Breach of contract – legal implications

What remedies are available if you suffer a breach of contract?

If you run a business, you may contract suppliers to deliver goods or services to you. Or you may be contracted to provide a service to your customers. In all likelihood, you do both. But you don’t have to be a business owner to be party to a contract. If you engage a builder to renovate your home, or even buy a smartphone, you enter into a contract. What happens if the builder disappears before the job is finished? Or if the job is completed to an unsatisfactory standard, or something in your home is damaged in the process? It’s likely that a breach of contract has occurred. What constitutes a breach of contract and what remedies are available to you if you suffer a breach of contract?

What is a contract?

A contract is a legally enforceable promise, usually for the purchase of an item or for a service rendered. A contract does not have to be in writing to be legally valid, but it is easier to enforce if it is. If things go wrong with a verbal contract, there is no evidence of what was agreed and a dispute becomes one person’s word against the other’s. To be enforceable, a contract should contain three elements: 

1. Offer – an intention to enter into a contract
2. Acceptance – the parties have agreed to the contract’s critical terms
3. Consideration – each party gives and receives something of value (i.e., one party delivers an item or a service and the other pays them for it)

What is a breach of contract?

When entering into an agreement, a general requirement is that the contracting parties must act in good faith. Parties to a contract are bound to respect the contract and perform their contractual obligations. If a party fails to honour these obligations, whether by act or omission, without a lawful reason, they commit a breach of contract. A breach of contract is defined as an unlawful infringement of the other party’s rights that arise from the contract.

What are the different types of breach in South Africa?

South African law recognises five types of breach of contract. In other English-speaking countries, the types of breach are known by fairly simple terms: anticipatory, actual, material, minor, and fundamental (or repudiatory). The terms we use in South Africa are slightly different, and it’s important to understand them.

1. Mora debitoris is a breach of contract caused by the debtor (the party due to pay money to the other party). The breach arises when the debtor delays performance (i.e., payment) and the cause is the debtor’s fault. An example might be, to continue with the “builder” analogy, a homeowner failing to pay the balance due to the builder on completion of the renovation within the time period stipulated in the contract.
2. Mora creditoris is when the creditor (the party to whom money is owed) has caused a breach of contract and delayed the debtor’s performance. Effectively, the creditor has failed to cooperate with the debtor in a timely matter and therefore the debtor is unable to perform their obligations. This might happen if the builder walks off the job and begins a new job with another client before completing the contracted renovation, promising to come back at a later, unspecified date. The homeowner (the debtor) is unwilling to pay the full amount owed because the builder (the creditor) has not honoured the contract and finished the job.
3. Positive malperformance is a breach where the debtor commits an act contrary to the terms of the agreement. The debtor has either provided improper or defective performance or performed the contracted service in a way not specified in the contract. An example of this would be the installation of a new basin that leaks onto the floor of the bathroom. The builder’s performance is substandard or defective.
4. Repudiation occurs when a party indicates to the other that they no longer intend to fulfil the contract. The party will typically try to withdraw from the agreement without justification. Repudiation can take place wholly or in part. This might happen if our builder finishes the renovation and refuses to repair the leaking basin, or if they leave the job before all work is complete and indicate they have no plans to return. Repudiation happens when either party indicates their intention not to honour the agreement, and so it could just as easily be the homeowner who terminates the builder’s contract without reasonable cause, perhaps because they have found a cheaper builder or decided to complete the work themselves.
5. Prevention of performance is the final type of contract breach in South African law. In this instance, either party renders the performance of the contract impossible. This might happen if the homeowner goes away before the renovation is complete and denies the builder access to the property.  

What remedies are available? 

In the event of a breach of contract, depending on the type of breach, there are various remedies available, with different consequences. 

1. Cancellation of the contract. The party whose rights have been breached (the innocent party) may cancel the contract when the breach is of a serious nature, for example if the builder has repeatedly performed shoddy work or caused breakages to the homeowner’s property.
2. Claiming specific performance from the defaulting party. The innocent party can claim specific performance unless performance is made impossible or is prevented. Therefore, the innocent party can demand that the defaulting party performs immediately (e.g., if the builder has walked off the job), or that the defaulting party performs properly (e.g., if the builder has installed a leaking basin; it must be reinstalled to the correct standard). 
3. Claiming damages from the defaulting party. The innocent party can claim compensation for damages suffered. Damages are normally claimed alongside cancellation and specific performance. However, the common law and the contract itself may place limitations on the extent to which the defaulting party is liable for the damages suffered as a result of the breach. 

What are damages?

The common law of contract distinguishes between general and special damages. General damages are damages considered to flow naturally and generally from a breach in the normal course of events and are recoverable without a need to prove anything more. For example, in the case of the leaking basin, the basin should be replaced and any damage to the surrounding area repaired, as this is a reasonable recovery to expect from a breach of this nature.

In terms of special damages, a defaulting party will only be liable for special damages where they can prove the following: (1) there are special circumstances that make it reasonable to presume that the contracting parties contemplated the damage as a result of the breach of contract; and (2) the parties had agreed, expressly or tacitly, that there would be liability for such damages. A court will need to be convinced, on a balance of probabilities, of the existence of an agreement whereby the defaulting party undertook to pay the special damages claimed. The parties may insert provisions into their contract that are designed to regulate the consequences of a breach of the agreement. 

Examples of special damages include:

• A cancellation clause giving a right to cancel even for a minor breach, provided certain procedures are followed. This is usually a clause that provides for written notice of intention to cancel unless the default is cured within a certain number of days
• A penalty clause which removes practical difficulties in proving damages
• An acceleration clause, making the outstanding balance of the debt immediately due and payable
• An interest clause which regulates the amount or rate of interest payable if the debtor defaults
• A restitution clause, regulating what has to be restored if the agreement is cancelled

Do you need help with a breach of contract?

If you are facing a breach of contract, there is a remedy. However, this remedy is dependent on the type of breach you are experiencing. If the breach is not sufficiently material to cause you to cancel the contract, you may still be able to claim damages. A contract is likely to be upheld in court if it is fair, reasonable and entered into with good faith. 

Simon Dippenaar and Associates can review and assess your contract and advise the best course of action for you. It may be preferable to enforce performance rather than cancel the contract. Either way, you may be able to claim damages. If you need help with a breach of contract, contact Simon today on 086 099 5146 or email sdippenaar@sdlaw.co.za.

Further reading:

• Drafting effective contracts
• Non-disclosure agreements

SD Law

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