What are the potential consequences of breaching a commercial contract?

If a breach of contract occurs, whether you are the innocent or offending party, it is important that you seek specialist legal advice as soon as possible so that you properly understand your potential claims or liability.

The potential consequences of a contractual breach are varied and will depend on a range of factors.

The starting point is to consider what contractual obligations the parties owe to one another. The contractual terms can be agreed orally, in writing or a combination of the two. The core terms are usually expressly agreed but others can be implied into the contract. For example, some terms will be implied where they are so obvious that, without them, the contract would make no commercial sense.

The terms of the contract may expressly set out some or all of the consequences for the parties in the event of a particular breach. Many commercial contracts will give one or both of the parties the right to terminate the contract if the other party encounters some kind of insolvency event or breaches a particular obligation. Such express rights do not usually prohibit the innocent party from pursuing other forms of legal redress such as monetary compensation – damages.

Urgent injunction

In certain circumstances an innocent party may be entitled to apply to court for an urgent injunction. An injunction is a court order which prohibits the offending party from continuing to breach the contract. Injunctions are often sought on an emergency basis where the impact of the breach is likely to cause irreparable harm to the innocent party.

Termination

A party may elect to terminate a contract where the offending party commits a serious (or repudiatory) breach of the contract. Repudiatory breaches tend to be those which go to the heart of the contract, such as an obligation to pay for goods or services. Where a party commits repudiatory breach, the innocent party is not compelled to terminate and may instead seek other remedies such as damages and/or an order for specific performance.

Damages

Damages are effectively a sum of monetary compensation intended to restore the innocent party to the financial position it would have been in had the breach not occurred. The contract may expressly state the precise damages which must be paid if certain breaches occur. These are what are known as ‘liquidated damages’.

Specific performance

The innocent party may also seek an order from the court compelling the offending party to comply with its contractual obligations.

Assessing your legal position and the types of remedies you may be entitled to when a breach occurs is only the starting point. With the assistance of legal advisors, it is then vital to quickly assess the strength of your legal position, i.e., how likely it is that a court would award a particular remedy, and develop a strategy to achieve your desired outcome.

The various means of resolving disputes are summarised here.