A contract is an enforceable agreement between two or more parties. Usually, all the parties agreed to the contract in the first place with a full understanding of what it requires. In many cases, contracts are mutually beneficial, but even those are breached under certain circumstances.
Ideally, no one would ever breach a contract. When a party does break the agreement, it may be a minor issue — or it may be significant and interrupt the remainder of the contract. This is called a “material breach.”
A material breach is enough for the injured party to seek a remedy, whether through negotiation, mediation, arbitration or litigation. That remedy could be to have the contract specifically enforced on its existing terms. Another common remedy is damages — compensation for what has been lost. Or, the injured party may have the right to cancel the contract and pay only what is already reasonably owed to the breaching party.
A material breach can occur in three main ways:
- Lack of timely performance
- Performance not in accordance with the terms of the agreement
- Failure to perform at all/nonpayment
Common contract terms related to breach
In many contracts, the parties can specifically agree that time is of the essence. This removes the need to prove later that timeliness was a required part of the contract.
Many contracts include a term called “liquidated damages.” This allows the parties to estimate, during the negotiation stage, the monetary value of certain types of breaches of contract. This is done in part so that there will be no mistake, and also to remove the need to prove actual damages later.
For example, the parties might agree that missing the deadline for Stage 1 of a development project will cost the developer between $8,000 and $12,000. They could agree to $10,000 in liquidated damages. If the deadline is missed, the developer receives $10,000 regardless of the actual damages incurred.
Calculated damages, specific performance and cancellation or restitution
Other types of damages include compensatory, punitive and nominal damages. Compensatory damages are the main remedy for breach of contract and simply involve payment for actual monetary losses. Punitive damages are available in certain circumstances to punish wrongdoers. Nominal damages are a token amount paid in some cases when a breach occurred but little to no actual monetary losses occurred.
When compensatory damages are the chosen remedy, the non-breaching party may be entitled to more than just a refund. It could be entitled to the benefit of its bargain. In other words, compensatory damages can include lost profits.
Another important remedy for breach of contract is called “specific performance.” Courts have the power to order a breaching party to complete the contract after a breach as opposed to granting damages. For example, if one party refused to hand over a piece of art that had been purchased by the other, the court could order it to provide the art instead of returning the money.
In many circumstances, the non-breaching party can choose to cancel the breached contract moving forward. In such a case, it can seek restitution for any money or benefits already given to the breaching party, putting the non-breaching party back into the position it was in prior to the breach. Typically, there is a settlement between the parties to account for reasonable past expenditures authorized by the contract and to return any money no longer owed.
If you or your organization is involved in a breach of contract, quality legal representation can help you choose the most appropriate remedy and press for that outcome in whatever venue you prefer.