To assist smallcompany 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 Im 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 weve 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 isnt 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.
David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.
This week, our legal law expert David Walker completed his series on all things contract law with a look at how a small business owner should handle a contract breach. Now, he responds to questions from readers that fear they have experienced a contract breach in some capacity. more»