignores your reminders, you may need to send a letter of demand. This is a more serious notice. Letters of demand formally outline: 

  • your claim to the money the customer owes;
  • when you expect to receive payment; and 
  • the consequences of non-payment. 

Sending a letter of demand can encourage your buyer to take action. 

Going to Court

If the above steps fail, you may need to take the customer to court. Going to court is an expensive process, so you may only wish to take this final step if the value of the breach is high.

The first step in going to court is to file a statement of claim. The statement of claim triggers legal action and notifies your customer that you are pursuing the breach of the contract. It will outline the:

  • relationship between you and the breaching party;
  • details of the breach; and
  • compensation you require. 

After you file a serving a statement of claim, your customer has between 21 and 28 days to respond. They may respond by: 

  • filing a notice of defence;
  • attempting to negotiate with you; or 
  • ignoring the claim completely. 

If you are unable to reach an agreement, the court will decide whether your customer breached their contract with you and award you damages.

Key Takeaways

If a customer breaches their contract with you, they will usually do so by failing to pay on time. If you have agreed on payment by a certain date and your customer fails to meet the deadline, you may be able to seek damages. However, it is generally quicker and more cost-effective to try to negotiate with the other side before commencing legal action.

If the customer’s breach does not involve failure to pay, negotiating with them can often resolve the dispute before you resort to commencing court proceeding. If you need help with a breach of contract, contact LegalVision’s dispute resolution lawyers on 1300 544 355 or fill out the form on this page.

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