At some point, most everyone is a party to a contract, and sometimes one of the parties fails to live up to their obligations. When that happens, it's important to understand breach of contract basics.
Types of Breach of Contract
A contract requires each party to perform certain obligations. In the most basic form, these consist of one party providing goods or services, for which the other party pays. There may be additional requirements, such as specifications of the goods or services, time frames for completion, method of payment, etc. Failure by either party to meet their contractual commitment constitutes a breach of the contract.
There are two ways in which a breach of contract may be classified, the first being the seriousness of the breach:
- Material breach of contract. This type of breach significantly impairs the benefit of the contract to the nonbreaching party. This can include failure to perform any of the obligations, failure to perform them on time, or failure to properly perform them even if done on time. A material breach allows the other party to consider the contract ended and to pursue legal remedies.
- Minor breach of contract. Sometimes called immaterial breach, this is a breach that does not significantly impair the benefit to the nonbreaching party. A minor breach may or may not allow the nonbreaching party to pursue legal remedies, depending upon whether a financial loss can be proven. For example, Margie's Catering Service agrees to deliver food to Susan by 9 a.m. on Saturday for a party Susan is giving at noon. The food isn't delivered until 9:30 a.m. but is still ready to be served at the scheduled time. The failure to deliver on time is technically a breach of the contract, but it did not result in any financial injury to Susan.
A second way a breach may be classified is when the breach occurs:
- Actual breach of contract. The most common type of breach, this is when a party fails to fulfill an obligation by the time it is due according to the contract.
- Anticipatory breach of contract. Also known as a renunciation of the contract, this is when a party shows an intention not to fulfill their obligations at some point before performance of the obligation is due. This can occur if the breaching party informs the other party of the intent not to honor the contract or if the breaching party takes actions that indicate they will not honor the contract. For example, George signs a contract requiring him to paint Phil's house by June 1. On May 21, Phil learns that George has left for a two-week cruise to Alaska, making it obvious that George will not be fulfilling his obligation.
Breach of Contract Lawsuits
When one party fails to meet their contractual obligations, the first step is to send the breaching party a written notice of the breach. If this fails to bring about a satisfactory resolution of the problem, the next step is filing a lawsuit.
The facts you must prove in court, called the elements of breach of contract, are:
- There was a contract and what its terms were.
- The contract was broken by the defendant
- You suffered some type of damage.
Proving the first point is generally a matter of producing a copy of the written contract. The difficulty of proving breach of a verbal contract is readily apparent. This may be done by the testimony of one or both parties and of anyone else present when the terms were discussed and agreed to. State law, typically called the statute of frauds, requires certain types of contracts to be in writing in order to be enforced in court, such as contracts involving real estate or any contract that will not be completed within a year.
Under state laws, the statute of limitations for breach of contract typically requires that a lawsuit for breach of contract must be filed no later than four years from the date of the breach.
Remedies for Breach of Contract
In most cases, the remedy is the payment of monetary damages by the breaching party, which can include:
- Compensatory damages. Direct economic loss as a result of breach.
- Consequential damages. Additional damages for economic losses that were reasonably foreseeable.
- Attorney's fees. If either a law or the terms of the contract allow, the party losing the lawsuit may be ordered to pay the winning party's attorney's fees.
- Liquidated damages. Damages stated in the contract that the parties agree will be owed in the event of breach.
- Nominal damages. Minimal or token damages awarded for a minor breach.
In some cases, other remedies may be available but usually only if monetary damages aren't sufficient to compensate the nonbreaching party. These remedies are:
- Specific performance. This is where the breaching party is ordered by the court to fulfill their obligations under the contract.
- Rescission. Sometimes called rescission and restitution, this remedy cancels the contract and orders the breaching party to take actions designed to return the nonbreaching party to the position they were in before the contract was created.
- Reformation. This is where the court changes, or reforms, confusing or poorly written terms of the contract to try to reflect the actual intent of the parties and achieve a just result.
Although remedying a breach may not give you the full satisfaction of having the contract fulfilled, it can help compensate you to some degree. Clear and continuous communication between both parties may even help prevent a breach in the first place.