A contract is an agreement that specifies the rights and duties of the parties to the agreement. It is legally enforceable when all parties to the agreement have an obligation to perform and the agreement otherwise meets the requirements of the law. A contract in business typically involves employment, the sale of goods or services, payment, or promises relating to any of those activities.
The law of contracts has developed through many centuries and has developed its own body of legal terms. One term that is often heard in connection with contracts is the phrase “breach of contract.” A breach of contract by law simply means a broken promise, or a failure to perform under a
contract, without legal excuse or justification.
How Breaches Of Contract Occur
In a lawsuit for breach of contract, the party claiming a breach must prove that a valid contract existed, and the other party did not fulfill its obligations under the contract. Such lawsuits for breach of contract are common in the business world. Examples of breach of contract claims in business transactions commonly involve the following circumstances:
- A business fails to deliver promised goods or services or
delivers inferior products or services. This failure could be on a supplier, a seller to a consumer, a business, or an individual.
- A contractor or business fails to complete a job according to an agreement fully.
- A buyer fails to pay within a specified time.
- An employer fails to pay an employee the salary or benefits promised under an employment agreement.
If the claimant successfully proves a valid contract and the occurrence of a breach, the non-breaching party may recover damages for the breach.
Types Of Breaches
Not all contract breaches are the same. The nature of the breach can impact the type of damages the claimant can seek. The law recognizes different types of contract breaches. They include:
An anticipatory breach, also called repudiation, occurs when one party indicates that the party will not perform its contractual obligations through words or actions. For example, one contracting party may tell the other contracting party, “I will not be able to pay you for the cleaning services you provided,” or “I cannot deliver the lumber I agreed to deliver.”
These words show that the party will not perform under the contract. If the other party did not breach the contract, they would be able to recover damages from the party that did. In the case of the cleaning crew above, if the job has been completed and payment was not rendered, the cleaning company could recover damages caused by not being paid for their service.
An actual breach of contract refers to a breach where a party’s failure to perform has occurred and is not anticipatory. For example, an actual breach in a business transaction can occur when a party fails to meet contracted performance standards or deadlines.
A breach of contract is material if it causes harm to one of the contracting parties, though such a breach can hurt both parties when it makes completing the contract performance difficult or impossible.
A material breach occurs when there is a significant failure of performance under the contract. Breaches of contract are material when there is little or no chance that the breaching party can rectify the situation by providing replacement in value or performance or acting in bad faith. For example, a material breach would occur if a business paid a property owner to rent office space but was then told that there was no available space for them or the office was not up to the standards advertised.
A minor breach of contract—also referred to as an immaterial or partial breach—is less severe than a material breach. A minor breach occurs when one party to the contract fails to fulfill a contract term and that term has only a negligible effect on the agreement. For example, a one or two day delay in delivery may be a minor breach, depending on the circumstances, and provided that the contract did not note that it was a time-sensitive matter. Such a minor or non-material breach usually does not prevent the contract from being fulfilled.
A minor breach may give the non-breaching party the right to sue for damages but may not excuse the non-breaching party from further performance. Note that the damages suffered may not be enough to warrant initiating legal action to recover them, as the damages may be nominal and inconsequential.
Damages For Breach Of Contract
As already noted, a breach of contract can entitle the non-breaching party to damages. The nature and extent of the damages that the non-breaching party can claim depend on the nature of the breach and the contract terms that apply to damages. The type of damages a claimant may be able to recover include:
Expectation damages compensate the non-breaching party for the
loss of future income, or the amount that the innocent party reasonably anticipated under the contract had it not been breached. This is a different type of damage award than damages based on an actual, concrete and definite loss.
Consequential or incidental damages cover the special circumstances of the innocent party in a breach. To recover consequential damages, there must be a foreseeable result of the breach. In construction contracts, examples of consequential damages may include lost income, property value reduction, cost of advertising, and other losses experienced by the non-breaching party. Consequential damages are the costs that the non-breaching party incurs as a result of the breach of contract. Depending on the nature of the transaction, consequential damages may consist of lost profits, loss of use, loss of goodwill, and so forth.
A common provision in many business contracts is a clause called the liquidated damages clause. This is a predetermined and agreed-upon amount of damages or a method of calculating damages that one or both parties will pay in the event of a breach. These provisions are frequently included when damages are difficult to foresee, and an estimate for potential damages is necessary.
These clauses must be reasonable pre-estimates of probable loss. They can not be used to penalize the other party. Some contracts include penalty clauses for that purpose, which may help dissuade parties from a breach. Unlike liquidated damages clauses, penalty clauses are often not enforceable. The reason is that liquidated damages are considered actual damages that have been agreed upon by the contracting parties resulting from a breach. They are in the nature of compensation, rather than punitive.
However, a party can not use a liquidated damages clause to set the other party up for failure and demand damages.
Other remedies may be available to the non-breaching party. One option is specific performance, where the breaching party is ordered to perform their part of the contract, which is a common remedy in real estate transactions. Another remedy may be a rescission of the contract, where the contract is cancelled and the parties are relieved from further obligations to perform under the contract.
Contact The Experienced Litigation And Dispute Resolution Attorneys At KPPB LAW For More Information.
If you or your business is involved in a contract dispute, you should speak with an attorney who is experienced in contract disputes and the options for resolving them. Working with an expert in contracts can save you a lot of time and money. Speak with the Litigation and Dispute Resolution attorneys at KPPB LAW about your case today.