Whether it involves contractors, vendors, suppliers or employees, a broken agreement can be costly and frustrating. You may simply lose the benefit of your bargain, which is serious enough. Depending on the situation, though, a breach of contract could threaten your business operations or even put the public at risk. What are your options?
What constitutes a breach of contract?
A breach of contract is when one party fails to fulfill its contractual obligations to the other:
- Fails to perform on time when time is of the essence
- Fails to perform as the terms of the contract require
- Fails to perform at all/does not pay
When should you take action after a breach of contract?
Not every deviation from the contract is considered a breach, and not every small breach should be acted upon. As is always the case, the parties should be reasonable. However, breaches that go to the essence of the contract are called “material breaches,” and these should be addressed with the other party right away.
If another party has materially breached the contract, your first step should be to consult the contract. It may contain provisions for how breaches are to be handled. For example, the contract may require the parties to attempt mediation, arbitration or another alternative dispute resolution method before resorting to litigation. Or, the contract may specify that disputes are to be resolved using the courts and law of a certain state.
What remedies are available after a breach of contract?
Depending on the terms of the contract, the non-breaching or innocent party may get to choose which of three basic remedies it prefers:
- Compensation for losses (damages)
- Specific performance
- Cancellation and restitution
The most common remedy is damages. These are intended to put the innocent party in the position it would have been had the contract been performed as agreed, including any profits that were lost through the breach. Punitive damages can sometimes be ordered to punish serious wrongdoing, or nominal damages may be granted as a token payment when the actual damage was minimal. Sometimes an estimated amount of damages was agreed to in the contract. That estimate is called “liquidated damages.”
When damages are insufficient, courts have the power to order the breaching party to fulfill its end of the bargain. This is called “specific performance.”
Finally, the innocent party may want to cancel the contract. This is meant to put the innocent party back into the position it would have been in had the contract never been signed. Any payments are returned, minus reasonable costs for work already performed.
An experienced business litigator can help resolve your breach of contract claim through negotiation, alternative dispute resolution or litigation.