Entering into contracts is a necessity for all businesses. Occasionally, a party may breach the contract because of financial hardship, technological failures or operational issues. So, what do you do when the other party has breached their contract? While it may be instinctive to sue the other party, this isn’t always in your best interests. There may be other steps you can take that will resolve the matter more quickly without substantial costs.
1. Talk to the Other Party
Contract breaches happen for all sorts of reasons. In some cases, it will be in your interest to discuss the breach and work out a suitable resolution rather than end the relationship.
For instance, consider a wholesale supplier of goods whose retailer is overdue on payment for recent orders. Should the supplier terminate the contract and end the relationship?
This might resolve the issue, but they’ve lost a potentially valuable customer who may have continued to purchase the goods for years to come. Before taking any formal action, reach out to the other party — you may discover that the breach was a result of a short-term difficulty and can be resolved quickly.
2. Amend or Alter the Contract
As a contract is a private agreement between two parties — it’s up to those parties to agree to terms, fulfil obligations and decide what to do when the other party fails to meet a condition. When you face a breach, rather than jumping to terminate the agreement, you can amend the contract to reflect the change in parties’ circumstances, positions or needs.
Although you can amend your agreement verbally, we strongly recommend you record the change in writing. This is sometimes called a ‘deed of variation’. A deed of variation is simply a written and signed document stating how parties have amended the contract.
Let’s revisit the above scenario with the wholesale supplier and retailer. Imagine the reason the retailer was overdue on payment was due to a downsizing of the business. As a result, the retailer no longer sells the same quantity of goods as originally conceived by the contract between the parties. The parties may decide to amend the contract to reduce the quantity of the product that the retailer is required to order every month.
3. Terminate the Contract
Following a breach, you may be entitled to terminate the agreement. This right typically arises where the other party had breached an essential term of the contract.
However, a breach does not always give you this right – and if you’re unsure about whether you’re entitled to terminate a contract, it is best to engage a contract lawyer to review your contract before acting.
Ensure that you comply with any termination clause in the contract. A termination clause outlines how a party can terminate the contract and may require a party satisfies certain conditions, including:
- notification in writing; and
- a notice period before termination.
It makes sense to terminate the contract when there appears no way to remedy the breach and continue the working relationship. For example, if the retailer who has failed to pay for recent orders has also closed her shop, it is appropriate for the supplier to terminate the contract to avoid further losses because there is no hope of re-establishing a working relationship – she no longer needs or wants the supplies.
Terminating a contract due to a breach does not mean that you have given up your right to claim for any loss or damage caused to you by the breach.
4. Sue for Damages
A breach of contract usually entitles the party not in breach to recover their losses in court. This remedy is referred to as ‘damages’. The purpose of damages is to put you in the position you would have been had the breach not occurred.
This may be an appropriate option if the other party’s breach has left you significantly out-of-pocket or has caused you some other loss. Let’s say the retailer after closing her shop, owes the supplier $40,000 for several unpaid orders and has refused to pay. The supplier can likely sue the retailer to recover the $40,000 it has lost because of the contractual breach (failing to pay for orders per the contract).
When considering this option, you should be aware of the risks of litigation. In particular, litigation can be costly and time consuming, and there is no guarantee that the breaching party will have the means to pay out any judgement made against them.
When faced with a breach by the other party in a contract, think carefully about what option best suits your business – it’s not always termination. If termination is appropriate, ensure you comply with any relevant contractual terms.