Businesses are aware of what follows from any failure to adhere to, or fulfil, a contract. They know they’ll suffer nonpayment, loss of reputation and risk legal action. But what happens when a loss is incurred indirectly because of another’s (in)actions?
For example, what if a factor cannot complete orders following a break-in where key pieces of equipment have been stolen? They’ve not willingly let their garage customers down, but these customers could make trouble, especially where unexpected costs (or loss of income) are involved. Resolving this situation could get very messy.
THE GENERAL POSITION
According to Mohammed Toqeer, a solicitor in the commercial team at Harrison Clark Rickerbys, the general position under English contract law is that “the party who is legally or contractually bound to perform an obligation under contract will be in breach of contract if it fails to perform the obligation.”
He says that the other side can claim damages for the loss it has incurred and could even have the right to terminate the contract. Chris Else, managing partner at Else Solicitors, agrees and says that apart from compensation or damages, they could “seek a court order for specific performance if the contracting party is not able to complete the work it had agreed to do”. They could, in other words, be ordered to (somehow) fulfil the bargain.
But logically, and usually, he says that the claim is for monetary damages. As to how damages are awarded to compensate for loss, Else says that they are calculated differently from ‘liquidated’ or agreed damages which are usually detailed in a written contract in advance.
He says: “If damages are not prescribed, then normal contractual rules of putting the party in the position they would have been in had there been no breach of contract would apply.” By way of example, Else says that net loss calculated on this basis can lead to a more costly outcome for the party in breach.
“If, for example, I had agreed to do xyz at a particular rate of, say, £1000, and I was unable to carry out the work which cost £2000 for an alternative contractor to complete, I would be liable to pay £1000 damages for breach of contract to put the customer back in the position he would have been in had I complied with my contractual obligations,” he says.
He adds that the cost of rectifying the breach of contract should not be unreasonable; it would be unreasonable and disproportionate if the customer set out to have the work completed in an excessive or over-expensive way.
It makes sense, then, that supplier firms protect their position and that for the other side, as Else says, “there is a duty to act reasonably if they have been the victim of a breach of contract claim and to mitigate loss”.
He emphasises that mitigation of loss requires the injured party to ensure that they do not make matters worse and that they “take a commonsense approach rather than ‘let’s see how expensive we can make this for the party in breach of contract’”.
ROLES OF FORCE MAJEURE AND FRUSTRATION
There is some solace to be had by suppliers – they may be able to seek refuge in ‘force majeure’ clauses. These apply where circumstances beyond the control of one party halts contractual performance. Else says: “Parties agree to suspend the contract, or excuse liability for not doing the work, as opposed to releasing one of the parties from the contract. It may be possible to terminate the contract at that point.”
Toqeer advises the same, noting that force majeure clauses are designed to “suspend a party’s obligations when a specific event occurs, for example, an act of God”.
He notes that those relying on force majeure “will likely have a period of time in which to continue their performance, failing which the other party can terminate the contract.”
But for force majeure to be effective it must, says Else, be included within the contract and must detail the event that could cause the contract to be suspended. He gives another illustration: a contract includes a clause to say the obligations could be suspended due to a pandemic. But when restrictions ended the contract would be reinstated.
This is why he says that “it is essential to look at the contractual terms if you are likely to be in breach of contract and demonstrate that the scope of the clause clearly fits the circumstances.” Another source of relative comfort for suppliers is the doctrine of frustration.
As Toqeer describes it, this allows one side to assert that a contract should be terminated when an unforeseen event makes it impossible for them to perform their obligations. He adds that suppliers that wish to rely on this should note that it is seen as a last resort.
Else concurs, saying: “It can assist a supplier and applies even if there is no specific written clause in the contract; in other words, it applies under common law principles.”
He adds: “In recent cases this principle is considered the starting point, which makes sense. And to deal with the question of frustration it is necessary to establish whether this was the cause of frustration at the outset.”
If so, he thinks it unlikely that the contract will be frustrated at common law. Frustration is therefore about impossibility and there are numerous cases that Else throws in to highlight this: an old case about an opera singer falling ill and being unable to perform; a specific potato crop from a particular location that couldn’t be supplied because the crop was diseased, and alternatively sourced potatoes did not satisfy the contract; and Edward VIII’s abdication, which led to bookings for prime spots to watch the procession being cancelled and contracts being held frustrated.
So, to compare the two, Else says that “force majeure causes a temporary suspension of the contract, but frustration will discharge it, and all rights and obligations are ended.”
Regardless, for Toqeer, to make a successful case in court claimants must prove the losses they have incurred – “this may be in the form of providing written receipts, expert evidence and a detailed schedule of loss.”
INSURANCE AND SUPPLIERS
Insurance products are part of the defences that suppliers can deploy. For Toqeer, it’s possible to link insurance to “a limitation of liability cap which can then be used as a negotiating tool for the same”.
His view is that insurance can act to mitigate losses depending on the risk involved.
But for Else, insurance should cover force majeure related issues such as the pandemic, labour shortages and events, which are all things that are reasonably foreseeable but outside the parties’ control.
He adds: “Ensure that terms are put before insurers and cover is agreed and the contract is priced accordingly to take account of the insurance cost.”
As to final advice to suppliers worried about failure to perform and being sued for losses, Else’s comments are very specific. He says to “focus on the risks and have a Plan B to make sure that you have the maximum coverage on insurance and practical solutions”.
Toqeer, on the other hand, would recommend, where possible, negotiating supplier friendly clauses.
He says: “Think about the reasons behind potentially failing to perform and mitigate these by including a period in which to remedy any potential breach of contract; ensuring time is not ‘made of the essence’; incorporating a robust limitation-of-liability clause; and considering a supplier friendly force majeure clause.”
The bottom line for both? Instruct lawyers to engage in the contractual process from the outset, particularly if it is a valuable and expensive deal; anything otherwise might be a fool’s errand.