Business Breakfast Club June Summary - The Terminator: Managing Contractual Non-Performance
This month at Business Breakfast Club, we discussed how to manage contractual non-performance. In particular, we focused on performance measures, reporting requirements, breaches, rights to damages, and rights to terminate. BAL Legal Director, Mark Love shared some of his insights on the topic. Mark touched on:
The Information Pathway
Contract management involves contract performance which can be determined via ‘performance indicators’. These indicators demonstrate that a party has satisfied the criteria to become entitled to payment. ‘Lead indicators’ can provide information on future performance including whether the desired result will be achieved within the agreed time period. It can also provide an early warning of any potential issues that may arise in contract delivery. A well drafted contract will include the following milestones:
- the deliverable;
- the means by which the deliverable will come to life;
- the matters that create barriers for the deliverable; and
- the matters that mitigate one’s loss at each milestone point.
Damages for breach of contract are compensatory for the other party’s failure to perform the contract. Compensation is rooted in the notion that where a party sustains a loss by reason of a breach of contract, that party should be placed in the same position as if the contract had been performed. To address the breach, you must turn your mind to:
- whether you will engage a new contractor to rectify the breach;
- address the balance of performance of the contract in terms of time delays;
- determine how to keep the contract enforceable; and
- address the consequences of loss flowing from the works that still need to be completed to keep the contract on foot.
Arrangements should be put in place to monitor and assess the underperformance in a contract. This may include the parties engaging in an ‘action plan’. The action plan may require the contract manager to be aware of the contractor’s capabilities, so that the acquiring entity is informed about the goods or services being provided and is able to determine whether the agreed performance standards and rectification path are capable of being met.
Termination of a contract leaves the parties free from any further obligations to perform the contract. Only certain breaches permit you to validly terminate the contract. These include:
- a breach of a fundamental term – which relies on the requirements of specific clauses;
- repudiation – which relies on the contracting party’s behaviour to demonstrate that the contracting party no longer regards themselves as ‘bound’ by the contract terms; and
- a fundamental breach of the contract – whereby the contract has been breached to such a degree that the bargain under the contract cannot be delivered as intended or has been destroyed.
Ultimately, identifying the common intention of the parties before entering into a contract will ensure that the issues of underperformance or non-performance in a contract are minimised.