We’d all prefer it if everything in business was ideal. Yes, if every time you entered into a business agreement everything proceeded as both parties intended, life would be great. But in reality, that’s not how life or business works. Things go wrong. There are delays, finances come up short, things out of anybody’s control occur and prevent all kinds of plans from moving forward. Savvy business owners understand this comes with the territory of working with other people and prepare for it by understanding their legal options when a less-than-ideal situation causes the breach of a business contract to occur. Let’s take a few minutes to look at a few of those options now, starting with understanding what a breach of contract actually is.
How a Breach of Contract Occurs
To put it in very simple terms, a business contract is an agreement between two parties to “fulfill” specific obligations. The way the law sees it is this: if one of the parties who signed a contract fails to fulfill the obligations they agreed to, a breach occurs. Now the specifics of this failure depend on the contract itself, but typically it involves things like failing to perform on time, no performing in accordance with agreed terms, or simply failing to perform at all. When it comes to the law, such breaches are classified as either “material” or “immaterial,” which in turn determines what kind of “remedy” is legally appropriate in response to the breach.
The difference between material and immaterial can be best understood through a quick example. Company A agrees to deliver a product to Company B by 5:00PM Tuesday. They instead arrive at 8:00AM Wednesday. A court will be highly likely to determine such a breach immaterial and award no remedy to Company B (unless they could prove lost profits – something not so easy to do). However, if the language of the contract had been very clear about the importance of the timeliness of the delivery, a court will be far more likely to find the breach material and thus rule for a remedy in Company B’s favor, likely that Company B would not owe Company A for the delivery.
What You Should Do After a Breach Occurs
When it appears that a breach allegedly happens, one or more parties involved in the contract may opt to have its terms enforced or recover financial losses incurred due to this breach. The first recourse before getting a court involved is usually some personal discussion of possible recourse. If such discussions do not remedy the situation, the most common method to resolve such a dispute would be through a lawsuit over breach of contract using the US court system. There are a few options depending on the state whose laws govern the contract and the value of losses incurred. If they are small enough and in the right state, a small claims court may be used to resolve the issue (this is typically for amounts under $7,500).
Though lawsuits are the most common method to pursue a legal remedy for a breach of contract, other less formal options do exist such as mediation and arbitration. These alternative dispute resolution methods are used outside of the courtroom though typically with a legally qualified mediator or arbitrator to lead the proceedings.
Though there are several ways things may proceed after a material breach occurs, the end result is that the parties who did not breach the contract will likely be entitled to some kind of legal remedy.
Possible Legal Remedies When a Breach Occurs
The law says that when one party breaches a contract, the other parties shall be entitled to a form of remedy or relief. Remedies for contract breach fall into three categories: damages, specific performance, and cancellation/restitution.
This is the most common form of remedy when a breach occurs. A remedy of damages usually results in a payment of some type due to the non-breaching party and paid by the party that breached the contract. The types of damages under the law are numerous and pertain to a contract’s specifics and the type of breach that occurred.
Nominal Damages: this type of remedy is basically a token award when a breach does occur, yet no monetary loss occurred because of it.
Punitive Damages: any punitive damages awarded result in payment over and beyond what would be due the non-breaching party if the contract was held. This type of extra payment is intended as punishment by the court for clear wrong doing and thus is rarely awarded except in cases with particularly wrongful actions.
Compensatory Damages: this would be damages awarded to the non-breaching party in order to secure their position as if the breach had never occurred.
Liquidated Damages: this would refer to any pre-identified damages that were included in the contract between the parties. Such damages attempt to be reasonable in terms of what sort of damages would actually result from the occurrence of a breach.
Cancellation & Restitution: In the even that a breach occurs, the non-breaching parties may actually cancel the contract and sue for restitution of any losses they incurred because of entering into the contract. In other words, to restore the party to the position they were in before a breach. Furthermore, both parties are also relieved of all other obligations of their contract.
Specific Performance: in the event that damages fail to be adequate as a remedy for a breach, non-breaching parties may also seek a separate remedy known as specific performance. This is best understood as having the court order the breaching party to follow the terms of the contact. This is only used in rare or unique circumstances where damages simply fail to suffice as a remedy for a breach of the contract.
Still Have Questions?
There’s a lot that goes into a business contract. If you have reason to believe you are in breach or are contracted with a party who is currently in breach of contract and you have more questions, please give the Law Offices of Yoel Molina a call. Yoel Molina has the experience, dedication, and knowledge to help you secure the best possible outcome, so give our offices a call today.