August 25, 2020
by Mary Clare Novak / August 25, 2020
Rule follower or rule breaker, abiding by the terms of your legal agreements should be a high priority for your business.
Ideally, when a business contract is formed, both parties would hold up their end of the deal, both sides would reap the agreed upon benefits, and no disputes would arise. However, we do not live in a perfect world, and achieving effective contract management can be hindered by a variety of problems.
Business issues present themselves even when efforts are made to avoid them. Unexpected events occur, processes cause delays, and financial situations can get messy. If one of the countless potential business issues you can run into keeps you or a party you have a contract with from fulfilling their obligations, that is known as a breach of contract.
A breach of contract is a civil wrong in which a party of a legally binding agreement does not honor their obligations outlined in the contract by either non-performance of actions or interference of the other party’s actions. Depending on the agreement, a breach can occur if a party fails to perform their obligations on time, if they don’t perform in accordance with the agreement, or if they don’t perform at all.
When someone breaches a contract, they have to pay damages to the aggrieved party since they were negatively affected. Contracts will typically include a course of action to follow if either party breaches the contract, but the nature of the breach will typically determine the remedy following it.
Contracts will typically outline what constitutes a breach for that particular agreement, but to officially determine if a one has occurred, a judge will examine it.
There are a few questions that the judge will have to answer to make the final call:
After answering all of those qualifying questions, the judge will determine whether or not a breach of contract occurred. If it didn’t, the contract will continue until its expiration, termination, or renewal. If a breach of contract did occur, then the appropriate remedies will be rewarded to the affected party.
While breaching a contract will likely look different depending on the subject matter of the agreement, there are three categories of action that encapsulate all methods of breaching a contract:
The first method listed above is what is known as an actual breach of contract, because the breach actually happened. The other two listed are known as renunciatory breaches or anticipatory breaches. In both of those situations, the breaching party will renunciate the contract before they are supposed to have performed their obligations.
These ways of breaching a contract only define how the contract is breached. The severity of the breach is a completely different story.
The way or method or breaching a contract is simply the action a party took, or didn’t take, that resulted in them not fulfilling their obligations in the agreement.The classification of the breach refers to the seriousness of the offense.
Each term within a contract is classified as either a warranty, condition, or innominate term. So each classification is a breach of one of those terms of the contract, giving us the three types: breach of warranty, breach of condition, or breach of innominate term.
A warranty is an assurance by one party that a particular statement is true and reliable. Essentially, it’s a promise that whatever good is being sold is in the exact condition that the seller has described. Warranties typically accompany any agreement made regarding the sale of real estate, insurance, or products.
A breach of warranty occurs when the seller of a product fails to fulfill the terms of a promise made regarding the quality or type of product. When describing a product in advertisements or sales promotions, misrepresentation might occur in regards to the safety and security of using a product. If someone buys that product and can prove that they relied on those false promises of safety, the contract can’t be terminated, but they can claim damages from the seller on the basis of breach of warranty.
The next classification is a breach of condition. The conditions of a contract get right down to the actual transaction of the agreement. Conditions can be explicitly stated or implied. Even if a condition is implied and not expressly stated, they are required to be present when entering the contract.
They have a few different responsibilities:
A breach of condition occurs when one of the above conditions is not fulfilled by one of the contract’s parties. If someone proves breach of condition, the claimant can terminate the contract and receive damages from the other party.
An innominate term falls between a warranty and a condition. The seriousness of a breach of innominate terms varies, giving it a wide range of consequences. In the case of breach of innominate term, the court (or whichever style of conflict resolution the parties choose) will decide the impact on the innocent party.
If it’s determined that the breach was serious enough that it ruined the entire value of the contract for the aggrieved party, they will likely be allowed to end the contract. If the term that was breached was minor, the aggrieved party will likely only be allowed to sue for damages but not terminate the contract.
Another measurement of the seriousness of a contract breach is whether it was material or minor. Whatever category the court places the breach in will determine the legal remedies for the aggrieved party.
A minor breach occurs when a party fails to perform a small detail of the contract. In this case, the entire contract has not been violated and can still be performed in a certain manner. Minor breaches can occur when there is a small technical error in the wording of the contract. Terms written incorrectly like the wrong date or price can cause a minor breach.
A material breach, also known as a fundamental breach, occurs when the breach is so substantial that it basically cancels the contract because it makes performance on the behalf of both parties impossible or if one party doesn’t receive their agreed upon benefit. When a material breach occurs, the nonbreaching party no longer has to perform their duties and has a right to all remedies.
Here are a few different elements that a court will look at to determine if a breach was minor or material:
Here’s a quick example to make a distinction between minor and material breaches.
