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As a business owner, you will often deal with contracts and agreements as part of the daily running of your business. Most of the time, your legally binding contracts will go to plan, but there may be occasions when the other party does not comply with the contract terms and carry out their contractual obligations. In these circumstances, you will need to understand the practical effect of a contract breach by the breaching party. To help, this article will explain three myths about breaches of contract that every business owner should know when dealing with a legally binding agreement.
1. Most Breaches of Contract End Up in Court
It does not always make sense to throw away a successful business relationship because of a minor, unintentional breach of a contractual term. Therefore, not every breach of contract will end up in court. Instead, most contractual breaches will end up with a business contacting the other party to find out the reason for the breach and then agreeing on a way forward.
For example, imagine that a supplier only supplied you with half the agreed order last month. In that case, you can decide that they can make up the difference and deliver 150% next month. This way, there is no need to rip up the contract or take things to court. Additionally, you will likely retain a good business relationship by not taking things to court.
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2. Every Breach of Contract Results in Compensation
Not every breach of contract will result in large amounts of compensation for your business. Instead, the amount of compensation you receive will depend on the nature of the contractual breach and whether you can prove that it caused a loss to your business.
Examples
Imagine these two scenarios of a business agreeing to supply your business with framed photographs.
- Your supplier accidentally sends a box of photo frames with the photographs separate. The photographs are not damaged, but it takes 30 minutes of your time to put them into the photo frames, even though the agreement stated that the supplier was responsible for this task.
- The supplier forgets to enclose the photographs and only sends blank photo frames. There is nothing you can do in this situation to remedy the breach. The one-month delay in receiving the photographs costs your business a predicted loss of £50,000.
In the first scenario, the supplier should technically provide the product in a complete state. However, it can be easily remedied, resulting in the item still being listed for sale in the same way. Therefore, the breach still allows your business to sell its products as normal, leading to no actual financial loss. Accordingly, any court action would unlikely result in compensation. Instead, you are likely to spend more pursuing the court action.
In the second scenario, however, there is a provable and substantial loss of profit. The supplier has failed to meet its obligations under the contract terms by not supplying the correct goods, and you have lost significant money. This is a typical situation where it is likely to make sense for your business to consider a legal claim for damages. You should also note that judges tend to only award ‘reasonable’ legal costs rather than ‘actual’ legal costs. The judge may decide that only a certain percentage of your legal costs were reasonable and only order the other party to pay you that percentage.
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3. You Have to Go to Court to End a Contract
Fortunately, it is a myth that you must go to court to end a contract. For example, if you wish to end a contract when another party has committed a material breach of a legally binding agreement with your company, you do not usually have to obtain the permission of a court to do so. Instead, you can serve written notice to the other party that you are terminating the agreement. Most contracts contain provisions explaining how this should be done, setting out any relevant notice period. A specific clause usually sets out how and why your business could terminate a contract.
The main exceptions to this tend to be where the contract specifically prevents itself from being terminated absent prior referral to arbitration, mediation or a court.
Key Takeaways
You should be aware of many common myths about a breach of contract. It is not true that most breaches end up in court or that you must go to court to end a contract. It is also not the case that a breach of contract will always result in compensation for your business. Instead, the circumstances of a contractual breach and how it affects your business will determine how you deal with it, such as whether court is a viable option.
If you need help with a breach of contract, our experienced commercial 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
Not all contractual breaches will end up in court, and often the parties will find a way to move forward and rectify the mistake amicably.
Judges tend to only award ‘reasonable’ legal costs rather than ‘actual’ legal costs, and it is up to the judge to decide what is reasonable.
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