In the dynamic business world, contracts are the lifeblood that keeps transactions and agreements in order. However, not all contractual relationships go smoothly. Breach of contract is an unfortunate but common occurrence, and it occurs when one of the parties to the contract fails or omits to perform or fulfill their part of contractual obligations as per the terms and conditions mentioned in their commercial contract.
It is not uncommon that commercial relationships are dissolved due to partial performance, late performance, anticipatory breach, etc., and it is necessary to understand what the rights available to the non-defaulting party over the defaulting party which can be claimed due to the breach and dissolution of commercial relationship between the parties.
The remedies available are crucial. In this article, we’ll explore the common remedies for breach of contract in business, shedding light on the legal and equitable solutions that help restore balance and fairness.
Events Constituting Breach of Contract
Every contract contains unique terms and conditions that vary per the commercial relationship which the parties have created between themselves. Similarly, events or actions that constitute breach or default will vary depending on the terms and conditions.
The contract is considered to be breached when either of the parties creates an undesirable event or constitutes failure upon any of the parties to perform its contractual obligations, which are necessary for the performance. These events are not limited or exhaustive but are created as per the contractual terms, some of which are as follows:
- Failure to Perform
- Partial Performance
- Violation of Non-Disclosure or Non-Compete Agreements
- Constituting an Event of Default
Damages are the most common remedy for a breach of contract. Damages are a form of compensation due to a breach, loss or injury. They aim to compensate the other party for any loss suffered as a result of the breach. There are three primary types of damages:
- Compensatory Damages: Compensatory damages refer to actual losses incurred by the non-defaulting party due to the other party’s breach of contractual obligation. The primary goal of compensatory damages is to restore the affected party to its original position before the breach occurred. In United Kingdom (U.K.), compensatory damages are awarded only if the pecuniary loss incurred by the claiming party is identifiable and measurable, in other words it is also known as “damages for loss” which is a fundamental concept in contract. Common Law principles and case laws.
- Consequential Damages: Consequential damages, as the name suggests, refer to the damages arising from the defaulting party’s actions in any contractual agreement. These damages are special damages and are recoverable if they are foreseeable, are enumerated in the terms of the contract, and can be both direct and indirect. For instance, if a supplier fails to deliver goods to a manufacturer, it can cause direct consequential damage, such as loss of profit. On the other hand, if the supplier delivers defective goods, it can lead to indirect consequential damage, such as loss of reputation and future business opportunities. In U.K. the principles governing consequential damages in the contract law are largely based on common law and the interpretation of the specific contract terms. It means that when a party to the contract suffers any loss due to the breach by the other party, they are entitled to receive compensation for any loss or damage caused.If you want to include consequential damages in your contract, its important to seek the help of legal professionals, you can visit our website LegaMart.
- Punitive/Exemplary Damages: Punitive damages, also known as exemplary damages, are awarded by courts in addition to actual damages when the breach of contractual obligation is motivated by a mala-fide intent, such as recklessness and deceit. Punitive damages are a form of punishment awarded to the non-defaulting party. Punitive damages are prevalent in common-law countries like the United Kingdom. The concept of punitive damages was established in the UK in the case of Rookes v. Barnard [ 1 All ER 367]. The case provided three categories in which punitive damages may be awarded:
- Actions that are arbitrary, oppressive or unconstitutional done by government employees.
- Wrongful conduct performed by the party in furtherance of their benefit exceeds the compensation payable to the other party.
- Authorised through statutory provisions.
There are other types of damages, which are as follows:
- Liquidated Damages: Almost all contracts include a provision for liquidated damages predetermined and agreed-upon damages in the event of a breach. Liquidated damages clauses are designed in such a manner as to provide the non-defaulting party a right to recover the damages, which are based on the principle of predictability and certainty in cases of breach. However, courts will scrutinise such clauses to ensure they are not punitive or excessive. In U.K., liquidated damages are governed by the terms of the contract or the law of the contract, so the common law principles and the legal precedents are the sources of law. Contract between the parties addresses the liquidated damages and these damages are pre-agreed or decided at the time of negotiations in a specific value or through a calculation mechanism.
- Mitigation of Damages: Damages are a right against the breach of contract, and the party claiming against such breach is very well entitled to recover the loss suffered. However, the claimant cannot claim endless damages merely because there is a breach of contract. Mitigation of damages means when the party who is not at fault or the innocent party should take reasonable steps to avoid or reduce the loss suffered. Mitigation of damages is a principle recognised internationally in the sale of goods, wherein the United Nations Convention on Contracts for the International Sale of Goods is recognised and has been implemented in almost 89 countries including U.K. In the event of a breach, the duty to mitigate the damages is paramount, and the duty to take reasonable actions to avoid any further loss can vary from case to case, as commercial transactions and performance in a contract are unique arrangements between the parties.
Damages are the most common solution for breach of contract globally. However, since contracts often involve complex relationships and unique arrangements between parties, the terms of each contract can differ based on the needs of those parties. In such a scenario, equitable remedies come into the picture, which can either supplement or replace damages, depending on the specific circumstances of the case. In some instances, an equitable remedy may be more beneficial than seeking damages through litigation. This allows the innocent party to prevent the other party from breaching the contract or to compel them to fulfil their part of contractual obligations.
Some of the types of equitable remedies are as follows:
In cases where damages may not be adequate or are not quantifiable in any specific value, the specific performance of such a contract can be remedied through specific performance. Specific performance is a remedy issued through the assistance of a court that compels the defaulting party to fulfil their part of contractual obligations. Specific performance is issued in contract disputes involving unique assets or services where monetary compensation alone would not suffice.
For example, in real estate contracts, a court may order the sale of a property as initially agreed, along with penalty and other benefits of delayed performance.
Specific performance is an equitable remedy that is granted in the normal course in cases of contract for sale of land in case of failure to complete contractual obligations. The factors which leads to decline for the claim of specific performance where the court is satisfied that there was exceptional hardships and delay.
Injunctions are legal orders prohibiting or restricting any party from performing certain actions. They are typically issued by a court against a party who has not fulfilled their contractual obligations and has caused, or is likely to cause, harm to the other party.
There are two types of injunctions –
- Prohibitory Injunction: A prohibitory injunction is issued when one party seeks to prevent another party from engaging in an action that could lead to a breach of contract and cause harm to the innocent party. For instance, inserting a non-compete clause in a commercial contract and then seeking a prohibitory injunction to prevent the other party from starting a competing business.
- Mandatory Injunction: On the other hand, a mandatory injunction is issued when a breach has already occurred, and the court is convinced that damages alone cannot rectify the situation. In such cases, the court orders the defaulting party to take specific actions to rectify the breach. For example, delivering goods to the other party when the contract is for selling goods.
Commercial relationships are primarily built upon the execution of contracts between parties. These contracts help to establish secure and trustworthy relationships. However, if one party fails to fulfil its contractual obligations, it can lead to a breach of contract, disrupting the business relationship and causing financial losses. The primary objective of creating business relationships through contracts is to provide remedies to the innocent party, such as specific performance, injunctions, damages, etc. Parties must be aware of these remedies to protect their interests in business transactions and avoid suffering losses that could impact their business.