The Other Party Breached the Contract - What Do You Do Now?

1. When a contract is breached, the power shifts to you. You choose whether to enforce, terminate, or claim damages. The breaching party no longer dictates the pace.
2. A liquidated damages clause in a contract allows you to claim the predetermined amount without proving actual loss-but the court may reduce it if there is no reasonable relationship to the anticipated damage.
3. A fundamental breach permits immediate termination of the contract. A non-fundamental breach requires first granting the breaching party an opportunity to remedy.
4. Damages may be claimed for non-monetary harm as well-mental distress, loss of business opportunities-at the court’s discretion.
5. “Anticipatory breach” allows legal action even before the contractual deadline arrives, when it becomes apparent that the other party will not fulfill its obligation.

When a Contract Is Broken-Who Holds the Cards?

In business life, contracts are broken. A supplier who did not supply, a contractor who disappeared mid-project, a business partner who reneged on a commitment-these are situations any business owner may encounter. The right question is not only “who is at fault,” but “what remedies are available to me, and which step will produce the best outcome for me.”

The Contracts (Remedies for Breach of Contract) Law, 5731-1970-known as the “Remedies Law”-establishes a clear framework. Under Section 2, the injured party is entitled to claim specific performance or to terminate the contract, and is entitled to damages in addition to or in lieu of one of the aforementioned remedies.

The Three Remedies Available to You

Specific PerformanceUnder Section 3 of the Law, the injured party is entitled to request that the court compel the breaching party to perform the contract as written. This is the appropriate remedy when performance in kind is more important than monetary compensation-for example, a contract for the delivery of a unique asset, or a contract whose performance cannot be compensated in money. Specific performance will not be granted when the contract is not capable of performance, when it involves compulsion of personal service, or when its performance requires unreasonable supervision.

Termination and RestitutionUnder Sections 6 and 7 of the Law, the injured party may terminate the contract. If it is a fundamental breach, termination is immediate. If the breach is not fundamental, the breaching party must first be given an opportunity to remedy, and only if it is not remedied may the contract be terminated. Following termination, each party is obligated to restore what it received.

Fundamental Breach is defined in the Law as a breach in respect of which it may be assumed that a reasonable person would not have entered into that contract had he foreseen the breach and its consequences-or a breach agreed upon in the contract to be deemed fundamental.

DamagesUnder Section 10 of the Law, the injured party is entitled to damages for the loss caused to him, which the breaching party foresaw or should have foreseen in advance as a probable consequence of the breach. The burden of proving the loss and its extent rests on the injured party-but case law has recognized that when the nature of the loss makes precise proof difficult, an “estimate” may be made to complete the gap.

Liquidated Damages-A Tool Worth Including in the Contract

Section 15 of the Law allows the parties to determine in advance in the contract the amount of compensation that will apply in the event of breach-and then it may be claimed without proving loss. This is a powerful tool: it eliminates the need to prove actual loss and provides certainty to both parties.

But it is important to know: the court may reduce the amount of liquidated damages if it finds that they were set without any reasonable relationship to the loss that could have been foreseen. Liquidated damages set at an excessive amount may be reduced by the court. Therefore, drafting a proper liquidated damages clause is a task that requires advance consideration, not a generic template.

Non-Monetary Loss

Section 13 of the Law allows the court to award damages for non-pecuniary loss as well-mental distress, hardship caused, loss of opportunities. This is within the court’s discretion, and the outcome depends on the circumstances. It is important to know: the causal connection required under this section is direct and proximate-the breach of contract itself caused the loss.

Anticipatory Breach-You Do Not Have to Wait for It to Happen

Section 17 of the Law establishes a provision that many are unaware of: if it appears from the circumstances that the other party does not intend to perform the contract, or has declared its intention not to perform, legal proceedings may be initiated even before the contractual deadline arrives. You do not need to wait for the moment of actual breach to protect yourself.

What to Do the Moment You Realize the Other Party Has Breached

The first step: documentation. Every communication, every non-response, every action taken contrary to what was agreed-documented in writing. Evidence collected immediately after the breach is the best evidence.

The second step: understanding the type of breach. Is it a fundamental breach permitting immediate termination, or a breach requiring an opportunity to remedy? A mistake at this stage-for example, terminating a contract without granting an opportunity to remedy where one is required-may turn the injured party into the breaching party.

The third step: choosing a strategy. Specific performance, termination, damages-sometimes a combination of them. The quick step is not always the right one, and waiting is not always advisable. This decision, if made correctly, is what determines the outcome of the proceedings.

A point the court does not tend to forgive: a party who believed the contract was breached but did not act to terminate it and did not even give the other party an opportunity to remedy, while continuing to receive services and make payments. In a case represented by our firm (TA 7536/04 BTM v. Scopus et al.), the court held that such conduct constitutes implied acknowledgment of performance of the agreement. One who chooses not to act may discover that he has lost the argument.

The opposing party may also adopt such an approach. In a case represented by our firm (TA 41336-11-19 Check Bass Ltd. v. Y. Solomon Experience in Vessels Ltd. et al.), a client attempted to sue a supplier who stopped supplying goods before Passover, but the court held that the client himself had breached a material payment term that was expressly agreed upon, and therefore the supplier was entitled to stop the supply. Payment terms in engagements involving enormous sums are material terms-their breach allows the other party to cease the engagement and does not grant the breaching party a cause of action.

The other party breached a commitment and you are not sure what remedies are available to you? Before deciding, it is advisable to determine the proper course of action in your specific circumstances.

© Tidhar Tzur Law Firm | This article is for general information purposes only and does not constitute individual legal advice.