Breach of contract: Understanding the basics

| Oct 10, 2019 | Business Law

Few businesses can operate effectively without relying on contracts. Maybe it’s a small one, such as a bi-weekly delivery of certain supplies. Or maybe the business requires multiple custom agreements with contractors and employees.

Either way, each contract is what ensures you, as a business owner, have what you need to be successful. What happens when someone fails to live up to that agreement?

Breach of contract

Breach of contract is the legal way of saying someone did not hold up their end of the deal. There are a few different ways a party can breach a contract, but two common ones are important to understand: a material breach vs. a minor breach.

A material breach is essentially more serious. It occurs when one party outright fails to perform part of the contract, or delivers something significantly different than what the contract called for. If you agreed to pay $10,000 to a digital media company for a working website, for example, and the site never went live or did not include any relevant content, that could be a material breach.

For a breach to be minor, the party must have delivered on most aspects of the contract, but failed to perform in a small way. Using the same example from above, if the digital media company created the website and everything functioned as it should, but accidentally did not include a specific page you’d asked for, that would potentially be a minor breach.

Why it matters

To determine whether a breach is material or minor, courts consider a variety of factors, including:

  • How much of the contract was fulfilled
  • Whether the breach was willful or accidental
  • How much the non-breaching party benefited
  • How much hardship it will cause the breaching party

There is another important distinction. If a breach is minor, the non-breaching party still has to uphold their end of the deal and provide the agreed-upon compensation. However, that party can still recover damages directly tied to the breach, if they can show it resulted in a loss.

If a breach is material, the non-breaching party is generally not obligated to fulfill their part of the deal, and has a right to remedies. That could include both direct and indirect damages.

A breach of contract can be resolved in a few ways. The parties may come to agreeable terms on their own, for example, or as part of dispute resolution facilitated by attorneys. They may also agree to arbitration. In some cases however, it might require going to court.