Do you know the difference between a material breach of contract and an anticipatory one; do you understand the legal requirements for remedying a breach?
If you own a business, you probably work with contracts regularly. Therefore, understanding the legalities surrounding them is essential.
If you’re not clued up on the subject, stick around to find out more.
What is a breach of contract?
A breach of contract refers to one or more parties not sticking to the agreement outlined in a contract between them.
This can be a partial breach, where part of the agreement is not upheld, or a full breach of the agreement, where the entire thing is disregarded.
A breach of contract can land you in hot water, making you liable for financial penalties. These can be costly for a business in terms of money and reputation.
Mitigating a breach of contract, and understanding what makes a contract valid or not, are complex matters. There are multiple types of breaches and not all of them are equally damaging.
Additionally, it can be difficult to place a monetary value on the damages caused in breach of contract cases.
As you can imagine, these factors combined mean breaches of contract are rarely clear-cut.
They’re often disputed, too, which can lead to litigation and court action.
Therefore, businesses need to take their contractual agreements seriously and seek expert advice if they’re ever in doubt about the contents of a contract or if the contract is valid, or else risk being on the wrong end of a breach of contract claim.
Breach of contract elements
A breach of contract typically has four elements. These are:
The contract exists
The first element is the existence of a contract. You may be wondering, are verbal contracts and agreements legally-binding? The answer is “yes”.
Contracts can be both written and verbal. They’re an agreement between two parties that form an offer and an acceptance.
The legalities, terms, and conditions must be outlined, and all parties must have the capacity to understand what they’re agreeing to.
The plaintiff’s performance
The performance of the plaintiff refers to the extent to which they’ve fulfilled their end of the bargain as it’s detailed (or not) in the contract.
In some cases, one party may be excused from fulfilling their agreement if the other party hasn’t adhered to it either.
An example would be if someone (the defendant) purchased something from you (the plaintiff) and it stated in the contract that they must receive a specific item before they were obligated to pay.
If you sent the wrong but very similar item, they wouldn’t have to pay you.
If, on the other hand, such conditions weren’t specifically expressed in the contract, the “substantial performance” rule might apply and the customer might be legally required to pay.
A defendant breach
This is similar to the plaintiff’s performance element but pertains to the defendant not performing their contractual obligations instead.
For example, not paying for an item you sent even though you “substantially performed” your end of the bargain.
These are the damages that you, as the plaintiff, have suffered as a result of the defendant not adhering to the contract.
In our example above, the damage would be the amount of money the defendant owes you.
In other cases, this is harder to define. For example, with regard to reputational damages.
Types of breaches of contract
Generally speaking, there are four types of breaches of contract:
1. A material breach of contract
A material breach is where one or more parties fail to meet the terms of a contract.
This must be done in such a way that it makes the contract completely pointless.
For example, if a contracted website developer fails to complete part of the project they agreed to do.
2. A minor breach of contract
A minor breach of contract refers to one party not carrying out part of their agreement.
For instance, a website developer not having finished developing your website on the agreed date. However, they might complete it two days later in full.
The damages for this would thus be minimal.
3. An anticipatory breach of contract
If you’re frantically googling “how to terminate a contract”, an anticipatory breach might allow this.
An anticipatory breach of contract is where one of the parties anticipates they will breach the contract.
This could be, for example, a materials supplier informing a manufacturer that their materials will be delivered a week late.
Because the manufacturer still has orders to fulfill, they might have to purchase the materials elsewhere for a higher cost.
An actual breach of contract
An actual breach of contract is where some, or all, of the contractual agreement hasn’t been adhered to; it’s a fact rather than a likelihood.
Remedies and damages for breach of contract
Once a breach of contract has been established, the law requires the breacher to remedy the situation.
There are a number of routes that can be taken when it comes to breach of contract remedies:
This is a kind of court order, which rules that the party at fault is legally bound to carry out a “specific performance” as detailed in the contract.
Failing to do so could mean they’re fined, held in contempt of court, or arrested.
An affected party might seek specific performance if their business would significantly suffer because of the other party not keeping to their agreement and if money wouldn’t remedy the damage caused.
This is where one party pays the other to compensate them for the loss, injury, or damages they incurred.
The monetary amount must be quantifiable and reflect what the guilty party caused the innocent party to lose. In other words, nothing more and nothing less than was lost.
Similar to compensatory damages, punitive damages are awarded in extreme cases.
They’re cases where the guilty party is ordered to pay more than the amount the actual loss or damage was worth.
In essence, it’s an extra penalty for a breach of contract.
These are awarded when a court establishes that the innocent party hasn’t suffered a monetary loss or significant damage as a result of a contract breach.
This is usually a small sum of money that serves as a token gesture.
Liquidated damages are one of the many types of contract clauses that may exist. They’re detailed in the contract prior to signing it.
This is the amount of money each party agrees to pay if they break the contract.
If a court finds one party guilty of breaching said contract, they must pay the amount set out in it.
Breach of contract use case examples
To help you get to grips with each type of breach, let’s look at some examples:
Material breach example
It’s your child’s birthday party, and you’ve placed a catering order with a local business. Someone within the company makes a mistake and writes down the wrong date.
Therefore, nobody turns up on the day of the party.
As a result, you have to do a last-minute dash to the shops to buy food and prepare this yourself. This would be a material breach of contract on the part of the catering company.
Minor breach example
You’re planning on hosting a big neighborhood barbeque at 1 pm.
You’ve arranged for a landscaping company to mow your lawn at 9 am, leaving plenty of time before your guests arrive.
However, there’s rain that morning, which delays the job.
Although it’s carried out later than expected, your lawn is finished at 12 pm, before your guests show up. This would be an example of a minor breach of contract.
Anticipatory breach example
You’ve hired a carpet fitter to fit a new carpet three days before moving into your new house.
The carpet fitter phones two days before they’re due to complete the work to tell you they might not be able to finish the job on the day they agreed.
However, they assure you they should be able to complete it before you move into your new house.
In this case, an anticipatory breach of contract has occurred, and you’re within your rights to tell the company that you’re going to find someone else to complete the job to be sure it’s done on time.
Avoid breaches of contract by using PandaDoc templates
If you want a simple solution for creating, managing, sharing, and signing contracts, PandaDoc is the way forward.
Choose from hundreds of contract templates and customize these to reflect your circumstances.
PandaDoc helps you collaborate with all parties involved in your contract to eliminate the nasty business of breaches.
Start your free trial with PandaDoc today and learn more about how we can help with contracts and other business-critical documents.
Frequently asked questions
If you breach a contract, you might be required by law to compensate the other party for any damages.
This won’t necessarily involve litigation, and it’s often more beneficial for both parties to come to an agreement before pursuing court action.
A breach of contract may become criminal if you don’t carry out a ruling delivered in court to remedy the situation and/or provide reparations to the other party.