Breach of a contract

A contract is regarded as carried out, once the aim of the legal relationship has been achieved. A contract must be carried out to the right person, on the right time, in the right place and in the right manner, as normally specified by the contract itself. A breach of contract means the non-performance or unsatisfactory performance, including delayed performance, of the obligations.

As a general rule, the parties agree in the contract on the consequences and definition of a breach of contract. In the absence of such agreements, the procedure of applicable sanctions is provided by the Law of Obligations Act.

Before legal remedies can be applied, it must be checked whether they are not precluded. The violation as well as the consequence (damage) must be identified. There must be a causal relationship between the act and the consequence – the act must have directly brought about the consequence.

A creditor cannot refer to the non-performance of the debtor if he or she caused the non-performance him- or herself. As a rule, the debtor is not held liable for the violation, if the latter can be excused due to force majeure (circumstances that the debtor is unable to influence, such as forces of nature). In cases provided by law or in the contract, a person is held liable for non-performance only in the presence of guilt. The debtor is entitled to apply certain legal remedies regardless of the liability of the debtor.

The party who breached a contractual obligation may compensate for the breach, if the other party agrees to that. In the event of non-performance, it is important for the creditor to know if he or she can request performance and the improvement of unsatisfactory performance, or if he or she has lost the claim to performance and must either be content with compensation for damages or file new claims.

Legal remedies applicable in case of non-performance are:

  • Claim to performance, or initial claim. Payment of money can always be claimed. The performance of a non-monetary obligation cannot be claimed, if it is impossible or unreasonably costly for the debtor. Upon unsatisfactory performance, the creditor also has a claim to the improvement of performance.
  • Reduction of price can be applied by the creditor if he or she has accepted an unsatisfactory performance. This is based on the difference in value between satisfactory and unsatisfactory performance.
  • Fine for delay is a legal remedy in the event of delayed performance. The creditor may charge from the debtor a fine for delay from the moment the monetary obligation became collectible up to the satisfactory performance. If the rate of the fine for delay has not been specified in the contract, section 94 of the Law of Obligations Act shall be applied.
  • Claim for the compensation of damage is the broadest legal remedy. If a contractual obligation is breached, the creditor may accept an unsatisfactory performance and request the compensation of the related damages or the performance of the non-performed obligation, as well as the compensation of the damages resulting from the delay. A claim for the compensation of damage is a legal remedy that can, as a general rule, be used in combination with all other legal remedies. Both patrimonial and non-patrimonial damage are to be compensated. The purpose of the compensation of damage is to put the injured party in a position where he or she would have been if the circumstances resulting in damage had not occurred.
  • Withdrawal is a legal remedy that can be applied in the event of a material breach of contract that the debtor has not performed by the extended deadline. If the material breach occurred with regard to one part, it is possible to withdraw from that part only, unless the breach was not material with regard to the contract as a whole. Withdrawal from contract relieves both parties from the performance of their contractual obligations, but does not affect the validity of the rights and obligations created before the withdrawal.
  • Cancellation is a legal remedy for terminating long-term contracts in case of a material non-performance or with “good reason” when changes have occurred in the contractual relationship or in the relationship that served as the basis for the contract.

A creditor may choose between the legal remedies that he or she considers practical and purposeful. He or she may also use several legal remedies in combination, unless their joint use is not precluded due to their nature, the law or the contract. If a breach of contract has already occurred, a claim should first of all be raised to the offending party as soon as possible. By doing so, the injured party demonstrates his or her good will and gives the offending party the opportunity to remove or redress the breach.

On the other hand, a quick notification of the violation is often also a precondition for later compensation for damage, and failure to notify the other party of the breach might deprive the injured party of legal remedies altogether. It is quite possible that the offending party voluntarily compensates for the damage caused by his or her mistake or redresses the violation. However, often it becomes necessary to claim compensation and apply legal remedies through court.

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Related authorities

Compiled by: Ministry of Justice