Breach of Contract

Contracts impose a set of performance obligations on all parties to the agreement. Failure to comply with the requirements of a contract, without legal excuse is called a “breach” of the contract. “Breach of contract” is also the name of the civil cause of action pursued in court against a breaching party.

What is Considered Breach of Contract?

Anything that prevents a contract from being fulfilled can be considered a Breach of Contract. Breach of Contract can occur when a party takes an action that makes it impossible for the parties to perform under the contract or when a party repudiates the agreement. 

Breach of Contract Examples

• The failure of a party to make payments as required by the contract:  A tenant stops paying their rent.
• The failure to perform a task, or the alleged untimeliness of performance:  A painter starts painting an office building but does not finish the job by the agreed upon completion date.
• Poor performance, which can lead to allegations of contract violations:  A marketing company promises to get a furniture company on page one of Google but instead gets them on page five.

What are Common Types of Breach of Contract?

Not all contract breaches are the same. There are 6 types of Breach of Contract. They all have different severity and business impacts, which we’ll discuss in more detail below.

1. Minor Breach

2. Material Breach

3. Actual Breach

4. Anticipatory Breach

5. Repudiatory Breach

6. Mutual Breach

Is Breach of Contract a Crime?

No, Breach of Contract is generally considered a civil matter, not a criminal one. However, there are some limited situations where breach of contract can intersect with criminal law. Entering into a contract under fraudulent intent (or misrepresentation), contracts involving criminal activities, and contract violations in specific industries (like healthcare and securities) can involve or trigger additional criminal proceedings. But just because Breach of Contract isn't a crime, that doesn't mean there aren't potentially serious consequences.

Consequences of Breach of Contract

The consequences of a breach of contract will vary depending on the parties involved, the type of breach, the nature of the contract, and the applicable laws/jurisdiction.

Contracts often include clauses specifying how breaches should be handled, including dispute resolution mechanisms such as arbitration or mediation. Some common consequences include:

• Damages

• Liquidated Damages

• Termination of Contract

• Additional Costs

• Legal Costs

• Injunctions

Businesses may face additional considerations, beyond just financial penalties, especially in business-to-business (B2B) contracts. It can affect a company's reputation, operational efficiency, and relationships with key stakeholders in the industry. These additional concerns may include:

• Impact on Business Relationships

• Loss of Future Business Opportunities

• Industry-specific Regulations

• Contractual Penalties

• Operational Disruptions

• Insurance Considerations

What are Breach of Contract Exceptions?

The law of many states holds that minor discrepancies in performance will not constitute a breach if the party substantially complies with the spirit of the contract. Additionally, there are sometimes legal excuses for not complying with a contract, which can constitute a complete defense to a claim of breach. Finally, parties can waive their claims for breach of contract, both explicitly and by implication. Therefore, legal assistance is recommended to interpret potential claims for or against the company for breach of contract.

What is a Minor Breach of Contract?

A minor breach occurs when someone doesn't fully meet a minor promise in the contract, like being a few days late on a delivery.

When a Minor Breach occurs, the non-breaching party generally has the right to sue for damages caused by the breach. But the consequences are usually relatively minor compared to a material breach. Consequences typically encompass losses or damage caused by the minor breach: things like expenses incurred because of the delay or repairs needed to fix a minor defect.

In many cases, contracts contain specific provisions outlining the consequences of a Minor Breach and mechanisms for dispute resolution (like mediation or negotiation) to address these minor breaches without resorting to costly litigation. Your contract management software should be able to help you track and act on these provisions.

An important note: the distinction between a minor breach and a material breach often depends on:

1. the specific circumstances of each case, and

2. the language used in the contract.

Categorizing a breach as minor serves to preserve the overall purpose and performance of the contract, allowing one party to seek appropriate remedies without disproportionately affecting the other party.

What is a Material Breach of Contract?

A material breach occurs when someone fails to fulfill a significant promise in the contract, like not delivering the product at all, non-payment for delivered goods/services, or providing goods that are below agreed-upon quality standards. Material breaches are determined based on the impact they have on the core purpose and integrity of the contract, but it may also depend on the specific wording of the contract. 

A material breach is substantial enough that the non-breaching party can't receive the benefits they expected to receive from the contract. Material breaches can lead to more serious consequences and may give the non-breaching party the right to terminate the contract.

In many cases, contracts contain specific provisions outlining the consequences of a Material Breach and mechanisms for dispute resolution (like mediation or negotiation) to address these breaches without resorting to costly litigation. Your contract management software should be able to help you track and act on these provisions.

What is an Actual Breach of Contract?

An actual breach occurs when a party doesn't fulfill their obligation as agreed-upon in the contract. This can include failing to deliver goods or services, failing to make a payment, or performing poorly or incompletely. Actual breaches may vary in severity depending on the importance of the obligation and how late or poorly it was fulfilled. It may be minor (partial breach) or significant (material breach) depending on the nature and consequences of the breach.

The difference between an actual breach and an anticipatory breach of contract:
Contract breaches are classified as either actual or anticipatory depending on whether the breach has already occurred or is expected to happen, but hasn't yet. 

The difference between an actual and a material breach of contract:
A material breach of contract is a type of actual breach. Actual breaches are classified as either material or minor depending on the severity of the breach.

What is an Anticipatory Breach of Contract? 

An anticipatory breach occurs when a party signals they won't be able to fulfill their obligation before the agreed-upon date. In this case, the non-breaching party may have the option to terminate the contract or seek remedies before the breach occurs.

What is a Mutual Breach of Contract?

A mutual breach occurs when both parties agree to breach the contract, typically due to a mutual understanding that the original agreement is no longer viable or beneficial. In these cases, both parties may agree on new terms or dissolve the contract altogether.

What is a Repudiatory Breach of Contract?

A repudiatory breach occurs when a breach is so significant that it gives the innocent party the right to refuse the terms of the contract altogether. This type of breach is severe and often leads to contract termination and legal action.