To better understand what it means to breach a business contract, it may be helpful to know what a business contract entails. A business contract is between two business entities, merchants, or persons who know about dealing with certain goods.
Contracts between two merchants or businesses (i.e., between two sellers) often have very different rules than contracts involving a merchant and a consumer (i.e., seller and buyer) or two individuals.
Generally, courts assume that businesses and merchants will better understand the law of contracts. Courts give fewer limitations and protections over how these parties choose to contract with each other.
A business contract can cover a wide range of business operations. Like any type of contract, business contracts are enforceable by law so long as they contain all of the elements of a valid contract, such as offer, acceptance, consideration, and execution.
Some business topics that frequently arise as the subject matter of a business contract may include:
- The shipment and delivery of goods;
- Construction of a business (commercial) building;
- The sale, purchase, or transfer of a business;
- Short-term joint business ventures; and
- Long-term agreements (e.g., deals involving cyclical shipments over many years).
What Is a Breach of Contract?
A business contract creates certain obligations to be fulfilled by the parties who agree. Legally, one party’s failure to fulfill any of its contractual obligations is known as a “breach” of the contract. A breach can occur when a party fails to perform on time, does not perform per the terms of the agreement, or does not perform at all.
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.
What is a Breach of Contract in a Business Setting?
In a business setting, a breach of contract occurs when one of the parties fails to perform their duties as specified in the contract. A breach can take on various forms that depend on what the parties have agreed upon as contract terms.
Some common examples of acts that might constitute a breach of a business contract include:
- Failing to make payments for goods;
- Failing to deliver goods after payment was received;
- Delivering the wrong goods;
- Delivering goods late;
- Delivering goods in a damaged condition;
- Failing to surrender business property after the transfer or sale of a business; and
- Violating confidential business information, like a trade secret.
A primary feature of lawsuits that involve the breach of a business contract is the concept of “prior business dealings.” In some cases, a breach of contract can be based on how the two businesses have conducted business in the past or conducted business up to the time of the breach.
These patterns of business interactions are called “prior dealings” and can serve as the basis for determining what can be considered a breach of contract concerning a particular business scenario.
- For example, suppose that Business A had consistently supplied Business B with 15-inch screws for over 35 years. If Business A suddenly starts to provide 20-inch screws instead of the regular 15-inch screws, Business A might be in breach of their contract.
- The prior business dealings between A and B only involved 15-inch screws, not 20-inch ones, which can signify a breach. Business A could be liable even if the written contract did not specify the size of the screws.
It is not uncommon to find that many business transactions often operate without a contract, especially if the parties have been dealing with each other for many years. If that is the case, the breach will be based on the business’s prior dealings.
When determining a breach of contract within a business setting, a court may conduct an in-depth analysis of how the companies have previously interacted over the years, if at all.
Can I Sue for Breach of Contract?
When a breach of contract occurs or is alleged, one or both parties may wish to have the contract enforced on its terms or try to recover for any financial harm caused by the alleged breach.
If a dispute over a contract arises and informal resolutions fail, the most common next step is a lawsuit. If the amount at issue is below a particular 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 “alternative dispute resolutions” that can take place as alternatives to business litigation.
What are the Remedies for a Breach of a Business Contract?
The remedies available for a breach of a business contract depend on whether the breach can be categorized as a minor or material one.
A minor breach, also known as a “partial breach,” occurs when one party has substantially performed the major obligations of the contract but does not meet a minor condition or term of the contract. In other words, a partial breach does not usually have a significant impact on the contract or its parties.
If a court finds that a party’s breach was only a minor one, it will determine any losses caused by the breach and provide the non-breaching party with an award of compensatory damages in an amount that makes up for the loss. The parties must continue to meet their contract requirements; otherwise, they may be held liable for a material breach.
On the other hand, a material breach is a much more serious violation and will make the fulfillment of the contract very difficult or near impossible. If a material breach has happened, the court may issue an equitable remedy instead.
Some examples of equitable remedies include:
Equitable remedies are generally only granted when a monetary award would be insufficient to protect the interests of a party harmed by the breach of a contract.
What is Specific Performance?
If damages are inadequate as a legal remedy, the non-breaching party may seek an alternative remedy called specific performance. Specific performance is the breaching party’s court-ordered performance of a duty under the contract.
Specific performance may be used as a remedy for breach of contract if the agreement is rare or unique, and damages would not 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 its position before the breach. In contrast, the “cancellation” of the contract voids the contract and relieves all parties of any obligation under the agreement.
Do I Need to Hire a Business Lawyer for Help with Business Contracts?
The law governing business contracts is exceptionally complex. If you believe that a party you are contracting with has failed to meet its obligations, you should consider contacting a contract lawyer.
A lawyer will be able to determine whether you might have a claim for damages, can research comparable business standards in your area or field, help you navigate the terms of your contract, and provide representation in court, if necessary.
An experienced lawyer can also help you secure and protect your business’s financial interests by drafting and reviewing any current or future business contracts and participating in contract negotiations on behalf of you and your business.