Breach of contract37i 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:
- the existence of a legally enforceable contract between the claimant and the defendant;
- a failure by the defendant to adhere to the requirements, terms and conditions of the contract; and
- 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:
- where damages are an adequate remedy;
- contracts that require ongoing supervision; and
- 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:
- a fundamental breach – a breach so serious that it terminates the rights and obligations of the innocent party;
- a repudiatory breach – a breach so serious it terminates the contract immediately; and
- 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.
Defences to enforcement
Parties to commercial contracts continuously try to find ways to circumvent contractual obligations. The legal arguments advanced are broad and vary from arguments that no contract was formed to doctrines of impossibility or impracticability. Common defences to enforcement include the following.i Duress or undue influence
As agreements are based on consent, an agreement that is reached as a result of threats or undue influence (usually by the counterparty) is liable to be set aside. This argument has arisen in a number of cases involving the enforcement of guarantees. The principles in relation to what measures a bank should take in cases of undue influence previously outlined by the High Court are only relevant where actual undue influence has arisen. In a 2016 Court of Appeal decision, the court found that a key factor for the court to consider in determining whether undue influence has occurred is whether the guarantor in question had any material interest or involvement in the business or derived a commercial benefit therefrom. In the High Court in 2018, in the case of Barry v. Ennis Property Finance DAC and Others, the court set out a useful list of the type of questions which claimants should address when seeking to establish whether undue influence has taken place, including the commercial experience possessed by the claimant, the relationship that it is alleged gave rise to the undue influence and the nature of the events which led to this influence being alleged.ii Duty to ensure independent legal advice
As an ancillary argument to undue influence, parties to finance agreements frequently argue that lenders are under an obligation to ensure that they receive independent legal advice. In 2017, the argument was considered by the Court of Appeal in a case that involved a father who guaranteed the debts of his son who subsequently defaulted and was subject to enforcement proceedings. The father argued that there was an arguable defence to the claim against him under the guarantee as the creditor had been on notice of the familial relationship between him and the debtor, and the creditor was under a duty to ensure that he got independent legal advice. He had received advice from his son's solicitor in this case, and not a separate solicitor. The court found that in circumstances where no evidence was presented by the guarantor to support an argument that he had been subject to undue influence, there was no positive duty on the lender to ensure that he obtained independent legal advice or otherwise ensured that he had freely entered into the guarantee.iii Public policy and illegality
Contracts that are contrary to public policy are unenforceable. The Supreme Court has recently confirmed the modern criteria that the court will consider when deciding whether or not to enforce contracts tainted with a degree of illegality by virtue of statutory breaches. Members of the Quinn family and companies within the Quinn group had given guarantees in respect of loans by Irish Bank Resolution Corporation (IBRC) to other companies within the same group. The Quinn family argued that they should not be liable for the guarantees on the loans because of regulatory and statutory breaches on the part of IBRC. The court noted that in certain cases a finding of illegality may result in an unjust windfall for a party. The court considered whether or not the public policy aspect of an illegal activity should automatically render a contract unenforceable. In this instance, it was held that the contracts in question were enforceable notwithstanding issues of illegality affecting them.iv Force majeure clause
Force majeure clauses exist to exclude liability where exceptional, unforeseen events beyond a party's control prevent the performance of its obligations. As there is no doctrine of force majeure in Irish law, it is at the contractual parties' discretion whether they wish to rely upon force majeure and can do so by inserting a provision in their contract.v Frustration
The Supreme Court has held that frustration arises where a supervening event occurs without the default of either party, and for which the contract makes no provision. The event must so significantly change the nature of the outstanding contractual rights and obligations from what the parties could reasonably have contemplated, so as to make holding them to its stipulations unjust.
Frustration takes place only after a contract has been entered into, and means that the contract ceases to have effect from a particular date onwards. As such, it discharges an otherwise valid contract.