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Breach of contract

i Breach of contract

A breach of a contract may occur if a party fails to perform as agreed, does something that it has agreed not to do, or if either party has prevented further performance of its obligations under the contract without legal excuse. The level of liability resulting from a breach of contract normally depends on the consequences of the breach.

ii Proof of breach

In order to permit recovery of damages from a defendant or equitable relief for breach of contract, three basic elements of the claim must be proven:

  1. the existence of a legally enforceable contract between the claimant and the defendant;
  2. a failure by the defendant to adhere to the requirements, terms and conditions of the contract; and
  3. the suffering of a loss by the plaintiff a result of the non-adherence.

The main element of a breach of contract cause of action is the non-fulfilment of one or more of the defendants' obligations under the legally enforceable contract. This may occur through an action or an omission.

Whether a particular act or omission constitutes a breach and the entitlements flowing therefrom will depend on the terms of the contract and the nature of the obligations arising thereunder. The materiality of the breach will depend on the individual contract, with some contracts applying an obligation to exercise due care and skill and others a standard of absolute or strict liability.

iii Specific performance

An order of specific performance is an equitable remedy to a breach of contract and compels a party to perform its obligations under the contract. As specific performance is based on the duty to perform a contract, a prior breach of contract is not required as a prerequisite to an order. Failure to obey an order for specific performance can result in the offending party being in contempt of court.

An order for specific performance is at the discretion of the court to grant it. Examples of where an order will not be granted include:

  1. where damages are an adequate remedy;
  2. contracts that require ongoing supervision; and
  3. open contracts.

It is important that a plaintiff considers whether an order for specific performance is appropriate to a particular contract as compelling performance from an unwilling counterparty may increase the risk of defective performance. Additionally, where an order is not granted, damages may be awarded against the party seeking relief.

iv Right to terminate in the event of a breach

A breach of an innominate or intermediate term does not automatically entitle the innocent party to terminate the contract.

A right to terminate arises where there has been:

  1. a fundamental breach – a breach so serious that it terminates the rights and obligations of the innocent party;
  2. a repudiatory breach – a breach so serious it terminates the contract immediately; and
  3. a statutory breach – a breach provided for under statute.

In order to rely on a statutory breach, any preconditions set in statute must be complied with. An example of this is the Sale of Goods Act 1893, which imports terms relating to title, description and merchantability into commercial contracts.

The most common form of breach in commercial contracts arises where there has been a fundamental breach, a principle that was developed by the courts with a view to limiting the operation of exemption clauses, the rationale being that no party could exclude or restrict his or her liability for such a breach.