How Breach of Contract Can Affect Your Business
By Will Elton, Updated: 2023-05-24 (published on 2019-07-17)
A contract is an official written or spoken promise that two or more parties pledge to each other. Each of the parties agrees to perform particular actions or deliver certain items. In the case when one or more parties fail to fulfill their promises, they are accused of a breach of contract. Effective contract management plays a crucial role in preventing and addressing breaches of contract. By establishing clear and comprehensive terms, conditions, and obligations within the contract, parties can minimize the risk of misunderstandings and disputes. Additionally, contract management encompasses activities such as monitoring, enforcing, and resolving contractual issues, ensuring that all parties uphold their commitments and take appropriate actions in the event of a breach. This helps maintain the integrity of the contractual relationship and facilitates the efficient resolution of any conflicts that may arise.
It can include one of the following situations:
- The actions promised were not performed in the time period specified in the contract.
- The actions promised were not performed in accordance with the terms of the agreement.
- The actions promised were not performed at all.
But in order for the damaged party to seek compensation, several requirements have to be met. First off, the contract must be valid and contain all legal elements to be enforceable in court. Next, the plaintiff of the suing party has to offer a clear explanation of how the terms of the agreement have been breached. Finally, it is imperative to notify the other party prior to officially filing a lawsuit.
Oral vs. Written contract
Both oral and written contracts are enforceable in court. However, when only a verbal agreement has been made, it may be difficult for an injured party to prove the breach of contract in case they suffer any damages. What is more, certain types of contract are required in written form in order for them to be effective and serve as valid proof in your case against the other party, including (but not limited to):
- Sale or transfer of property;
- Sale of goods;
- Payment promises;
- Contracts impossible to complete in the first year of its making;
- Contracts in which the specified time period is longer than the expected lifetime of one or more of the parties.
Types of breaches
Depending on the severity of the breach, one of the parties can get into a troubling situation due to the other party’s underperformance. It is possible for a business to be unable to operate as planned or to suffer serious financial losses.
Types of contract breaches include:
- A material breach is one of the most serious breaches of contract and refers to one party’s failure to complete their duties. It is significant enough to excuse the injured party from fulfilling their promises included in the contract and seek damages in court.
- A fundamental breach, just like the material one, allows the injured party to sue for damages and not perform their part of the deal.
- Anticipatory breach is considered one of the most difficult to prove in court. Namely, as its name suggests – it refers to one parties anticipation of the breach. This means that no promises were broken yet but there are signs that indicate one of the parties will not fulfil their duties as promised.
- A partial or minor breach is not as significant and does not normally exclude the injured party from fulfiling their part of the contract. It refers to a situation when one party performs its duties but fails to meet certain terms of the agreement.
Types of remedies
A contract is a legally enforceable document, meaning that the party who suffered damages due to the breach is entitled to legal remedies.
- Damages are the most common type of remedy, and there are several types of damages that can be awarded.
- Compensatory damages refer to the money paid to compensate for the losses your business suffered. The amount should put the injured party in the position they would be if the breach had not happened in the first place.
- Liquidated damages which are the damages previously specified in the contract that has been breached. Liquidate damages should be a reasonable estimate of actual damages.
- Nominal damages are token damages awarded when no financial losses were suffered in case of contract breach.
- Punitive damages are intended to punish the party who breached the contract by forcing it to pay a greater amount than the compensatory damages.
- Specific performance means the court orders the sued party to perform the duties promised in the contract.
- Rescission occurs when the contract is cancelled, money returned and the charges dropped.
- Restitution puts the non-breaching party in the position they were prior to the contract breach, meaning they are required to perform the actions they promised.
It is advisable to include the preferred remedy in case of the breach within the contract. That way, both parties are aware from the start what kind of consequences lay ahead if the provisions are not followed.
What to do
Whether you just assume or are absolutely certain that the other party has broken their promise, your first step should be reading through the contract to see if there are any instructions that specify what should be done in case of a breach.
By law, you are required to inform the accused party of your intentions to file a lawsuit and on what grounds. This gives the other party a chance to remedy the breach. If they refuse or ignore you, this move on your side will only strengthen your case in court.
The notice of breach should be drafted using formal and unemotional language. It is also imperative to include the following details:
- The date that specifies the exact time the breaching party was informed.
- The description of the breach identifying the contract clauses that have been breached.
- A proposed remedy if it is not pre-defined in the contract itself.
The final step involves legal consultation where a lawyer will instruct you on the best plan of action. They will guide you through a filing procedure and help determine which remedies are available to you.
How to Defend Against False Accusations?
It is not unlikely for your business to be accused of a breach of contract when, in fact, you have a valid explanation of why you were unable to perform the promised duties or the alleged breach is just that – alleged. In such instances, you can resort to one of the following defences:
- Prove the fraud if the other party concealed or twisted the truth to their advantage.
- Show you were under duress at the time the contract was signed. Duress may refer to both physical force and verbal threats, which can invalidate a contract because you had no free will.
- Show you were under the undue influence, meaning that the other party overpowered you and forced the contract on you.
- Prove a mistake made by the other party (if there was one) and invalidate the contract.
- Rely on the Statute of Limitations if the other party hasn’t brought and filed the lawsuit within the legally defined time constraints.
This article does not constitute legal advice.