Breach of contract: requiring performance, terminating, or claiming damages
The other side has not delivered, has delivered late, or has delivered something other than what was agreed. Before deciding what to ask for, you have to choose between three routes that are not interchangeable and that are prepared in different ways. We explain when each one applies, what has to be documented before the first step is taken, and which time limits are running.
The three routes the law offers
In contracts with reciprocal obligations — sale, works, supply, services, distribution, leases — the power to terminate is implied for the case where one of the parties does not perform what falls to them. The injured party may choose between requiring performance and terminating, and in either case claim damages and interest as well; they may even seek termination after having opted for performance, where performance turns out to be impossible (art. 1124 of the Civil Code, Código Civil).
That choice is not a formality. It determines what is asked for in the claim, what has to be proved and what is recovered:
- Performance. That they deliver, that they finish, that they pay. Worth pursuing where the performance is still of use and the other side is good for the money. Compensation for the delay is claimed alongside it.
- Termination. The contract is unwound and the parties return what they received. Worth pursuing where the performance is no longer of use or trust has broken down. It requires a breach of some substance, not any defect at all.
- Damages. Those who act with intent, negligence or default, and those who in any manner contravene the terms of the obligation, are liable to make good the loss (art. 1101 CC). This may be sought together with either of the other two.
The most expensive mistake is choosing wrongly at the outset. Someone who announces in writing that they are terminating the contract and then discovers that the breach did not go that far finds that they are the party in breach. And someone who goes on requiring performance for months while accepting partial deliveries weakens their own position later. That is why the decision is taken with the paperwork in front of you, and before anything at all is written to the other side.
When the contract can really be terminated
Not every breach allows termination. What is required is a fundamental breach, one that substantially deprives the creditor of what they were entitled to expect and defeats the purpose of the contract. A short delay in a supply that is still needed is not one; a delay in a delivery whose date was precisely the reason for the contract is.
Three elements usually decide these cases:
- Whether time was of the essence, and whether that appears in writing or follows from the nature of the contract.
- The seriousness of the defect measured against the performance as a whole: a poor finish is not the same thing as an installation that does not work.
- The conduct of the parties after the breach: demands, offers to put things right, payments accepted, extensions allowed.
Art. 1124 CC itself adds a qualification worth knowing: the court will order termination unless there are justified grounds entitling it to set a period for performance. In other words, it may give the party in breach one last chance instead of unwinding the contract.
Default: why a formal demand changes the case
Those obliged to deliver or to do something fall into default from the moment the creditor demands performance, judicially or out of court. That demand is not needed where the contract or the law says so, or where it follows from the nature and circumstances of the contract that the date was a determining reason for contracting (art. 1100 CC).
Two practical consequences follow. The first: without a demand there is often no default, and without default no interest runs and the injured party’s position is not consolidated. The second, set out in the last paragraph of the same article: in reciprocal obligations neither party falls into default if the other does not perform or is not ready to perform. Anyone making a claim must be up to date with their own side of the bargain; if they are not, the other side will have that defence waiting.
What the demand has to say. What has been breached, with a reference to the clause; what exactly is required; within what period; and what will happen if it is not done. Sent by a means that proves both content and receipt — in Spain, typically a burofax, a certified letter with proof of its contents. That document interrupts the limitation period, puts the other side in default and, when the matter reaches court, is what orders the narrative.
Penalty clauses, deposits and guarantees
A penalty clause fixes the compensation in advance and avoids having to prove the loss. It has an important limit: the court will adjust the penalty equitably where the principal obligation has been performed in part or irregularly (art. 1154 CC). That is worth bearing in mind both when drafting one and when relying on it, because a disproportionate penalty over a partial breach will be reduced.
Deposits (arras). Where a sale involves arras — a deposit or earnest money — the contract may be rescinded, the buyer forfeiting the deposit or the seller returning double (art. 1454 CC). But not every arras clause is of that kind: they may be confirmatory — simply an advance on the price, with no right to withdraw — or penal. What decides it is how the clause is drafted, and it is one of the most frequent arguments in house sales that fall through.
Guarantees and bonds. Where there is a bank guarantee, a surety or a retention, the first task is to check that it is still in force and on what terms it can be called: many guarantees expire on dates nobody is watching, and calling them in time can settle the matter without litigation.
Late payment between businesses
Where the contract is between businesses, or with a public authority, the Act on combating late payment in commercial transactions (Ley 3/2004) also applies, and it improves the creditor’s position considerably:
- Payment period. If none was fixed in the contract, thirty calendar days from receipt of the goods or performance of the service. It may be extended by agreement, but never beyond sixty calendar days (art. 4).
- Default interest. Failing agreement, the European Central Bank rate on its most recent main refinancing operation plus eight percentage points, published every six months in the BOE (the official state gazette) (art. 7). It is far above the statutory rate.
- Recovery costs. The creditor is entitled to a fixed €40 added to the debt without having to ask for it, plus compensation for any proven recovery costs above that figure (art. 8).
