Contracts are a common tool used throughout our lives to create legal relationships between parties. They define what actions people will take.
If you have entered a contract with another party, you must abide by its terms and conditions. Any failure to perform an obligation required by the contract—such as not completing an obligation within a set time—will be a breach of contract.
If a breach of contract occurs, what happens next depends on the type of term breached and other laws that might apply to the specific contract.
What is a breach?
A breach of contract happens when one party fails to abide by a term of the contract. This can involve both express and implied terms.
When express terms are involved, it is much clearer that a breach of contract has occurred. With implied terms, it may be less clear that a term has been breached, or a party might not even be aware the term exists. For example, employment contracts include implied terms such as a term of fidelity. Disclosure of confidential information by an employee might also amount to a breach of contract.
Partial Breach
A partial breach of contract, also called a minor breach, occurs when the terms of the agreement have been partly satisfied. This can happen in different contracts in various ways. For instance, in a contract for supply of goods, delivering only some of the purchased goods would be a partial breach of contract. Similarly, in a building contract, performing some works without meeting the required standard may be a partial breach.
When there has been a partial breach, parties usually try to make good by performing the outstanding obligation. However, there could be a dispute about whether the breach caused financial loss.
Breach of an essential term
Essential terms of contracts contain key requirements. A term is essential if a party would not have entered the contract without assurance that the obligation would be met.
Unlike a partial breach, a breach of an essential term has a much greater impact. The affected party loses the benefit they expected from the contract’s performance. The remedies available for breach of an essential term differ from those for partial breaches.
Remedies
When a breach of contract occurs, the available remedy depends on the type of term breached.
As noted above, parties commonly try to remedy a partial breach by completing the remaining obligations. However, if the breach causes financial loss, this could lead to a dispute over compensation.
In cases of breach of an essential term, a party is usually entitled to terminate the contract. This ends the legal relationship and releases them from any unperformed obligations. After termination, the party can seek damages for the breach. Damages may compensate for actual loss, which must be proven. If no damage is proven, damages awarded will likely be nominal.
If a party “affirms” the contract by continuing to treat it as valid, they lose the right to terminate. Therefore, it is important to consider your options and seek legal advice if you believe an essential term has been breached.
Another possible remedy is specific performance, which the court may order. This remedy is discretionary and only applies if damages are inadequate. The court will only order specific performance if the contract remains in force. Specific performance will not be ordered if:
- It forces the parties to maintain a personal relationship, such as in employment contracts.
- The obligations under the contract are unclear.
- Specific performance would cause unconscionable hardship for the defendant.
Conclusion
Contracts frequently set out the terms and conditions agreed upon by parties. A breach of contract happens when a party fails to uphold a promise under the contract. The remedy depends on factors including the breach type and circumstances.
This information is general in nature only. If you believe someone has breached a contract you entered, or if you have been accused of breach, we recommend obtaining legal advice. For personalised assistance, please contact our office (02) 9466 5189 or email [email protected].