Breach of Contract Penalties

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How Can a Contract Be Breached?

A contract can be breached in a number of ways and the breach may be partial or material. A partial breach occurs when it is minimal such as missing a small payment or delivering 99 items when a contract was for 100 items. A material breach occurs when multiple payments are missed or for example only 5 items are delivered when a contract required 100 items.  However, there are many times where it is unclear whether a breach was partial or material, which makes a substantial difference in the amount of contract damages.

What Happens When Someone Breaches a Contract?

When a contract is breached there are several potential ways a court may award the breached party. The general rule in contracts is that a party will get their expectancy damages. This means the breached party will get what they expected to receive from the contract. For example if an employee was supposed to receive a $5,000 paycheck every month and his employer breached by not paying one month his expectancy damages would be $5,000 and that is likely what a court would award to the breached party.

However, there are times when the expectancy cannot be determined adequately, such as lost profits for a business that never started. In that scenario a court will likely award the breached party the amount of money they spent to start the business.

There is also a remedy known as unjust enrichment which occurs when one party benefits unjustly from someone else. An example would be paying someone $1,000 to build a house and then they never build the house. In that scenario the builder received $1,000 unjustly and could be required to return the $1,000 they received.

Are There Penalties in Contracts?

The answer is generally no. Courts generally look down on penalties in contracts because they do not want to punish people for entering into deals or breaching them if it makes financial sense.  Even if there is a liquidated damages provision in the contract, the court will not enforce it against the breaching party if it amounts to an unreasonable penalty.  

Therefore, even if the other party behaves horribly there is generally no penalty or punitive damages in contracts. It may be possible to get punitive damages if the contract was based on fraud, but this is unusual and rarely imposed by the courts.

Do I Need a Lawyer To Avoid Contract Penalties? 

If a contract has been breached the remedy the court decides to utilize can make a significant difference in the amount paid. If a contract was fraudulently entered into you may get punitive damages instead of mere expectancy but this is very rare. Therefore, if you are in a breach of contract situation it would be wise to contact an attorney to ensure you are getting the best legal remedy available.

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Last Modified: 12-19-2013 10:53 AM PST

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