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As a business entering a commercial agreement, you should be aware of the potential risks of breaching your contract. Occasionally, a breach of contract will be intentional. However, many times a business may unintentionally or unknowingly breach its contractual obligations. This article will explore the main risks to your company if it breaches a commercial agreement in England.
What is a Commercial Contract?
A commercial agreement is a legally binding contract recording the main aspects of a commercial deal. Naturally, the more complicated the commercial arrangement, the longer the contract.
The main point of a commercial agreement is to ensure the businesses involved stay true to their word. With this in mind, all companies in England know that a material breach of contract can result in time-consuming and expensive consequences.
Examples of Contract Breaches
The reaction of a business to a contract breach often depends on the type of contract violation and whether they believe it was intentional or not.
Some of the more common types of contract breaches include:
- failing to action payments within the timeframe prescribed by the contract;
- delivering defective goods or services;
- refusing to make required payments;
- providing goods or services late; and
- breach of confidentiality or exclusivity restrictions.
Now we understand some common types of contract breaches, let us explore a few potential risks should your business breach the terms of a legally binding agreement.
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1. Threat of a Court Claim
The most common reaction to learning of a commercial contract breach is to inform the other business and mention that the violation gives rise to an ability to sue. Whether or not the other business will bring legal action will depend on the importance of the violated contractual clause and the financial consequences of the violation.
Suppose your business can persuade the other company that the breach was unintentional. For example, the payment was delayed due to a banking error and the monies will be transferred that day. This may appease the other party. In contrast, if your organisation intentionally chooses not to follow a contractual term because it did not like it in hindsight, the other party is likely to strongly consider legal action.
2. Payment of Damages
Whether commercial or otherwise, most threatened court claims settle before the final hearing. This is because the parties usually decide that the certainty of a settlement is better than the uncertainty of losing at a hearing and potential liability for the other side’s legal costs.
The same is true with contractual breaches if those breaches remain capable of repair. Let us consider two quick examples of reasonable settlement following contract violations
Example 1
Your business fails to deliver breakfast for a company’s business breakfast. This leads to the company to order last-minute provisions for £100, which are not as good. It may be wise for the parties to agree to compensation of £100 to cover the replacement costs and waive the fee for that breakfast (and perhaps the next one).
Example 2
Your organisation is due to update the decor within an unused office space owned by the landlord company. It was due to do so two weeks ago. However, the area remains unfinished and your business has hinted it requires more money to complete the job. The landlord company is unimpressed and threatens to sue. Accordingly, you settle by agreeing to an updated completion date and a £100 cost reduction of the job.
Many settlements occur outside courtrooms or official arbitration processes between business owners or their lawyers. They are a good reminder of the potential financial costs of not complying with a sentence in a contract, whether a minor breach or a fundamental breach.
3. Potential Injunction
Some contract breaches are so severe that the other business (known as the innocent party) will threaten your company with an injunction. Most court injunctions are to the effect that an organisation is banned from performing a specific action.
So, for example, let us say that your business planned to sell its entire stock of a best-selling author’s books to a supermarket for £3 per book. However, shortly after signing the contract, a national bookstore offers £5 per book and you accept that. The supermarket gets wind of your plan, and after negotiations fail, seeks an injunction against your business.
Any granted injunction is likely to forbid you from selling your stock of books to anyone other than the supermarket. This ensures your business is bound by the terms of the original contract, absent any settlement you reach. In this way, injunctions usually aim to prevent businesses from performing actions opposite to the promises within the contract wording (known as an anticipatory breach).
Key Takeaways
Different types of contract breaches can have different consequences for your business under English law. However, knowing the potential risks of any contract violation is helpful, so your business can do everything possible to avoid them absent very good reasoning.
If you need help with negotiations further to a commercial contract breach, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
This is known as specific performance. A court can potentially order a company to comply with the contract obligations rather than simply pay compensatory damage if the aggrieved party desires it.
The court will usually try to put the other party in the financial position they should have been in, had the contract been complied with. This may include monies to compensate for payment under the contract and potential loss of profit from the non-delivery of any goods or services.
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