Commercial solicitor Leigh Ellis explains what happens when a breach of contract occurs in business. Typically the injured party can either terminate or affirm (continue) with the terms. But, what happens if delays occur?
Breaches of contract
Breaches of contract occur all the time in business. Mostly they are of such a minor nature, have such little impact or are so easily cured that they are largely ignored.
In other cases breaches of contract continue for a prolonged period because they take time to reveal themselves or because the party that has suffered financial loss from the breach is unsure about how to best deal with it.
When a sufficiently serious breach of contract occurs the innocent party is left with the option to either terminate the contract or to “affirm” it (continuing with the contract). The option chosen must be communicated to the party in breach either directly by simply stating the option chosen or indirectly through conduct. The former method is always preferable.
Explicit termination or continuation of a contract usually leaves little doubt as to the intentions of the injured party. Inferring the choice made from the innocent party’s conduct can sometimes be straightforward and usually leaves doubt as to whether or not they wish the contract.
The problem lies with the approach of the Courts that mere delay of its own does not affirm a contract, however the longer the delay the more likely it is an affirmation. In the intervening period, there is likely to be conduct of the innocent party which can be argued to be conduct amounting to an affirmation of the contract.
When will delay affirm a contract after a breach of contract?
The starting point is usually the time when the breach occurred. Generally, a small delay in acting or making a decision by the person whom the breach was committed against will not be considered to automatically infer that it wished to affirm the contract. It is perfectly normal for the innocent party to take some time to decide what they wish to do –usually days or weeks, not months. In addition, in some circumstances the innocent party may only discover that a breach has actually occurred some after time after the event.
There must come a point where inaction on the part of the innocent party must be inferred to mean that they have chosen to affirm the contract. However, when exactly this point is, is not entirely clear and always depends on all the circumstances and facts of the case.
In the 2010 case of Force India Formula One Team Ltd v Ethiad Airways PJSC, the Court of Appeal explained some instances where a delay is more likely to be seen as an affirmation of the contract by the innocent party:
- Where time is an important factor because there is a sense of urgency in the decision to affirm or terminate the contract;
- When the innocent party’s silence or delay may be misleading. For example, when the innocent party is aware of the breach but the breaching party is not;
- When the delay is in relation to a minor or easily remedied breach.
Following a breach of contract
Despite the clarifications made by the Court of Appeal in the above case, uncertainty will always exist to some extent because the tests set out by the Court of Appeal take in account the facts of the case to assess delay between breach of contract and an alleged affirmation.
Businesses which have suffered from a breach of contract should seek legal advice sooner rather than later to assess their options while they still exist and avoid the risk of accidentally affirming a contract that they may in fact wish to terminate.
Leigh Ellis is a business solicitor in London at Drukker Solicitors. Breaches of contract are within his areas of expertise along with technology related contracts and disputes.