Introduction
In the Herald of 3 February 2022 I wrote an article titled “Guarding against breach of contract”. I received numerous inquiries thereafter with some readers requesting me to address how to deal with breach when it has occurred, which I will hereby do.
Some of the safeguards I suggested in the said article include documenting an agreement, providing for the worst case scenario, how to draft the contracts, use of definitions and preambles, clarifying nature of agreements, specifying rights and obligations of parties, key deliverables and timeframes, definition of breach, how to rectify breach, consequence of breach, proactive communication, etc.
The above safeguards are not always employed effectively. Let me highlight that breach is in most cases caused by non-performance of a contractual duty or obligation within an agreed timeframe by the defaulting party. Such non-performance can be in whole or in part. This can be due to:
- Intentional failure such as refusal.
- Accidental or inadvertent failure.
- Circumstances beyond a party’s control.
- Negligence occasioned by the defaulter.
- Due to actions of the aggrieved party.
Dealing with breach
Everyday contracts or agreements are breached. Many commercial disputes are due to alleged breach of contract by one party towards the other. This article gives some insights into how parties to a contract may deal with breach when it has occurred, as explained hereunder.
Rectifying breach
Most agreements provide for how breach can be rectified especially the timeframe within which that can be done. Parties are advised to familiarise with such provisions. For example breach may be rectified by the defaulter within 7 or 14 days upon written notice by the aggrieved party to the defaulter to rectify such breach.
The defaulter may write to the aggrieved party offering to rectify breach within the contractually provided period. The aggrieved party may also demand rectification of breach in terms of the contractual provision. Depending on the gravity of the situation or values involved parties may prefer to do so through their legal practitioners.
Renegotiation of contract
At times it may be advisable for parties to re-negotiate contractual terms and condition where performance may be onerous or impossible. For example parties may agree to extend the period of performance such as delivery or payment.
Termination
In the extreme case an aggrieved may terminate an agreement citing breach. For example a seller who has another offer may choose to terminate and transact with the next best purchaser. This remedy can be invoked in the event of material breach which goes to the root of the agreement. It is therefore common for an aggrieved party to terminate a contract and claim damages. Please note that the defaulter may contest termination for various reasons, for example making counter claims or accusations.
Mediation and arbitration
It may very well be that breach or its implication is contested. A contract may provide for alternative dispute resolution (“ADR”) mechanisms such as mediation and arbitration. To allow for quick resolution of disputes parties usually provide for ADR mechanisms which should be followed first.
In the case of mediation parties may appoint a mutually agreed mediator to bring them together to resolve their differences. In the case of arbitration parties may agree to appoint an arbitrator or provide for the appointment of one if none is agreed between the parties.
ADR mechanisms are preferred as they may be faster, non or less adversarial in nature and the possibility of confidentiality unlike in litigation.
Damages
Some contracts provide for damages in the event of breach, for example interest on overdue amounts, predetermined penalties or higher rates or price variations. For example where equipment is hired and completion is delayed higher rates can be charged during the extension period.
An aggrieved party may claim contractual damages through a court with competent jurisdiction. For example such damages may be compensatory or liquidated. In the former the aggrieved party will seek compensation for loss suffered. Liquidated damages are easily determinable as they are usually provided in agreements for example in clear monetary terms.
Specific or positive performance
Where damages are considered inappropriate or inadequate for example where the aggrieved party wishes to continue with the contract, that party can demand specific positive performance such as delivery of goods, services or payment. The party may approach the court for a compelling order, for example, in the case of wilful dereliction of a contractual duty.
Interim relief
Agreements may provide that, despite mediation or arbitration being underway, an aggrieved party may approach a court with competent jurisdiction for interim or temporary relief pending determination of the main dispute. Such interim relief may for example be in the form of an interdict or a spoliation order.
An interdict in an injunction meant to bar or prohibit a party from carrying out certain actions. For example a party may be barred from using certain assets which have a bearing on the main dispute.
In the case of spoliation an aggrieved party may request the court to grant an order against the offending party to restore a certain position, for example to bring back certain assets or even funds pending determination of the main dispute.
Factors to consider in deciding on litigation
The decision to sue for damages or specific positive performance should consider:
- What the contract provides for in the event of dispute and the dispute resolution mechanisms.
- Chances of success and availability of evidence.
- Time litigation is likely to take compared to desired timeframe.
- Cost of litigation, affordability and expected monetary benefits.
- Publicity that may arise.
- Future business relationship.
Defence against alleged breach
A party allegedly in breach may raise the following defences:
- Substantial or adequate performance.
- Impossibility of performance due to no fault of the defaulting party.
- Invalid contract.
- Counterclaim that it is the aggrieved party that breached instead.
- Fraudulent misrepresentation by the aggrieved party therefore the alleged offender is cancelling contract.
- Both parties at fault and make a counterclaim for damages.
- Aggrieved party made it impossible to perform for example due to delays in providing materials or in providing payment details.
Conclusion
Breach is at the centre of many commercial disputes. There are many remedies available in the event of breach which parties to contracts should know.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA (EBS, UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant and consultant in deal structuring and is an experienced director of companies. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
