Breach of contract: How it occurs

This blog is part of the “Contract Law” series.

Jump to:

How does a breach of contract happen?

Proof of breach

Legal remedies and damages

Final words

Just as contracts are an essential part of the day-to-day business relationships in nearly every sector of public and private life, so too is adjudicating disputes born of their adoption. While good management and preparation can help prevent many of these disputes before they rise to the level of litigation, conflict in contract law is inevitable.

In instances when one party accuses another party of not honoring the terms of a contract, a number of legal options present themselves. The type of litigation that follows an accusation of a breach of contract, generally, depends on what type of contract was crafted in the first place, and what promises were purported to be broken. Below, we explore some of the key considerations of these disputes and subsequent lawsuits.

How does a breach of contract happen?

A breach of contract occurs when one party fails to fulfill its obligations as specified in the contract without a lawful excuse. This failure can take various forms, such as failing to deliver goods or services as promised, not completing work within the agreed timeframe, delivering defective or substandard goods, or not paying for goods or services rendered.

In order for a breach of contract to occur, a contract must have existed in the first place. This begs the question, “What is a contract?” A contract is a formal, legally binding agreement between parties. This agreement creates “mutual obligations that are enforceable by law.”

Types of contract breaches

There are several common types of contract breaches. These breaches can be broken down into five major classifications, which are as follows:

• Minor– A minor breach of contract, also referred to as an immaterial or partial breach of contract, occurs when the non-breaching entity is merely entitled to the actual damages resulting from a breach, explains the Peck Law Group. For example, a contract might state a vendor is required to serve soft drinks for a catered birthday party in green plastic cups. If the vendor shows up with yellow cups, the terms of the agreement would technically be violated, although it would not likely excuse the party host from having to pay the catering bill. At most, they would be due whatever costs were actually incurred from the minor breach, which in this case may very well be none.
• Material– A material breach is a more substantial violation of the promises of a contract. In a legal sense, material refers to “important information, generally significant enough to determine an issue.” In a material breach of contract case, a court might find one party’s failure to perform its obligation was so severe the aggravated party would be entitled to a more robust remedy. These might come in the form of economic damages, injunctive relief, or a court order for performance.
• Anticipatory– This form of a breach occurs when it is inevitable one party will be unable to perform an obligation when such a performance is contractually due. In these instances, it is possible for the non-breaching party to attempt to sue for damages immediately, and that party does not need to wait until the breach actually occurs.
• Actual- In contrast to the anticipatory breach, this comes after a given performance is expected, rather than prior to the above-stated event.
• Mutual- This breach of contract occurs when both parties choose to break the terms of a contract agreement. This may occur after a substantial change in circumstances surrounding an agreement.

Proof of breach

A judge adjudicating a breach of contract claim must consider many factors. Most fundamentally, perhaps, a judge must decide if a valid, legally binding contract existed in the first place. In order to do so, that judge must decide if each of the key elements of a contract is present. As such, contracts have several distinct and important existential facets. They are Offer, Acceptance, Awareness, Consideration, Capacity, and Legality.

• Offer– One party promising to do something, or conversely, promising to refrain from doing a particular action
• Acceptance– The unambiguous nature by which an agreement is solidified. This may be done verbally, or through performance or deed
• Awareness– Both parties acknowledge the contract agreement exists
• Consideration– When something of value is offered in exchange for the above-stated action or inaction; the value that induces the parties to enter into the contract
• Capacity– Individuals must have the ability to reasonably understand what entering a contract agreement means; individuals compromised by, for example, illegal drugs, may be found to lack capacity with respect to contract law
• Legality– Valid contracts must fall in line with existing laws
• Similarly, opposing counselors will likely grapple over questions regarding any actual damages or losses that might have occurred, any modifications to the agreement that may have taken place, and if any breach of the agreement actually took place.

White Paper Smarter about Contracts: Bringing a system of intelligence to contract lifecycle management Access white paper

Legal remedies and damages

If a breach of contract is shown to have occurred, it is incumbent upon the court to ensure the wronged party is justly compensated. This compensation can come in many forms. The “overarching goal of contract law is to place the harmed party in the same economic position they would have been in had no breach of contract occurred. As a result, the default remedy available for a breach of contract is monetary damages.”

In general, damages in a breach of contract case are limited to what is listed in the contract, and as such, courts usually do not award punitive damages as they would in a tort case. This reluctance comes from a legal theory known as “efficient breach,” which claims it is sometimes economically beneficial from a societal standpoint to breach a contract and then pay the requisite damages.

Sometimes, a court may order a “specific performance,” in which the breaching party will be expected to attempt to fulfill their contractual obligation to the best of their ability. This is usually prescribed with respect to unique assets such as real estate.

Examples of a breach of contract

The breadth of these lawsuits can range from nominal damages related to home improvement projects all the way to hundreds of millions of dollars when big tech and other economic giants are involved. There are lots of ways a contract can be breached.

One such example is when one company fails to execute a previously agreed upon business merger. This happened when a federal judge in the Southern District of New York ruled against RPM Mortgage after it failed to execute its planned merger with Partner Re. RPM was ordered to pay almost $11 million after being found to have “willfully breached its obligations” by not showing up to the closing proceedings.

There are also other examples of the enormity these cases can reach. Consider the $242 million recently awarded an Antero Midstream after Veolia Water Technologies was found to have committed fraud and breach of contract.

Final words

Ultimately the purpose of the contract relates to what it provides: the consideration. For contractual purposes, consideration includes the value that has been agreed upon, whether that be an action or an item. Property, services, and even protection from harm, are all examples of contractual consideration.

Ask Practical Law AI Introducing Ask Practical Law AI on Practical Law: Generative AI meets legal how-to Read blog post