When entering contracts on behalf of your business, you must be aware if you or the other party breach the agreement. If you commit a breach, you risk liability and legal action from the other party. Alternatively, if the other party commits a breach, your business may seek a remedy depending on the situation and your goals. It can be difficult to work out if a party to a contract is in breach of contract. In some circumstances, this confusion may result from a poorly drafted contract. Nevertheless, a party can breach a contract in many ways. In this article, we set out the three major breaches of contract that commonly occur.
1. Material Breach
The first and most severe type of breach is a ‘material’ breach (also known as a ‘fundamental breach’). Generally, a material breach of contract involves failure to provide or undertake one of the key elements of the contract.
For example, material breaches might occur in the context of online shopping. Suppose you purchase a complete computer package online and only receive a monitor upon delivery. In this case, the online retailer has materially breached your contract. This is because they did not fulfil their contract with you by providing a complete computer package.
Many complex contracts define what is and is not a material breach of contract. However, basic everyday contracts generally do not. Generally, upon a material breach, the contract will be deemed to have ended. Once this occurs, the party who suffers from the breach is in a position to claim remedies, including damages.
2. Minor Breach
It is important to be clear that not all breaches of a contract will be material. As per the previous example of online shopping, imagine that the computer retailer delivers all the computer equipment you order. However, you discover that a couple of pages were missing from the user manual. This would not be a material breach but would likely constitute a minor breach instead.
In most cases, a minor breach by one party does not give the other party the right to terminate the contract. However, the party in breach would nonetheless have to remedy the breach of contract.
Continue reading this article below the form3. Repudiation
Repudiation of a contract involves one of the parties stating or indicating that they will not fulfil their side of the contract before they are due to do so. This may be either because they are unable or unwilling to. The repudiating party will usually notify the non-breaching party of their intentions, however, occasionally, it may be implicit. Some ways to demonstrate repudiation of a contract include:
- through words or conduct proving a refusal to comply; or
- an inability to perform or circumstances that prove a repudiation.
The threshold for whether or not a party intends to breach their obligations is quite high in Australia. Australian courts have determined the test to be whether the conduct of a party is such to convey to a reasonable person in their situation, renunciation (rejection) of the entire contract or a fundamental obligation under the contract. For example, repudiation under the online shopping scenario might arise if the computer retailer told you they no longer intended to ship your order to Australia or no longer stocked the relevant items after you had already paid a deposit. This would make it impossible for them to perform their obligations, giving you the right to terminate.
While this type of breach of contract is uncommon, it still entitles the wronged party to remedies. In connection with an anticipatory breach, the non-breaching party needs to take immediate legal action instead of waiting for a breach to occur. If the non-breaching party allows the refusal to take place and does not take timely action, the contract will remain in force, and they will no longer be able to terminate for that particular breach.
Mitigating Breach of Contract Risks: Proactive Measures
Firstly, it is very important to draft comprehensive contracts. The foundation of a strong contractual relationship begins with a well-drafted agreement. Invest resources in drafting clear, comprehensive contracts that leave no room for ambiguity. Explicitly outline the parties’ obligations, performance standards, timelines, and consequences for non-compliance in your contracts. Incorporate precise definitions, detailed scopes of work, and clear termination clauses to significantly reduce the risk of disputes arising from differing interpretations.
Secondly, it may be prudent to include dispute resolution mechanisms in your contract so that if a breach does occur, the dispute resolution process can function far more seamlessly and cost-effectively than unbridled legal action. Contract clauses outlining the use of mediation or arbitration can be very useful. These mechanisms provide a structured approach to resolving conflicts before they escalate into full-blown breaches, potentially saving you time, resources and money, as well as providing a better chance of preserving business relationships.
Lastly, you should ensure consistent monitoring of contract performance. Indeed, effective contract management doesn’t merely end with the signing of the agreement. Establish robust monitoring procedures to ensure both parties are adhering to the contract terms. Implement regular progress reports, performance reviews, and open communication channels. These measures will help you identify potential breaches early, allowing for timely corrective action or renegotiation of terms if necessary.
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Key Takeaways
If you are a party to a contract that has been breached in one of the above three ways, you need to work out what remedies you are entitled to. It is important to do this as soon as possible after suspecting a breach (or potential breach), as a failure to enforce your rights promptly may result in losing them. If you need help with a breach of contract, 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
If you anticipate the other party will breach your contract, you can sue them. However, this type of breach is not very common.
While proving a breach of contract will always depend on the circumstances, you will need to prove that the term of the contract existed and that the other party breached this term.
If someone breaches a contract, the other party may be entitled to terminate the contract. They may also be entitled to the payment of monetary damages.
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