What Is a Breach of Contract?

What is a Breach of Contract?

When someone fails to keep their end of a legally binding deal, it's called a breach of contract. A breach of contract could be as simple as missing a payment deadline or as complex as delivering completely different goods than promised. Understanding the basic meaning of a breach of contract helps protect the interests and rights of businesses and individuals when agreements are not upheld.

Types of Contract Breaches

The nature and severity of a contract breach determine what remedies are available. There are four primary types of contract breaches to understand: 

Material Breach

A material breach happens when someone fails to perform contractual obligations, ultimately undermining the core purpose of the agreement. For example, a breach of contract may occur if a contractor fails to complete a project according to specifications, causing financial loss to the client. 

Minor Breach

A minor breach, also called a partial breach, is when one party fails to meet a small aspect of the contract but does not entirely void the agreement. For instance, a web designer delivering a website late but meeting all agreed-upon requirements may be considered a minor breach of contract. 

Anticipatory Breach

An anticipatory breach happens when one party tells or demonstrates to the other that they won't fulfill their end of the agreement in the future. In this situation, you can typically terminate the contract and seek damages rather than waiting for the actual breach to occur. 

Actual Breach

An actual breach occurs when one party completely fails to meet its contractual obligations. Typical legal responses include demanding performance, seeking financial compensation, or taking the case to court for resolution. 

What Causes a Breach of Contract?

Several common situations can lead to a breach of contract in the business world. A few breach of contract examples include: 

• Missing deadlines: Failing to deliver products, services, or payments by the agreed-upon date. 
• Non-payment: Not providing compensation for goods or services as outlined in the contract. 
• Poor quality: Delivering work that falls below the standards specified in the agreement. 
• Incomplete work: Providing only part or a piece of the promised goods or services. 
• Misrepresentation: Providing false information that influenced the contract terms. 

Legal Consequences and Damages

When someone breaches their contract with your company, there are several consequences for them, which may include:

• Monetary damages: The court may order financial compensation to cover losses suffered by the non-breaching party. These monetary damages may include both direct costs and sometimes lost profits. 
• Contract termination: The agreement may be canceled, releasing both parties from future obligations while still allowing the injured party to seek damages. 
• Court-mandated performance: In some cases, especially when monetary damages are insufficient, the court may require the breaching party to fulfill its original contractual duties. 

Different types of damages serve various purposes in breach of contract cases. Compensatory damages provide reimbursement for actual losses incurred. Meanwhile, though rare in contract cases, punitive damages punish particularly egregious conduct by forcing the breaching party to pay a certain amount in addition to compensatory damages. 

Specific performance is a court order requiring the breaching party to fulfill their exact contractual obligations as initially promised. You might see this if someone has agreed to sell you their house and breaches the contract even though you've met all your contractual obligations. 

How to Prove a Breach of Contract

To successfully pursue legal action, you need to establish that a breach of contract actually happened. Key elements required in court include: 

The existence of a valid contract

You must prove a legally binding contract was in place, with signatures or acknowledgment from both parties. The contract should have clear terms demonstrating exactly what each party was obligated to do. 

Proof of breach

You must provide actual evidence showing how the other party failed to meet its obligations. 

Legal justification for damages

The court will need to see proof of financial or other harm caused by the breach of contract. 

The best way to protect yourself from a breach of contract is to have documentation. Save all contracts, emails, texts, payment records, and other communications related to the agreement. This documentation provides the foundation for working with a lawyer for breach of contract cases. 

How to Avoid a Breach of Contract

Prevention is always better than dealing with the aftermath of a broken agreement. Contract management software can streamline these preventive measures, making tracking obligations and deadlines easier for both parties. Here are a few ways to help avoid contract disputes that can lead to a breach of contract: 

Draft Clear Contract Terms

Not being clear in your contract can lead to misunderstandings and disputes, making precise wording essential in any agreement. When drafting contracts, include explicit obligations, specific deadlines, and clearly defined consequences for non-compliance to minimize the risk of the other party misinterpreting vital information.

