Default vs. Breach: Everything You Need to Know
Default vs. breach is a confusing term related to contract execution.3 min read
Default vs. breach is a confusing term related to contract execution. Contracting parties need to understand these terms, along with many others, to avoid disputes over agreements. In contract law, a breach means the failure of a contracting party to perform their obligations according to the terms of the agreement. Default, according to the law of obligations and banking law, means to refuse to pay a debt when due.
Willful Misconduct and Deliberate Default
When assessing the amount of damages to award an aggrieved party, judges work with the contract's limitation of liability clause, which is not applicable when there is evidence of "willful misconduct" or "deliberate default." Willful misconduct is an act of an individual who deliberately commits a breach of duty or treats committing a breach of duty recklessly. On the other hand, deliberate default refers to a default done on purpose, in the sense that the defaulter was aware that their conduct is a default. However, deliberate default does not constitute recklessness, making it less severe than willful misconduct.
Disputes over Defaults on External Debt, Expropriation, and Breach of Contract
The World Bank's operational policy statement on disputes regarding breach of contract, defaults on external debt, and expropriation is the following:
1. The World Bank monitors disputes over certain international financial transactions involving member countries, or a public agency within a member country and the citizens of other member nations. These types of disputes are divided into three categories including:
- Disputes arising as a result of a refusal to service external debts based on the terms of the transaction.
- Disputes over failure to compensate foreign nationals after the expropriation of their possessions.
- Disputes arise when a government breaches the terms of a goods and services contract it made with aliens.
2. If the Bank is notified that a member country refuses to service its external debt and is not cooperating with its creditors to resolve the dispute, the Bank will consider the effect of this conduct on the creditworthiness of the member country and its ability to execute projects/programs financed by the Bank. It also assesses the procedures used by the parties to resolve the dispute before deciding on the matter.
3. If the Bank finds the member country at fault, it may not disburse new loans to the members unless it receives guarantees that the issue will be resolved.
4. If a public body or political organization from the member country is the defaulting debtor and the member is not liable for their debts, the Bank only restricts the defaulting body's access to financing while the member and other borrowers in the country will continue to get loans from the Bank.
5. The Bank is aware that a member country has the power to expropriate the property of aliens after following due process under the law. If disputes arise over expropriation and the Bank holds the view that the member country is not doing enough to remedy the situation, and this is affecting the country's ability to attract international financing, the Bank will assess the qualification of such member to continue receiving loans from it.
6. If a member country has compensated the alien whose property was confiscated, the Bank does not recognize such compensation until the member country resolves the issue with the alien's government.
7. The Bank's loans cannot be used as compensation for settling a dispute over expropriation; however, the Bank can lend to improve or expand expropriated property.
8. The Bank maintains a neutral position on the matters stated above. It only plays the role of a facilitator between the disputing parties to ensure an amicable resolution. The bank may recommend different mechanisms for dispute resolution such as conciliation and arbitration through the International Center for Settlement of Investment Disputes (ICSID).
9. If a World Bank-financed project/program is involved in a dispute over a breach of a governmental contract, the Bank will ensure a speedy settlement of the dispute to guarantee the success of the project/program.
10. If a dispute is not related to a Bank-financed project/program, the Bank tries to distance itself from the matter. If the dispute may jeopardize the country's ability to secure financing and no concrete efforts are being made to resolve the issue, the Bank encourages a speedy resolution of the dispute.
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