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What Is a Breach of Contract? Types and Penalties

Simply put, a breach of contract occurs when at least two people enter a binding contract, and at least one of the parties fails to meet the terms or conditions specified within the agreement.

What Is a Contract?

Contracts or agreements can be created and agreed to in writing (typed or handwritten), or they can be verbal only*. Whether you’re in a written or verbal contract, as long as it meets the conditions that apply to all contracts, it is considered legally valid.

Conditions of a contract include:

  • Offer – This refers to the exchange of value between the parties. The value is often monetary (like in a home or auto loan, for instance), but it can also be action- or outcome-based (like what you would find in an NDA or a partnership agreement). The offer should be clear and specific.
  • Acceptance – The offeror and the offeree will agree to the terms by signing the contract. If it’s a verbal agreement, they may speak their agreement out loud and “shake on it.”
  • Adequate consideration – This refers to a reasonable value of exchange. In other words, what is being offered and the exchanged value should be equal. For example, the auto loan should match the value of the car being purchased.
  • Capacity – This refers to the ability of the parties to satisfy the terms of the contract. A lender should not enter into an agreement with someone who cannot prove their capacity to pay back the loan within the decided time frame.
  • Legality – This refers to the legality of the deal and the terms within the contract. If the contract includes illegal items or illegal conditions, it won’t be considered legal in the eyes of the law. For instance, if a contract involves an exchange of illicit drugs or laundered money, the law will not enforce it.

Whenever a party violates the terms or does not uphold their end of the contract, they are considered to have breached the contract.

*A verbal agreement is considered legally binding if it meets all the conditions listed above. However, a verbal agreement is much harder to prove in a court of law should a dispute arise.

Are There Types of Contract Breaches?

There are four main categories that a breach of contract can fall under: minor breach, material breach, anticipatory breach, and fundamental breach.

Minor Breach

A minor breach, or a partial breach, is low in severity and occurs when a minor part of the contract is not fulfilled or carried out. The affected or offended party can sue for damages or receive compensation for the violation, but a minor breach does not stop either party from fulfilling the rest of their obligations. Whether a deadline for a deliverable is missed or a slightly inferior product is provided, the recipient can sue for damages or demand partial compensation. However, they will still have to pay for the goods or services while the offending party completes their side of the deal.

For example, let’s say a customer asks a jeweler to resize a ring. The jeweler agrees to the service and provides a delivery date that is four days away from the date of the agreement. If the jeweler returns the ring on the fifth day, this could be considered a minor breach of contract. The customer has the right to sue for damages or request compensation, but they will still be expected to pay for the service.

Material Breach

A material breach, or a major breach, is far more substantial than a minor breach and occurs when the affected party receives something that is entirely different from what was specified in the contract. Unlike a minor breach, if someone commits a material breach, the non-breaching party is not required to uphold their end of the agreement and can sue for damages or compensation.

Sticking with the jeweler example from earlier, let’s say the jeweler agrees to resize the customer’s valuable, pricy diamond ring within four days of the agreement. But when the customer arrives to collect the ring, the jeweler hands it back, except the ring now has a moissanite setting, not a diamond. This is a material breach, as the item expected is not the item received, it is a lesser value than the original, and—if it’s genuinely a case of the gems being swapped—the jeweler has committed theft. The customer is not expected to pay, can be compensated for their loss, and can legally fight to get the original diamond back, as long as they can prove that the jeweler acted in bad faith/committed the crime.

Anticipatory Breach

An anticipatory breach is one where the breach has not technically happened yet, but one party can conclude that the other party will not be upholding their end of the agreement. In some cases, the offending party will inform the other party either verbally or in writing that they will not be completing the terms of the contract, or the affected party can observe the breaching party’s actions and realize their intentions. The non-breaching party may sue for damages if they have suffered any loss from the breach.

Fundamental Breach

Similar to a material breach but more severe, a fundamental breach occurs when one of the parties fails to complete the main conditions of the contract, thus preventing the non-breaching party or parties from receiving or fulfilling their end(s) of the agreement. In this case, the non-breaching party can terminate the contract, breaking ties with the other party before the contract’s conditions are met.

For example, if a building owner enters into a contract with a construction company to add another wing to the building, but after the start of the project, the construction team stops performing any labor, so it stalls indefinitely, the building owner can seek to terminate the contract and receive damages for any time or money lost.

What Are the Penalties or Consequences of a Breach of Contract?

It depends on the severity of the breach or the context of the contract, but a breach of contract can result in significant and major damages, including:

Compensatory Damages

This penalty compensates the injured party for any actual losses, or the exact amount lost from the contract. It is intended to allow the affected party to return to their original state prior to the contract as if the agreement never took place.

Liquidated Damages

In some contracts, there is a list of predetermined damages specified within the text that will need to be paid should certain terms of the contract not be met.

Nominal Damages

Nominal damages are more symbolic than anything else and show that a breach of contract occurred, even though neither party suffered financial loss as a result. Nominal damages are small sums that do not significantly impact either party’s finances.

Recission

Recission is the decision to terminate the contract, making the agreement null and void and restoring both parties to their original state prior to entering the contract. The judge may also order the breaching party to pay damages to the non-breaching party if losses were suffered.

Punitive Damages

Rarely in a breach of contract case are punitive damages awarded, but this order punishes the breaching party if their actions were performed with malicious, fraudulent, or reckless intent. The intent behind punishing the offending party is to deter them or others from performing the same actions and creating new victims.

Are you facing a breach of contract? The business litigation lawyers at Clark, Smith & Sizemore will fight for you.

If you are in a situation that has led to a complex or financially significant breach of contract between you and one or more parties, talk to the team at Clark, Smith & Sizemore. We are well-versed in the laws surrounding business litigation and contract disputes and will fiercely represent you in your journey to resolution. Call us today for a free consultation: 478-254-5040.

Thanks for checking out part 3 in our 6-part series about business litigation. Stay tuned for all articles, which include: