Breach and Remedies Clauses in Contract Drafting

Introduction

Breach and remedies clauses are critical components of commercial contracts. These provisions determine what constitutes a breach, how it is to be addressed, and what remedies are available to the innocent party. In essence, they provide the framework for risk allocation and legal recourse when contractual obligations are not met. Well-drafted breach and remedies clauses reduce uncertainty, minimise litigation, and allow the parties to manage commercial expectations effectively. This article explores the legal principles underpinning breach and remedies in contract law, best practices in drafting, and the implications of poorly constructed provisions. Practical illustrations are included to demonstrate how these clauses function in real-world scenarios.

1. Legal Foundations: Breach and Its Consequences

1.1 What Constitutes a Breach?
A breach of contract arises when a party fails to perform its obligations under the agreement. This may occur in several forms: the failure to deliver goods or services, late performance, defective or substandard performance, or outright repudiation and refusal to perform. Whether such a breach entitles the innocent party to terminate the contract or merely to claim damages depends largely on the nature of the term that has been breached.

1.2 Classification of Contractual Terms
Under English law, contractual terms are generally classified into three categories: conditions, warranties, and innominate terms. Conditions are fundamental terms, and breach of a condition entitles the innocent party both to terminate the contract and to claim damages. Warranties, by contrast, are less fundamental; their breach gives rise to damages but does not justify termination. Innominate terms fall between these two categories. The remedy for breach of such terms depends on the seriousness of the consequences of the breach, as illustrated by Hongkong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd [1962]. Drafters must bear in mind how terms are classified, since this directly affects the remedies available.

2. Purpose and Scope of Breach and Remedies Clauses

Breach and remedies clauses serve multiple functions. They define what amounts to a breach, they specify the procedures to be followed when a breach occurs, they prescribe the consequences of breach, and they may either limit or expand the remedies available. In doing so, they allocate risk between the parties in a manner that reflects commercial expectations. These provisions provide certainty, especially in circumstances where parties wish to pre-agree the framework for dispute resolution and enforcement.

3. Drafting Breach Clauses

3.1 Defining Breach Events
Breach clauses often include a list of events that will be treated as breaches  sometimes described as “events of default” in financing or commercial agreements. For example, in a supply contract, the clause may specify that a failure to deliver goods within ten days of the agreed delivery date, the supply of goods that do not conform to the specifications in Schedule 1, or the failure to remedy any breach within fourteen days of notice from the purchaser will constitute a material breach. By expressly identifying what counts as breach, such clauses reduce uncertainty and enhance enforceability.

3.2 Material vs Non-Material Breach
Contracts frequently distinguish between material and non-material breaches, attaching different consequences to each. For instance, a purchaser might be entitled to terminate the agreement with immediate effect if a material breach occurs and is not remedied within thirty days of written notice. Minor breaches, however, may be addressed without escalation to termination, thus allowing the commercial relationship to continue.

3.3 Cure Periods
Many agreements include cure or rectification periods, which give the breaching party an opportunity to correct the breach before termination or other remedies are triggered. For example, a clause may provide that if either party breaches any term of the agreement, the non-breaching party shall give written notice, and the breaching party shall have fifteen business days to cure the breach before termination or enforcement action is initiated. This balances fairness with enforcement and is commonly used in service contracts, leases, and commercial partnerships.

4. Drafting Remedies Clauses

Remedies clauses specify the legal or contractual consequences that follow a breach. These consequences may include rights to terminate, the payment of damages, liquidated damages, specific performance, indemnities, or limitations of liability.

4.1 Termination Rights
Contracts often contain express rights to terminate in specified circumstances. A remedies clause might, for example, provide that either party may terminate the agreement immediately by written notice if the other commits a material breach which is not remedied within fourteen days, or if the other becomes insolvent or enters administration. Such provisions must be drafted with precision and must align with any general termination provisions elsewhere in the contract.

4.2 Damages and Compensation
The default common law remedy for breach of contract is damages, designed to place the innocent party in the position they would have been in had the contract been performed, as established in Robinson v Harman [1848]. Remedies clauses can affirm this right, but they often also limit or cap liability, for example, by restricting liability to the value of the contractor exclude certain categories of loss such as consequential damages. A typical limitation of liability clause might state: “The Supplier’s total liability under this Agreement shall not exceed £100,000, and the Supplier shall not be liable for indirect or consequential loss, including loss of profit, revenue, or anticipated savings.” Such provisions must be reasonable within the meaning of the Unfair Contract Terms Act 1977 and remain subject to judicial scrutiny.

4.3 Liquidated Damages Clauses
In many commercial agreements, particularly in construction or delivery contracts, liquidated damages are used as a pre-agreed measure of compensation. For example, a clause might provide that if the contractor fails to complete the works by the completion date, they shall pay the employer £2,500 per day of delay as liquidated damages. These clauses are enforceable only if they represent a genuine pre-estimate of loss and are not penal in nature, as clarified in Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67.

4.4 Specific Performance and Injunctions
Some agreements expressly recognise the availability of equitable remedies, such as specific performance or injunctions. For example, a clause may state that damages would be inadequate compensation for breach of a confidentiality clause and that the non-breaching party is entitled to seek injunctive relief. Although such clauses can guide the court, they cannot override judicial discretion in granting equitable remedies.

5. Indemnity Clauses as a Remedy Mechanism

Indemnities serve as a distinct remedial device by requiring one party to compensate the other for specified losses or liabilities. Unlike damages, indemnities are not always dependent on proof of breach or causation, and they are commonly employed to allocate particular risks. For example, a seller may agree to indemnify the buyer against all losses, claims, and liabilities arising out of any tax liabilities of the target company relating to periods prior to completion. Careful drafting is required to define the scope of the indemnity, the events it covers, its duration, and the notice and claim procedures that apply.

6. Force Majeure and Excused Breach

Although not strictly a breach clause, force majeure provisions address circumstances in which performance becomes impossible or impracticable due to events beyond the parties’ control. A typical clause might state that neither party shall be liable for any delay or failure in performance caused by natural disasters, war, epidemics, or governmental restrictions. When validly drafted, such clauses can suspend or excuse performance without triggering the ordinary breach and remedies framework.

7. Practical Illustration: Software Development Agreement

Consider a contract for the development of a custom software platform. The breach clause may provide that failure to deliver the beta version within sixty days of the agreed date, or failure to rectify critical defects within fourteen days of notice, constitutes a material breach. The remedies clause may then specify that in the event of material breach, the client may terminate the agreement with immediate effect, recover all amounts paid under the agreement, and claim liquidated damages of £1,000 per day of delay, capped at £30,000. This structure gives the client multiple avenues of recourse while capping the developer’s liability. The clarity of triggers and remedies helps avoid disputes and supports enforceability.

8. Integration with Other Contractual Provisions

Breach and remedies clauses do not operate in isolation. They must be harmonised with other provisions in the agreement, such as termination clauses, limitation of liability clauses, dispute resolution provisions, governing law and jurisdiction clauses, and force majeure clauses. Any inconsistency between these provisions risks creating uncertainty and increasing the potential for litigation.

9. Avoiding Common Drafting Errors

Several pitfalls recur in the drafting of breach and remedies clauses. These include the use of vague language such as “substantial breach” without definition, the failure to specify timeframes for notice or cure, the inclusion of unenforceable penalty clauses, the omission of appropriate limitations or exclusions of liability, and the failure to consider how governing law may affect enforceability. Avoiding these errors requires precision, foresight, and a sound understanding of the relevant legal framework.

Conclusion

Breach and remedies clauses are among the most important elements in contract drafting. They establish the contractual framework for responding to non-performance, allocate risk, and determine the consequences of failure. When carefully drafted, they reduce the likelihood of disputes and provide mechanisms for enforcement that are both predictable and proportionate. Contract drafters must strike a balance between legal precision and commercial pragmatism, ensuring that breach triggers are clearly defined and that the remedies reflect the parties’ expectations and risk appetites. In doing so, they safeguard both the integrity of the contract and the interests of the contracting parties.