In a perfect world, business contracts would be entered into, both sides would benefit and be pleased with the outcome, and no disputes would arise. But in the real world of business, delays happen, financial problems can crop up, and other unexpected events can occur to hinder or even prevent a written contract from being carried out and one party ends up suing the other. The following is a discussion of the legal concept of “breach of contract” and an overview of your legal options should such a breach occur.
What Is a Breach of Contract?
A business contract creates certain obligations that are to be fulfilled by the parties who entered into the agreement. Legally, one party’s failure to fulfill any of its contractual obligations is known as a “breach” of the contract. Depending on the specifics, a breach can occur when a party fails to perform on time, does not perform in accordance with the terms of the agreement, or does not perform at all. Accordingly, a breach of contract will usually be categorized as either a “material breach” or an “immaterial breach” for purposes of determining the appropriate legal solution or “remedy” for the breach.
Breach of Contract Case: An Example
Let’s assume that R. Runner contracts with Acme Anvils for the purchase of some of its products, for delivery by the following Monday evening. If Acme delivers the Anvils to Runner on the following Tuesday morning, its breach of the contract would likely be deemed immaterial, and R. Runner would likely not be entitled to money damages (unless he could show that he was somehow damaged by the late delivery).
However, assume now that the contract stated clearly and explicitly that “time is of the essence” and the anvils MUST be delivered on Monday. If Acme delivers after Monday, its breach of contract would likely be deemed “material,” and R. Runner’s damages would be presumed, making Acme’s liability for the breach more severe, and likely relieving Runner of the duty to pay for the anvils under the contract.
Can I Sue for Breach of Contract?
When a breach of contract occurs or is alleged, one or both of the parties may wish to have the contract enforced on its terms, or may try to recover for any financial harm caused by the alleged breach.
If a dispute over a contract arises and informal attempts at resolution fail, the most common next step is a lawsuit. If the amount at issue is below a certain dollar figure (usually $3,000 to $7,500 depending on the state), the parties may be able to resolve the issue in small claims court.
Courts and formal breach of contract lawsuits are not the only options for people and businesses involved in contract disputes. The parties can agree to have a mediator review a contract dispute or may agree to binding arbitration of a contract dispute. These out-of-court options are two methods of “alternative dispute resolution” that can take place as alternatives to business litigation.
Remedies for a Breach of Contract
When an individual or business breaches a contract, the other party to the agreement is entitled to relief (or a “remedy”) under the law. The main remedies for a breach of contract are:
- Specific Performance
- Cancellation and Restitution
The payment of damages — payment in one form or another — is the most common remedy for a breach of contract. There are many kinds of damages, including the following:
- Compensatory damages aim to put the non-breaching party in the position that they would have been in if the breach had not occurred.
- Punitive damages are payments that the breaching party must make, above and beyond the point that would fully compensate the non-breaching party. Punitive damages are meant to punish a wrongful party for particularly wrongful acts, and are rarely awarded in the business contracts setting.
- Nominal damages are token damages (small amount of damages) awarded when a breach occurred, but no actual money loss to the non-breaching party was proven.
- Liquidated damages are specific damages that were previously identified by the parties in the contract itself, in the event that the contract is breached. Liquidated damages should be a reasonable estimate of actual damages that might result from a breach.
If damages are inadequate as a legal remedy, the non-breaching party may seek an alternative remedy called specific performance. Specific performance is best described as the breaching party’s court-ordered performance of duty under the contract.
Specific performance may be used as a remedy for breach of contract if the subject matter of the agreement is rare or unique, and damages would not suffice to place the non-breaching party in as good a position as they would have been in had the breach not occurred.
Cancellation and Restitution
A non-breaching party may cancel the contract and decide to sue for restitution if the non-breaching party has given a benefit to the breaching party.
“Restitution” as a contract remedy means that the non-breaching party is put back in the position it was in prior to the breach, while “cancellation” of the contract voids the contract and relieves all parties of any obligation under the agreement.
Get Legal Help with Your Breach of Contract Dispute
If you’ve been named in a breach of contract lawsuit or believe another party has failed to honor its contractual obligations to your company, quite a bit may be at stake. Before deciding on how to proceed with your business dispute, it’s advisable to first consult with an experienced small business attorney near you to discuss your options. Your business lawyer can counsel you on the pros and cons of filing a breach of contract suit and weigh the other options.
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