Key Takeaways:

  • A breach of contract occurs when one party fails to fulfill contractual obligations, either partially or entirely.
  • Breaches are classified as material (significant impact) or immaterial (minor issues).
  • The legal system evaluates various factors, such as the contract terms, breach severity, and resulting damages.
  • Legal remedies for breach include compensatory damages, specific performance, restitution, and punitive damages in some cases.
  • Alternative dispute resolution (ADR) methods like mediation and arbitration can resolve disputes without litigation.
  • Preventing breaches involves clear contract drafting, dispute resolution clauses, and careful negotiation.
  • If a business contract was breached, legal professionals can help navigate contract enforcement and potential remedies.

Breach of contracts is the legal term for a situation when one party fails to honor the terms of a legal agreement. This can occur because of unforeseen delays, financial issues, and other unexpected events. For example, if you complete a job as a contractor but the employer fails to pay as agreed, he or she is in breach of contract. Breach of contract is one of the most common cases brought up in small claims courts.

What Is a Breach of Contract?

When you enter into a business contract, you and the other party or parties are legally bound to fulfill the obligations therein. When one party fails to do so without a lawful excuse, the contract in question has been breached. 

A breach can occur if the terms of the contract are not met on time, are not in accordance with the spelled-out requirements, or are not met at all. If only one party breaches the contract, the other party is entitled to financial compensation. The breach can be categorized by the legal system as either material or immaterial, which affects how the situation will be remedied by the court system.

What Counts as a Breach of Contract?

If a delivery was contracted for Thursday night and arrived Friday morning, this would be considered an immaterial breach by the court, meaning the late delivery did not cause damages and thus does not result in monetary compensation. However,  if the contract explicitly states that time is of the essence and that the product must arrive by Thursday night, this would be considered a material breach. In this scenario, the party who purchased the product would likely be reimbursed for the cost. 

When a breach of contract suit is brought to court, the judge will ask the plaintiff the following:

  • Whether a contract existed
  • The terms of the contract
  • Whether the contract in question was ever modified
  • Whether the breach in question occurred as claimed
  • If the breach was material to the contract
  • If the party who allegedly breached the contract had a legally admissible reason for doing so
  • The extent of damages caused by the breach, if any

Types of Contract Breaches

A breach of contract can take various forms depending on the circumstances and the level of harm caused. The key types include:

  • Anticipatory Breach: One party declares in advance that they will not fulfill their contractual obligations. This allows the non-breaching party to seek legal remedies immediately.
  • Fundamental Breach: A violation that affects the core purpose of the contract, giving the non-breaching party grounds to terminate the contract and seek damages.
  • Actual Breach: When a party fails to perform as agreed by the deadline or does not perform at all.
  • Minor Breach (Partial Breach): A less severe violation where the contract is still largely fulfilled, but there is a discrepancy that may warrant compensation.

Recognizing the type of breach helps determine the appropriate legal response and potential remedies.

What Happens After a Contract Is Breached?

A breach of contract can cause wasted time and money, as well as frustration for the individuals and small businesses involved. When a contract breach occurs, one or both parties may take legal action to recover financial damages or have the contract terms enforced. Informal resolution is often the best route. If that doesn't work, you may have to file a lawsuit. Depending on the state, you may be able to file in small claims court. This is typically the appropriate venue when the dollar amount in question is below $7,500.

You'll need to have evidence of the breach to file a lawsuit. This can be challenging in the case of an implied or verbal contract. You must prove the following:

  • The contract existed.
  • A breach occurred.
  • You suffered financial damage as a result.
  • Another party to the contract was at fault for the breach.

If you do not want to file a lawsuit, you can use a method of alternative dispute resolution. This could include assistance from a mediator or binding arbitration.

How to Prevent a Breach of Contract

To minimize the risk of a breach, businesses should adopt preventative measures such as:

  • Clearly Defined Terms: Ensure the contract explicitly states obligations, deadlines, and penalties for breaches.
  • Dispute Resolution Clauses: Include mediation or arbitration provisions to handle disagreements efficiently.
  • Regular Contract Reviews: Periodically reviewing contracts helps identify ambiguous language that could lead to disputes.
  • Performance Monitoring: Keeping track of contractual milestones and obligations helps prevent misunderstandings.
  • Legal Consultation: Engaging a contract attorney ensures agreements are legally sound and enforceable.

A well-drafted contract reduces uncertainties, safeguarding businesses from potential breaches.

Legal Remedies for Breach of Contract

When a business contract was breached, the affected party may pursue legal remedies, including:

  1. Compensatory Damages – The most common remedy, compensatory damages reimburse the injured party for actual financial losses resulting from the breach.
  2. Consequential Damages – Awarded for indirect losses caused by the breach, such as lost profits.
  3. Specific Performance – A court may order the breaching party to fulfill their obligations rather than paying damages, particularly in cases involving unique goods or services.
  4. Restitution – The injured party may be reimbursed for expenses incurred due to the breach.
  5. Liquidated Damages – If the contract includes a pre-determined damages clause, the breaching party must pay the agreed amount.
  6. Punitive Damages – In rare cases, courts impose punitive damages for egregious conduct, such as fraud or bad faith breaches.

Choosing the right remedy depends on the severity of the breach and the contract’s provisions.

What Is a Material Breach?

A material breach means that the party in question failed to fulfill his or her contractual duties. If this has occurred, the party injured by the breach can seek damages in court. A material breach has occurred if the person receives a product or service substantially different than was agreed upon in the contract. 

In the case of a material breach, the party who did not breach the contract is no longer bound by its terms and has a right to remedies. Courts use these questions to determine whether a breach was material:

  • Did the non-breaching party benefit from the contract?
  • Is it possible to adequately compensate the non-breaching party for damages?
  • Did the breaching party fulfill any part of the contract?
  • Was the breaching party subject to undue hardship?
  • Did the breaching party willfully or negligently breach the contract?
  • Is the breaching party likely to fulfill the remainder of the contract?

Alternative Dispute Resolution (ADR) Options

Instead of pursuing litigation, parties can consider alternative dispute resolution (ADR) methods, which are often faster and more cost-effective:

  • Mediation: A neutral third party facilitates negotiations to reach a mutual agreement.
  • Arbitration: A legally binding process where an arbitrator makes a final decision based on evidence presented by both sides.
  • Negotiation: The involved parties work together to settle the dispute without third-party intervention.

Many business contracts include mandatory ADR clauses, requiring disputes to be resolved through mediation or arbitration before litigation.

FAQs

1. What is the first step if my business contract was breached?

The first step is to review the contract terms and determine whether the breach is material or minor. Next, consider legal options such as negotiation, mediation, or filing a lawsuit if necessary.

2. Can I sue for breach of contract if there is no written agreement?

Yes, but it may be more difficult. Verbal and implied contracts can be legally enforceable, but proving their terms often requires emails, witness testimony, or business records.

3. How long do I have to file a breach of contract claim?

The statute of limitations varies by state, typically ranging from 3 to 6 years for written contracts. Consulting a lawyer helps determine applicable deadlines in your jurisdiction.

4. What damages can I recover for a contract breach?

Depending on the severity of the breach, you may recover compensatory damages, consequential damages, specific performance, or restitution. In rare cases, punitive damages may apply.

5. Should I include a dispute resolution clause in my contract?

Yes, ADR clauses (mediation or arbitration) help resolve disputes efficiently and cost-effectively without the need for litigation.

If you need help with a breached contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.