Say Mike agreed to deliver 100 oranges to Bob’s Orange Juice Stand by Tuesday. If the delivery arrives on Tuesday but instead of oranges, 100 apples are delivered, this would be seen as a material breach. If a delivery of 100 oranges arrived a day late on Wednesday, this would be seen as a minor breach (unless it was explicitly stated in the contract that deadlines are firm).
When a contract is breached, there is going to be a breaching party and a nonbreaching party. The course of action for both groups is going to look different.
If you are the breaching party, there’s a chance you can fix your mistake before it affects the other party. If that’s possible, take whatever action is necessary to right your wrong. Whatever the case may be, reread the section of the contract that discusses what to do in the event of the breach. The contract might specify a certain period of time the breaching party has to fix their mistake or how to handle the situation altogether.
If the breach can’t be fixed, the breaching party should alert the nonbreaching party and tell them what happened to show good faith. The parties might be able to find a way to resolve the breach on their own. As a last resort, the breaching party should find another way to fulfill their obligations.
If you are the nonbreaching party, you have an automatic right to file a lawsuit against the breaching party. However, litigation is a pain, and it’s definitely favorable to find a way to resolve the issue on your own.
Your first step should also be to reread the contract. Take note of any clauses with information regarding damages or the amount of time the breaching party has to fix the breach. It’s in the best interest of the nonbreaching party to give the breaching party a chance to resolve the situation. If nothing can be done to reverse the breach, it’s possible that there is an alternative solution that can still fulfill the nonbreaching party’s needs.
However, they are under no legal obligation to accept a remedy that doesn’t completely resolve the breach, fulfill the initial promise, or compensate the suffered damages. If this is the case, the nonbreaching party can file a lawsuit.
If you are the nonbreaching party and you’ve decided that there’s no way for the breaching party to fulfill their obligations after the breach occurred, you might decide to sue the other party.
Before filing the lawsuit, make sure the contract doesn’t have any clauses regarding whether or not a lawsuit can even be brought. It’s possible that the agreement specifies that another contract dispute resolution method is required, such as mediation or arbitration.
If the lawsuit goes forward, the person filing with have to prove that the following four things are true:
After the breach of contract is proved, the aggrieved party will file a breach of contract claim with the appropriate court and follow that specific course of action.
Not all breach of contract scenarios will require legal assistance from a lawyer. For example, if you decide to resolve the situation with an alternative conflict resolution method like mediation or arbitration, you won’t need a lawyer. This is good news for both parties, as it will save plenty of time, money, and energy.
The deciding factor of whether or not you should take the breach of contract claim to court all lies in the severity of the subject matter and potential damage. If you are dealing with a breach of a business contract or an agreement that deals with something of great value, you’ll likely want to seek help from a legal service provider. Lawyers are professionals in drafting, reviewing, and editing contracts to prepare you for negotiations, minimize risks, and avoid legal disputes.
When a party breaches a contract, the aggrieved party is entitled to relief, also known as remedies. The purpose of a remedy is to put the nonbreaching party in as good of a situation if the breach had never happened. There are three types of remedies for breached contracts: damages, specific performance, and cancellation, and restitution.
Damages are the most common form of remedy from a breach of contract. Depending on the contract at hand, damages will fall into one of the four following categories:
Essentially, damages refer to some form of payment or another.
Sometimes, damages might not cut it for the aggrieved party. If this is the case, they might prefer specific performance, which is a court-ordered performance of a specific duty. This type of remedy is really only used for unique situations where damages aren’t going to cover the loss caused by the breach.
The nonbreaching party can also decide to cancel the contract and sue for restitution, or restoring them to their situation before the breach. Courts will typically order the breaching party pay restitution if the other party experienced some sort of financial setback because of it. And because this also includes the contract being cancelled, it relieves all parties of their associated obligations.
Say someone you entered a contract with claims you’ve breached it in one way or another. This isn’t automatically game over. There are a few defenses you can raise that can get you out of legal trouble.
Tip: If your agreement needs to be in writing to be enforceable, make sure you know exactly how to write a contract that covers everything you need to make it legal.
If you encountered any of those situations above when entering a contract and the other party claims you breached it, these defenses should hold up in court.
From all of the information included above, it’s obvious that breaching a contract will enter you into a complicated process that can result in some serious consequences. All in all, when you sign a contract, it’s in your best interest – and that of the other party – to abide by your obligations and be proactive in noticing and resolving issues. It will save you from a world of hurt later on.
Even if your business is only involved in a few straightforward agreements, you need a system to keep everything in place to avoid a breach. The second you sign an agreement, implement a contract management system to help out.
Mary Clare Novak is a Content Marketing Specialist at G2 based in Burlington, Vermont, where she is currently exploring topics related to sales and customer relationship management. In her free time, you can find her doing a crossword puzzle, listening to cover bands, or eating fish tacos. (she/her/hers)
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