When there is a contract, the parties are expected to fulfill its terms. If either party violates the terms, a breach of the contract occurs. Most people know that a breach of contract can cause professional, financial and/or personal problems, but many fail to recognize the opportunities it can present. A skilled commercial litigator can help you better figure out which situation you may have on your hands.
Businesses should understand all the aspects of a contract, including how it can be breached, and, perhaps most importantly, the repercussions of said breach. Generally, businesses should try to avoid a breach but, believe it or not, there are times when contracts SHOULD be breached. For example, if the terms have become detrimental to the party, antiquated, or irrelevant, breaching may put the party in a better position to achieve the contract’s purpose.
To attorneys that litigate contracts, fighting for or against them in court, the contract in and of itself may simply be a tool to use in negotiations of other issues, or it could be a means to an end. The point is that even the most carefully drafted contract has its strengths and weaknesses, but that all depends on the goals of the parties and the importance of the issues addressed by the contract at the time.
Types of Breaches:
There are three types of breaches: material, partial and anticipatory:
- A material breach gets to the heart of the contract. It is a violation of a term that would undermine the whole purpose of the contract if not fulfilled. A material breach is often enough to spur the damaged party not to fulfill their end of the agreement.
- A partial breach is a violation of a term, or part of a term, that is not severe enough to excuse performance by the damaged party. It can usually be remedied by a reduction in payment or some other adjustment to the contract.
- An anticipatory breach is a party’s definite refusal to fulfill its obligations under the contract, through actions or words that demonstrate the party’s intent to breach. This usually happens in the sale of goods, but can also apply to services.
Breaches of any type can happen for a multitude of reasons such as suspecting fraud, having agreed to the contract under duress, making mistakes on the subject matter of the contract, and/or noting that the statute of limitations expired.
There are several ways to remedy a breach of contract including an award of damages, specific performance, or rescission.
- Damages can either be compensatory or punitive. Compensatory damages are intended to make the injured party whole again, while punitive damages are intended to punish a wrongdoer who acted with malintent.
- In some cases, damages are not a sufficient remedy because of the particularity of the contract terms. The only thing that could make the situation better is for the court to require specific performance. For example: if there was a contract for a specific piece of rare art, the only remedy would be for the court to require the sale of that specific art to go through.
- Recission allows the non-breaching party to be released from performance of their obligations. This is usually allowed when the non-breaching party has contracted on the basis of a false statement, a mistake, or was subject to undue influence.
As a business owner, if the other party breaches a contract, your first instinct might be to litigate for one of the remedies described above. Instead, take a moment to think about your relationship with the other party and whether there are other business ventures in which you can leverage this breach. Maybe you do not actually want to litigate but you desire more lease space or want to change the terms of something unrelated to the terms that were breached. You now have an opportunity to leverage the breach to acquire what you want from the breaching party.
Additionally, there may be occasions when a contract needs to be breached. Perhaps the terms are antiquated or have become contrary to your interests. The other party may not want to go through the hassle of litigation and may be willing to revisit the unfavorable terms of the contract in order to avoid it altogether. Thinking beyond the contract terms or its original purpose, can turn a potentially negative situation into a positive pone. Further, when considering the contract and all of its nuances – ramification of its breach or its enforcement – that big picture view can lead to using it as a sword or a shield, depending on which approach best serves you at that moment.
Whenever a contract is at issue, it is wise to have an attorney analyze the situation to provide options for you to consider within the context of your business needs and goals. Consulting with a business law firm invested in the success of its clients and cognizant of business challenges may help.