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If you are a New Zealand business that transacts with other businesses, you have likely underpinned your professional relationships with contracts. Contracts can come in many different forms and vary depending on the purpose. Businesses use contracts to ensure remedies if the other party refuses to perform an obligation in the agreement. Surprisingly, these situations happen often and are called contract breaches. If this happens to you, you must be aware of your rights. Otherwise, the situation may leave you empty-handed. This article will explain the key considerations if your contracting party is to breach a contract.

What Is a Breach of Contract?

A contractual breach occurs when a party to a legally binding agreement does not perform an obligation stated in the contract. This could mean that they refuse to perform it altogether or perform it exactly as written. For example, if you are a builder who has signed a contract to buy a specific material and the party supplies a different one, they are breaching the contract. Often enough, this would be an accident, and both parties could resolve it quickly. However, there are times where your contracting party will deliberately refuse to perform an obligation correctly.

1. Communicate With Your Contracting Party

If your contracting party breaches the contract, your first port of call should talk to them. Often, there has been a mistake or miscommunication that has caused the breach of contract. This scenario is easy to rectify. Your contracting party may also be in a situation where they cannot perform the full extent of their obligation due to financial pressure. If this is the case, you should think about giving your contracting party some leeway if you can afford to. If they have been an excellent business to deal with, it may be hard to find a new business to partner with if you decide to cut ties. However, this can only happen if you can take on the extra burden that the contracting party is putting on you.

2. Terminate the Contract

If it seems like your contracting party is not going to fulfil their obligation at all, you are entitled to terminate the contract. When a party to a contract fails to uphold their obligations, then the court will find they have repudiated the contract. Once you repudiate a contract, you can terminate it. Terminating the contract means that you fully cancel the contract, and both parties lose any rights and relinquish any previously outlined obligations. This is the most common way to deal with a breach of contract and is relatively easy to perform. You may think you cannot receive any compensation if you terminate the contract, but this is not the case. There are two ways that you can get damages. These are:

  • liquidated damages; and
  • court-ordered damages.

Liquidated Damages

Liquidated damages are a pre-determined amount set out at the start of a contract that is paid out if either party breaches the contract. It allows both parties to know the consequences and what the other party will get if they breach the contract. Liquidated damages clauses are standard in contracts where a breach of contract happens often. However, the courts can rule that a liquidated damages clause is unlawful if it is not a fair estimate of the loss incurred by either party. 

3. Court-Ordered Damages

Alternatively, you can seek an order granting you damages in court. You will have to prove that you have suffered substantial loss, and the court can order your contracting party for this loss. However, if your contracting party cannot perform their obligations under the contract initially, they are likely struggling financially. This means they may not be able to pay any damages and could be adjudged bankrupt, which would mean you would not receive any compensation.

Note: You must be cautious with who you enter into a contract with. Even though you are entitled to remedies if there is a breach of contract, this does not always materialise. 

Key Takeaways

Even if you have a foolproof contract, you must know the ramifications if your contracting party breaches the contract. First, you must find out what caused the breach so that you know what steps to take. If accidental, you can resolve this by communicating with your contracting party. However, if it’s a deliberate breach, you should consider terminating the contract and claiming damages. This can be done through a liquidated damages clause or filing a claim in court. 

If you need any legal assistance with contract breach considerations, contact LegalVision’s contract lawyers on [numbers] or fill out the form on this page.

Frequently Asked Questions

Will a breach of contract always be apparent?

No, it will not necessarily be evident as the breach could be minor. However, if the breach is affecting your agreement, then you will realise this. If you are unsure, it is best practice to consult a lawyer.

Can I permanently terminate the contract once the contracting party has failed to uphold their obligations?

Yes, when a party fails to uphold their obligations, they are said to have repudiated the contract. Once this has been done, you are entitled to terminate the contract. However, you must ensure they have repudiated before you terminate. Otherwise, you could have repudiated the contract.

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