Breach of Contract
In a perfect world, agreements would be entered into, both sides would benefit and be pleased with the outcome, and no disputes would arise. But in the real world of business, delays happen, financial problems can crop up, and other unexpected events can occur to hinder or even prevent a successful contract from being carried out.
What is a Breach of Contract?
A business contract creates certain obligations that are to be fulfilled by the parties who entered into the agreement. Legally, one party's failure to fulfill any of its contractual obligations is known as a "breach" of the contract. Depending on the specifics, a breach can occur when a party fails to perform on time, does not perform in accordance with the terms of the agreement, or does not perform at all. Accordingly, a breach of contract will usually be categorized as either "material" or "immaterial" for purposes of determining the appropriate legal "remedy" .
Let's assume that Abel contracts with Cain for the purchase of some of its sugar products, for delivery by the following Monday evening. If Cain delivers the sugar to Abel on the following Tuesday morning, such a breach of the contract would likely be deemed immaterial, and Abel likely not be entitled to money damages (unless he could show that he was somehow damaged by the late delivery).
However, assume now that the contract stated clearly and explicitly that "time is of the essence" and the sugar MUST be delivered on Monday. If Cain delivers after Monday, its breach of contract and the late delivery would likely be deemed "material. "
What Happens After a Contract is Breached?
When a breach of contract occurs or is alleged, one or both of the parties may wish to have the contract enforced on its terms, or may try to recover for any financial harm caused by the alleged breach.
If a dispute over a contract arises and informal attempts at resolution fail, one legal next step is to file a lawsuit . If the amount at issue is below a certain dollar figure (usually $5,000 or less in Iowa), the parties may be able to resolve the issue in small claims court.
Courts and formal lawsuits are not the only option for people and businesses involved in disputes. The parties can agree to have a mediator review a contract dispute, or may agree to binding arbitration of a contract dispute. These out-of-court options are two methods of alternative dispute resolutions, (such as arbitration).
Remedies for a Breach of Contract
When an individual or business breaches a contract, the other party to the agreement is entitled to relief (or a "remedy") under the law. The main remedies for a breach of contract are:
- Specific Performance, or
- Cancellation and Restitution
The payment of money for damages -- payment in one form or another -- is the most common remedy for a breach of contract. There are many kinds of damages, including the following:
- Compensatory damages aim to put the non-breaching party in the position that they had been if the breach had not occurred.
- Punitive damages are payments that the breaching party must make, above and beyond the point that would fully compensate the non-breaching party. Punitive damages are meant to punish a wrongful party for particularly wrongful acts, and are rarely awarded in the business contracts setting.
- Nominal damages are token damages awarded when a breach occurred, but no actual money loss to the non-breaching party was proven.
- Liquidated damages are specific damages that were previously identified by the parties in the contract itself, in the event that the contract is breached. Liquidated damages should be a reasonable estimate of actual damages that might result from a breach.
If damages are inadequate as a legal remedy, the non-breaching party may seek an alternative remedy called specific performance. Specific performance is best described as the breaching party's court-ordered performance of duty under the contract. Specific performance may be used as a remedy for breach of contract if the subject matter of the agreement is rare or unique, and damages would not suffice to place the non-breaching party in as good a position as they would have been had the breach not occurred.
Cancellation and Restitution
A non-breaching party may cancel the contract and sue for restitution if the non-breaching party has given a benefit to the breaching party. "Restitution" as a contract remedy means that the non-breaching party is put back in the position it was in prior to the breach, while "cancellation" of the contract voids the contract and relieves all parties of any obligation under the agreement.