What are the consequences of a breach of contract?
What type of contractual breaches are there and what happens next?
What are the possible remedies to a breach of contract?
Let’s get started!
What is a breach of contract?
A breach of contract is when a contracting party fails to respect the terms and conditions agreed upon in a contract.
When a party fails to respect the contract, we generally say that the party has “breached” the contract.
A breach of contract means that the contract has been broken by a party due to their failure to fulfil their contractual obligations.
Quite often, the breach of contract leads to a party suffering damages or injuries as a result of the breach.
The consequences may be that the non-breaching party terminates the contract and files a lawsuit to seek legal remedies.
To better understand the potential consequences of a breach of contract, let’s first look at the type of contractual breaches.
What types of breaches of contract are there?
There are different types of contractual breach:
- Material breach of contract
- Fundamental breach of contract
- Anticipatory breach of contract
Let’s look at each.
Material breach of contract
A material breach is the type of breach that is the most serious among the three types.
A material breach is a breach of a contractual party’s obligations such as a failure to perform a service, acts of negligence or other important failures.
Fundamental breach of contract
A fundamental breach is another type of contractual breach where the non-breaching party can terminate the contract and claim damages.
A fundamental breach is a type of breach that is of certain gravity beyond than breaching conditions of a contract.
A fundamental breach may not be possible in certain jurisdictions.
For example, in Canada, the Supreme Court of Canada, in the case Tercon Contractors Ltd v. British Columbia (Transportation and Highways) adopted a three-step test to evaluate the breach instead of the notion of a fundamental breach.
Anticipatory breach of contract
An anticipatory breach is when a party is unable to fulfill their contractual obligations and such breach is evident.
When a person has no competency to fulfill their duties and it is clear that they are struggling to perform their obligations, that’s when you have an anticipatory breach.
What happens after a breach of contract?
When a breach of contract occurs, depending on the nature of the breach, the breaching party may be considered to be in default of its obligations enabling the non-breaching party to terminate the contract.
An event of default is generally an event either contractually defined by the parties or an undefined event resulting in a party being unable to fulfill its contractual obligations.
In some cases, the default event can be so important and material that results in damages to the other party and allowing the other party a clear right to terminate the contract.
On the other hand, there are instances where a party breaches continually and persistently.
Each event of default is not material or important if of itself but when considered globally, it is clear that a party has failed in adequately performing its contractual obligations.
What are the consequences of a breach of contract?
The most obvious consequence of a breach of contract is the non-breaching party suffers damages or injury due to the actions or omissions of the breaching party.
The legal consequences of a breach of contract will depend on several factors:
- Terms and conditions of the contract
- Type of contract
- Law applicable to the contract
Terms and conditions of the contract
Fundamentally, contracts are signed by individuals and businesses to protect themselves against a potential breach.
The parties will mutually agree to legally commit themselves to the terms and conditions of a binding contract.
In a commercial context, businesses have the flexibility to enter into contracts that they have adequately considered the pros and cons.
As such, they will be held accountable for a breach of the contractual terms.
Generally, a contract will provide for:
- The technical specifications of the obligations
- The legal framework applicable to the contract
- Financial aspects of the contract
The actual terms of the contract can directly stipulate the consequences of a breach of contract.
For example, a contract can provide for a penalty clause or liquidated damages.
If that’s the case, in the event of a breach, the breaching party will be held legally accountable to pay the penalty or liquidated damages as required in the contract.
The legal treatment of a penalty clause and liquidated damages may not be the same in every jurisdiction but what’s important to note is that the parties have mutually agreed to the financial consequences of a breach.
Type of contract
The type of contract can also have an impact on the consequences of a breach.
For example, if a person has entered into a contract of adhesion, in many jurisdictions, the court may cancel abusive clauses or even the entire contract if the obligations are disproportionate.
A contract of adhesion is a contract where one party dictates the terms and conditions to the other who does not have any meaningful ability to negotiate its terms.
Also, a consumer contract will not be treated the same way as a commercial contract.
A consumer is protected by law and will benefit from much greater protection when a merchant breaches the contract.
Law applicable to the contract
The governing law is significant in determining the actual consequences of a breach of contract.
The same contract, between the same people, with the event of default giving rise to a breach, can be handled one way in one jurisdiction and another way in another jurisdiction.
For example, in the United States, the state of Florida has a statute of limitations of 5 years for most breach of contract claims while in other jurisdictions like in Quebec, Canada, the statute of limitations is 3 years.
A party filing a lawsuit on the fourth year in Quebec will be time-barred while the same person in Flordia can file a lawsuit for damages within the statute of limitations time period.
As a result, depending on the governing law, the consequences on a party’s rights and recourses may be different.
Suing for breach of contract
When a party suffers damages as a result of a contracting party’s breach of contractual obligations, the non-breaching party has the ability to sue for damages or seek legal relief.