Define Penalties and Resolution Methods

Outlining specific penalties for breaches, such as late fees or loss of deposit, establishes clear consequences up front. Consider including resolution methods like arbitration, mediation, or other alternative dispute resolution (ADR) processes that can help resolve disagreements more efficiently than traditional litigation.

Communicate and Document All Agreements

Ongoing communication prevents disputes and ensures both parties understand their responsibilities throughout the contract period. Maintain detailed records of all contract-related discussions, modifications, and approvals, creating a paper trail that can prevent or resolve potential disputes.

Consider Legal Review Before Signing

Legal professionals can help identify loopholes and potential risks before a contract is finalized, potentially saving significant time and money later. This oversight can be helpful for high-value transactions, long-term agreements, or contracts with complex technical requirements.

Track Obligation Fulfillment Post-Signature

The use of contract management software allows users to integrate with other company systems to ensure what’s happening in a business complies with the contract. For example, procurement professionals can compare payment terms with their invoicing systems to ensure they are in compliance.

What to Do If a Breach Occurs

Proper contract lifecycle management can help organizations identify potential breaches early and take corrective action before significant damage occurs. Unfortunately, sometimes, there's no preventing someone from not fulfilling their end of a deal. If you find yourself dealing with a broken agreement, follow these steps:

1. Review the Contract Terms

Carefully examine the agreement to determine which specific provisions were violated and what remedies are outlined in the contract. Specific breach clauses can outline the steps for resolution, including notice periods or particular remedies for different types of violations.

2. Attempt to Resolve the Issue Informally

Contact the other party directly to discuss the issue and negotiate a solution, which can help avoid unnecessary legal expenses and preserve business relationships. Informal resolution methods include agreeing to a deadline extension, accepting partial performance with a reduced fee, or modifying the contract terms to accommodate changed circumstances.

3. Send a Formal Notice of Breach

A breach notice serves as an official record of the violation and a formal demand for corrective action when informal discussions don't resolve the situation. Include key elements such as specific details of the breach, required remedies, reference to relevant contract provisions, and a clear deadline for response or correction.

4. Seek Legal Action If Necessary

Legal action becomes necessary when the breaching party refuses to comply with the contract despite informal attempts and formal notices. Consider litigation and alternative dispute resolution options like mediation or arbitration, weighing factors such as potential costs, time involvement, relationship impact, and likelihood of successful recovery.

Example of a Breach of Contract

Consider this scenario: A manufacturing company signs a contract with a supplier for 1,000 custom parts to be delivered within 60 days. After 45 days, the supplier informs the manufacturer they can only deliver 600 parts and will need an additional 30 days.

This creates several problems, such as:

• Production delays impact the manufacturer's ability to fulfill its customer orders
• Potential revenue losses and damage to customer relationships
• Extra costs to source the remaining parts from an alternative supplier

The manufacturer first attempts to negotiate a solution, offering a partial payment for the 600 parts with a smaller extension. When the supplier refuses, the manufacturer sends a formal breach notice. Ultimately, the case requires legal intervention, with the manufacturer seeking damages for lost profits and additional costs.

This example shows how contract authoring with clear delivery terms and consequences for non-compliance could have prevented the dispute or provided clearer remedies.

Use Icertis to Manage Contract Breaches

Contract breaches cost businesses money. Recognizing the warning signs early and establishing clear protocols for handling violations protects your company from financial damage and potential reputational harm. 

The Icertis Contract Intelligence Platform can help you identify missed deadlines, unfulfilled obligations, and compliance risks before they become legal problems. Icertis uses AI to surface obligations so they can be assigned and tracked throughout the duration of the contract.  By automating deadline tracking, sending timely obligation reminders, and providing comprehensive visibility into contract performance, businesses using contract intelligence solutions prevent the most common contract violations from happening in the first place.

With self-service contract initiation and enhanced contract visibility, companies reduce breach incidents while cutting contract administration costs, strengthening compliance, and building more reliable business relationships. Request a demo today.  

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