Failure to perform a contractual obligation is breach of contract. The general remedy in law for breach is damages, that is compensation for loss suffered, so that the injured party is placed in the position it would have enjoyed, had the contract been properly performed. Should that party seek to claim compensation over and above the loss actually suffered, that would be likely to be deemed a penalty and therefore unenforceable under English law.
There is no basic right in law to terminate a contract for breach unless it is sufficiently serious to constitute fundamental breach. In such a case the injured party would have the right, not only to damages, but also to terminate the contract, to procure the goods, materials, services elsewhere and to charge the defaulting party with all reasonable costs thereby incurred Fundamental breach is a breach of a condition of the contract, as distinct from a term of the contract.
The terms of the contract are all aspects of the agreement and the documents incorporated in it. The conditions are those of the terms that are considered to be fundamental to the performance of the contract, default against which would effectively render the contract incapable of performance.
Making a contractual term 'of the essence' of the contract makes it a condition of contract, the breach of which is fundamental. Most commonly experienced is the time of delivery being expressed as of the essence of the contract. In general, the courts will interpret the time of delivery in a commercial contract as being of the essence, even if the contract does not expressly say it is. The same judgment will not, however, be made about the time of payment.
Some sellers therefore include provision for the time of payment to be of the essence of the contract, which means that if the customer is late in making payment, the provider has the right to terminate the contract and sue for damages. Care must be taken in using 'time of the essence' provisions to ensure they are properly understood.
Dispute resolution
If it is the service provider that defaults, what will the customer then want — compensation or the service? In most cases it will be the latter. The priority therefore must be unemotional, level-headed discussion and negotiation to deal with the problem within the framework of the contract, while maintaining the service provision. Never lose sight of the overall objective.
Bear in mind, too, that the more obdurate problems can sometimes be overcome much more effectively with the help of an independent third party. So, make sure your contracts incorporate a suitable disputes resolution condition to facilitate that. Do not, however, use that as the first resort. It can use up valuable time, which could be better spent sorting things out yourself, rather than letting the sore fester.
Third parties are usually involved through a process of Alternative Dispute Resolution (ADR). This covers the processes of mediation and conciliation and in recent years has been more widely acknowledged and practised under the banner of adjudication. It has the invaluable benefit of being tightly controlled on time and therefore cost, but it carries the disadvantage of not being legally binding on the parties unless they expressly agree that it shall be.
The last resort
Litigation must be the absolute last resort. At the end of litigation the best you are likely to have is compensation, but relations with the service provider will have been soured, you will have lost time and incurred huge legal fees. You will be left wondering whether it was worth it.
Arbitration has been seen by many in the past as being preferable to litigation because it costs less and is quicker. That is not necessarily the case — arbitration can take as long and cost as much as litigation. Its most significant advantage over litigation is its confidentiality. All arbitration proceedings are private; all litigation proceedings are public.
Many people in the buying and selling business talk expansively about 'partnerships' and 'partnering'. The ideals and principles behind these expressions are entirely laudable and should be what buyer and seller are aiming at in the context of contracts for services. But never forget that the relationship, however good it might be, is a business relationship, a contract. Contracts are between organisations, which depend on people to maintain existence. Organisations and people change, introduce new policies, make mistakes of judgement. All these factors provide the groundbait for the rise of disagreement and potential dispute. Markets and economies change, companies are taken over. No matter how good the relationship is at the start, therefore, it can change later for many reasons. Ask yourself what happens if it does? What you will be left with? You might have only the contract left in which case the 'partnership' will only be as good as the contract which defines it.
A good partnership arrangement will make provision for the future. The quality of the partnership should be judged by the quality of the contract. If the partners have a loose contract, the partnership will be less than solid.
Source
The Facilities Business
Postscript
David Pearson is managing partner of DJP Consultancy, which advises on contract and purchasing management.
Email: djpconsultancy@btinternet.com David Pearson is not a lawyer and his articles do not purport to be, and should not be read as, constituting legal advice.
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