Key Takeaways

  • A broken contract occurs when one party fails to fulfill its legal obligations, leading the other party to seek legal remedies.
  • Breach of contract types include material, fundamental, anticipatory, and minor breaches, each with different legal implications.
  • Legal remedies for a broken contract may include monetary damages, contract enforcement, or termination.
  • Common breach scenarios range from delayed deliveries and missed payments to employment contract violations.
  • Preventing contract breaches involves clear drafting, including dispute resolution clauses, and maintaining documentation of all agreements.
  • Small businesses face severe consequences from contract breaches, including financial losses and operational disruptions.
  • Legal action should be carefully considered, as contract disputes can be settled through negotiation, mediation, arbitration, or litigation.

A broken contract occurs when one party to a contract breaches the contract so severely that the non-breaching 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.

Common Causes of a Broken Contract

A contract can be broken for several reasons, ranging from intentional misconduct to unforeseen circumstances. Common causes include:

  • Failure to pay: One party does not fulfill financial obligations as per the contract.
  • Missed deadlines: A product or service is delivered late or not at all.
  • Substandard performance: A party does not meet agreed-upon quality standards.
  • Misrepresentation: One party provides false information that affects the contract’s validity.
  • Unforeseen events: Situations such as economic downturns, supply chain disruptions, or pandemics that prevent contract fulfillment.

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.

Legal Remedies for a Broken Contract

When a contract is broken, legal remedies vary depending on the severity of the breach. These include:

  1. Compensatory Damages – Financial compensation awarded to the non-breaching party for losses suffered due to the breach.
  2. Punitive Damages – Imposed in rare cases where the breaching party acted maliciously or fraudulently.
  3. Specific Performance – A court order requiring the breaching party to fulfill their contractual obligations.
  4. Restitution – Restores the non-breaching party to the position they were in before the contract was made.
  5. Rescission – Allows the non-breaching party to cancel the contract and seek damages.
  6. Liquidated Damages – Pre-agreed damages stipulated in the contract that apply in case of a breach.

Choosing the appropriate legal remedy depends on the contract terms, the nature of the breach, and the potential consequences for both parties.

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.

How to Prevent a Broken Contract

While breaches are sometimes unavoidable, several measures can help prevent contract disputes:

  • Draft Clear Contracts – Ensure contract language is specific, comprehensive, and legally sound.
  • Include a Dispute Resolution Clause – Define mediation or arbitration processes to resolve disputes without litigation.
  • Maintain Records – Keep copies of all communications, agreements, and amendments to the contract.
  • Use Performance Metrics – Establish measurable expectations and deadlines.
  • Review Contracts Regularly – Update contracts to reflect changing circumstances, market conditions, or legal requirements.
  • Vet Business Partners – Conduct due diligence on clients, vendors, and employees before entering into a contract.

Taking these steps can reduce the likelihood of contract breaches and provide a stronger legal foundation in case disputes arise.

Frequently Asked Questions

  1. What should I do if the other party breaks a contract?
    First, review the contract terms to determine the extent of the breach. Then, attempt to resolve the issue through communication, mediation, or arbitration. If necessary, consult a lawyer for legal action.
  2. Can I sue for a minor breach of contract?
    Yes, but minor breaches usually result in limited damages. Courts typically encourage resolution through negotiation unless financial harm is significant.
  3. What is the difference between a material and a minor breach?
    A material breach significantly impacts the contract’s purpose, allowing the non-breaching party to terminate the agreement and seek damages. A minor breach does not excuse the non-breaching party from fulfilling their obligations but may still warrant compensation.
  4. How long do I have to sue for a breach of contract?
    The statute of limitations varies by jurisdiction and contract type. Generally, it ranges from three to six years, but consulting a lawyer can clarify specific time limits.
  5. Can a contract be broken legally?
    Yes, some contracts include termination clauses that outline valid reasons for ending the agreement without legal consequences. Additionally, contracts may be voided if misrepresentation, fraud, or undue influence is proven.

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