What Happens If Someone Breaks a Contract?

Contract breaches are costly business realities that can destroy relationships, trigger expensive lawsuits, and derail important projects. Understanding how to prevent, identify, and respond to contract breaches is essential for protecting your business and personal interests. Whether you're the victim of a breach or accused of one, knowing your rights and remedies can save you thousands in legal fees and damages.

What is a Breach of Contract?

A breach of contract occurs when one party fails to fulfill any obligation specified in a legally binding agreement. This can involve failing to deliver goods, missing deadlines, not paying on time, or performing work below agreed standards. Even minor deviations from contract terms can constitute a breach, though the severity determines available remedies.

Types of Contract Breaches

Material Breach (Major Breach)

A material breach is a significant failure that defeats the contract's essential purpose. It's so substantial that it:

• Deprives the non-breaching party of the benefit they reasonably expected
• Goes to the essence of the contract
• Defeats the object of the contract
• Is so serious that it would be unfair to require the other party to continue

Example: A contractor builds a house with a foundation that doesn't meet building codes, making the house uninhabitable.

Minor Breach (Partial Breach)

A minor breach involves a party failing to perform some aspect of the contract but not destroying the agreement's fundamental purpose:

• The non-breaching party still receives substantial benefit from the contract
• The breach can typically be remedied with monetary compensation
• The contract's main purpose is still achievable
• Performance obligations continue for both parties

Example: A contractor finishes a renovation project two weeks late but completes all work to specification.

Anticipatory Breach

An anticipatory breach occurs when one party indicates they won't fulfill their contractual obligations before performance is due:

• Clear statement of intent not to perform
• Actions that make performance impossible
• Allows the non-breaching party to treat the contract as breached immediately
• Enables immediate legal action without waiting for the due date

Example: A supplier emails that they won't deliver ordered materials due next month.

Fundamental Breach

A fundamental breach is so serious that it goes to the root of the contract and destroys the entire agreement:

• Completely defeats the contract's purpose
• Shows willful disregard for contractual obligations
• Justifies immediate contract termination
• May void all future obligations

Legal Remedies for Contract Breach

1. Compensatory Damages

The most common remedy, designed to put the non-breaching party in the position they would have been in if the contract had been performed:

• Direct Damages: Immediate losses flowing directly from the breach
• Consequential Damages: Indirect losses that were foreseeable at contract formation
• Incidental Damages: Costs incurred trying to minimize losses from the breach

2. Specific Performance

A court order requiring the breaching party to fulfill their exact contractual obligations:

• Typically used when monetary damages are inadequate
• Common in real estate transactions (land is unique)
• Not available for personal services contracts
• Requires clear, definite contract terms

3. Rescission and Restitution

Cancellation of the contract and return of any benefits received:

• Returns both parties to their pre-contract position
• Appropriate when performance becomes impossible or illegal
• Requires return of money, goods, or services already exchanged
• Often combined with restitution to prevent unjust enrichment

4. Reformation

Court modification of contract terms to reflect the parties' true intentions:

• Used when contract doesn't accurately reflect the agreement
• Corrects mistakes in drafting or interpretation
• Requires clear evidence of the intended terms
• Not available to rescue bad bargains

5. Liquidated Damages

Pre-determined damages specified in the contract for specific breaches:

• Must be reasonable estimate of actual damages
• Cannot be punitive (penalty clauses are unenforceable)
• Provides certainty and avoids costly damage calculations
• Common in construction and time-sensitive contracts

Defenses to Breach of Contract Claims

Impossibility

Performance becomes objectively impossible due to unforeseen circumstances:

• Death or incapacity of someone whose personal performance is required
• Destruction of subject matter essential to performance
• Government regulation making performance illegal
• Act of God or natural disaster

Frustration of Purpose

The contract's fundamental purpose is destroyed by unforeseen events:

• Performance is still possible but pointless
• Purpose must have been known to both parties
• Event must have been unforeseeable
• Neither party caused the frustrating event

Waiver

The non-breaching party voluntarily gave up their right to claim breach:

• Can be express (written/verbal) or implied (conduct)
• Accepting late performance may waive timing requirements
• Continuing performance despite known breach
• Must be clear and unambiguous

Statute of Limitations

Legal action must be brought within specified time limits:

• Typically 3-6 years for written contracts
• Usually 1-3 years for oral contracts
• Varies by state and contract type
• Time starts when breach is discovered or should have been discovered

How to Respond to a Contract Breach

Step 1: Document Everything

• Gather all contract documents and communications
• Document the specific breach with dates and details
• Calculate actual damages and losses
• Preserve evidence before it's lost or destroyed

Step 2: Review Contract Terms

• Check for notice requirements
• Look for cure periods or grace periods
• Identify dispute resolution procedures
• Review remedies and damages clauses

Step 3: Provide Formal Notice

• Send written notice specifying the breach
• Include opportunity to cure if required by contract
• Set clear deadlines for response or correction
• Send via certified mail or email with read receipt

Step 4: Attempt Resolution

• Try direct negotiation before litigation
• Consider mediation for faster, cheaper resolution
• Explore modification of terms if appropriate
• Document all settlement discussions

Preventing Contract Breaches

Clear Contract Drafting

• Define all terms precisely and avoid ambiguity
• Include detailed performance specifications
• Set clear deadlines and milestones
• Specify consequences for non-performance

Include Protection Clauses

• Force Majeure: Excuses performance during extraordinary events
• Notice Requirements: Formal procedures for communications
• Cure Periods: Time to fix breaches before termination
• Liquidated Damages: Pre-determined compensation for specific breaches

Regular Contract Management

• Monitor performance milestones closely
• Maintain regular communication with contracting parties
• Address issues early before they become breaches
• Keep detailed records of all performance

Cost of Contract Breaches

Contract breaches are expensive for all parties involved:

• Litigation Costs: $50,000-$500,000+ for complex commercial disputes
• Opportunity Costs: Lost business during dispute resolution
• Relationship Damage: Destroyed business partnerships
• Reputation Harm: Public disputes damage credibility
• Time Investment: Years of management attention diverted
• Emotional Stress: Personal toll on business owners

When to Seek Legal Help

Consider hiring an attorney when:

• Contract value exceeds $50,000
• The breach threatens your business operations
• Multiple complex issues are involved
• The other party is represented by counsel
• Criminal activity may be involved
• Interpretation of complex contract terms is required

Protect Your Contracts and Business

Well-drafted contracts with clear terms and built-in protections are your first line of defense against costly breaches.