Have you ever had a promise broken that cost you money?
When a promise is memorialized in a written contract, you have a breach of contract law issue. Now hold on, don’t fall asleep on me just yet because this is important. Breach of contract disputes are by far the most common form of business litigation that you will likely face as a business owner.
Say what?
Thousands of businesses every year find themselves both sides of a contract dispute. The bottom line impact on the business can be crippling. In fact, according to legal resources damages in breach cases typically cannot exceed four times the actual loss incurred.
Wait, there’s more…
The sad reality is that most business owners don’t fully understand their rights until after it’s too late. That is why this article is going to explain everything you need to know about breach-of-contract disputes and the legal implications that may impact your business financials.
You’ll learn:
- What Qualifies As A Breach Of Contract?
- Types Of Contract Breaches You Need To Know
- Legal Remedies And Damages Explained
- How Long Do You Have To Take Action?
What Qualifies As A Breach Of Contract?
At its most basic, a breach of contract occurs when a party to a contract fails to perform under the terms of the legally binding agreement.
It seems like that would be pretty cut and dry…
However, there are four essential elements that must exist before you can even file a breach lawsuit. These elements are:
- A valid, enforceable contract exists between parties
- The Plaintiff performed their obligations under the contract
- The Defendant failed to perform their obligations under the contract
- The Plaintiff suffered actual losses as a result
Let’s think about this real quick. If you enter into a contract with a contractor to remodel your offices by March 1st and they don’t even show up to start the job until April, that might be a breach of the contract. But it isn’t breach until you can prove you suffered real damages as a result of their delay.
Courts are not interested in “what if’s” or theoretical losses. Actual losses must be proven.
Types Of Contract Breaches You Need To Know
Not all breaches of contract are the same. There are different types of contract breaches. Each type impacts your legal rights and damages you may be able to recover.
Minor Breach
A minor breach occurs when most of the contract is performed, but a relatively minor obligation isn’t.
For instance, a vendor might have contracted to deliver 100 widgets to you, but instead, they delivered 95.
Minor breaches typically cannot be used to terminate the contract, but you can still sue for damages for that unfulfilled part.
Material Breach
Material breaches of contract are serious breaches that go to the heart of the contract’s purpose.
Material breaches allow the non-breaching party to terminate the contract and sue for damages. This is the “big dawg” breach that changes everything.
Here’s a quick example: Your business enters into a contract with a software company to provide custom software by December 31st to support a new product rollout. The software company fails to deliver anything by the deadline. That would be a material breach because the whole purpose of the contract was destroyed.
Anticipatory Breach
Here’s a little factoid for you.
Contract breaches can happen even before the performance is due. In legal terms, this is called an anticipatory breach. This type of breach happens when one party gives the other party clear notice that they will not perform under the contract.
If your vendor tells you two months before a delivery date that they will be unable to supply the goods you need, you don’t have to wait until the actual due date to file a lawsuit for breach.
Legal Remedies And Damages Explained
Alright then, so what remedies are available if someone breaches a contract with you?
The law affords you a number of remedies to “make you whole” again. They are described below.
Compensatory Damages
This is the most common form of damages awarded by the courts. These are damages that attempt to put you in the position you would have been in had the breach not occurred.
Courts will look at the difference between what was promised under the contract versus what you actually received. The difference between those two numbers is your damage award.
Consequential Damages
Consequential damages are losses that flow from the breach but aren’t direct losses to the plaintiff. For example, if a supply contract is breached by the supplier, any lost customers and resulting lost profits would be consequential damages.
The “but” here is that consequential damages must be foreseeable at the time the contract was entered into. The breaching party must have realized these damages were possible.
Liquidated Damages
Contracts may have a pre-set damage amount for certain breaches. These are called liquidated damages clauses.
Courts generally enforce these clauses, provided the amount is reasonable and actual damages are difficult to calculate. Excessive or punitive liquidated damage clauses will likely be rejected by the courts.
Specific Performance
Money is not always a remedy.
For cases involving unique items or property, courts will order the breaching party to perform their actual obligations. This is called specific performance.
Specific performance is most common in real estate cases because each parcel of land is considered unique. No other parcel of land will replace the subject house or commercial building.
How Long Do You Have To Take Action?
Your watch will not work as your timer in a breach of contract action.
Each state has a statute of limitations that places time limits on filing a lawsuit for breach of contract. If you miss the statute of limitations, your case is automatically dismissed no matter how clear cut the breach was.
The limitation period for most written contracts is 2-6 years depending on your state. Generally, the statute of limitations runs from the date of the breach, not the discovery date.
Hold on there, smart guy…
Verbal contracts (oral agreements) often have shorter limitation periods. One to three years is common for oral contracts.
The Real Cost Of Contract Disputes
Class action breach of contract settlements have already reached $560 million through August 2024. Keep in mind, this is the tip of the iceberg in terms of cost.
Contracts and business agreements are so critical to our economy and social functioning that the failure to enforce them would result in chaos.
Beyond the immediate financial impact, contract breaches cause hidden business costs. Business owners spend a ton of time trying to get others to live up to their promises instead of focusing on growing their business. Contract litigation almost always results in burned bridges with no future business.
Negotiation and mediation are almost always a cheaper and better course of action if both parties are willing. Many contract disputes can be worked out amicably.
Prevention Is Better Than Litigation
The best defense against breach of contract disputes is to prevent them from happening in the first place.
Here are some tips:
Clear, specific contracts help avoid disputes. Vague language in the contract can create issues.
Including dispute resolution clauses in contracts requiring mediation or arbitration before litigation may also help. Those processes are cheaper and quicker than going to court.
Documentation of everything. Keep records of all communications, deliveries, invoices and payments, as well as performance metrics.
Bottom Line
Breach of contract law is meant to protect contracting parties when an agreement is no longer being followed. Knowing your rights and legal remedies for different types of breaches allows you to respond effectively when these situations arise.
The key takeaways? Don’t wait until you have a contract dispute to understand your rights. Prevention, clear documentation, and acting quickly to resolve problems will save you time, money, and headaches.
If you are facing a breach of contract…
Contact experienced legal counsel right away. The statute of limitations clock is running and your window to recover damages will be much smaller than you might think.