breach of contract

08 January 2004 by
breach of contract

The problem

Your laundry supplier tells you it won't be supplying you from next Friday - but your contract still has a year to run. What are your options?

Can the laundry supplier (the "defendant") simply walk away from its obligations under this contract? Assuming that a valid contract exists, there are a number of options available to the hotelier or restaurateur (the "claimant").

Even though the claimant is being left with the prospect of no clean sheets or tablecloths for his business, he cannot try to force the defendant to perform its contractual obligations.

This is because where a claimant can be compensated in damages (ie, money) for breach of contract, he cannot get an order that the defendant perform the contract. A court may order "specific performance" if the service provided by the defendant to the claimant is so rare that the only fair remedy is to enforce the contract - for example, if the claimant supplied the defendant with antique laces and silks and the defendant was the only launderer providing such a service in the region.

Damages are the most common remedy for breach of contract. Broadly speaking, damages are awarded by the courts in two ways.

First, the contract might already provide that a fixed sum be paid by the defendant to the claimant in the case of a breach. The parties must be careful when drafting the contract that the amount to be paid out upon breach is compensatory and not punitive. The amount payable on breach shouldn't amount to more than what the entire contract is worth.

The object of damages is to put the claimant in the same financial position he would have been in had the contract been properly performed. If the amount payable on breach prescribed by the contract is too extravagant then damages will be determined using the normal method of quantifying damages as described below.

In the absence of prior agreement, the claimant is entitled to a level of damages that reflects the loss suffered by him resulting from the breach. It may be that the claimant pays the defendant only on a weekly basis and is able to find another laundry supplier that charges the same rate in a matter of hours. Damages would then be nominal, as the claimant is, in effect, suffering only the inconvenience of arranging an alternative supplier.

If, however, other laundry suppliers all charge more than the defendant for the same service, then the claimant will be able to recover the difference between the amount the claimant paid the defendant and the amount it will now have to pay the new supplier.

If the claimant had paid for the year's contract upfront, then the defendant is entitled to keep a proportion of the money paid in respect of services already performed.

The claimant must take reasonable steps to limit his loss, in this case by trying to find a new supplier quickly so that his business doesn't suffer unnecessarily as a result of the breach.

THE LAW

"Specific performance" is an option, but rarely granted. The claimant is then entitled to monetary compensation for any loss that's reasonably caused by the breach. The claimant should be put in the same position as if the contract had been performed correctly.

CHECK LIST

Make sure any clause-fixing costs upon breach don't penalise the contract-breaker as such a clause will be deemed void.

Upon breach the claimant should take all reasonable steps to limit his loss as any unnecessary expense will not be compensated.

BEWARE!

After breach, mitigate your loss and establish your legal position. Seek to negotiate a sensible deal. If negotiations fail, provided you're on strong legal ground and the defendant has assets, issue proceedings to recover your loss.

CONTACTS

David Leibowitz, Berwin Leighton Paisner, Tel: 020 7760 1000

British Hospitality Association, Tel: 0845 880 7744, www.bha-online.org.uk

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