Breach of Contract: What Are Your Legal Options?
Contracts are part of everyday business. They govern everything from the supply of goods and services to leases, construction projects, employment relationships and commercial transactions.
But what happens when the other party simply does not do what they agreed to do?
A breach of contract does not automatically mean that the agreement comes to an end. Depending on the contract and the circumstances, the innocent party may have several potential remedies, including requiring performance, cancelling the agreement in appropriate circumstances and claiming damages.
South African courts continue to recognise remedies including specific performance, cancellation and contractual damages, although which remedy is available will depend on the nature of the breach and the terms of the agreement.
Here are some of the main options to consider.
1. Require the Other Party to Perform
Sometimes you do not want to end the contract. You simply want the other party to do what they promised.
This is generally referred to as specific performance.
For example, if a purchaser has agreed to pay a purchase price but fails to do so, or a contracting party has undertaken to perform a particular obligation, the innocent party may in appropriate circumstances seek an order requiring performance.
South African courts recognise specific performance as a contractual remedy.
Whether pursuing specific performance is appropriate will depend on the contract, the obligation involved and the particular circumstances.
In many commercial relationships, requiring performance can make more sense than terminating an otherwise valuable agreement.
2. Give the Defaulting Party an Opportunity to Fix the Breach
Before cancelling an agreement or approaching a court, the first place to look is often the contract itself.
Many agreements contain a breach clause setting out exactly what must happen if one party defaults.
For example, the agreement may require the innocent party to give written notice identifying the breach and giving the defaulting party a specified period—such as seven, fourteen or thirty days—to remedy it.
Only if the breach is not remedied within that period may cancellation or other remedies become available.
South African litigation regularly turns on the wording of these contractual breach provisions and whether the required notice procedure was followed.
This is why sending an angry email saying “the contract is cancelled” can be dangerous. If the agreement does not entitle you to cancel at that stage, your own conduct could potentially create further legal complications.
Have the agreement reviewed before taking decisive action.
3. Cancel the Contract
Cancellation is a powerful remedy because it brings the contractual relationship to an end.
But not every breach automatically gives the innocent party a right to cancel.
The right may arise from the wording of the agreement or from the nature and seriousness of the breach under the applicable principles of contract law.
Where cancellation is available, it generally involves a clear election by the innocent party to terminate the agreement and communication of that election to the defaulting party. Recent South African judgments continue to distinguish between enforcing an existing contractual obligation and cancellation, which may give rise to further claims such as restitution or damages.
Because wrongful cancellation can itself amount to a serious contractual problem, businesses should obtain advice before terminating important agreements.
4. Claim Damages
A breach of contract may cause financial loss.
For example, a supplier’s failure to deliver could force a business to obtain replacement goods elsewhere at a higher price. A tenant’s breach could cause a landlord financial loss. A contractor’s failure to perform may delay a project and generate additional costs.
Depending on the circumstances, the innocent party may have a contractual claim for damages.
The purpose of contractual damages is generally compensatory rather than punitive. The question is ordinarily what recoverable loss the innocent party suffered because the contractual obligation was not properly performed.
The Constitutional Court has recently considered the distinction between claims for contractual performance and claims for damages arising from breach, including how those claims interact with prescription.
A damages claim therefore requires more than simply showing that the other party behaved badly. The breach, loss and legal basis for recovering that loss must be properly established.
5. Negotiate a Commercial Resolution
Court proceedings are not always the best first solution.
Depending on the relationship between the parties, it may be possible to negotiate:
- payment of an outstanding amount;
- revised performance dates;
- replacement of defective goods;
- completion of outstanding work;
- an acknowledgement of debt;
- a settlement agreement; or
- an agreed termination of the contract.
A commercially sensible settlement can sometimes preserve an important relationship and avoid the cost and uncertainty associated with prolonged litigation.
The agreement should nevertheless be properly documented so that the settlement itself does not create another dispute.
Read the Contract Before You Act
When a breach occurs, your agreement should be one of the first documents you review.
Pay particular attention to clauses dealing with:
breach, notice periods, cancellation, dispute resolution, arbitration, jurisdiction, damages, limitation of liability and domicilium.
The wording of these clauses can materially affect the remedies available to you and the procedure that must be followed.
There may also be limitation and prescription issues, which makes unnecessary delay potentially costly. The Constitutional Court has confirmed that different contractual remedies can have distinct consequences for prescription.
Dealing With a Breach of Contract?
Before cancelling an agreement, withholding payment, stopping performance or issuing summons, obtain advice on your legal position.
A properly drafted letter of demand and a clear strategy at the beginning of the dispute can often prevent an avoidable and expensive contractual battle later.
This article provides general information regarding South African law and is not a substitute for legal advice based on your particular contract and circumstances.