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Many people are surprised to know how many contracts they enter into on any given day. You might be buying a coffee at your local cafe or entering into an important commercial arrangement for your business. Either way, you are entering into contracts. Despite how prevalent contracts are in our everyday lives, there is a lot of legal jargon that you may be unfamiliar with. This includes phrases like ‘breach of contract.’ 

You can easily form a contract, and you can also easily breach one. To help you better understand breach of contract, this article will answer seven frequently asked questions. 

1. What Is a Breach of Contract?

Breach of contracts can occur in two instances:

  • a party to the contract fails to perform their obligations in the contract; or
  • there is an anticipatory breach.

The first instance is fairly simple. When someone signs a contract, they promise to perform certain obligations. If they fail to do so, they will likely be in breach of contract. For example, in a contract for the sale of furniture, the manufacturer’s failure to provide you with the contracted furniture would likely be considered a breach. 

On the other hand, an anticipatory breach may be more difficult to prove. This is where one party to the contract cannot fulfil their obligations and indicates their intention to ‘walk away’ from their obligations. For example, you may enter into a contract for the sale of land but realise you have insufficient funds to purchase the property before the settlement date. In this case, you will likely be in anticipatory breach of the contract. 

2. What Does a ‘Failure to Perform’ Mean?

If you fail to complete your obligations under a contract, this is a ‘failure to perform’. You can think of the performance of a contract and a breach of contract as two opposing sides of one contractual coin. A failure to perform can occur where there is:

Non-performance

You do not perform your contractual obligations at all. 

Defective performance

You perform your obligation but not to the quality or quantity specified in your contract.

Late performance

You perform your obligations after the time specified in your contract. 

For example, in the contract for the sale of apples, you might have promised to select and provide a specific grade of apples. You will be in breach for non-performance if you fail to deliver the apples at all. On the other hand, if you deliver the apples but fail to select the specific grade required in the contract, this would be considered a defective performance. Finally, if you deliver the right grade of apples but do so two months after the date of delivery specified in the contract, this would be considered late performance of the contract. Whilst these examples follow a simple transaction, a failure to perform can of course operate in a larger commercial context. 

3. What Is The Scope of My Contractual Duty?

The scope of your contractual obligation refers to what you promised to do upon signing the contract. In the context of failure to perform, a court will decide that there is a breach based on what you actually promised to do. This requires a close analysis of the written terms of your contractual agreement, as well as any implied terms which may have affected the scope of your performance under the contract. 

In a building contract, the scope of your contractual duty would include the specific requirements of the renovation. For example, this would include the demolition of a particular wall, the construction of new steps, and so forth. 

There may also be terms implied by law that you have not specifically outlined in the contract. For example, in many service contracts, there is an implied duty that you will execute the service with due care and skill. When determining the scope of your contractual duty, a court will attempt to give effect to what you and the other contracting party agreed to. 

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4. What Is a Standard of Performance?

When you sign a contract, you might agree to meet a certain standard when performing your obligations. There are many ways in which a contract can ‘set the bar’ for the performance of an obligation, and we look at a few common standards here.

Generally, parties in a commercial contract might agree to use care, skill or diligence when performing their obligation. However, similar to the example above, you can breach your duty if you do not perform your obligations using reasonable care, skill or diligence. 

For example, a tradesperson may have completed a renovation project in accordance with the specificities of their contract. However, the tradesperson may be in breach of the contract if they failed to exercise the care, skill or diligence expected of a similar tradesperson in their industry. Ultimately, the standard will differ depending on the terms of the contract you have entered into and your level of expertise. 

This means that even if you perform your obligations under the contract, you may still be in breach if you fail to meet your contract’s strict standard.   

5. What Is an Anticipatory Breach?

Put simply, an anticipatory breach occurs when you indicate that you are no longer able to perform your obligations under a contract. This can be because you refuse to perform your obligations under the contract for some reason. Perhaps you are not able to perform your obligations financially.

For example, if you enter into a contract for sale of apples but realise you cannot deliver the apples on time and you let the other party know, you will likely be in anticipatory breach of the contract. 

6. How Do I Prove That a Breach of Contract Has Occurred?

If the other party to your contract has failed to perform their obligations, you must prove that a breach has occurred. In a similar vein, if the other party has not performed to the standard of care, skill or diligence specified in the contract, you will need to prove that the party failed to meet this standard.

If the standard is strict, you need to prove that you have not received the performance of this standard under the contract. For an anticipatory breach, you will need to demonstrate repudiation of the contract based on the objective acts or omissions of the other party.

7. What Are The Consequences of a Breach of Contract?

If the other party to your contract is in breach, they may have to pay you damages. Damages are intended to compensate you for the loss or damage that you have suffered or may suffer as a result of the breach. 

The general idea is to place you in the same position as though the wrong has not occurred. 

Indeed, damages are not designed to penalise a party. For this reason, a court will typically assess damages as either:

  • expectation damages, which refers to your right to receive the promised performance of the contract; or
  • reliance damages, which take into account the funds and efforts you have exhausted in reliance on performance of the contract.

Of course, there may be other remedies particular to your contract. For example, your contract might include a clause that stipulates what will happen in the event of a breach. In this case, the party in breach of the contract might be obliged to pay a liquidated sum specified in the contract for failing to perform their obligations. Furthermore, a court might order specific performance or an injunction depending on the nature of the contract you entered into. 

Key Takeaways 

A breach of contract can arise if someone fails to perform their obligations under the contract or there is an anticipatory breach. An anticipatory breach occurs when a contracting party indicates that they are unable to perform their obligations prior to the time that the contract stipulates that they must perform their obligations. Generally, a breach of contract will entitle you to damages for the loss you suffered as a result of the breach. 

If you have any further questions about breach of contracts, LegalVision’s experienced commercial contract lawyers can help. Call us on 1300 544 755 or complete the form on this page.

Frequently Asked Questions

I signed a contract without reading its terms. Is it still legally binding?

If you signed the contract, you are legally obliged to perform its obligations even if you did not read its terms in full. There are, however, exceptions to this rule. For example, where the other party exerts an undue influence over you which compels your entry into the contract. 

What is the parol evidence rule? 

The parol evidence rule prevents parties from introducing extrinsic evidence to determine the interpretation of certain clauses in a contract. Generally, the rule is designed to provide a presumption of finality to parties signing an agreement. However, there are some limited exceptions to the rule such as where there is ambiguity about the meaning of a certain contractual term.

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