What is a Breach of Contract? Types, Legal Implications, and Prevention

A valid contract defines obligations for both parties and when a party fails to perform theirs—partially or entirely—a breach of contract occurs.

These breaches can range from minor oversights to major failures, leading to serious consequences such as financial losses, damaged reputations, strained business relationships, and the mental toll of legal battles. This is why preventing contract breaches is far more beneficial than dealing with their aftermath.

Therefore, in addition to exploring the nature, examples, types, and remedies for contract breaches, this article will show you how to prevent them using contract automation and management tools.

What is Breach of Contract?

A breach of contract occurs when one party fails to meet the obligations or terms specified in a legally binding agreement. While some breaches can be resolved informally, others may require court intervention. Before pursuing legal action, consider these steps:

• Review the contract for clauses outlining how to address the specific breach.
• Notify the breaching party of the breach, allowing them an opportunity to confirm and possibly correct the issue.
• Discuss and attempt to resolve the breach through alternative dispute resolution (ADR) methods such as negotiation, mediation, or arbitration.

If ADR efforts fail, you may then seek legal remedy with the help of your lawyer.

Breach of Contract Examples

Some common examples of contract breaches include:

Late date delivery

A company hires a construction firm to build a new office space with a contract stating an October 1st deadline. Due to delays in material supply and labor shortages, the firm finished construction on November 15th.

This delay breaches the contract, as the late delivery may cause lost business or increase overhead costs from using a temporary office space. The company can seek compensation through liquidated damages or renegotiate the contract terms.

Non-payment

An agency contracts a freelance graphic designer to create a logo, with payment split into two installments: 50% upfront and 50% upon completion.

The designer delivers the logo on time and meets all specifications, but the agency refuses to pay the remaining 50%, citing financial issues. This action breaches the contract and the designer may pursue mediation, or file a claim in small claims court.

Substandard work

A contractor agrees to remodel a homeowner’s kitchen with high-quality materials and a precise layout.

Instead, the contractor uses cheaper materials and the layout is incorrect. This material breach allows the homeowner to demand corrections at the contractor's expense or sue for damages to hire another contractor to fix the mistakes.

Failure to provide service

A small business hires an IT support company to manage their network and ensure smooth operations. The contract specifies that the IT company will monitor the network 24/7 and respond to issues within an hour.

However, when a critical network outage occurs, the IT company takes several hours to respond, resulting in lost customers and revenue. This failure breaches the contract, allowing the business to either terminate the contract and seek alternative services or demand compensation for the losses incurred during the outage.

Unauthorized use of information

A healthcare provider shares confidential patient information with a third-party billing company under a contract that limits the use of the information strictly to billing purposes.

If the billing company uses the information to market additional services to the patients without consent, they breach the contract on confidentiality and data protection grounds. The healthcare provider can terminate the contract, seek damages, or report the breach to regulatory authorities, which may lead to imposed fines or penalties on the billing company.

Key Elements of Breach of Contract

For the non-breaching party to seek remedies from the court, they must prove the following elements:

1. Existence of a Valid Contract: For a contract breach to occur, a valid and legally enforceable agreement must exist.  A valid contract must include essential elements: an offer, acceptance of that offer, consideration (something of value exchanged), and mutual intent to be bound by the agreement. This applies to both written and implied contracts, though real estate transactions, sales over $500, and contracts longer than one year must be in writing due to the statute of fraud.
2. Performance of Contractual Duties: The next step the court takes is determining whether the plaintiff has fulfilled their contractual obligations as outlined in the agreement. This confirms that the contract was in effect and that the plaintiff did not contribute to the breach. If the plaintiff failed to perform, they must prove that their non-performance was due to the breaching party’s default.
3. Failure to Perform Under the Terms: This element shifts focus to the breaching party’s failure to meet their contractual obligations. It aims to establish that the breaching party had no valid excuse for non-performance. The court will decide whether the breach is material and determine the appropriate remedy.
4. Link Between Breach and Damage: This element helps establish that the breach directly caused harm to the non-breaching party. The court will assess the cost of damages to determine their significance, as a breach of contract claim can proceed only if the damage is substantial and the breaching party's actions are the primary cause of the harm.
5. Requirement for Notification: The non-breaching party must notify the breaching party of the breach. Some contracts also require this notification to include an opportunity for the breaching party to remedy the situation and prevent further escalation.

