You are in a contract and the other side has broken it. You can end it, right? And that’s the best thing to do? You might think the answers are yes and yes – but they are maybe and maybe. And if you can end it and do want to, how do you do that? This blog looks at the choices the innocent party has and at the end has a roadmap of what decisions need to be taken.
Not all breaches of contract allow the innocent party to end the contract. The breach has to be serious enough. Generally a minor infraction will not entitle the innocent party to terminate, it has to be a more serious infraction. Terms of the contract are sometimes classified as “conditions”, the breach of which allows termination, and “warranties”, the breach of which is minor and does not allow termination (but might give rise to a claim for damages). There is also an intermediate category, the breach of which might or might not allow termination, depending on the context.
First question
So the first question if there is a breach of contract by the other side is: is this breach actually serious enough to allow me to terminate? (Often phrased as whether it is a repudiatory breach.)
If the answer is no, then the only option is to carry on with the contract and perhaps claim damages. But what if the answer is yes, the question is then: it is serious enough?
The innocent party then has a choice: he can either choose to terminate the contract (“accepting the breach”) and claim damages and perhaps other remedies, or choose to keep the contract going (“affirm the contract”). Again, he will still be entitled to claim damages. The other big difference is that if the innocent party accepts the breach and terminates, he is relieved from all further obligations under the contract. If however he affirms the contract, he remains bound to perform his side of it.
So if you do have the choice, what should you do? The first thing to realise is that once you have chosen to affirm the contract, you can’t change your mind. When it is done, it is done. An affirmation could be express (“even though you are in breach of contract, I affirm the contract and it continues”) or implied (“even though you failed to deliver the goods by the required time, I still want them asap”). An implied affirmation can be as simple as saying nothing but behaving inconsistently with terminating the contract, for example carrying on doing your part.
Second question
So the first question is: can I terminate? If yes, the second question is: do I want to terminate? The answer depends very much on the circumstances. For example, an employer fails to pay two employees a bonus that they are due. This is a serious breach and the employees are entitled to terminate. Employee A does not want to leave the job and needs continuity of income. He elects to stay but sue for his bonus. Employee B on the other hand has been wanting to leave and to join a rival but has been inhibited by the post-termination restrictive covenants. He elects to accept the breach and terminate the contract, which leaves him free to ignore his further obligations including the covenants. He can sue the employer for damages for his notice pay.
The innocent party therefore has critical decisions to make, as to whether he is allowed to terminate the contract, whether he wants to terminate the contract, and whatever he chooses, how to go about that. Time is short – while the passing of time will not itself affirm a contract, the more time that passes the more likely it is that something will be done to affirm the contract.
This is a complex area and one that is often misunderstood. The innocent party should take some legal advice before doing anything at all, if he thinks he might be able to terminate a contract.
Written by: Alex Kleanthous
Alex Kleanthous is a partner specialising in commercial contract disputes including employment contracts. Alex advises on how to settle disputes effectively and how to litigate if necessary.