Claiming with this Act in hand, rather than at the statutory rate of interest, changes the final figure and, with it, the other side’s willingness to negotiate.
Claiming a sum of money: which procedure
For a money debt that is liquidated, ascertained, due and payable, of any amount, there is the juicio monitorio (the order for payment procedure), which is supported by documents signed by the debtor or by invoices, delivery notes and the other documents that customarily evidence credits in that kind of relationship, even where the creditor created them (art. 812 LEC, the Civil Procedure Act). It is quick and inexpensive: if the debtor does not oppose, enforcement is ordered; if they do oppose, the matter goes on to whichever form of trial corresponds to the amount.
Where what is in dispute is not only a sum but the contract itself — termination, performance, damages — the route is ordinary proceedings or the juicio verbal (the simplified civil trial) according to the amount, with whatever expert evidence is needed. And, as a general rule, before suing you have to show that an attempt was made to resolve the dispute by an appropriate means of dispute resolution.
Time limits
- Five years for personal claims with no special period, from the moment performance could be required; in continuing obligations to do or not to do, the period starts afresh each time they are breached (art. 1964.2 CC).
- Three years of statutory guarantee and five in which to claim from the moment the lack of conformity becomes apparent, where the contract is a consumer one (arts. 120 and 124 of the consolidated text of the General Act for the Protection of Consumers and Users).
- Two years from the occurrence of the damage in construction cases governed by the Ley de Ordenación de la Edificación, the Building Act (art. 18.1).
How we handle it, step by step
Read the contract before reading the anger
Subject matter, deadlines, delivery terms, penalties, guarantees, grounds for termination, governing law and jurisdiction. A great many cases are won or lost on a clause nobody had read again since signature.
Decide the route: performance or termination
With written, reasoned grounds and a valuation of the loss. We tell you what it is realistic to obtain on each route and what risk each one carries, including the possibility that the court grants a period for performance instead of terminating.
Formal demand
Drafted so as to put the other side in default, interrupt the limitation period and set out our position. It is also the document that most often closes the matter without reaching court.
Evidence and solvency
Expert evidence if needed, and a check on what the other side has to meet a judgment with. A case won against someone with nothing is an expense; we tell you that beforehand, not afterwards.
Documented negotiation and proceedings
An attempt at an out-of-court solution with a defensible figure and, if that comes to nothing, a claim with the principal and alternative heads of relief properly ordered, which is what stops you ending up with nothing by having asked for too much.
Frequently asked questions
Can I stop paying if the other side is not performing?
Sometimes, yes: in reciprocal obligations neither party falls into default if the other does not perform or is not ready to perform their own side (art. 1100 CC, final paragraph). But suspending payment on your own initiative and without documenting it is risky: you have to state in writing what has been breached and why payment is being suspended, and the suspension has to be proportionate to the breach. Done badly, it turns the injured party into the party in breach.
I signed arras and want to pull out. Do I just lose the deposit?
Only if they are arras penitenciales, the withdrawal deposit of art. 1454 CC. If the contract sets them up as confirmatory — an advance on the price — there is no right to withdraw, and the other party may require performance or terminate and claim damages, which can far exceed the amount of the deposit. The whole clause has to be read before deciding.
The penalty in the contract strikes me as disproportionate.
If the principal obligation has been performed in part or irregularly, the court will adjust the penalty equitably (art. 1154 CC). The reduction is not automatic: you have to establish what part was performed and to what extent. In consumer contracts, moreover, a disproportionate penalty may be void as an unfair term.
How much interest can I claim for late payment?
Between private individuals, whatever was agreed and, failing that, the statutory rate of interest. In commercial transactions between businesses or with a public authority, the European Central Bank rate plus eight points, plus a fixed €40 for recovery costs and any proven costs above that (arts. 7 and 8 of Ley 3/2004). The difference between the two routes is usually considerable.
More than five years have passed. Is it too late to claim?
Two things have to be looked at: when the period started running — in continuing obligations it starts afresh each time they are breached — and whether anything interrupted it: an out-of-court demand, an acknowledgement of the debt, a part payment. Limitation is interrupted more easily than people tend to think, but you have to be able to prove it.
Where we work
Our office is in Villanueva de la Cañada, with cases in Brunete, Villanueva del Pardillo, Valdemorillo, Quijorna, Majadahonda, Las Rozas, Boadilla del Monte, Pozuelo de Alarcón and the rest of western Madrid. This page forms part of our civil law practice; for particular situations, see building and renovation contracts, consumer rights and company and commercial law.
Tell us about your case
If you have a contract that has been breached, a delivery that never arrives or an invoice that is not being paid, tell us what was agreed and what has happened, with the contract and whatever the parties have written to each other. We study every case before taking it on, and we tell you frankly whether it has any prospect of success and by which route.
First consultation: quoted before we start.
28691 Villanueva de la Cañada (Madrid)