Contracts are central to most business relationships.
Whether you are supplying services, selling products or working on a long-term commercial project, the agreement between you and your client should establish what each party is expected to do.
But what happens when the other party does not keep their side of the agreement?
A breach of contract can cause financial loss, disrupt your business and damage an otherwise valuable commercial relationship. Taking the right steps early can make it easier to resolve the problem.
What is a breach of contract?
A breach occurs when one party fails to comply with an obligation under a contract.
For example, a client might fail to pay an invoice by the agreed deadline, cancel an agreement contrary to its terms or fail to perform another obligation they agreed to undertake.
Not every disagreement automatically amounts to a breach of contract, however.
The starting point should usually be the contract itself.
Check what the contract actually says
Before taking action, review the agreement carefully.
Look at the obligations of each party, payment provisions, termination clauses, notice requirements and any procedure the contract sets out for resolving disputes.
You should also check whether the contract contains provisions dealing specifically with the type of breach that has occurred.
It can be tempting to rely on what you remember agreeing with the client, particularly where the commercial relationship has existed for some time. However, the written terms can be extremely important if the dispute escalates.
Keep your evidence
Good records can make a significant difference in a contractual dispute.
Keep copies of the contract, relevant emails and correspondence, invoices, payment records, meeting notes and any documents showing the work or services you provided.
You should also record the financial impact the breach has had on your business.
If court proceedings later become necessary, this evidence may be important when establishing what was agreed, what went wrong and what loss your business suffered.
Can we resolve the issue without going to court?
Often, yes.
Court proceedings are not necessarily the first or best option for every commercial dispute.
In many cases, a clear letter setting out the contractual position and what needs to happen next can help move matters towards a resolution.
Depending on the circumstances, negotiation or another form of dispute resolution may also be appropriate.
Businesses should consider both the legal and commercial position. If the client is an important long-term customer, for example, you may want to explore whether the dispute can be resolved while preserving the relationship.
Can I terminate the contract?
You should be cautious about terminating a contract without first checking that you are legally entitled to do so.
Not every breach gives the innocent party an automatic right to terminate.
The contract itself may specify circumstances in which termination is permitted and may require you to follow a particular notice procedure.
Ending the contract incorrectly could potentially put your own business in breach.
If the breach is serious and you are considering termination, obtaining advice before taking that step can reduce the risk of making the situation worse.
Can my business claim compensation?
Damages may be available where your business has suffered loss as a result of another party’s breach of contract.
However, the amount that can be recovered will depend on the circumstances.
The business claiming damages will generally need to establish the loss caused by the breach and should take reasonable steps to reduce avoidable losses.
There may also be contractual provisions affecting what losses can be recovered or limiting a party’s liability.
This is why the wording of the agreement can be particularly important.
What if the client simply refuses to cooperate?
If attempts to resolve the matter are unsuccessful, formal legal action may need to be considered.
Before court proceedings are issued, there may be pre-action steps that should be followed. The appropriate approach will depend on the nature and value of the dispute.
Taking advice early can help you understand the strength of your position, the potential costs and the most proportionate way of pursuing the matter.
Protect your business
Contractual disputes are easier to manage when the agreement clearly records what each party is expected to do and what happens if something goes wrong.
If a dispute has already arisen, avoid making rushed decisions or sending correspondence that could undermine your position.
Penerley can advise businesses on contractual disputes, unpaid sums and other commercial matters.
If a client or another business has breached an agreement with your company, contact Penerley to discuss your options and the most appropriate next steps.
