Breaches of contract occur when there is some form of non-performance of a contractual obligation. Before responding to a breach of a contract, an aggrieved party must determine whether the breach is material or immaterial. This will inform how the aggrieved party may respond, and the remedies that are available.
If a breach is material, the aggrieved party can take more severe action than they could if the breach was immaterial. For example, they would be entitled to withhold their performance under the contract until the party in breach has rectified the situation. However, where a breach is immaterial the aggrieved party would not have the right to take this course of action. If they were to do so they could be breaching the contract themselves.
Material Breach v Immaterial Breach
It can be difficult to distinguish material breaches from immaterial breaches. The Inner House has defined a material breach as a breach that goes to the “root of the contract”. This is a serious breach that causes a substantial failure under the contract.
Determining whether a material breach has occurred is a question of fact and will depend on the circumstances of each situation. An instance of defective performance may be a material breach, but this will depend on the extent of the defect. Similarly, whether late performance constitutes a material breach will depend on the effect of that delay. Some examples of material breaches include:
- A failure by a landlord to keep a house in tenantable condition under a lease;
- An excessive delay in shipping goods under a shipping contract; and
- Disobedience by an employee under a contract of employment.
Immaterial breaches usually stem from failures to comply with minor or technical provisions, such as a failure to comply with the conditions of a notice clause. Short delays in payment or performance are likely to be an immaterial breach unless this would be fatal to the purpose of the contract.
Parties can mitigate uncertainty over what will amount to a material breach under their contract by agreeing on what breaches will be material from the outset and including a clause within their contract to this effect. This is helpful, especially if there is a particular term of the contract that is important to the parties but might not otherwise be deemed material.
Remediable breaches
If a party has committed a material breach the other party may be entitled to rescind or terminate that contract. However, before doing so they must consider whether the material breach is capable of being remedied. If it can be remedied, the party in breach should be given an opportunity to do so before the contract is terminated.
Whether a breach is remediable or not is a matter of common sense. For example, a failure to make payment can obviously be rectified. Whereas a breach of confidentiality usually cannot be rectified because by this point ‘the cat is out of the bag’.
The Court of Session considered the concept of remediable breaches in Lindley Catering Investments Limited v Hibernian Football Club 1975 S.L.T. (Notes) 56. In this case, Hibs terminated a catering contract following complaints about sub-standard half-time refreshments without giving the catering company a chance to improve the quality of the refreshments and rectify the breach.
The Court held that this approach was not acceptable. Where a breach is capable of being remedied, the aggrieved party is not entitled to terminate the contract without giving the other party an opportunity to remedy the breach. To use a football analogy, had the catering contractor failed to up their game following the first yellow card from Hibs, the football club would then have had just cause to terminate the contract and send the catering company packing. However, as Hibs did not give the catering contractor a yellow card, i.e. a warning or opportunity to raise their standards, they were not entitled to terminate the contract.
Choosing a remedy
The remedies that may be available to an aggrieved party following a breach of contract can be divided into two categories: self-help remedies and judicial remedies which are granted by the courts. However, before pursuing any of these remedies, parties should attempt to resolve matters amongst themselves. If this is successful it could save the parties a lot of money, and potentially preserve their relationship with each other.
1. Self-Help Remedies
Self-help remedies are exercised without the involvement of the courts and include rescission and retention. Rescission relieves both parties from further performance of their obligations under the contract. Retention is where the aggrieved party suspends performance of their obligations under the contract until the other party remedies their breach. This principle applies to contractual obligations that are mutually interdependent on one another and can be enforced across more than one agreement, provided that the agreements are linked.
In Inveresk plc v Tullis Russell [2010] UKSC 19, the Court held that the defender was entitled to withhold sums that were due to the pursuer under an asset purchase agreement on the basis of their pending claim for damages against the pursuer under a linked services agreement. It is clear that the remedy of retention can have a wide application.
Before exercising a self-help remedy, parties must be confident that the breach they are responding to is a material breach and that a fair opportunity to remedy that breach has been given where required, to ensure that they do not breach the contract themselves. If the breach is immaterial the parties will not be entitled to rescind the contract or to withhold performance, doing so could be a breach of contract in itself.
2. Judicial Remedies
Judicial remedies can be awarded in response to a material or immaterial breach. There will always be a degree of irrecoverable cost and time that is associated with pursuing a judicial remedy, even if that remedy is granted. It is often commercially appropriate for parties to make attempts to resolve things between themselves before turning to the courts.
There are a number of remedies that courts can award depending on the needs of the aggrieved party and whether they are seeking to compel performance under the contract or substitute it. If a party seeks to compel performance under the contract the most appropriate remedies are specific implement. This compels a party to do something or to interdict, which prohibits a party from doing something. If the performance relates specifically to the payment of a debt, the aggrieved party should seek an action for payment. If securing performance of the contractual obligations will not provide a satisfactory remedy, the alternative is to seek damages as a ‘substitute’ for performance. These remedies are not mutually exclusive and more than one judicial remedy may be awarded in response to a singular breach if it’s deemed appropriate to do so.
Before responding to a contractual breach parties should pause, and consider which remedy is best suited to their situation. This is likely to depend on the extent to which they wish to preserve the relationship that they have with the other party, the nature of the contract, and the breach.
If you would like to find out more about commercial contracts and the common issues our clients face, visit our Commercial Contracts video and article series.