When a breach of contract occurs, there is essentially a “broken” contract. A breach occurs when one party to a contract fails to perform or refuses to perform according to the terms of the contract without a lawful or justifiable excuse.
There are many different types of contracts. Understanding the type of contract you have formed will help you understand whether you have breached any rights or obligations under the contract.
- Sales Contract: A sales contract is an agreement between parties regarding the transfer of property or assets. A sales contract exists for the sale of goods, services, or real property. Some sales contracts must be in writing to be enforceable in the event of a breach.
- For example, all sales contracts for the sales of goods $500 and over must be in writing to be enforceable. Additionally, the sale of real property must be in writing to be enforceable.
- Lease Agreements: A lease is a contract between to parties for the right to use and/or inhabit property. There are two main types of leases, residential leases and commercial leases. However, there may be lease agreements for the use of equipment or other goods.
- Licensing Agreements: A license agreement is an agreement where the owner of intellectual property such as a copyright or patent, grants to another the right to use the intellectual property for their own benefit.
- An example of a licensing agreement is where a musician grants a commercial company to use their song for the advertisement of a good or service. The musician would earn royalties and payment for use of the music. There is typically a term of use, for example, the music may only be contracted for use with one good and for a definite period of time.
- Employment Agreements: Employment agreements are contracts between an employer and employee for a term. In an employment agreement, the employee agrees to work for the employer for a set of time, performing specific tasks. Likewise, the employer agrees to pay the employee for the designated period of time outlined in the contract.
- Non-Disclosure Agreements: A non-disclosure agreement is typically exists for the protection of confidential information between an employee and employer. The non-disclosure agreement, or NDA, prohibits either party, usually the employee, from disclosing certain confidential information dictated by the contract.
- Government Contracts: Government contracts are contracts where federal or state governments contract with private parties for services or property.
- Option Contracts: An option contract is an agreement between the parties to the contract permitting one party to purchase certain rights at a future date for a set and specified amount of money. Examples of an option contract include a lease agreement with an option to purchase the property.
- Implied-in-Fact Contract: An implied-in-fact contract exists when no actual contract is found, but one is implied by the conduct of the parties to the contract. It is possible for a contract to be found by conduct where the conduct of both parties is intentional and each knows, or has reason to know, that the other party will interpret the conduct as an agreement to enter into a contract.
- An example of an implied-in-fact contract would be when patient goes to a doctor’s appointment and the doctor treats the patient. The patient’s conduct indicates that he would like to receive treatment from the doctor for what ails him. The doctor’s actions of diagnosing the patient indicate that the doctor agrees to see and diagnose the patient.
- Third-party Beneficiary: A third-party beneficiary contract exists where a party that is not an original party to the contract has a right to sue on the contract. The third-party can sue on the contract, despite not being a named party in the actual contract, based on the legal theory wherein the third party was the intended beneficiary of the contract.
- To prove the existence of a third-party beneficiary contract, the third-party must show that they relied or assented to the relationship. Once proven, the third-party beneficiary can sue either the promissory or the promisee of the contract.
The are four different ways that a breach of contract may be found:
- Material Breach of Contract: A material breach, or major breach, occurs where a party to the contract ends up with something significantly different than what was contracted for. A material breach typically provides that the non-breaching party is not required to perform their end of the bargain and has the right to seek a remedy from the breaching party.
- Minor Breach of Contract: A minor breach of contract, or a partial breach, occurs where one party fails to perform some part of the contract even though the specified item or service was delivered. For example, if a contractor contracted to complete a remodel on a certain day, however, the contractor completes the project the day after, this would be considered a minor breach.
- Anticipatory Breach of Contract: Anticipatory Repudiation, or anticipatory breach of contract, occurs when one party announces, prior to their time to perform under the contract, that he or she does not intend to perform under the terms of the contract.
- Actual Breach of Contract: An actual breach of contract occurs when one person fails to perform according to the terms of the contract. An actual breach may also be found where one party performs incompletely.
There are typically two types of remedies you can seek for a breach of contract: damages and equitable remedies. Damages are monetary awards. Damages typically cannot be speculative. Equitable remedies are awarded when a monetary award, or damages, would be insufficient to properly remedy the plaintiff.
