What is a breach of contract?

When two parties enter into a legally binding agreement or contract, they’re both expected to fulfill their outlined responsibilities and obligations. However, there may be situations where one party fails to follow through on their end of the deal, that is what is called a Breach of Contract.

Types

There are two main types of contract breaches:

  • Minor Breach

A minor breach is when the violation of a contract is relatively small and doesn’t cancel out or change what was intended by the agreement. For example, a contractor may finish a job a few days late.

  • Material Breach

A material breach is a more serious and significant violation that completely defeats the purpose of the contract. An example could be a supplier delivering significantly inferior products compared to the agreed-upon quantity or quality.

Forms

A breach of contract can take many different forms, such as:

  • Non-performance

When one party simply fails to fulfill their end of the contract.

  • Defective performance

This occurs when the goods or services provided by a party don’t meet the required level of quality or standard.

  • Late performance

When a party misses deadlines or doesn’t deliver on time.

One image of two men shaking hands on a contract and another of two men disputing a Breach of Contract
Image created by Market Business News.

Consequences

If one of the parties breaches a contract, there may be consequences, such as:

  • Damages

Financial compensation for losses caused by the breach.

  • Specific Performance

A court order requiring the breaching party to follow through on the contract terms.

  • Cancellation/termination

The non-breaching party has the power to cancel or terminate the contract if a material breach occurs.

Demarco.com.au says the following regarding calculating damages when your contract is breached:

“In the case of the sale of goods, where the breach consists of the seller’s failure to deliver those goods, the buyer is entitled to the cost of obtaining substitute goods, which means that the measure of damages will be the difference between the contract price and the market price of the goods actually obtained.”

Prevention

To minimize the risk of contract breaches, it’s crucial for both parties to take proactive steps such as:

  • Having a well-drafted, clear contract that outlines all the expectations and duties.
  • Maintaining regular communication to resolve any problems before they escalate.
  • Including dispute resolution processes in the contract for handling disagreements.
  • Understanding their rights and obligations under the contract terms.

Real-world examples

The following are some examples of breaches that occur in both business and consumer contexts:

  • A construction company abandons a project before completion.
  • An employee violates a non-compete agreement with their former employer.
  • A homebuyer backs out of a real estate purchase contract.
  • A service provider consistently misses agreed-upon deadlines.
  • A wedding photographer fails to show up at the wedding without any explanation.
  • A software developer delivers a product that fails to meet the specifications outlined in the contract.
  • A retailer does not honor the warranty of a sold product, despite valid claims.
  • A freelancer uses copyrighted material without permission in a client’s project.
  • A tenant leaves the property before the lease term expires without proper notice or justification.

 

Written by Nicolas Perez Diaz