Consequences of Breaking a Contract
Consequences of breaking a contract occur when one party of a contract does not keep one or more of the agreed upon terms of a contract. 3 min read
2. How Does a Breach of Contract Impact a Small Business?
3. What Happens After a Contract (in General) Is Breached?
4. What Can Happen if You Breach a Sales Contract
5. Remedies for a Breach of Contract
Updated July 14, 2020:
Consequences of breaking a contract occur when one party of a contract does not keep one or more of the agreed-upon terms of a contract. Breaking a contract can be costly. The monetary damages associated with a contract breach depends on the impact it has on the contract's core — the material damage. Litigation to remediate losses due to failure to perform can be costly to both parties. It is essential to know the consequences of breaking a contract before you pursue a lawsuit.
What Is a Breach of Contract?
A breach occurs when either one or both parties fail to fulfill their part of a contract. Not all violations are equal. Material breaches go to the core of the agreement while immaterial breach does not affect the contract's primary purpose.
How Does a Breach of Contract Impact a Small Business?
Litigation is costly and time-consuming. There are plenty of contract disputes but not all lead to a lawsuit. The following are four breaches that may lead to a breached contract suit:
- Material breaches: These are serious because it means the offending party did not perform the duties outlined in the contract. The other party to the agreement can sue and seek damages in court.
- Fundamental breaches: These are breaches that allow the afflicted party to halt contract performance and sue for damages.
- Anticipatory breaches: These happen when the complainant can prove that the other party behaved in a way that showed they were not going to fulfill the duties outlined in the contract.
- Partial contract breaches or immaterial breaches: These happen when one party fails to uphold one of the terms of a contract, but the term is negligible and doesn't cause the whole contract to fail.
To take a breach to court, you must prove the following:
- A contract exists.
- The contract was broken.
- You lost money.
- The violating party was responsible.
What Happens After a Contract (in General) Is Breached?
After a contract is breached, the court tries to fix it by making the damaged party whole. Sometimes that damage amount is hard to compute. There are less expensive ways to mitigate a breach other than court. Two alternate dispute methods include the following out-of-court options (you may include in your contract):
- Binding arbitration
What Can Happen if You Breach a Sales Contract
Breaching a sales contract can come with harsh consequences. The breach can happen to either party — the buyer or the seller. The Uniform Commercial Code establishes laws regarding commercial business transactions. According to this code, a seller-induced when the product does not perform as describe or the seller did not deliver the product per the agreement. If a product did not perform as expected or did not arrive timely, the buyer may have some recourse.
Not all late delivery count as a breach of contract. Even when you receive something late, ask the following questions:
- Did the breach cause you significant benefit lost you anticipated?
- Can you receive compensation for the breach?
- Is the breaching party known for handling situations where there is a breach?
- Did the breaching part act fair and in good faith?
- Was the breach within the breaching party's control?
A buyer can sue if the seller fails to live up to obligations. The amount of restitution depends on the loss. Many times, there is an arbitration clause to minimize litigation costs for both parties. In that case, the seller and the buyer must follow the arbitrator's recommendation.
Remedies for a Breach of Contract
Under the law, once a contract is breached, the guilty party must remedy the breach. The primary solutions are damages, specific performance, or contract cancellation and restitution.
- Compensatory damages: The goal with compensatory damages is to make the non-breaching party whole as if the breach never happened.
- Punitive damages: Though rare, this happens when the breaching parted acted egregiously. The non-breaching party receives a payment beyond the damaging amount.
- Nominal damages: When the non-breaching party did not suffer a monetary loss, the court or the arbitrator may award nominal damages as a token award.
- Liquidated damages: There are situations where both parties outline costs in the contract. This is known as liquidated damages. The damage amount must be a reasonable estimate of actual damages.
Try to remedy contract disputes without the courts since litigation can be costly. Let a lawyer look over your contracts to avoid misinterpretation by you or the other party.
If you need help with reviewing a possible 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.