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I am a Business Owner. What Should I Know About Breach of Contract?

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In today’s day and age, contractual relationships between businesses are becoming more frequent and complex. Consequently, there is a greater potential for a business to breach of contract. As a business owner, you must understand:

  • what a breach of contract in business is;
  • in what instances a breach can arise; and
  • the consequences of a breach of contract in business.

By understanding these features, you can gain a better understanding of the legally binding agreements you enter into. However, you can also avoid breaching any contractual terms that you are obliged to fulfil.

Breach of Contract

Put simply, a breach of contract in business can arise when a party commits an actual breach or is in anticipatory breach of a contractual agreement. 

Actual Breach

In the first instance, an actual breach involves a contracting party failing to perform their obligations under a contract. For example, if the manufacturer of roof tiles fails to provide you with the tiles you contracted for, this would likely be considered a breach of contract. A failure to perform can occur when a party:

  • fails to perform their obligations per the contract terms altogether;
  • performs their obligations but not to the standard specified in the written contract; or
  • performs their obligations but does so after the time specified in your contract.

Anticipatory Breach

In the second instance, an anticipatory breach refers to the situation where a contracting party can no longer fulfil their obligations. To be in anticipatory breach of a contract, a party must indicate their intention to ‘repudiate’ or ‘walk away’ from their obligations.

For example, if you enter into a contract for the sale of furniture but realise you do not have the funds to purchase the furniture before the settlement date, you will likely be in anticipatory breach of the contract.

An anticipatory breach typically arises when businesses are no longer financially capable of performing their contractual obligations. It can also arise when they refuse to be bound by the agreement for some other reason.

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Standard of Performance

Parties to a commercial contract will also generally agree to meet a standard of performance when fulfilling their contractual obligations. This standard typically requires that parties use care, skill and diligence when performing their obligation. In the instance where someone fulfils their contractual obligations but fails to meet the standard of performance required in the contract, you may also sue for breach of contract.

Say you enter into a contractual arrangement with a builder to renovate your storefront. They might have fulfilled all their obligations under the contract, like tiling the entryway, fitting new doors, and building display cabinets. However, if the builder was careless in fulfilling their obligations, resulting in a faulty renovation, they would likely be in breach of the contract.

Ultimately, the standard of care will differ depending on the terms of your contract. What is important to note is that a party’s breach of a contractual obligation is independent of their failure to exercise the standard of performance required under the contract.

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Consequences of a Breach

If a party has breached their contractual obligations, you are generally entitled to damages. Damages should not penalise the party in breach but compensate you for the loss you suffered or may have suffered as a result of the breach. A court will award you damages with the intention of placing you in the same position as though the wrong had not occurred.

Suppose you paid your supplier $50,000 for the delivery of goods for your business under a contract of sale. If the supplier refuses to deliver these goods, you could sue for breach of contract. This will likely entitle you to recover the $50,000 lost since you failed to receive your goods as a result of the breach of contract.

There may be other remedies particular to your contractual arrangement. For example, your contract might specify a sum for liquidated damages in the instance where a specific breach arose. Additionally, litigation might entitle you to equitable remedies such as an injunction that can prevent any further breaches from occurring. All in all, you should be aware that litigation is both costly and time-consuming. For this reason, it is a good idea to seek legal advice in the instance where you suspect a breach in order to explore other legal avenues available to you.

Key Takeaways

A breach of contract typically arises when a party fails to fulfil their contractual obligations. A party can also be in anticipatory breach if they indicate that they no longer want to be bound by the contract or fail to meet the standard of performance required under the contract. If you have any questions about a breach of contract, LegalVision’s experienced contract lawyers can help. Call us on 1300 544 755 or complete the form on this page.

Frequently Asked Questions

What is specific performance?

Specific performance is where a court orders a party in breach of their contractual obligations actually to perform their obligation. A court will only order specific performance for a breach of contract in limited instances where damages are inadequate. For example, a court may order specific performance when a vendor is in breach of a contract for the sale of land.

What are punitive damages?

Punitive damages go beyond simple compensation. Instead, punitive damages seek to punish the wrongdoer for the breach they committed. Generally, contract law in Australia does not allow for the award of punitive damages. 

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