But what happens when a loss is incurred indirectly because of another’s actions – or inaction?

Consider, a printer that cannot complete a job because its presses keep breaking down. It has not willingly let the customer down, but that customer could lose expected sales, and therefore money, because of the printer’s failure.

Resolving this situation could get very messy.

The general position

According to Mohammed Toqeer, a solicitor in the commercial team at Harrison Clark Rickerbys, the general position under English contract law is that “the party who is legally or contractually bound to perform an obligation under contract will be in breach of contract if it fails to perform the obligation”. As a result, he says that the other side can claim damages for the loss it has incurred and could even have the right to terminate the contract.

Chris Else, managing partner at Else Solicitors, agrees and says that apart from compensation or damages, they could “seek a court order for specific performance if the contracting party is not able to complete the work it had agreed to do”. They could, in other words, be ordered to (somehow) fulfil the bargain.

But logically, and usually, he says that the claim is for monetary damages. As to how damages are awarded to compensate for loss, Else says that they are calculated differently to ‘liquidated’ or agreed damages, which are usually detailed in a written contract in advance. He says: “If damages are not prescribed, then normal contractual rules of putting the party in the position they would have been in had there been no breach of contract would apply.”

By way of example, Else says that net loss calculated on this basis can lead to a more costly outcome for the party in breach: “If, for example, I had agreed to do XYZ at a particular rate of say £1,000, and I was unable to carry out the work which cost ultimately £2,000 for an alternative contract or to complete, I would be liable to pay £1,000 damages for breach of contract to put the customer back in the position he would have been (or expected to be) in had I complied with my contractual obligations.”

He offers, however, a cautionary note though – that the cost of rectifying the breach of contract should not be unreasonable “as to be a failure to reduce or mitigate the loss”. This means that it would be unreasonable and disproportionate if the customer set out to deliberately have the work completed in an excessive or over-expensive way.

To this Toqeer adds another point – that while “losses the supplier could be liable for very much depend on what is written into the contract, they will not be liable for any penalty clause or any other term that is deemed an unfair contract term”.

Act reasonably

It makes sense, then, that supplier firms protect their position and that for the other side, as Else says, “there is a duty to act reasonably if they have been the victim of a breach of contract claim and to mitigate loss”. He emphasises that mitigation of loss requires the injured party to ensure that they do not make matters worse and that they “take a common-sense approach rather than ‘let’s see how expensive we can make this for the party in breach of contract’”.

That said, Else points out that suppliers can incorporate written terms in their contracts that limit damages payable. “Certain categories of loss, such as death or personal injury, cannot be restricted, but it is possible, for example, to agree in terms of business or other written contractual documents to limit contractual damage to the contract value or to an amount limited to the value of indemnity insurance.” He adds that “terms must be reasonable and proportionate to be enforceable. For example, it would not be reasonable to limit claims for breach of contract to a £1 as a contractual term, but possibly to £10,000 if the cost of the work was in fact £10,000 or thereabouts.”

But for Toqeer, the best way a supplier can protect its position is by deploying its own standard terms and that means having a good contract in place. “This,” he says, “will give a supplier control over key clauses including payment, limitation of liability and obligations of the parties.” But as Else noted earlier, Toqeer warns that in general, terms which are unfair or unreasonable will be unenforceable. 

The roles of force majeure and frustration

There is some solace to be had by suppliers – they may be able to seek refuge in ‘force majeure’ clauses. These apply where circumstances beyond the control of one party halts contractual performance. Here Else says: “Parties agree to suspend the contract, or excuse liability for not doing the work, as opposed to releasing one of the parties from the contract. It may be possible, and consideration should be given to this, to terminate the contract at that point.”

And Toqeer advises the same, noting that force majeure is designed to “suspend a party’s obligations when a specific event occurs, for example, an act of God”. He notes that those relying on force majeure “will likely have a period of time in which to continue their performance, failing which the other party has the right to terminate the contract.”

A topical industry example is UPM, which claimed force majeure after strike action at its Finnish mills left it unable to fulfill some contracts.

