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Sarah-Lawrence

What is breach of contract?

In business and in life, we enter into contracts with other people. Contracts can be written agreements or verbal agreements, but at the end of the day, a contract is simply an agreement between two parties as to what each party will do (their obligations), and what they will receive in return (their rights).

A breach of contract is a failure by one party to do something that he/she has agreed to do under the contract.

Let’s imagine that you have a contract with a car hire agency. The agency has agreed to deliver a rental car to your offices on Monday morning at 9 am. Monday morning comes, and no car arrives – the agency has breached the contract.

Kinds of breach

Breaches can be done intentionally, but they can also be done by accident.

Staying with the example above, the car hire agency may have breached the contract intentionally by deciding to send the rental car to another (higher-paying) client.

On the other hand, the breach could have occurred accidentally, because the bookings clerk simply forgot to tell the driver to deliver the car.

From a legal perspective, it does not matter whether a breach was intentional or accidental – it is still a breach of the contract.

Breaches can be minor or they can be serious. Minor breaches are often referred to as ‘immaterial breaches’, while serious breaches are referred to as ‘material breaches’. Whether a breach is minor or serious depends to a large extent on why the parties entered into the contract in the first place.

In our car rental example, delivering the car half an hour later than the agreed time might be a minor breach where you (the recipient of the car) are not under any time pressure.

But if you needed the car by 9 am to catch a flight at 10h30 so as to make a conference at which you were the guest speaker at 13h00, then delivering the car half an hour late would be a serious breach, because the whole purpose for which you rented the car in the first place would have been defeated.

What happens if the contract has been breached?

If one party to the contract has committed a breach, and the breach is something that can be fixed, the other party should call upon them to fix their breach and give them a reasonable amount of time to do so.

For example, the car hire agency was supposed to deliver the car at 9am on Monday morning and it fails to do so. However, it doesn’t really matter to you whether you receive the car on Monday or Tuesday, so you would call upon the agency to fix the breach by delivering the car as soon as possible.

If the breach is something that cannot be fixed, there is no need to give the breaching party a chance to fix the breach. So, if late delivery of the car caused you to miss your flight and the conference, it would be too late for the agency to fix their breach, because you would no longer need the car at all. There would be no point, and no need, for you to give the agency a chance to rectify.

Remedies for breach

If the car rental agency fails to fix its breach in the time period that you’ve given them, or if it is not possible to fix the breach, you would have a choice.

On the one hand, you may –if the breach is material – cancel the entire contract, and claim restitution of any monies that you may already have paid (such as a deposit that you had paid upfront). At the same time, you could claim monetary compensation to cover any loss you have suffered as a result of the breach. Monetary compensation of this type is often referred to as ‘damages’.

Cancellation is achieved by giving notice to the party in breach (usually in writing) that the agreement has been cancelled. The effect of cancellation is that the entire contract falls away and is no longer binding on either party.

On the other hand, you could ask a court to direct the car rental agency to do what it was supposed to do in the first place (in other words, deliver the car at your offices). This is known as an order for specific performance.

Even if you decide to get an order for specific performance, you would still be entitled to claim monetary compensation to cover loss you suffered as a result of the breach.

What you cannot do is cancel the contract AND get an order for specific performance, because a court cannot enforce a contract which has been cancelled.

Avoiding breach of contract

In our example, it was the car rental agency who was at fault. Bear in mind, though, that breaches can be committed by either party to a contract. Also remember that even an accidental failure to do what you agreed to do will still be a breach of the contract, and you could be sued for damages.

In other words, before entering into a contract, you need to ask yourself two questions:

  1. What exactly do I need the other party to do under this contract, and have all of those obligations been clearly listed in the agreement? If you have not listed an expectation of the other party in the contract, you will not be able to place them in breach if they fail to meet that expectation.
  2. What is the other party expecting of me under this contract? Does the contract list any obligations for me which I already know I cannot or do not want to fulfil? If so, those obligations need to come out of the contract, because if you enter into the contract and later fail to meet those obligations, you could be placed in breach and sued by the other party.

If you are planning to enter into a written contract, it is always advisable to let an attorney have a look at it first, so they can advise you of your risk under the contract. This is especially true where the contract is complicated, or where it is for a lot of money, or where it is for an ongoing period of time.

 

Sarah Lawrence 

Sarah has a BA from Stellenbosch and a BA Hons and LLB from UCT. She was admitted as an attorney in early 2010 after having completed her articles at ENS. She worked as an associate in ENS’ corporate commercial department for two years, before leaving to focus on her commercial practice, and joining Caveat Legal in 2012.