Broken Contracts: Everything You Need to Know
A broken contract, also called a breach of contract, occurs when one or both parties fail to fulfill the terms and conditions of a legally binding agreement or contract without any legal justification.3 min read
A broken contract, also called a breach of contract, occurs when one or both parties fail to fulfill the terms and conditions of a legally binding agreement or contract without any legal justification. A breach or break can occur between employers and employees, homeowners and contractors, or small businesses and customers and include any of the following:
- Failing to perform on time
- Failing to perform in accordance with any of the terms of the agreement
- Unexpected delays and events
- Financial problems
One of the most common legal issues facing business, broken contracts not only cause undue stress and frustration but can also be a waste of time, money, and resources. Knowing your rights, options and legal remedies can make dealing with the consequences and challenges of a breach of contract more manageable.
Types of Broken Contracts
Most broken contracts fall within the criteria of four classifications of breaches. The type of broken contract will determine your next steps in resolving the breach. The four classifications are:
Anticipatory – An anticipatory breach occurs when one party does not fulfill their obligations under the contract, causing the other party to assume that the terms of the contract will not be met. In anticipation of the breach, the non-breaching party is entitled to end the contract and sue for breach of contract damages.
Minor – A minor breach, also known as a partial or nonmaterial breach, occurs when the terms of the contract are met but there are small issues with how the terms of the agreement are met. The non-breaching party may be able to sue for damages suffered due to the way the terms of the agreement were fulfilled.
Fundamental - A fundamental breach occurs when the breaching party fails to fulfill the most basic terms of the contract, preventing the non-breaching party from fulfilling their obligations under the contract.
Material breach – The strongest of the breaches and the one that almost always results in a lawsuit, a material breach occurs when the breaching party fails to meet a substantial obligation under the terms and prevents the fulfillment of the contract as a whole.
To determine if the broken contract in question is a material breach, consider the following:
- Whether compensation is warranted
- The extent to which the non-breaching party was harmed or inconvenienced
- Whether the breach can be corrected, and if the breaching party is willing to correct or resolve the issue
- Whether the breaching party acted “fairly and with good faith.”
Broken Contract Resolutions
There are many options for addressing a broken contract. However, your first step should be reviewing the original contract terms. Most contracts include stipulations, limitation, and requirements to handle any breaches to contract and agreed upon remedies or resolutions. To resolve the broken contract, parties can:
- Engage in informal conflict resolution or mediation
- Agree to have a mediator review a contract dispute
- Agree to binding arbitration of a contract dispute
If any of the above options fail, the aggrieved party can move forward with filing a lawsuit. Since a lawsuit is a costly and time-consuming process for both parties, it is wise to consider this option a last resort.
Remedies for a Broken Contract
Once a lawsuit has been filed and brought before the court, the remedy or resolution is determined. Remedies can take several forms, including an award of damages. Damages are money awarded to compensate a party for the loss, injury, or harm caused by the broken contract. As the most common remedy for a breach of contract, damages can include:
- Incidental damages
- Liquidated damages
- Punitive damages
- Nominal damages
Specific performance occurs when the court has ordered the breaching party to perform according to the contract. It is very rare for specific performance to be ordered because court favors awarding monetary damages.
Cancellation or rescission occurs when the contract is canceled.
Reformation occurs when the court orders the contract be re-written to better reflect the expectations of the parties.
Get Legal Assistance
With a better understanding of what a broken contract entails, possible consequences, and your options, you can begin to develop a plan to resolve the broken contract.
Before deciding on how to proceed, it's advisable to first consult with a qualified and experienced legal professional near you to discuss your options. You can post your legal need or job 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.