No one wants to be a party to a breach of contract. Small businesses are especially vulnerable when a violation occurs. Consider the costs and repercussions if someone sues you or even if you are the aggrieved party—all parties usually lose more than they gain when faced with legal disputes. You can only have a breach of contract on a valid contract. While it is optimal to have a lawyer review your contracts, it is not always possible nor is it a requirement by law. The courts have measures to assess whether there is a breach of contract. Not all contract violations invalidate a contract.
What Is A Breach Of Contract?
A breach of contract is a violation of a legally binding agreement where at least one party fails to perform one or more contractual obligations. If you are considering suing someone, a court will first evaluate your contract to see if it meets the criteria for a breach of contract case.
First, you must prove your contract is legally valid. You must then demonstrate you fulfilled your part of the contract. If you could not perform all of your contractual obligations, you must prove that the breach hindered your performance. Furthermore, you have to show you suffered damages because of the breach.
WHAT CONSTITUTES A CONTRACT?
You do not need a lawyer to construct a legal contract. The contract can be a verbal agreement, something written on a dinner napkin, or it can be a 50-page agreement written in a lawyer’s office. Even if you have a formal agreement drawn up with lawyers present, it still needs to pass the validity test. Your contract is only valid if the following criteria are met:
The party making the offer must clearly communicate the proposition. All parties in the contract must agree on its terms. The offer details should be easy to understand, and both parties must interpret the conditions the same way.
The contract must also have consideration, which means it should be mutually beneficial. For instance, if you want a web design company to create your company website for a fee, then the contract has consideration for both parties.
Another critical element to a valid contract is the legal intent. For instance, if you pay someone to rob a bank and the party takes your money but does not go through with the robbery, you can’t sue the breaching party because robbing a bank is illegal.
The parties signing the agreement must have the mental capacity to understand what they are signing. You can’t enter into an agreement with someone who cannot understand the agreement (including minors). All parties to a contract must be of clear and of sound mind. You cannot enter an agreement while under the influence of any mind-altering agent like drugs or alcohol.
Finally, a contract is not valid if it is not fair. Going back to the website design firm example, assume the design firm owner is a college student who needs money to pay college expenses. You take advantage of his situation and pay him $500 per month for a year to complete and maintain the website. However, the student works 40 hours a week. Your contract is invalid because it is not fair to both parties
Types Of Contract Breaches
Once you determine you are dealing with a breach of contract, you still have to determine the kind of breach that occurred. There are four contract breaches:
What Is a Material Breach?
A material breach is the most severe type of contract breach and deems a contract “irreparably broken.” A contract breach is a material breach if one or more parties in the contract failed to perform their duties as outlined in the contract. Proving a material breach is difficult. The court determines the answer to the following questions before declaring a material breach:
A contract breach would deprive the aggrieved party of the “heart” of the deal if the party did not enjoy the core agreement. For example, you paid the web design company $20,000 for your website. They completed all the site's core functionality and design, but the content contained obvious grammar errors and some broken links. The courts would consider the errors a material breach since you received all the required features. That would not deprive you of your part of the core deal. You still can pursue corrective measures, however, it does not qualify for material breach.
If the breaching party can compensate the aggrieved party for the breach, then the courts would enforce the contract. The court also considers what the breaching party would lose if the contract were void. You paid the web design company $10,000 dollars to start the website. A week before the project is complete, you tell them you are not happy with the product and decide you will not pay the final $10,000. The courts would not consider a contract breach since they completed most of the work.
If possible, the courts will try to uphold the contract, so unless the breaching party does not have the capability of taking corrective actions or acted unethically, you cannot cancel the contract. The last thing the courts will test is the contract itself. If there are provisions in the contract for handling breaches, the courts will enforce the contract.
What Is a Fundamental Breach?
A fundamental breach is one where the breaching party failed to complete a task so essential to the contract it hindered the aggrieved party from fulfilling their part of the agreement. If you are having a website built, but you do not give the contracted party access to your web servers, then they cannot deploy your site.
What Is an Anticipatory Breach?
You hired a web design team to launch your website by December 1st. It takes about three months to complete the site. It is now November 3rd, the team has not worked on the project and you no longer trust the project will make the launch date. You can sue before any violation occurs. An anticipatory breach is a breach that has not yet occurred, but it is clear the offending party will not perform their duties.
What Is a Minor Breach?
A minor breach, also known as a partial breach, is when there are minor contract violations. In the example where the web design company finished most of your website but the content contained errors, it would be a minor contract breach.
What Happens In A Breach Of Contract?
The journey is not over once you have determined you have a compelling breach of contract case. Not all contract breaches are treated the same. The courts consider an array of remediation tactics. You may get monetary remediation or contract remediation.
Common Remedies for Breach of Contract
The legal remedies depend on factors such as the breach, its severity, and how much work both parties completed. Compensatory damages allow you to recover the money you are owed while punitive damages penalize the breaching party their wrongdoing.
People use incidental and consequential damages interchangeably, however; they have two distinct meanings. Incidental damages are the expenses the non-breaching party incurred while trying to avoid further losses. Consequential damages are expenses that would have been avoided if the breach did not occur.
Liquidated damages are damages the parties outlined in the contract should a breach occur. Contracts usually use liquidated damages when the losses are hard to prove (like intellectual property). Some contracts include a clause that forces the breaching party to pay attorney fees. You cannot recover attorney fees unless the contract permits it.
Other Remedies for Breach of Contract
Along with monetary damages, there are other options available to remedy a breach of contract. The court can force both parties to fulfill their obligations under the original agreement.
It is possible that a judge would rescind the contract. This means the contract is treated as if it never existed and all monies are returned to the rightful party. Contract rescission can occur in the following situations:
Contract reformation is a viable option if both parties agree a contract rewrite to match the original intent.
Legal contract disputes can get complicated. Make sure your agreements are legally binding and try to settle disputes before going to court.