Broken Promises: The salient aspects of breach of contract

Contracts impose various obligations on the parties and if one of the parties does not carry out any particular obligation, they are said to be in breach of contract.

It goes without saying that for there to be a breach of contract, there must be a valid contract between the parties. In most cases, fault is required for a breach of contract to occur, and this can be either deliberate or negligence.

According to the common law, a breach of contract can be classified as a major breach or a minor breach. A major breach may justify terminating the contract while a minor breach may for example only allow the innocent party to claim damages but not terminate the contract.

The innocent party to a contract that has been prejudiced by such breaches has the following remedies available:

• Terminate the contract
• Damages
• Uphold the contract and claim specific performance together with damages

Damages may be further classified into General Damages or Special Damages. General Damages naturally flow from the specific breach, and Special Damages do not naturally flow from the breach but can be reasonably anticipated.

The general rule for termination is that a party may only terminate if the breach is so serious that it goes to the root of the contract. Due to it often being difficult to determine whether the severity of the breach is sufficient to warrant termination, construction contracts usually stipulate the grounds for termination.

Late completion is hardly the case for termination of a building contract since the remedies for late completion are usually specified in the building contract, i.e. penalties. Where there is a cogent ground to terminate a building contract, the requisite procedural steps are prescribed in the contract to invoke the termination procedure. Non-compliance with the termination procedure in itself may be a breach of contract.

The general rule where a contract is terminated due to breach is that the innocent party is placed in a position, he would have been in had the breach not occurred. This presents practical problems in a building contract since it may be unreasonable to demolish a building and refund the purchase price to a client claiming breach. Therefore, the innocent party may be limited to claiming damages which may include the cost of rectifying the work and financial losses he can prove.

The most common breach is late completion by the contractor. Due to the difficulty in proving the damages suffered, parties usually agree to a pre-estimate rate for liquidated damages known as penalties. In this instance, a client under a building contract cannot also claim damages for late completion or claim damages in lieu of the predetermined penalty amount.

Defences against a claim for breach of contract include the following:

• Mistake
• Duress
• Impossibility of Performance

The landscape concerning breach of contract can be complex. In an effort to be unambiguous, most construction contracts cover the most common areas that may be considered a breach of contract and provide the remedies therein. This further emphasises the importance of following the agreement. To further elaborate on this point, consider the following generalised examples:

• As highlighted above, a common breach of contract is late completion, and the client may claim penalties.
• A contractor who is paid late may elect to suspend the work and claim an extension of time with costs.

Should you have any further queries on this topic, please contact the Association.

Bilaal Dawood

Head: Membership Services