Do you need to include breach of contract clauses in your agreements? (Part 1 of our breach of contract series)

It is often believed that a clause expressly stating that the parties to a contract would be liable for its breach should be inserted within agreements as a safeguard for liability in situations of breach. For example, it is common for the wording of liability and indemnity clauses to specify breach as a cause of action, however this is an unnecessary addition. Expressly stating breach of contract as a cause of action in an agreement will add no extra value and may in fact limit other causes of action instead of benefitting the parties; liability for breach of contract is an implied term of any agreement under the laws of England and Wales and need not be expressly incorporated into written agreements.

The law:

A contract is defined as an undertaking by at least two parties, where they both exchange promises. In other words, it is a bargained for exchange, and the exchange can encompass virtually anything that is of benefit to the party receiving it or is of a legal detriment to the providing party. The key purpose of a contract is the promise of performance and the enforcement of such exchanges in a legal manner; it imposes legal obligations on the contracting parties to perform what they have contracted to perform. Therefore, each party has an implied right by law against the other in the case of non-performance or defective/delayed performance, as both can constitute breach. If such a right did not exist there would essentially be no contract as the obligations would be unenforceable and the existence of agreement would be pointless. In a similar manner, liability for negligence in tort need not be expressly stated as it is implied by law.

The consequences of a breach of contract would be to entitle the non-breaching party to a remedy. The most common form of a remedy is damages, where the aim of such damages is to put the non-breaching party in the position they would have been had the contract been performed properly. In order for a party to be able to successfully claim damages for breach of contract, the damages sought to be recovered need to satisfy the remoteness principle, which means that they must naturally flow from the breach or the loss suffered must have been contemplated by the parties as resulting from the breach. Once the remoteness test has been satisfied, the non-breaching party will be subject to a duty to reasonably mitigate the loss they have suffered as a result of the breach. After the process of mitigation, the non-breaching party will be able to claim the full amount of loss or the amount left after mitigating the loss, and no contractual clause need to specify this for it to be effective. These are the remedies for breach of contract under general law and they are implied, as is the fact that there is an implied cause of action for breach of contract.

Conclusion:

Any party to a correctly executed agreement will be able to sue the others for breach, should that be the case, and claim damages without being specifically given that right. Breach of contract need not be expressly stated as a cause of action in agreements as it would make no material difference in the case of breach, as discussed – it is a general legal right. Even more so, including such provisions might negatively impact parties’ rights in the case of breach as it might result in excluding other non-stated causes of action that might arise under law or would have otherwise been intended. Drafting of such provisions should be handled with a high degree of caution and clarity as it may have an adverse impact on the parties and ultimately work to their detriment.

For more practical guidance on how to draft liability and indemnity clauses lookout for Part 2 of our Key Points on Drafting Indemnity and Liability Clauses series.

Cleveland & Co, your external in-house counsel, has extensive experience in drafting, reviewing and negotiating commercial agreements and is here to help with any such contractual needs.

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