Breach of Contracts
Definition, Examples & Next Steps
A breach of contract happens when one party to the contract fails to perform their duties and promises under the contract.
A contract is a legally binding document that protects you in the event of a breach. A breach of contract happens when one party to the contract fails to perform their duties and promises under the contract. There are several factors a judge will consider when determining if there is a material breach of contract where the innocent would be entitled to relief.
Breach of contract claims is the most commonly disputed in contract law. That is why it is vital to ensure you have a legally enforceable agreement that includes all of the specific agreements between the parties. The contract should clearly document each party’s contractual duties. There are many ways a breach of contract may occur; here are a few of the most prevalent types of contract breaches:
- The failure to remit payment for goods or services in a timely manner
- The failure to perform and complete a project
- The failure to deliver goods or services
- Providing unsatisfactory and substandard goods or services
What is Considered a Breach of Contract?
In order for a party to be entitled to a remedy, the breach must be material. A material breach is a considerable breach that adversely affects the non-breaching party. A judge will consider the following:
- Was there a contract? This may seem obvious, but if there is no contract, there is no breach. This is why it is vital to secure a written agreement between the parties. Oral agreements may be upheld, but they are difficult to prove.
- Was the Contract Valid? A contract must be legally valid and include all of the essential elements (offer, acceptance, and consideration).
- What were the Parties Contractual Obligations? If a contract did exist, the judge would review each of the parties’ responsibilities under the agreement. Again, this is why all of the agreements between the parties must be included in the written agreement. If an oral agreement was made outside the four corners of the contract, it might be challenging to prove that one or the other party was contractually bound by an outside “handshake” agreement.
- Was the Contract Amended? From time to time, contracts are amended to update the terms of the agreement. Amendments should always be in writing and agreed to by all parties to the contract. The amendment should be signed and attached to the original agreement.
- Was the Breach Material? The court will also examine the breach and evaluate whether or not the violation was minor or material. The plaintiff to a lawsuit must show how the other party breached the contract. Moreover, the plaintiff bringing the action must have fulfilled the agreement’s duties for the claim to stand.
- What was the Reason for the Breach? The judge will ask the breaching party if they are asserting any legal defenses to the breach to contend the claimed “violation” was permissible under the agreement.
- Was Sufficient Notice Provided? The filing party must provide written notice to the breaching party. Some elements of the law require the non-breaching party to have an opportunity to cure the breach before the innocent party can proceed to file a claim. However, the filing party must provide sufficient notice of their intent to file a breach of contract action and deliver it to the breaching party.
- What damages Occurred as a Result of the Breach? Finally, the judge will see if the non-breaching party suffered any damages and if the non-breaching party is entitled to any relief. Actual damages and losses must be shown to be granted relief.
Types of Contract Breaches: Material Breach, Minor Breach, and Anticipatory Breach
A breach of contract can be one of two things: major, minor (partial breach), or anticipatory. The relief a party is entitled to depend on how significant the breach was and how the losses the non-breaching party suffered.
So, what is a material breach? A material breach is a breach that substantially deviates from the terms of the agreement. For example, the business contract states that a buyer is to receive a shipment of baseballs, but they get a box of basketballs. The difference is material. The breach must be significant enough to negatively impact the contract. Review the agreement to confirm the other party breached their contractual obligations. The party that breaches the contract is known as the defaulting party.
A minor breach of a contract is when one party fails to fulfill a part of the contract, referred to as a partial breach of contract. The breach in this scenario is not as substantial as a major breach because the non-breaching party still receives the goods or services detailed in the agreement. Even if the breach is minor, the non-breaching party may be entitled to recover damages if the court finds they were affected by any delay or lack of performance. The innocent party in this situation is not generally excused from holding up their end of the agreement.
An anticipatory breach occurs when one party speculates that the other party may breach the contract by failing to perform or fulfill the contract. The suspecting party can ask for assurances if they believe the other party does not intend to perform their duties under the contract. Because of the nature of anticipatory breaches, they are often difficult to prove in court.
Defenses to Breach of Contract
There are several viable defenses to a breach of contract. Here are a few of the most common defenses:
- Illegal – A contract does not exist for unlawful activity (conspiracy to commit murder). A contract is also deemed invalid if it violates public policy.
- Fails to Include the Required Elements – Every contract must include an offer, an acceptance of that offer, and consideration. If the agreement lacks any of the required elements, it is not enforceable.
- Fraud & Duress – If a defendant asserts fraud as a defense, they are telling the court that the plaintiff misrepresented or concealed the truth of a material fact which induced them to enter into the contract. The defense of duress means that a party was threatened to sign the contract and deprived of their own free will.
- Mutual Mistake – This defense requires the defendant to prove that both parties made a mutual mistake on the subject matter to the contract, which would ultimately deem the agreement invalid.
- Impossibility – There are times when a contract cannot be performed. For example, many contracts include a force majeure or “Act of God” provision. This provision protects the parties from performing under the agreement in the event an incident occurs that is out of the parties’ control, such as a natural disaster, pandemic (COVI-19), or other reason included in the clause. This concept is also referred to as the “impossibility of performance.”
- Statute of Limitations – The statute of limitations is how long a party has to file a claim. Once the statute of limitations has passed, the party is barred from filing suit. The statute of limitations varies from state to state, averaging about 3 to 6 years for written agreements.
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Common Remedies for Breach of Contracts
For a breach of contract claim to succeed, the aggrieved party must have damages. The other party may have partially breached the contract, but if the other party did not suffer damages, there may be no viable claim.
|Monetary Damages||Monetary damages can be recovered by the plaintiff in the amount they would have received had the contract been completely performed, including any lost profits.|
|Compensatory Damages (“Actual Damages”)||Extends to the non-breaching party’s loss because of the breach. General damages are the most prevalent type of damages awarded in breach of contract claims.|
|Special Damages / Consequential Damages||These damages cover the non-breaching party’s loss as a result of special circumstances which the breaching party was already aware of when the contract was formed.|
|Punitive Damages (“Exemplary Damages”)||These types of damages are implemented to deter or punish the defendant for their behavior. However, punitive damages are rarely awarded in contract claims. These types of damages are awarded on top of compensatory damages.|
|Restitution||Restitution acts to restore the non-breaching party to the exact position they were in before entering into the contract. The defendant will be ordered to give back any property or money they received from the injured party under the contract. This type of remedy does not compensate the injured party for any lost profits.|
|Recession||This is simply the cancellation of the contract.|
|Injunction||The court will order the breaching party to stop performing whatever action is damaging the other party.|
|Specific Performance||When monetary damages are not adequate enough to compensate the plaintiff, the court may require the breaching party to perform their duties under the agreement.|
Damages are calculated based upon what type of contract was breached (for either goods or services) and the kind of loss the non-breaching party suffered. Generally, the standard measure is the amount that would make the non-breaching party whole. On the other hand, contracts for the sale of goods are governed by the Uniform Commercial Code (UCC). Damages are usually calculated by the difference between the contract price and the current market value when either the seller provides the goods or when the buyer discovers the breach.
The non-breaching party has a duty to mitigate its damages. This means that they must reasonably minimize the furtherance of any damages and attempt to avoid any more losses as a result of the breach. Failing to mitigate damages could limit the award of compensatory damages.
What Are the Next Steps?
Contracts are governed either under common law or under the Uniform Commercial Code (UCC). Anything relating to the sale of goods falls under the UCC. It can get a little tricky. That is why it is important to consult with an experienced attorney when reviewing your business contracts. If you suspect a breach of contract, a lawyer can help you explore your options for relief.
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