Depending on the gravity of the breach, the potential damages caused and the parties’ ability to settle their dispute through good faith negotiations, a party suffering damages may choose to file a lawsuit or not.
In practice, it’s not an enviable position to be in to suffer damages and to have to spend money and pursue the matter in court.
To avoid costly litigation, the parties have an incentive to negotiate and reach a mutually satisfying resolution of the incident.
Negotiations cannot last eternally either.
If there are no possibilities of amicable resolution, then filing a lawsuit becomes the possible path forward to seek compensation.
What’s important when suing for breach of contract is to remember that depending on your jurisdiction and law applicable to your contract, you have a certain time period available to you to sue the other party.
This is commonly referred to as the statute of limitations.
For example, in some jurisdictions, the party suffering damages has up to three years to sue the other party from the day the injury or damage was suffered.
If a party does not act within three years, their legal recourse will expire.
What are the remedies for breach of contract?
A breach of contract will allow the non-breaching party to claim damages or some form of performance.
Let’s look at some of the remedies a party may claim from another resulting from a breach of contract.
The most common form of remedy for breach of contract is the award of monetary damages.
Monetary damages represent an amount determined by the court allowing the compensation of the damages suffered by the non-breaching party.
Monetary damages can include any of the following types of awards:
- Compensatory damages
- Liquidated damages
- Punitive damages
Compensatory damages are intended to compensate the non-breaching party for the actual damages suffered.
In other words, if a person has suffered a loss of $10,000, the compensatory damages will entitle the person to $10,000 to compensate for the damages.
Liquidated damages are contractually negotiated damages where a party can claim liquidated damages without having to prove the actual damage suffered.
Each jurisdiction will have its own rules governing liquidated damages.
Punitive damages are damages awarded by the court, over and above the amount necessary to compensate the non-breaching party.
The goal is to actually punish the breaching party’s behaviour or conduct by imposing punitive damages.
The specific performance is when a party does not care as much for getting a monetary award but demands that the obligations be performed as originally intended.
In other words, the party breaching the contract must do what he or she had promised to do.
Often, specific performance will be the preferred remedy when the parties transacted on a specific item or property.
For example, imagine a person who bought a rare painting but the seller refused to deliver it.
Seeking the performance of the contract is to demand that the seller deliver the painting.
Reduction of price
A possible remedy to a breach of contract is to demand the reduction of the contract price.
If you agreed to pay someone $10,000 to paint your house and they breached the contract terms, you can choose to demand a reduction in the price instead.
Another remedy to a breach is claiming interest charges for the delays in the fulfillment of the breaching party’s contractual obligations.
The restitution is a type of remedy where the party suffering damages demands that the parties be put back to their original state.
In other words, give me back my money and take back your stuff.
The goal is to undo the contract and return any money or property that was exchanged.
Rescission is a type of remedy applicable to instances when a person is invoking the cancellation or nullification of the contract.
If due to misrepresentation or fraud, a person entered into a contract, the remedy will be to rescind the contract.
That’s when the law considers that the contract never existed and the non-breaching party must be made whole again.
Reformation is less common but can be possible.
Reformation is when the court modifies or alters elements of the contract to correct inequalities or disproportionate obligations.
Frequently asked questions
Is it a crime to breach a contract?
Generally, breaching a contract is not a crime as defined under criminal statutes.
A contract is a civil transaction entered into by private individuals.
However, a contract can lead to criminal accusations.
For example, contracts entered into due to fraudulent acts, force, threat, bodily harm, ransom or other criminal acts as defined by criminal laws will lead to criminal accusations.
What happens when both parties breach a contract?
It’s possible that both parties breach their contract.
The court will evaluate the overall context of the obligations between the parties, the damages suffered by both parties, the attribution of responsibility and the property compensation or remedy to each.
It may be that one party breached the contract to a different degree than another.
If a party suffers a loss due to the breach of another contracting party, generally, the party suffering damages can demand compensation.
However, if the party entitled to compensation has also caused damages to the other party, the other party can expect to receive compensation as well.
This is when the courts need to allocate responsibility to each party and determine who may be entitled to compensation.
For example, if a party suffers $50,000 of damages and causes $50,000 of damages to the other party, technically, although both parties have breached the contract, the parties will not end up getting anything.
In practice, the amounts are not that clear cut and the parties may not necessarily ask for monetary damages.
Depending on the breach, even if each party was responsible for 50% of the damages caused, a party may get condemned to pay punitive damages resulting in one party getting compensation and the other party getting no compensation.
What is the effect of a breach of warranty?
Often, when a company or contracting party offers a warranty on products or services, the client must respect certain contractual terms and conditions to benefit from the warranty.
If the terms and conditions are violated, then the warranty may be voided.
Typically, the contract will state what is covered by the warranty and what events can lead to the voiding of the warranty.
Another factor to consider is the type of contract and governing law.
For example, if you have a consumer contract, a merchant cannot easily void a warranty as certain warranties will be required by law.
The minimum extent and scope of the warranty must be observed.