Types of Breach of Contract

The types of contract breaches include:

Renunciatory breach

Renunciatory breach, also called anticipatory breach, occurs when a party announces in advance that they won’t fulfill their obligations. They can communicate this explicitly with words or actions that indicate they don’t intend to perform.

For example, if your event host calls two hours before the event to say they can’t attend due to a flight cancellation, this signals a potential problem with performance. You can terminate the contract immediately and seek damages or wait until the contract’s due date. If you choose the latter and the breaching party fulfills their obligations, you lose the right to terminate.

Material breach

When a party breaks a major part of the contract in a way that undermines the entire agreement, it’s called a material or substantial breach. This breach makes it impossible for the injured party to proceed with the contract as planned and causes significant loss.

For example, if you ordered blue paint but received purple instead, it’s a material breach if the color is crucial to the intended use. You may suspend the contract and give the breaching party a chance to cure the breach—that is, replace the paint with the correct color—or terminate and seek damages if time is a critical factor.

However, even after curing the breach, you can still sue for damages caused by the initial breach, though it would be treated as a minor breach rather than a material one.

Minor breach

A minor breach, also known as a partial or immaterial breach, occurs when one party fails to meet a small or non-essential part of their contractual obligations. Unlike a material breach, which significantly impacts the contract’s purpose and may justify termination, a minor breach does not entitle the non-breaching party to terminate the contract.

For example, if you ask your door maker to use a specific type of wood but they use a different, yet equally effective, wood, this might be considered a minor breach. While you're still required to fulfill your part of the obligation, you can request a cure (if the breach is curable) or seek damages.

Total breach

A total breach is the most severe type of breach. It involves a complete failure to perform essential contract terms, depriving the other party of the contract's main benefits.

For example, if after giving the paint seller (in the material breach example) a chance to correct the color, they still refuse to comply, the breach escalates into a total breach. This entitles you to terminate the contract immediately without liability and seek remedies such as damages or specific performance.

Legal Implication of Contract Breach

The possible remedies applied to contract breaches under the law include:

Damages

Damages are monetary compensation awarded to a party who has suffered a loss or injury due to the breach of a contract or a wrongful act. The purpose of damages is to restore the injured party to the position they would have been if the breach hadn't occurred. There are several types of damages, including:

• Compensatory Damages: This aims to make up for losses that are the natural and direct result of the breach, and are typically intended to cover non-monetary aspects, such as pain and suffering in tort cases. Examples include loss of earnings, medical expenses, and repair costs.
• Consequential Damages: Also known as special damages, they cover losses that are not the direct result of the breach but occur as a foreseeable consequence of violating the contract’s terms.
• Punitive Damages: These damages, also known as exemplary damages, are awarded in addition to compensatory damages. Their primary purpose is to punish the breaching party for egregious or malicious conduct and deter similar conduct in the future.
• Restitutionary Damages: This intends to restore the injured party to the position they were in before forming the contract or the wrongful act occurred. They involve returning any benefit that the breaching party gained at the expense of the injured party.
• Liquidated Damages: The predetermined amounts specified in a contract that a party agrees to pay if they breach the agreement.  They’re typically sought when actual damages are difficult to quantify.

Note: The injured party cannot claim compensation for losses that could have been avoided with reasonable efforts. They must prove their effort to mitigate, or minimize their losses after a breach or wrongful act.

Specific performance

Specific performance is an equitable remedy that compels a party to fulfill their obligations under a contract, rather than simply paying monetary damages for a breach.