But for force majeure to be effective it must, says Else, be included within the contract and must detail the event that could cause the contract and work agreed to under it to be suspended. And he gives another illustration: a contract includes a clause to say that the contractual obligations could be suspended due to a pandemic. This would apply to the current Covid pandemic. But if, however, when restrictions ended, or it only applied to key staff being off ill and they recovered, the contract would be reinstated. This is why he says that “it is essential to look at the contractual terms if you are likely to be in breach of contract and demonstrate that the scope of the clause clearly fits the circumstances, and the facts fall squarely on all fours with the cause of the delay”.

Another source of relative comfort for suppliers is the doctrine of frustration. As Toqeer describes it, this allows one side to assert that a contract should be set aside – terminated – when an unforeseen event makes it impossible for them to perform their obligations under the contract. He adds that suppliers that wish to rely on this should note that it is seen as a last resort.

And Else concurs, saying that it “can assist a supplier and applies even if there is no specific written clause in the contract; in other words, it applies under common law principles”. And to drive his point home he quotes from a 1956 case, Davis Contractors Ltd v Fareham UDC: “…frustration occurs whenever the law recognises that without default of either party a contracted obligation has become incapable of being performed because the circumstances in which performance is called for work render it a thing radically different from that which was undertaken in the contract”. He continues: “Lord Radcliffe said at paragraph 729: ‘Non haec in foedera veni... it was not this that I promised to do’.”

Else comments that “in more recent cases this principle is considered the starting point, which makes sense. And to deal with the question of frustration it is necessary to establish whether this was the cause of frustration in the contemplation of the parties at the outset.” If so, he thinks it unlikely that the contract will be frustrated at common law.

Frustration is therefore about impossibility and there are numerous cases that Else throws in to highlight this: an old case about an opera singer falling ill and being unable to perform; a specific potato crop from a particular location that was ordered but couldn’t be supplied because the crop was diseased and alternatively sourced potatoes did not satisfy the contract; and Edward VIII’s abdication which led to bookings for prime spots to watch the procession being cancelled and contracts being held frustrated.

So, to compare the two, Else says that “force majeure causes a temporary suspension of the contract, whereas frustration will discharge a contract and all rights and obligations are therefore ended”.

As to how the courts view claims because of the pandemic, Else says that nothing has really been determined and “perhaps this is something which will be decided at some stage in the Court of Appeal; it is reasonable to expect some cases to arise following the pandemic”.

Regardless, for Toqeer, to make a successful case in court claimants must prove the losses they have incurred – “this may be in the form of providing written receipts, expert evidence and a detailed schedule of loss”.

Insurance and the supplier

Insurance products are part of the defences that are available for suppliers to deploy. For Toqeer, it’s possible to link insurance to “a limitation of liability cap which can then be used as a negotiating tool for the same”. His view is that insurance can act to mitigate losses depending on the type of risk involved.

But for Else, insurance should most certainly cover force majeure-related issues such as the pandemic, labour shortages and events, which are all things that are reasonably foreseeable but outside the parties’ control. That said he says to “ensure that terms are put before insurers and cover is agreed and the contract is priced accordingly to take account of the cost of insurances”.

He would also suggest firms consider the matter of illegality and “make sure that there is insurance put in place in the event that a contract is rendered illegal, not just in this jurisdiction, but if it is to be performed in foreign jurisdictions in those jurisdictions also”.

Parting advice

As to final advice to suppliers worried about failure to perform and being sued for losses, Else’s comments are very specific. He says to “focus on the risks and have a backup Plan B to make sure that you have the maximum possible cover on insurance and practical solutions”.

Toqeer, on the other hand, would recommend, where possible negotiating supplier-friendly clauses. And he says to “think about the reasons behind potentially failing to perform and mitigate these contractually by including a period in which to remedy any potential breach of contract; ensuring time is not ‘made of the essence’; incorporating a robust limitation of liability clause; and considering a supplier friendly force majeure clause”.

The bottom line for both Else and Toqeer? Instruct lawyers to engage in the contractual process from the outset particularly if it is a valuable and expensive deal; anything otherwise might be costly – and end up in court.