Ideally, every promise that’s made is one that’s kept.
But we all know that’s not how the world works. Things happen and promises change. It’s one thing to cancel Saturday night plans; it’s another to fail to carry out a contract.
Reasons behind this failure can vary in the business world: financial difficulties, unexpected changes, surprise realizations, and other unforeseen circumstances can cause a party to be unable to complete a contract on the agreed-upon date, or at all, causing conflict, a potential need for mediation, and even a day in court.
Defining breach of contract
In business, a contract is a written agreement that is ultimately signed by both (or all) parties involved in the agreement. This agreement binds those who have signed the document to that document, meaning that failure to keep that promise results in a breach of contract.
What is breach of contract?
A breach of contract occurs when the promise that the contract makes is not kept by the signees because one or more parties have failed to fulfill their promise according to the contract. Breach of contract may occur when one or more task is not completed at the agreed-upon time, the tasks completed do not meet expectations of agreement, or tasks are not completed at all.
Below, we’ll go over the ways that breach of contract can occur and what action to take when it does occur.
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4 types of contract breaches
Just like there’s more than one way to break a promise, there’s more than one way to break a contract. Below, we’ll go over the four most common ways that breach of contract may occur.
1. Minor breach
A breach doesn’t necessarily mean that everything is left incomplete.
Minor breach of contract occurs when a party fails to complete a part of the contract but does not leave everything incomplete. For a breach to be considered “minor”, the part of the contract that was not kept is a part that is nonessential and the other obligations can be fulfilled with or without the minor aspect of the contract.
A minor breach may also be known as an “impartial breach”.
2. Material breach
A material breach of contract is one that is so large that it affects the entire contract itself. In order to consider a breach a material breach of contract, the initial agreement of the entire contract must be considered completely unachievable.
Also known as a total breach, a material breach is sometimes so serious that it requires court attendance so that the appropriate party can collect damages from the breaching party.
3. Fundamental breach
Similar to a material breach, fundamental breach of contract allows for the non-breaching party to terminate the contract and seek compensation for damages.
A fundamental breach is considered to be more intense than a material breach.
4. Anticipatory breach
An anticipatory breach is one in which the breaching party warns the other party that a breach will occur, either in writing or verbally.
The non-breaching party can therefore immediately claim a breach of contract and seek compensation, monetary or otherwise, for damages.
Treating breach of contract
When a contract is breached, there are several ways in which the non-breaching party can go about treating the situation. Below are some of the most common ways in which to treat the situation:
Damages are payment (not necessarily monetary) to make up for a breach of contract. Damages can be paid in more than one way:
Liquidated damages are damages that were specified in the contract prior to the breach occurrence, in anticipation that a breach would occur. The liquidated damages should be an appropriate estimate of actual damages that may result from the contract breach.
Compensatory damages work to put the non-breaching party in the same position that they would have been had the breach not happened.
Punitive damages are payments that the breaching party must make that exceed what would fully compensate the non-breaching party. Punitive damages are not often asked to be paid, and are assigned as the word intends: punishment. Therefore, they are rarely assigned to the non-breaching party.
Nominal damages are awarded when a breach occurs but no monetary damage to the non-breaching party was proven.
2. Specific performance
If no damages paid can fix the damage caused, specific performance may be requested by the breaching party. Just like it sounds, instead of paying a monetary compensation or other types of compensation, when specific performance is ordered, the breaching party must complete the task that they had initially promised.
This is typically ordered when a monetary amount cannot cover the actual cost of what was lost with the breach.
Finally, the non-breaching party may choose to completely cancel their contract and relieve all parties of any obligation, causing the non-breaching party to lose time and money, but also giving them the opportunity for a clean slate.
Breaching a contract does more than hurt feelings
If you’re the non-breaching party, there are several actions you can take to fix the situation. However, if you’re the party that has breached the contract, it’s best you prepare yourself for whatever the non-breaching party has in mind. By signing that contract, you’re agreeing to fulfill everything requested of you. If you can’t, you’re in the wrong, and it’s time to own up to your mistakes.
Or, you could skip breaching a contract all together by having some business ethics.
Daniella Alscher is a content marketer for G2. When she's not reading or writing, she's spending time with her dog, watching a true crime documentary on Netflix, or trying to learn something completely new. (she/her/hers)