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.
What is 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.
What constitutes a breach of contract?
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:
- Did a contract exist?
- What did the contract require of both parties?
- Was the contract modified?
- Did the alleged breach of contract actually occur?
- Did the breach apply to the contract?
- Did the other party hold up their end of the agreement?
- Does the breaching party have a legal defense to enforcement of the contract?
- What damages were caused by the breach?
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.
Ways of breaching a contract
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:
- A party either partially or fully fails to perform its obligations defined in the contract.
- A party behaves in a way that shows intent to not perform their obligations defined in the contract.
- A party acts in a way that makes their contractual obligations impossible to perform.
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.
Classifications of breach of contract
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.
Breach of warranty
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.
Breach of condition
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:
- Provide or deprive the right/interest to contract
- Provide or deprive the duties of the parties in regards to the contract
- Determine the presence and extent of liability or obligation
- Commence or end the requirements of each party to perform a duty
- State that a particular event will create or terminate the contract
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.
Breach of innominate term
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.
Minor vs. material breach of 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:
- The benefit received by the nonbreaching party
- If the nonbreaching party can be compensated for damages
- How much or how little the breaching party performed
- Negligent behavior of the breaching party
- The likelihood that the breaching party will carry out the rest of their contractual obligations
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).
What to do if a contract has been breached
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
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
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.
Breach of contract 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:
- The contract is valid.
- The aggrieved party held up their end of the contract.
- The breach resulted in a substantial violation of contract terms.
- The losses the aggrieved party suffered were due to the breach.
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.
Do I need a lawyer for a breach of contract lawsuit?
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.
Remedies for breach of contract
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:
- Compensatory damages: Payment that tries to put the aggrieved party in the situation they would have been in if the breach never happened. Essentially, compensatory damages attempt to reverse the breach.
- Punitive damages: Payment that goes beyond the amount that would fully compensate the aggrieved party. The purpose is to further financially punish the breaching party.
- Nominal damages: Damages awarded to the aggrieved party if there was no financial loss as a result of the breach.
- Liquidated damages: Predetermined damages that were identified by the parties in the case of a breach.
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.
Cancellation and restitution
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.
Defenses for breach of contract
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.
- Fraud: When one party intentionally misleads another about the contents of a contract to get them to sign it and abide by the obligations. If the party who is claiming you breached the contract committed fraud, this is a solid defense for you.
- Capacity: An important element of any contract, capacity refers to someone’s ability to enter a contract. Certain groups don’t have the legal capacity to enter a contract. Underage, mentally disabled, and intoxicated parties can all enter a contract, but lack legal capacity and can exit the contract at any time without breaching.
- Illegality: If the subject matter of the contract was illegal to begin with, the agreement is invalid. This makes it impossible for either party to be held accountable for breaching the contract.
- Mutual mistake: This refers to a situation in which the parties are mistaken about the reasoning and conditions of the agreement.
- Duress: In this scenario, one of the parties will force the other one to sign a contract and enter a legal agreement. If you signed a contract against your own will, that is considered a solid defense to invalidate the contract.
- Unclean hands: If both parties are at fault for committing a wrongdoing that led to someone breaching the contract, neither party can collect damages.
- Unconscionable contract: This is if the contract offers a large amount of benefits to one party and almost none to the other. Essentially, an unconscionable contract is when one party takes advantage of the other.
- Statute of frauds: In some states, a written contract is needed to be valid and enforceable.
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.
Something to avoid
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.