A breach of contract is a failure to perform an obligation that a contract imposes. For a director, shareholder or business owner, the question that follows is seldom whether something has gone wrong. It is what the agreement required, what the failure has cost, and which response is worth the time and expense.
Where a company entered into the contract, the contractual rights and obligations will ordinarily belong to the company rather than personally to its directors or shareholders. Identifying the contracting parties is therefore an important first step.
Those decisions are easier while the record is intact and the options remain open. Three questions usually come first: whether a binding agreement can be proved, how long there is to act, and where a dispute of this kind would be heard.
When is there a contract to breach?
Not every commercial understanding is a contract, and not every contract is written. An agreement can be legally enforceable where the elements of a binding contract are established: offer, acceptance, consideration, an intention to create legal relations, and sufficiently certain terms. The parties must also have intended to be immediately bound, rather than to remain subject to a later formal agreement.
Oral agreements can meet that description. Proving their existence and terms, however, may be difficult, particularly where a trading relationship has run for years and the arrangements shifted with each order. A contract may also be formed partly through oral discussions, partly in writing and partly by the parties’ conduct. Standard terms, purchase orders, order confirmations, invoices and website terms may all be relevant. Where each party has sought to contract on its own standard terms, it may be necessary to determine which terms, if any, were incorporated into the agreement.
Some transactions must be in writing, or evidenced by a signed written document. Certain contracts concerning interests in land fall into that group, as do guarantees under section 126 of the Instruments Act 1958 (Vic) and agreements subject to specific form or disclosure requirements, such as certain consumer-credit, domestic-building and retail-leasing arrangements. Those are examples rather than a complete list. Electronic communications may satisfy writing or signature requirements in some circumstances.
What to check before you act
Before sending anything to the other side, put the position in order. Four things matter most:
- The obligation said to have been breached, and the words of the contract that impose it.
- What the contract says about notice, a period to remedy, termination and dispute resolution.
- The documents: the signed agreement, purchase orders, invoices, variations and the email chain where terms changed.
- The loss, what it has cost to date, and what the business has done since to limit it.
A term varied by telephone, or a document nobody signed, will often bear directly on the strength of the position. The order of steps matters too. Treating a contract as at an end, withholding payment or raising the dispute with customers are each decisions with consequences, and they are difficult to reverse.
Whether termination is available depends on the terms of the contract, the nature and seriousness of the breach, and compliance with any contractual notice and remedy requirements. Some obligations go to the heart of the bargain and others are secondary. Where a contract sets out its own process for notifying and resolving disputes, that process is the starting point.
How long you have to bring a breach of contract claim
A contractual claim is commonly subject to a six-year limitation period running from the date of breach, but different periods and exceptions may apply. Under section 5(1)(a) of the Limitation of Actions Act 1958 (Vic), a party generally must commence an action on a simple contract within six years after the cause of action accrues. For an ordinary breach, that is when the breach occurs, even if the loss comes to light later. A deed or other specialty may be subject to a 15-year period under section 5(3). Different periods may apply to statutory claims, and fraud, mistake, disability, acknowledgment or part payment may affect the running of time.
The practical consequence is that a long negotiation can consume most of the period available. Where the date of breach is itself in question, for example in a supply arrangement with repeated failures over two years, that issue deserves attention before the commercial one.
Steps that ordinarily come before proceedings
Court proceedings are not ordinarily the first step in resolving a commercial dispute. A letter of demand setting out the relevant contractual term, the alleged breach, the resulting loss and the remedy sought will generally be sent first. This approach is consistent with the overarching obligations under the Civil Procedure Act 2010 (Vic). Those obligations include using reasonable endeavours to resolve the dispute by agreement (s 22) and, where it cannot be resolved, narrowing the issues in dispute (s 23). The Act does not make a letter of demand compulsory in every case, particularly where urgent interlocutory relief is required.
Before proceedings are commenced, the parties may exchange information, engage in without-prejudice negotiations or attend mediation. Care should be taken to distinguish open correspondence, which may later be relied upon in Court, from without-prejudice communications directed to settlement.
Disputes with a required process
The Victorian Small Business Commission provides an accessible dispute-resolution and mediation service, generally at a subsidised fee. Retail lease and franchise disputes may also be subject to statutory or code-based procedures. Under section 87 of the Retail Leases Act 2003 (Vic), some retail tenancy disputes must be referred to the Commission before a party commences VCAT proceedings, subject to statutory exceptions including certain injunction applications. The Franchising Code of Conduct under the Competition and Consumer Act 2010 (Cth) establishes a separate process for franchise disputes, and it does not generally prevent court proceedings where they are appropriate.
Where a breach of contract dispute may be heard
Depending on those matters, a Victorian contractual dispute may be heard in:
- the Magistrates’ Court of Victoria
- the County Court of Victoria
- the Supreme Court of Victoria
- the Victorian Civil and Administrative Tribunal, where it has statutory jurisdiction
- the Federal Court of Australia or the Federal Circuit and Family Court of Australia, where the proceeding falls within federal jurisdiction
- arbitration, where the parties have agreed to arbitrate the dispute
VCAT does not have general jurisdiction over every contractual dispute, and the federal courts do not ordinarily determine a purely state-law contract claim unless federal jurisdiction is otherwise engaged. The contract may also contain an exclusive jurisdiction or governing law clause.
Where a matter does proceed, the forum depends on the claim. Mazzeo Lawyers acts in matters before the Victorian Civil and Administrative Tribunal, the County Court of Victoria, the Supreme Court of Victoria, the Federal Court of Australia, and the Federal Circuit and Family Court of Australia, among other courts and tribunals.
Frequently asked questions about breach of contract
Yes, where the elements of a binding contract are established, including offer, acceptance, consideration, an intention to create legal relations and sufficiently certain terms. Proving the existence and terms of an oral agreement may be difficult, and some transactions must be in writing or evidenced by a signed written document.
Six years from the date of breach is the common position for a simple contract. Different periods and exceptions may apply, and a deed or other specialty may be subject to a 15-year period under section 5(3) of the Limitation of Actions Act 1958 (Vic).
In some matters, yes. Under section 87 of the Retail Leases Act 2003 (Vic), certain retail tenancy disputes go to the Victorian Small Business Commission first, and franchise disputes have a separate process under the Franchising Code of Conduct.
Starting with the contract and the date of breach
Assemble the contract, the variations and the correspondence, then identify the date on which the obligation was not performed. That date starts the limitation clock, and it narrows the argument to the obligation in question rather than the history of the relationship.
Mazzeo Lawyers is a Melbourne litigation practice serving clients throughout Victoria, acting in property and business disputes. The Principal, Nick Mazzeo, began practising law in 1994. The firm does not generally provide contract drafting or transactional contract advisory services. It acts in disputes arising from contracts, including disputes concerning a contract’s interpretation, performance, breach, termination and enforcement. Legal costs depend on the nature, complexity and scope of the matter, and we explain the applicable fee arrangements and provide costs information in accordance with our legal obligations before commencing substantive work.
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