The court considers this remedy when monetary damages are insufficient to compensate for the breach, particularly in cases where the subject matter of the contract is unique or irreplaceable like parcels of land, rare collectibles, antiques, or custom-made items.

A famous example is the case of Lucy v. Zehmer (1954) where Zehmer drunkenly wrote an agreement to sell his farm to Lucy on the back of a napkin and later claimed it was a joke. The court ordered specific performance after finding that the parties had a valid contract, and since land is considered unique, monetary damages would not suffice.

However, the court can deny a request for specific performance in the following cases: 

• Impossibility of Performance: The breaching party no longer has the legal ability to perform their obligation like in the case of destroyed goods.
• Laches: The principle of laches bars claims where there has been an unnecessary delay that prejudices the defendant.
• Unclean Hands: The plaintiff acted in bad faith, meaning they engaged in unethical or unfair conduct related to the contract.
• Hardship: Performance would impose undue hardship on the defendant such as when the contract price has become unfairly burdensome due to economic downturn.
• Public Interest: Enforcing the contract would be contrary to the public interest, such as causing environmental harm or violating public policy.

Rescission

Rescission is a legal remedy that allows the cancellation of contracts, returning both parties to their pre-contract positions. This remedy is typically sought when there has been a fundamental problem with the formation or performance of the contract, such as fraud, misrepresentation, mistake, duress, or undue influence.

Rescission aims to eliminate the contract as if it never existed, making it different from other remedies that seek to enforce and provide compensation for a breach. In this case, the parties must return benefits exchanged under the contract, and are no longer bound by its terms. 

How to Prevent Breach of Contract With Contract Automation and Management Software

Inefficient contract creation and management increase the likelihood of mistakes, delays, and miscommunications, all of which are common triggers for contract breaches.

You can address this issue with contract automation and management tools like Docupilot. Here’s how these tools can enhance your contracting process and reduce the likelihood of breaches:

• Minimize Errors: Contract automation tools allow you to create and use standardized contract templates. This ensures that you include all essential terms and conditions in every contract, reducing the risk of omissions or errors that could lead to a breach.
• Accelerate Contracting Workflows: Automate tasks like drafting, reviewing, and obtaining approvals with contract automation tools. This speeds up the workflow, ensuring prompt contract execution and reducing the risk of non-performance breaches.
• Reduce Misinterpretation and Ambiguous Terms: With contract automation tools, your attorneys can create contracts using pre-approved language and legal clauses for all business use cases, which can then be turned into templates. This ensures you're always working with clear and precise contract terms, reducing the risk of a breach.
• Maintain Contract Integrity: One party changing key terms, such as deadlines, payment amounts, or scope of services, without consent could result in the other party not fulfilling their contractual obligations. Version control keeps a detailed history of all contract modifications, allowing parties to see who made changes, when, and what was changed.
• Easily Store and Retrieve Contracts: The EY Contracting Report reveals that 90% of contracting professionals struggle to locate contracts. If you face similar challenges, you risk forgetting or misinterpreting your obligations, which can lead to non-performance or partial performance of agreed terms. With Docupilot, you can store and organize contracts into folders and quickly retrieve them using the search box, allowing you to easily reference contract terms and ensure adherence.

Automate Your Contract With Docupilot and Prevent Contract Breach

While the process of remedying contract breaches can be complex, you can reasonably foresee and prevent the causes. Consulting a legal professional during the contract generation and signing process can help address any doubts. 

Additionally, using document automation tools can minimize errors, reduce ambiguity, maintain contract integrity, and simplify storage and retrieval. This approach prevents financial costs, time loss, and the stress of legal disputes.

With Docupilot, you not only benefit from features designed to prevent contract breaches but also gain access to an easy-to-use, appealing, and affordable tool for creating a slew of business documents.

Ready to explore Docupilot? Sign up for your 30-day free trial today.