If, as a result of a party’s breach of contract, the innocent party does not obtain the full benefit of the contract, the innocent party is afforded the right to recover damages arising from the breach and may be entitled to terminate the contract. The ability to recognize a breach of contract, and act accordingly is paramount to allowing for a successful claim under contract law. The measure of damages recoverable is dependent on the nature of the breach, and knowing when a right to terminate exists is a matter of fact and degree.
In simple terms, any time the innocent party is deprived of substantially the whole benefit of the contract, it is a repudiatory breach of contract, and that innocent party is entitled to terminate as well as claim damages. That may sound complicated, but simplified, it essentially means that it is no longer possible to derive the commercial benefit which would have resulted from the proper performance of the contract. An easy way to tell if a breach is repudiatory, is that it will be listed in the contract as a reason to terminate, a common practice in construction contracts, where things like non-payment, lack of progress or insolvency are frequently listed.
However, the “substantially the whole benefit of the contract” test applies to any term of the contract. You have heard of the phrase innominate term, generally, these are terms were if the degree of breach is sufficient, at some stage “the substantially the whole benefit” test will be met and entitlement to terminate will exist. A simple example, is the supply of goods, if a sufficient number of the goods are not sufficient to sell on, then at some point the merchant is not able to make a profit any longer and can terminate the contract. This would not be the case if, say, one item, out of thousands was faulty.
Breaches which do not pass the “substantially the whole benefit” test are minor, and the innocent party remedy is limited to collecting damages.
Finally, a special type of breach is Anticipatory Breach, which occurs when a party indicates through its actions or states an intention to no longer fulfill its contractual obligations. Some examples include a contractor failing to turn up to site and/or stopping the works onsite whereby it becomes readily apparent that the completion date will be unattainable. If such a breach is repudiatory, then the innocent party receiving the notice or non-performance is entitled to terminate. However, care is required, as incorrectly terminating a contract, contrary to its contractual provisions, can be considered a repudiatory anticipatory breach.
The damages for termination can be significant, terminated contractors may face costs including the cost of completing any works, any new procurement, the delay incurred and potentially lost income. Terminated employers may be required to pay for any nugatory costs, loss of profit and opportunity as well as other damages.
In any situation where a party believes its contract has been breached, is about to be breached or is otherwise considering termination, it is important to seek expert advice at the earliest possible stage. In the interim, proactive measures that will benefit the strength and reliability of your claim include:
Should you need any advice on what constitutes a breach of contract under your contract and the next steps available to you as the non-defaulting party, please do not hesitate to contact us.
Quigg Golden are experts in the preparation and evaluation of all aspects of construction claims including claims for extensions of time, prolongation cost, disruption cost, acceleration cost or recovery of disputed variations. Our team, many dual qualified, can analyse the contractual, technical and financial position of any claim. We are experienced in advising on such claims under all standard forms including NEC, PWC, JCT and FIDIC.