- Damages: The following are different types of damage awards:
- Compensatory Damages are damages for a monetary amount that compensates the non-breaching party for the breach. They are intended to make the non-breaching, or injured party, “whole”. There are two types of compensatory damages:
- Expectation Damages: Expectation damages are damages that intend to cover what the non-breaching party would have received had the contract been fully performed. These may be based on the contract itself or market values.
- Consequential Damages: Consequential damages reimburse the non-breaching party for indirect damages that stem from the breach. These may include lost profits for the breaching party’s failure to comply with contract terms.
- Liquidated Damages are damages that are stated in the contract as a consequence for failure to carry out the terms of the contract. Liquidated damages are usually included in a contract if damages would be too difficult to quantify in the event of a breach. Courts will not award liquidated damages if the amount is improper as it may be seen as punishment for the breach.
- Punitive Damages are damages intended to punish the breaching party. Punitive damages are not awarded in contract cases.
- Nominal Damages are damages that are awarded when the injured plaintiff does not incur a monetary loss. These damages are usually awarded to show that the court agrees that the non-breaching party was the “winner” in the case.
- Restitution is based on the theory of unjust enrichment. Unjust enrichment is when the breaching party has received a benefit from the contract prior to breaching the contract. In these situations, the court awards to the non-breaching party the benefit the breaching party has received under the contract.
- EquitableRemedies: When legal or monetary compensation can’t adequately compensate:
- Specific Performance is a court order that requires a party to perform an act or refrain from performing an act. In the case of very specific goods, the court may order specific performance requiring the party that makes and delivers the specific goods to make and deliver the goods to the non-breaching party.
- Reformation occurs where the contract fails to reflect the contracting parties’ true intention. This typically occurs in the event of a mutual mistake of the parties. The court will then rewrite the contract to reflect the true intention of the parties.
- Rescission occurs when the court rescinds, or cancels the contract. A new contract may be created in its place. Rescission is usually awarded in cases of fraud.
Read more here: The Ultimate Guide to Remedies for Breach of Contract.
When a party is sued for breach of contract, they may argue that they have an affirmative defense, which justifies their actions. There are multiple affirmative defenses that may be raised by a party and can protect their rights in the event of a lawsuit.
Some commonly raised defenses to a breach of contract include:
- Statute of Frauds: The Statute of Frauds is a law that requires that certain types of contracts must be in writing to be enforceable in a court of law. Examples of contracts that must be in writing to be enforceable are contracts for the sale of real property or leases for a term of more than one year.
- Indefinite Terms: When a contract contains indefinite terms or the essential terms of the contract were never agreed upon, the contract fails for indefinite terms. In order for a contract to be enforceable, there must be mutual assent between the contracting parties as to the essential terms of the contract.
- Mistake: When both parties to the contract are mutually mistaken as to the essential terms of a contract the contract may fail.
- Capacity: If a party to a contract lacked the necessary capacity, the contract may be voidable by the party that lacked capacity. This defense will likely succeed in the case of minors.
- Fraud: Where a party contracts with another through fraud, the contract is voidable. Fraud occurs where one party misrepresents the purpose or terms of the contract to another with intent to defraud the other.
- Duress: Where party contracts with another through force or threat, the contract is voidable. There are two types of duress — physical duress and economic duress.
- Unconscionable: If contract terms are unconscionable or grossly unfair to one party, the court will likely rule that there was unequal bargaining power at the time the parties entered into the contract. A common rule of contracts is that both parties were at equal bargaining levels at the time the contract was made.
- Estoppel: Estoppel occurs where one makes a statement excusing the other party from performing under the contract. Based on this believe, the party does not perform. The party then relies on this representation and does not perform believing that they are excused from performance. The first party will then be estopped from suing in court based on a breach of contract.
- Illegal: If the purpose of the contract is illegal, the contract is unenforceable. An example of this would be a contract for a murder for hire or for prostitution.
Contract violations can be very complex. If you are being sued as the breaching party, or if you are seeking relief as the non-breaching party, it is important to seek the legal counsel of an experience contracts lawyer or business lawyer who can aid in navigating the difficult road ahead. Your attorney can advise you of your rights and can represent you in court if a lawsuit is filed.