Termination and compensation: defining your remedy before the dispute starts

When a contract is breached, most people go straight to one question: “how do I cancel it and get compensation?” The right question comes earlier. What do you actually want — performance of what was agreed, an end to the relationship and a return to the position before it, compensation for a loss, or some combination?

Identifying the remedy is not a drafting detail to be settled when the statement of claim is written. It is the decision the whole file is built on: which documents you need, which facts you have to prove, and whether an expert report will be required. This article sets out how that decision is made, with the Civil Transactions Law as the reference on the substantive rules of obligations and contracts.

Define the obligation and the breach

Before talking about termination or compensation, two questions have to be answered precisely. What exactly was the obligation, and in what way was it breached?

“They did not comply with the contract” is not a basis for a remedy. “They were obliged to deliver the second consignment on [date] to the specification in annex [x]; they delivered four weeks late and to a different specification in clause [y]” is a fact that can be proved and that consequences can be attached to.

One distinction matters a great deal here: is the obligation one of means or one of result? The difference is evidential. A party who undertook a result is answerable once the result fails to materialise. A party who undertook to use due care is answerable only if a failure to exercise the required care is established.

Three remedies, not one

Specific performance: requiring the other side to do what it undertook to do. This fits where performance is still possible and still useful to the claimant. It is often overlooked even though it can serve better than termination, particularly where a substitute is hard to find in the market.

Termination: ending the contract and restoring the position so far as possible. It does not fit every breach. A minor breach that does not defeat the purpose of the contract may not sustain termination, and compensation or a reduction in price may be the appropriate response.

Compensation: making good the loss suffered. It may be sought alongside performance, alongside termination, or on its own, and it has conditions of its own.

A hypothetical: a business contracts for a machine to a defined specification for a project already under way. Delivery is two months late and the machine supplied is to a lower specification. Three routes are possible: demand performance to the correct specification if the project can wait; terminate and recover what was paid if the purpose has been defeated; or accept the machine and claim a price reduction plus compensation for the delay. Which route fits depends on the state of the project, not on the contract text alone.

Formal notice and when it is required

A formal notice tells a defaulting party that the creditor is calling for performance. The rule in the Civil Transactions Law is that compensation is not due until the debtor has been given formal notice, unless an agreement or a statutory provision says otherwise. In contracts binding on both sides, if one party fails to perform, the other may — after giving him formal notice — seek performance or rescission, with compensation in either case where warranted.

The law excepts certain situations from the notice requirement: where the parties agreed expressly or by implication that the debtor is in default on the due date alone; where performance has become impossible or pointless through the debtor’s own act; where the obligation is compensation arising from a harmful act; where the obligation is to return something the debtor received without entitlement knowing that to be so; and where the debtor states in writing that he will not perform. Notice may be given by any agreed means or any means prescribed by law for service, including the filing of the claim itself.

The working rule: where notice may be required, sending it rarely causes harm, and omitting it may. Send it by a means that evidences dispatch, receipt and date, and have it identify the obligation, the deadline, and what will follow if performance does not come.

Loss and causation

Compensation does not follow from the breach alone. It needs an actual loss, and a causal link between the breach and that loss.

The recurring weaknesses in compensation claims:

• Unspecified loss: “our reputation suffered”, with no account of how or how much.
• Loss unconnected to the breach: a loss caused by market movement or by the claimant’s own commercial decision.
• Loss that could have been mitigated: a party who could have reduced the loss by a reasonable step and did not may find that taken into account.
• An assumed lost opportunity: “we would have earned x”, with no existing contract or confirmed dealing behind it.

The documents that strengthen a compensation claim: substitute invoices the claimant had to pay, contracts cancelled because of the delay together with correspondence showing the cause, technical reports, and documented calculations rather than estimates.

Liquidated damages and their limits

A liquidated damages clause is an advance agreement on the amount of compensation, intended to avoid a dispute about assessment. Under the Civil Transactions Law the parties may fix the amount of compensation in advance, in the contract or in a later agreement, unless the subject of the obligation is a sum of money; and formal notice is not a condition of claiming it.

It is not an untouchable figure. Agreed compensation is not due at all if the debtor proves the creditor suffered no loss. On the debtor’s application the court may reduce it if he proves it was excessive or that the principal obligation was performed in part. On the creditor’s application the court may increase it to match the loss if he proves the loss exceeded the agreed amount as a result of fraud or gross fault by the debtor. Any agreement contrary to these provisions is void.

Two practical consequences. A party relying on the clause is well advised to be able to show the loss that occurred. A party resisting it needs to show that the actual loss is substantially less than the agreed figure. In both cases, documents rather than assertion.

Characterisation and jurisdiction

The same remedy may take a different route depending on how the relationship is characterised: is it a commercial relationship between two businesses, a civil one between individuals, a construction contract, or an employment relationship? Characterisation determines both the substantive reference and the competent forum.

Filing before a forum that lacks jurisdiction is an expensive mistake, and it usually arises from a misdescription of the relationship rather than any flaw in the right. So characterisation is reviewed before drafting, and the forum follows from it.

The risk of terminating unilaterally

Few things turn a file around faster than a claimant who terminates the contract himself in a short letter, and then discovers that the contract did not permit termination in that situation, or that he did not do what the contract required first — a notice, or a cure period.

The consequence is heavy: the party complaining of breach may become the party in breach. So the termination provisions are read before any letter goes out. Is termination conditional on a material breach? Is prior notice required? How long is the cure period? Does termination have to be in writing and by a particular means?

One rule is routinely overlooked. The parties may agree that the creditor has the right to rescind on the debtor’s breach without a court judgment, but that agreement does not dispense with formal notice unless the parties expressly agreed to dispense with it. An automatic-termination clause on its own does not remove the need to put the debtor on notice. And the court may refuse rescission where the part left unperformed is of minor importance relative to the obligation.

A hypothetical: an annual services contract allows termination for breach after notice and a cure period. The client sends an immediate termination letter because a monthly report was late. The provider says the lateness was trivial and that no notice was given. The dispute has now moved from a late report to the lawfulness of the termination itself — a heavier and more expensive question.

When is settlement the better call?

Settlement is not always a concession. It is a decision calculated from four things: how long the litigation route is likely to take, what it costs, how strong the available evidence is, and how likely collection is once judgment is given.

Where the evidence is strong and the other side is solvent, carrying on is the closer call. Where there is a genuine gap in the evidence, or where enforcement is doubtful, a settlement at a calculated discount may serve better than a judgment that arrives late.

What matters is that the decision is taken after the whole picture has been put to the client — what is gained and what is given up under each option — rather than being presented as advice to concede or as a promise of victory.

A checklist before fixing the remedy

• What does the breached obligation say, word for word, in the contract or its annex?
• Is it an obligation of means or of result?
• What is the date of the breach and how is it evidenced?
• Is performance still possible and still useful?
• Has the purpose of the contract been defeated, or only partly affected?
• What is the actual loss, in figures and documents?
• Is there a liquidated damages clause, and how exactly is it worded?
• Does the contract contain a dispute-resolution clause naming a forum or a mechanism?

In short

Termination is not the automatic answer to every breach, and compensation is not the automatic consequence of every loss. Choosing the right remedy comes before the first line of the statement of claim, because everything after it — documents, facts, expert evidence — is built on that choice.

Anyone who starts with the right question — what do I actually want, and what can I prove? — saves themselves a long road.