To assist small company owners considering legal action to resolve a business dispute, Grid Law founder David Walker explains how to value such a claim for a breach of contract.
When I’m advising clients about a breach of contract, there are usually two main points of discussion. The first is the strength of their claim and I covered this in detail in a previous article – How to win in court without a lawyer.
Once we’ve established that they have a good chance of winning, the second point we discuss is the value of their claim. This is important so that we can assess the commercial viability of starting a claim.
It’s easy to make an emotional decision and fight a claim on a point of principle. However, it’s important to carefully consider what’s best for the business because even when you have a good claim, it may not be economical to pursue.
So, assuming you have a good claim, how do you value a claim for breach of contract?
First, you need to remember that the purpose of claiming compensation is to put you in the position you would have been in had the contract been performed properly. It’s not to punish the wrongdoer.
Let’s use the example of a dispute between a digital agency and their client to explain this.
Sometimes valuing the claim is easy. If the services are complete and the breach of contract is simply non-payment by the client, the value of the agency’s claim will be the amount of money outstanding. This amount should be clear from the terms of the contract and the invoices that have been submitted.
Valuing the claim becomes more complicated when the contract has only been partially completed. Say the client failed to pay an instalment of fees and as a result, the agency terminated the contract before the services were complete. The agency is still entitled to compensation. They can claim the amount they need to put them in the position they would have been in had the contract been performed properly but, this is unlikely to be the total amount outstanding.
This is because the agency is under a duty to mitigate its losses. If there are savings that can be made by not completing the services, they should make them. For example, if staff can be deployed on other projects, or if an advertising budget isn’t spent, these savings will reduce the value of the claim.
So, what can the agency claim?
First and foremost, the agency will be claiming for lost profits but if there are other, unavoidable costs that they have or will incur, they can claim these too.
What happens if it’s the agency that’s in breach of contract?
Again, the client can claim compensation in the same way, but their losses are likely to be very different to those claimed by the agency.
Say, for example, the launch of an ecommerce website was delayed. The client will be losing sales every day that it’s late. How do you estimate how a new website would have performed? This will be a matter of debate between the client and the agency and the circumstances will be highly relevant too. Losing a few days sales in the run up to Christmas is likely to be far more costly than the same number of days in mid-February.
To help simplify these disputes, it’s extremely common to add a liquidated damages clause to the contract. This basically means that the parties to the contract agree in advance how much compensation should be paid in the event of a breach of contract.
In this case, they could agree a figure that should be paid for each day that the website is late. Agreeing this in advance, when the parties are on good terms then makes valuing the claim for late delivery of the website very simple.
The value of a breach of contract claim can also be reduced if there are exclusion clauses or limitations of liability in the contract. These can either limit the amount one party can claim or prevent a claim being brought at all. For more information on these clauses, please see my previous article: Using a contract clause to reduce the risk in commercial transactions.
Once you have a good idea of the likely value of your claim, you can think about claiming costs and interest too. However, the amount of costs and interest you are likely to recover can be far less certain and is always at the discretion of the court.
There’s a general rule that if you have to take legal action to claim compensation for breach of contract, the winner of a claim can recover their reasonable costs from the loser. However, you can only recover your costs if the value of your claim is above £10,000.
If your claim is valued at less than £10,000 it’s considered by the courts to be a small claim, and for small claims you’re unlikely to recover anything other than the court fee you pay to start your claim.
So, when you’re involved in a contract dispute, even if you have a good claim, sometimes you have to make a commercial decision whether or not to pursue it.
As difficult as this decision can be, especially when emotions are running high, it’s essential to think about the best interests of the business.
If you have any questions about business disputes feel free to email me at email@example.com and I’ll happily answer them for you
Catch up on some our favourite David Walker articles:
- Five early warning signs that your client is in financial trouble
- Five keys that will unlock the cash in your business
- How to settle a dispute before taking the case to court
Sign up to our newsletter to get the latest from Business Advice.