Partner Article

The effects of breaching contracts

Jamie Paterson, Partner at Paterson Tighe Morton LLP (PTM) discusses the importance of trying not to breach contracts & how it affects those on either side.

At PTM, our customers regularly approach us stating their clients have withheld money because either they have done something wrong or, more specifically, have breached their contract.

It is a common misnomer that a breach of contract often leads directly to damages being levied against the party who has breached the contract. This is rarely true. Damages resultant from a breach of contract will not generally be allowed unless some sort of loss has been incurred by the innocent party. This loss must arise as a direct result of the breach.

Once we have a conversation with the client and determine whether the breach of rules has cost their client any money, we can then move on to the issue of investigating what money is owed to whom, if any.

In real terms, what this means is simple; even though a breach of contract may have occurred, if no additional cost has been incurred as a result of that breach, then the party in breach cannot be held to pay any compensation to the innocent party. This is because there is nothing to compensate the innocent party for.

An example of such would be a subcontractor including the wrong type of nail into a building. If the incorrect nail caused a structural problem or some other type of loss of amenity then resultant damages may, as a result, be levied as a remedy for that breach. Of course, the contrary is also true. If it were the case that the incorrect nail did not create any structural or amenity problems then no loss may be suffered. If no loss has been suffered, then there can be no damages to levy against the other party - even though a breach of contract has quite obviously taken place.

A common exclusion to this principle is that surrounding liquidated damages. An operational liquidated damages’ clause within a contract allows the innocent party to levy damages for a proven breach at a rate expressed within the agreement. It should be noted that liquidated damages provisions generally apply to culpable delay and very little else.

Although it is always useful to get some further advice in this instance, it may also be helpful to suggest that we should not be too quick to accept liability for making a change or accepting a financial burden for a breach of contract which may not have caused any loss.

The next time a deduction is made from an amount of money that is otherwise due, ask what loss has actually been suffered and ask for proof thereof. You may not regret it.

This was posted in Bdaily's Members' News section by Paterson Tighe Morton LLP .