Industrial engineering companies, like most companies, enter into contractual arrangements with one party and rely on the performance of that contract to enable them to complete their contractual relations with other parties. It is extremely rare to have a contract between two parties which exists in isolation and which, if one party acts in breach, will not have consequences for another part of a business or relations with other parties. There is usually a chain of contractual relations that although on the face of it are separate and distinct contracts between different parties, are actually intertwined – issues with one contract can cause the whole chain to collapse with devastating consequences. In the turbulent economic climate, companies are often looking to save costs and are facing funding issues. Unsurprisingly, IE companies are being let down by their suppliers, for instance those that provide them with equipment, staff or necessary components. It is important for IE companies to be live to the risks and act early when issues develop.
From a commercial perspective, it is important that companies anticipate when problems are developing. If a supplier’s performance is deteriorating, monitor this and act early – ensure that dialogue is open with the supplier so that you can understand their problems, pre-empt any failures and endeavour to achieve a workable solution for all parties. It may be worthwhile considering re-negotiating the contract and arrangements in place at an early stage. This is because, although legal remedies may be available for breaches of contract, such as early termination, practically, they can take time to be effective and enhance conflicting stances between the parties, compounding the problems and moving away form achieving a workable solution. Although it may not be your company that is in the wrong, it will be in your interests to find a solution so that your company can perform its obligations owed to others and not risk any adverse publicity which could affect its reputation if it doesn’t do so.
A further commercial point is to consider whether there are other third parties available who can service your supply requirements. Whether there is someone else in the market who can deliver what you need, in the time frame whilst getting up to speed with your business and its needs will affect the approach you should take to the party acting in breach. From this perspective, it is useful if your company uses a range of different suppliers who can be approached. Legally, you may be entitled to terminate your contract with your supplier and claim for damages but if you can’t source the services elsewhere, negotiating a workable solution may be the best approach to preserve the status quo.
From a legal perspective, there are various remedies which will be open to your company and which can be used either to obtain that remedy or tactically, to position your company to resolve the dispute. Even if a company is not actually in breach of its obligations owed to you, the law provides protection if they are likely to act in breach in the future, a situation referred to as an ‘anticipatory’ breach of contract. When a company is either in anticipatory breach of contract or is actually in breach of contract, it is important to check the express terms of the contracts to understand what you need to do. Often, you would be expected to give notice to the other party, which may allow them a period of time to rectify their defaults. Your company may need to explicitly reserve its rights in relation to any breaches of contract and make it clear that it has not accepted the breach. Following this, within a reasonable time you will need to decide whether you are entitled to and wish to exercise any rights of early termination. If your company does decide to terminate the contract, it should ensure that it follows the correct procedure for serving any notices in the contract.
Regardless of whether you exercise any rights to terminate the contract, if there has been a breach of contract you will be entitled to recover damages for that breach. Damages will usually be assessed on a compensatory basis being the actual losses suffered by your company. If, as a result of the breach, a third party is appointed or more money is paid to ensure that the contracting party performs its obligations, these costs could fall within losses which are recoverable. Losses which are recoverable cannot be too remote from the breach and your company would need to demonstrate that the breach caused the losses in question. Similarly, your company would need to demonstrate that it has complied with its “duty to mitigate” its losses. This includes taking reasonable steps to limit the loss suffered and depending on the facts, could include re-negotiating with the contracting party to perform the contract or entering into contracts with other parties on reasonable terms (including the cost for performance).
An equitable remedy, separate from damages, which a Court may award is for specific performance. This is a remedy to force a party to comply with the contractual promises it has made. Only in very unusual circumstances will a Court order specific performance and it will usually be where damages are not an adequate remedy. In the absence of special reasons, it will be difficult to convince a Court to make an order for specific performance.
In summary, if it looks as though one of your suppliers is likely to let you down, act quickly, endeavour to put in place a workable solution with that supplier if possible and explore your company’s other options. Similarly, be live to the obligations on both you and your supplier and ensure that you reserve your rights and give any notices in time. At all times, notwithstanding that your company may not have been at fault, ensure you take all reasonable steps to seek to minimise your losses to best position yourself in recovering those at a later date.