Remedies for breach of contract: Can you claim compensation?
When a commercial contract is breached, it can cause profound difficulties for a business. Knowing what remedies are available means you can protect your legal position and seek to enforce your rights or obtain compensation when this is not possible.
When a contract is breached
If a contract breach is resulting in a loss to one party, then that party is entitled to a remedy. Whether or not a contract has been breached is not always straightforward and it is important to ensure that you do not yourself breach the terms of any agreement by assuming that a contract is at an end.
For more details on a contract breach and how to identify them, see our article, breach of contract explained. If you are uncertain, you should seek legal advice before taking any action which might result in you breaching the contract terms.
Once it has been established that one party has committed a breach which has resulted in a loss to the other party, a court has three possible remedies available to it.
Firstly, damages can be awarded, with the intention of putting the claimant in the financial position they would have been in if the contract had not been breached.
Secondly, where the contract breach is serious and fundamental, referred to as a repudiatory breach, the court can choose to terminate the contract. Damages may also be awarded alongside termination.
Thirdly, the court may make an order for specific performance, insisting that the defaulting party conform to the contract terms and carry out their obligations.
Compensation for breach of contract
Damages are the remedy most frequently used. The aim is to provide financial compensation for loss or damage that puts the claimant in the same position as they would have been in if the contract had been performed. The principle is to provide fair compensation but not to punish the defaulting party.
The date on which the contract breach occurred is usually the date that will be used in calculating the amount of any damages which may be payable. The court does have the discretion to use a different date if it considers that this would be fairer and more likely to put the claimant in the financial position that they would have been in, but for the breach of contract.
Financial and non-financial losses
There are two types of damages available. The first is special damages, which are awarded for losses that can be calculated financially, such as a loss of profits.
Secondly, general damages, which can be awarded for non quantifiable losses, such as loss to reputation or loss of amenity, maybe available.
How a loss is quantified
The court will look at the difference in value between the claimant’s position following the contract breach and what their position would have been, had the contract be carried out correctly.
To establish evidence of this, the claimant needs to show that a valid contract was in existence, that the defendant breached the contract and that specific loss was caused because of this. For this reason, it is important to keep detailed financial records throughout any difficulties.
The loss caused must also be reasonably foreseeable.
Restrictions on claims for damages
In some cases, the defendant may be able to claim that damages should be reduced, even though they breached the terms of a contract.
The claimant must show that the loss was caused by the breach and that, where reasonable, the claimant sought to mitigate the loss.
The court will look at the damage caused and whether the defendant was responsible for that damage by considering breach of the contract terms and the probability of loss arising from that breach.
The chain of causation may be broken by events which occurred after the initial breach of the contract. This could have the effect of limiting liability.
If a claimant does not take reasonable steps to try and minimise the loss suffered when a contract is breached, the amount of damages may be reduced. For example, if a contract is breached when a product is not supplied, it would be reasonable to expect the claimant to try and source the goods elsewhere.
Similarly, the claimant may not take unreasonable steps to increase the amount of any loss.
There is scope to try and recover the costs of taking reasonable action to mitigate loss. This does not extend to costs incurred in undertaking some other commercially driven purpose.
Damages for breach of contract are usually compensatory in nature, designed to put the claimant in the financial position in which he would have been, had the contract not been breached. Punitive damages are not awarded for this type of claim, however some other types of non-compensatory damages may be available, as follows:
Negotiating damages are calculated by the court as being the sum that the defendant would have been willing to pay to be released from their contractual obligations. This is assessed by looking at the value of the right that has been infringed, for example, if a developer built on land in breach of an agreement not to build, negotiating damages would attempt to award the claimant the same sum that the developer could have been expected to pay to obtain a release from that agreement.
This is a more unusual remedy which allows a claimant to ask for damages that reflect gains made by the defendant because of their breach of the contract. It can be seen as an attempt to make the situation fair by taking unfair gains from one party and giving them to the other.
Where a breach of contract has taken place but the court finds that no real financial loss has occurred, it may occasionally award nominal damages, for instance, the sum of £1. This is an acknowledgement that the contract terms have been breached but no compensation is warranted as no harm has been suffered.
Dealing with a breach of contract can be complex, with a risk involved if an error is made in a legal claim or there is a failure to observe notice terms or time limits imposed by the contract. It is important to present the right evidence to support a claim and understand the remedies available.
It is always advisable to seek legal advice before bringing or defending a case, to ensure that you do not lose simply because of a procedural error or misunderstanding.
At Lincoln & Rowe we understand the importance of helping our clients keep their business running smoothly. We are able to act on your behalf if you are seeking payment of damages for breach of contract or if you are defending a claim against you.
We have wide-ranging experience in commercial law and were named as the ‘Commercial Disputes Specialists of the Year” in the Corporate Livewire Innovation & Excellence Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. Partner Dipesh Dosani was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards.
If you would like to talk to one of our expert legal team about any queries you may have regarding business contracts, particularly in light on the Covid-19 disruption, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.