1. What Is a Breach of Contract?
2. Breach of Contract: An Example
3. How Does a Breach of Contract Impact a Small Business?

A broken contract occurs when one party to a contract breaches the contract so severely that the nonbreaching party is justified in suing the breaching party for money, property, or the enforcement of an action.

What Is a Breach of Contract?

Contracts are lawfully executed and enforceable agreements, such as a service or job rendered or the purchase of a product. If one of the parties to the contract doesn't hold up to their end of the bargain, then the other party may be able to sue for breach of contract.

A contract is a promise or set of promises that are legally enforceable and, if violated, allow the injured party access to legal remedies. Contract law recognizes and governs the rights and duties arising from agreements. Contracts can be both verbal and written. Contracts play a significant role in our lives and, because of this, are usually written and signed by all parties involved. The average person will typically engage in a contract through either their employer, a real estate deal, or when purchasing insurance.

In utopia, contracts always work out efficiently and effortlessly, but in the real world the outcome is much more unstable. For example, financial problems occur, delays happen, and all sorts of unexpected events may pop up, causing a contract to be breached. Almost any party can be included in a breach of contract, including small businesses and individuals. In fact, breaches of contract are some of the most popular types of cases heard in small claims courts.

A breach is synonymous with the act or a result of breaking. In other words, the contract has been broken. A breach occurs when there is a failure to fulfill any aspect of the contract unless there's a lawful and justifiable reason. Common reasons for a breach of contract include:

  • Terms of the agreement have not been abided by
  • Failure to perform on time
  • Does not perform obligations at all
  • Co-workers refusing to complete their job
  • Employee completing prohibited acts
  • When a client prevents their contractor from completing their obligations in order to finish the project

A breach will normally be identified as either immaterial or material, based on the pertinent legal solution.

Breach of Contract: An Example

Let's consider ABC company contracting with XYZ company for the purchase of some of ABC's products. The products should be delivered by Monday evening. If ABC delivers the product to XYZ on Tuesday morning, a breach of contract has occurred, but it will most likely be deemed immaterial. XYZ company would most likely not be granted damages unless they could illustrate how they were specifically impaired by the late delivery. However, if the contract stated explicitly and clearly that XYZ needed expedited delivery and that the product must be received by Monday evening, then in this circumstance, the breach may be material.

How Does a Breach of Contract Impact a Small Business?

Contract breaches are very inconvenient for individuals and small businesses. They lead to unneeded frustrations and are a waste of time and money for all parties involved. It's important to remember that not all breaches are equal. Most of the time, if a breach of contract is to move forward through the court of law, it will need to meet specific criteria as outlined in the four breaches below:

  1. Material breach: One of the most serious breaches occurs when there's a failure to perform a specific obligation or duty. When this arises, the injured individual or business may seek damages. A breach may be considered material when the breaching party:
    • Causes a great financial impact to the nonbreaching party
    • Should provide compensation to the injured party
    • Probably won't go out of their way to correct the situation
    • Acts in way that wasn't in good faith or in good business practice
    • Was in total control and completely responsible for the breach
  2. Fundamental breach: Occurs when the injured party is allowed to stop their obligations and sue for damages because the actions of the breaching party have fundamentally broken the contract.
  3. Anticipatory breach: Takes place when a declaration by the promising party to a contract that he or she does not intend to live up to his or her obligations under the contract.
  4. Minor breach: It's less severe than a material breach and it gives the injured party the right to sue for damages, but does not necessarily excuse them from further performance.

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