General Principles of Contract; (part 11) The implications of breach of contract

Finally, let us look at the legal implications of breaching a valid contract.

Obviously, the purpose of a contract is to bind the parties to the performance terms promised in the contract. But it is unfortunately the case that people do not always keep their contractual promises. Other than specific remedies included by the parties (e.g. "penalty" above), what remedies are available in law to one party when the other party breaches the contract? In simple terms, there are three remedies: Specific Performance, Cancellation and Damages.

Specific Performance

Specific Performance is the remedy sought when the aggrieved party seeks to force the other party to keep his promises in terms of the contract. In many cases this is not the preferred option due to the fact that relations between the parties may have broken down. In other cases, however, this does not matter and specific performance is the appropriate remedy - this will be a matter for the court to decide, taking into account all the circumstances, facts, evidence and public policy.

An example where specific performance would be appropriate is where there is no need for an ongoing relationship between the parties, e.g. the sale of a used drum kit at a bargain price. If the seller does not perform, because he now realises he has agreed to sell the kit for half its value, the correct remedy would be specific performance. The parties do not have to maintain a relationship thereafter. But where the contract was, say, one for the hiring of a producer's services for a year, specific performance would probably be the wrong remedy due to the ongoing tension that would no doubt result from forcing them to work together.

Cancellation

Cancellation is also a remedy that is available to the aggrieved party when the other party has committed a breach that is serious enough to go to the root of the contract and affect it at a fundamentally level. It is, however, an abnormal remedy, because the consequence of it is that the parties do not end up achieving what they originally agreed upon.

Because pacta sunt servanda is an established principle in South African law, the courts might not grant cancellation if they see that another remedy can resolve the situation. Nevertheless, sometimes cancellation is simply unavoidable (and, of course, the parties might have included a cancellation clause in the agreement). In this case, the courts will allow it, but not only when the breach of contract is material.

The remedy of cancellation does not apply when only an ancillary or minor term has been breached. (An example of a material breach in a recording contract, say, would be that the artist does not deliver the master for his new album because he has been holidaying in Mauritius for the past year instead of recording.

A non-material breach would be where, say, the artist delivers the master, which is a rock album, and one of the tracks is not rock but shows the band experimenting with jazz. Unless there was something contrary in the agreement, this would not be a breach that is material or fundamental enough to justify cancellation by operation of law). When cancellation is granted, restitution normally follows - that is, whatever has been performed in terms of the contract must be returned, if possible.

Damages

Whenever one of the contracting parties has suffered loss as a result of the other party's breach of contract, he is entitled to compensation, or damages. This is the case whether or not he has also applied for cancellation or specific performance. Damages, therefore are available to the aggrieved party as a remedy on their own, or in combination with either of the above two remedies.

The term 'damages' describes the financial (or patrimonial) loss that the aggrieved party has suffered due to the other party's breach, and therefore also the quantum (amount) of payment to be made by the latter in order to redress the former's financial loss. The damages that will be awarded by the court will be the amount by which the aggrieved party's patrimony (estate) would have increased if the other party had properly performed in terms of the contract, or alternatively the amount by which his patrimony has decreased because proper performance did not take place.

So, let's say that Izzy, a well known concert promoter, hires Indigo, one of the country's leading singers, to perform at the biggest concert of the year, promoted by him. The contract is properly concluded and Indigo is advertised as the headline act (all the support acts are unknowns). Two weeks before the concert, Indigo decides to accept another gig for more money, being put on Izzy's competitor, Izak, a few miles down the road. If Izzy finds this out in time, he can attempt to bring a court application for specific performance (i.e. to make Indigo keep her promise).

But whether this would be a suitable solution, bearing in mind that it will involve her working with Izzy who has sued her, and that the performance might suffer as a result, will be a matter for the court to decide. Izzy might decide to sue for cancellation, due to Indigo's material breach. In addition to this, he will undoubtedly sue for damages, whether or not Indigo performs. I say this because obviously, if she does not perform at Izzy's concert, Izzy will lose a lot of money in ticket sales, cancellations, lost sponsorship and so on. In particular, if Indigo does perform at Izak's concert, the amount of people that turn up there to see her there will give a clear indication of the additional ticket sales that Izzy might have sold, and would assist him in quantifying his total damages. The result might be a contractual damages action against Indigo for millions of Rands, depending on the amount (profit) by which Izzy's patrimony would have been increased had Indigo not breached the contract.

Please note, however, that only contractual damages can be claimed - that is patrimonial loss caused by the breach. Compensation for pain and suffering or loss of reputation cannot be claimed in the law of contract, but they can be claimed in the law of delict. (In this overlap of the law, therefore, a breach of contract can give rise to delictual damages, but the requirements that have to be satisfied are those of the law of delict and not contract. Thus, if Indigo's cancellation so badly damaged Izzy's reputation as a promoter that his future career as a promoter was impaired, Izzy might sue Indigo in delict for the future damages caused by this).

In the next instalment, we take a look at the different forms of breach of contract.