Contracts are commonplace in everyday life, whether in business or in your personal life. You would have also likely heard the term ‘breach of contract’. However, what constitutes a breach of contract, and when does it occur? How do parties prove a breach? What are the consequences? Below, we’ve answered seven frequently asked questions and what they could mean for you.
1. What is a Breach of Contract?
A breach of contracts occur in two instances:
- Failure to perform; or
- Anticipatory Breach.
2. What Does ‘Failure to Perform’ Mean?
Failure to perform occurs when a promisor fails to perform their contractual obligation(s) per their applicable duty. Performance and breach of a contract are two sides of the one contractual coin. Failure to perform can occur where there is:
- Non-performance: no performance of a contractual obligation at all;
- Defective performance: the promisor performs their duty but not to the quality or quantity specified in the contract; or
- Late performance: performance as per the contract after the time allocated in the contract for performance.
As this list makes clear, breach of contract does not only occur when the parties fail to reach the point of performance. In the context of failure to perform, a court will only determine breach after considering the fundamental question: ‘What did the promisor really promise?’
When you ask that question, you need to consider two different points:
- The scope of the contractual duty; and
- The standard of that duty
3. What is the Scope of Contractual Duty?
The scope of the contractual obligation refers to what a promisor promised. Breach is likely if a party failed to do something that was within the scope of their pledge.
4. What is the Standard of Duty Under a Contract?
The standard of a contractual obligation refers to that standard a party promises to reach or abide by when they perform their contractual duty.
Breach of contracts occurs when the promisor does not perform their duty consistent with the appropriate standard. Standards can be strict. Alternatively, a party must use care, skill or diligence when performing their obligation.
A strict standard of duty means that a party can be in breach even if a party has done their utmost to perform. In other words, a breach is independent of the exercise of care.
If Harry delivers goods to Sally that do not meet the quality specified in their contract, Harry will be in breach. This breach is even if they did all they could to perform. For example, Harry made sure to purchase the goods from a reputable source.
However, if the standard of duty applicable to the contract is care, skill or diligence, it requires a party to use the requisite care, skill and diligence when performing the contract. A breach occurs when and if the promisor does not use that skill, even if performance does not take place.
For example, Harry promises to use reasonable endeavours to obtain a liquor licence and deliver wine to Sally. Suppose Harry uses all reasonable efforts to obtain the licence but is nonetheless refused. Consequently, Harry cannot deliver the wine to Sally. Harry will not be in breach of the contract for failing to deliver the wine.
5. What is Anticipatory Breach?
An anticipatory breach occurs when the promisee terminates a contract before the time set down for performance. They do so because the promisor’s words, conduct or situation prompt either a repudiation of obligation (they refuse to perform) or indicate that they cannot perform.
6. How do you Prove a Breach of Contract has Occurred?
In the context of failure to perform, a party alleging breach needs to prove that the promisor has failed to comply with the applicable standard of duty.
If that standard is duty, care or skill, a party needs to show that the promisor failed to exercise the necessary degree of care, skill or diligence required in the contract.
If the standard is strict, you need only to prove that you have not received the performance.
For anticipatory breach, you will need to demonstrate repudiation of the contract based on sufficiently serious objective acts and omissions such that a party is justified in terminating a contract.
7. What are the Consequences of Breach?
A party that breaches a contract will most likely have to pay damages. Damages are intended to compensate a party for the loss or damage that they have suffered. The general idea is to place a party in the same position as though the wrong had not occurred.
Damages are not designed to penalise a party, and a court typically assesses them on the basis of expectation and reliance:
- Expectation damages refer to a promisee’s right to receive the promised performance;
- Reliance damages take account of any money spent in reliance on the performance of the contract.
Of course, other remedies are possible. These include a promisor having to pay a liquidated sum specified in the contract in the event of non-performance. If a promisor unjustly enriches themselves by not performing, a promisee may also receive restitution. A court can also order specific relief such as specific performance or an injunction.
If you have any questions about breach of contract or need assistance drafting a contract for your business, get in touch on 1300 544 755.