3. If one party breaches a contract term, what can the other party do? What are the possible liabilities of the defaulting party?
The first issue is whether the contract violation is a breach of condition or a breach of warranty. A condition is a central (major) term of the contract. If a party breaches a condition, the other party has the right to be discharged from the contract and to claim damages (compensation). A warranty is a minor term. Breach of a warranty by a party gives the other party the right to claim compensation, but not to be discharged from the contract.
Whether a contractual term is a condition or a warranty should be determined using common sense, but it also depends on the seriousness of the infringement. The trade custom or previous dealings between the parties (if any) should also be considered. If such a dispute is brought before a court, then the judge will make the final decision.
You should try to seek legal advice before taking legal action. Generally speaking, the innocent party can choose to take the following measures:
- treat the contract as discharged and sue for compensation (if a condition has been breached);
- continue to act on the contract but sue for compensation; or
- request the court to grant an order for specific performance, injunction, rectification or rescission (*note), provided that no third party’s rights are affected.
(*Note: "Specific performance" aims to compel the defaulting party to carry out its contractual obligations. "Injunction" means requiring the defaulting party to stop doing something. "Rescission" means cancelling the contract and restoring the parties to the position that they were in before the contract was made (e.g. refund of any money paid or return of any goods delivered)).
The innocent party's duty to mitigate (minimise the loss)
A party who suffers loss as a result of a breach of contract must take reasonable steps to avoid further loss and to prevent the effects of the breach from multiplying unnecessarily, otherwise that party may not be entitled to full compensation from the defaulting party.