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Breach of contract claims

When one party to a valid contract is not complying with a particular term, its conduct may amount to a breach of the contract. When such a breach occurs, the innocent party is entitled to bring a claim in relation to the breach and seek compensation – usually in the form of damages.

The burden is on the claimant to show, on the balance of probabilities, that there has been a breach of contract that has caused it loss. Before bringing a breach of contract claim, the claimant should comply with the applicable pre-action protocols, annexed to the CPR.

i Termination for breach

Under English law, a breach of contract does not automatically entitle the non-breaching party to terminate the contract. A repudiatory breach,40 however, is a breach of contract that allows the non-breaching party to treat the contract as having come to at an end.41 Parties are also entitled to explicitly state that breach of a term results in termination, even if that right would not be provided under common law.

It is for the non-breaching party to elect whether it will accept the breach and treat the contract as terminated or affirm the contract and require continued performance. Although the right to terminate a contract is not generally subject to a duty of good faith, the courts have recently indicated that it may be arguable in certain cases that a termination right is subject to such an implied limit. In Bates v. Post Office Ltd (No. 3),42 it was held that a commercial contract for services that governed a relationship akin to employment was subject to an implied general duty of good faith, which affected the exercise of all termination rights.

In light of the covid-19 pandemic, a number of measures have been taken to limit a party's right to terminate contracts with an entity that is insolvent.43

ii Anticipatory breach

An anticipatory breach is where one party indicates, either by words or conduct, that it will not perform all or some of its obligations under the contract, such that the result of its performance will be substantially different from the requirements of the contract. If the anticipated breach would be a repudiatory breach (and it would be for the claimant to prove this), the non-breaching party is immediately entitled to terminate – without waiting for actual performance or breach.

The aggrieved party does not automatically have to terminate the contract; it is also entitled to wait until the time fixed for performance in the hope that the other party will perform their contractual obligations or affirm the contract, if possible performing its own part of the contract and thereby claiming the contract price from the other party.

iii Causation

To bring a breach of contract claim, the non-breaching party must show that there is sufficient causation between the breach and the loss it has suffered. The breach must be the effective or dominant cause of a loss.44

Causation may be complicated by a third party's intervening act or other event. If there is such an act or event between the breach of contract and the harm suffered that 'breaks the chain of causation', the court may hold the party in breach not liable for the loss.

Defences to enforcement

There are several ways in which parties may seek to avoid enforcement of contractual obligations or challenge claims of breach of contract in England.

If a party is able to argue that a purported contract is invalid, it may have a complete defence to any attempted enforcement of that contract. A party's challenge to the validity of a contract, if successful, may render that contract void (i.e., immediately ineffective) or voidable (valid and effective, unless and until rescinded).

A contract that lacks any of the key elements required for the formation of a valid contract is void. For example, a party who has not provided any consideration under a contract will be unable to enforce that contract's terms against another party. Other common instances that render a contract void include when a party lacks capacity or authority to enter that contract (e.g., an individual purporting to contract on behalf of a corporate entity without requisite authorisation).

i Force majeure and frustration

Contracting parties may choose to include a force majeure clause, which excuses performance of a contract following certain events that are beyond the control of the parties. Force majeure clauses must be certain to be effective and should include reference to specific events (e.g., natural disasters, acts of war and acts of terrorism). Wording equivalent to 'usual force majeure clauses shall apply' will likely be considered void,45 and the courts have had some difficulty in upholding the validity of force majeure clauses that contain such catch-all language.46

If there is not an explicit force majeure clause, parties may be able to rely on the common law principle of frustration, although this is very narrowly construed by the courts. Frustration is the principle that a contract may be set aside if the performance of the contract becomes impossible, illegal or pointless by virtue of an unexpected event that is beyond the control of the contracting parties. The courts have been slow to find that contracts have been frustrated and have been clear that changes to market conditions that mean that the performance of the contract is more onerous do not amount to frustration.47

The High Court recently rejected an argument that a lease of premises at Canary Wharf will be frustrated as a result of the United Kingdom's withdrawal from the European Union. The European Medicines Agency (EMA) attempted to argue that, as a result of Brexit, the organisation would be unable to use the London premises over which it had a lease for its proper purpose, owing to needing to be situated within an EU Member State.

The court rejected this argument on the basis that the EMA has powers to assign or sublet the lease and, in any event, any frustration would have been self-induced by the EMA. Further, the court found that, even if the EMA could not assign or sublet the lease under EU law, this would make no difference to the English law analysis. The court has subsequently granted the EMA permission to appeal and, in principle at least, the High Court decision leaves open the possibility of establishing frustration where a party is able to show that, as a result of Brexit, it will be deprived of all or substantially all of the benefit of a contract.48

ii Illegality

An illegal contract is void and will not be enforced by the courts as a matter of public policy, in accordance with the courts' duty to uphold the law. As such, in contrast to other defences, courts may invoke a defence of illegality even when no party has raised it.

Illegality is well established as a defence, and reflects the principle elucidated by Lord Mansfield that 'no Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act';49 however, more recently, the law on illegality of contracts was criticised as being unnecessarily complex, uncertain and arbitrary.50

In 2016, the Supreme Court evaluated the law in this area in Patel v. Mirza.51 Although a consensus was not reached, the majority of the Supreme Court deemed the key issue to be whether upholding the relevant contract would 'produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system'.

In 2018, the Court of Appeal found in the case of Singularis Holdings Ltd (in liquidation) v. Daiwa Capital Markets Europe Ltd52 that the defence of illegality was not available to a bank to defeat a claim brought by a customer in negligence and breach of contract. In that case, the bank had made payments to an individual shareholder of the corporate client who was acting fraudulently, but the Court of Appeal found that the actions of that individual could not be attributed to Singularis as an entity, so the defence of illegality was dismissed.

iii Limitation and exclusion

Even if a contract is valid, a party may seek to avoid enforcement on other grounds. A complete defence is available if the claimant does not commence his or her claim within the relevant limitation period.53 If a defendant raises this defence, the claimant has the burden of proving that the relevant limitation period has not expired. The limitation period for contract claims is six years. This limitation period commences from the date on which the cause of action occurred.

Commercial parties are also likely to limit their potential liability under a contract when negotiating and drafting its terms. For example, parties may protect themselves by excluding liability in certain respects, imposing financial limits on liability, restricting terms implied into contracts by statute and alleviating the parties' obligations of performance if prevented by forces outside of their control. English courts will generally uphold such provisions; thus, they will serve as a defence, as long as they are not prohibited by legislation54 or common law principles such as illegality.

iv Other defences

A party who is induced into entering or varying a contract by threats or other illegitimate means may rely on duress or undue influence, and the contract will be voidable by that party. For instance, a party may be subject to physical duress (e.g., actual or threatened violence against the party or to its property) or economic duress (e.g., threats to terminate the contract).