Contracts are a common tool used throughout our lives to create legal relationships between parties to define what actions people will take.
If you have entered a contract with another party, you are obligated to abide by the terms and conditions of the contract. Any failure to perform an obligation required by the contract, including if you don’t complete an obligation within a time limit set by the contract, will be a breach of contract.
If a breach of contract occurs, what happens next can depend on the type of term breached and other laws that might apply to the specific contract.
What is a breach?
A breach of contract occurs when one of the parties to the contract fails to abide by a term of the contract. This can occur with express terms, as well as implied terms.
Where there are express terms, it is much clearer that there has been a breach of contract. Where there is an implied term, it may not be as clear that a term has been breached, or a party might not necessarily be aware that the term exists. For instance, employment contracts include implied terms, such as a term of fidelity. Further, disclosure of confidential information from an employer might amount to a breach of contract.
A partial breach of contract, or minor breach, occurs where the terms of the agreement have been partly satisfied. This can occur in different contracts in different ways. For instance, in a contract for supply of goods, if only some of the purchased goods have been delivered, this would be a partial breach of contract. Similarly, in a building contract, if some of the works have been performed without meeting the required standard, this might be a partial breach.
Where there has been a partial breach, usually parties will attempt to make good by performing the outstanding obligation. However, there could be a dispute as to whether there has been a financial loss caused by the breach.
Breach of an essential term
Essential terms of contracts are terms which contain key requirements. A term is essential if a party would not have entered the contract unless assured of compliance with the obligation within the term.
In contrast to a partial breach, a breach of an essential term has a much greater impact on a party, who is deprived of the benefit they would have received by virtue of performance of the contract. The remedies available to a party where there has been breach of an essential term differ to those available for partial breaches.
Where a breach of contract occurs, the remedy that might be available depends on the type of term breached.
As stated above, where there has been a partial breach, it is common for parties to attempt to remedy the breach, by making good on the balance of the obligations. However, it is possible that there could be some financial loss occasioned by the breach and, if this is the case, this could lead to a dispute as to the compensation that should be paid, if at all.
Where there has been a breach of an essential term of a contract, a party will normally be entitled to terminate the contract, severing the legal relationship, and discharging themselves from performing any obligations they had yet to perform. Following this, it is possible to seek damages for the breach. Damages can include compensation for the actual loss suffered, by proving the loss they have experienced as a result of the breach. If no damage is able to be proved, it is likely that any award of damages will be nominal.
If a party ‘affirms’ the contract, by continuing to treat the contract as if it is valid and on foot, the opportunity to terminate the contract will be lost. Accordingly, it is important to consider your options, and seek legal advice, if you think a party has breached an essential term.
Another remedy available where there has been a breach of contract is specific performance. This is a remedy available from the court. However, specific performance is a discretionary remedy and will only be ordered by a court if damages are an insufficient remedy. A court will also only order specific performance if a contract is still on foot. In addition, an order for specific performance will not be available if:
- It forces the parties to maintain a personal relationship, such as with employment contracts.
- The obligations under the contract are unclear.
- Specific performance would result in unconscionable hardship for the defendant.
Contracts are frequently used to set out the terms and conditions of an agreement reached between one or more parties. A breach of contract occurs when one of those parties fails to uphold a promise they have made under the contract. In such cases, the remedy available will depend on a number of matters including the type of breach and the circumstances.
This information is for general purposes only. If you believe somebody has breached a contract that you have entered, or if somebody has alleged that you are in breach of a contract, we recommend obtaining legal advice.
If you or someone you know wants more information or needs help or advice, please contact us on 03 8346 4900 or email [email protected].