What Happens When You Breach a Contract

Every contract carries the possibility of breach. Whether through intentional non-performance, inability to fulfill obligations, or simple oversight, parties sometimes fail to meet their contractual commitments. Understanding what happens when a contract is breached is essential for assessing risk, making business decisions, and knowing your options when problems arise.

What Constitutes a Breach

Failure to Perform

The most straightforward breach occurs when a party simply fails to do what the contract requires. This might be failing to deliver goods, not completing services, missing payment obligations, or not meeting quality standards specified in the agreement.

Material vs. Minor Breach

Not all breaches are equal. A material breach is a failure so significant that it substantially deprives the other party of the benefit of the contract. A minor breach is a failure that, while technically a violation, does not defeat the essential purpose of the agreement.

The distinction matters because material breach generally allows the non-breaching party to terminate the contract and seek damages, while minor breach may only entitle them to damages for the specific failure while the contract continues.

Anticipatory Breach

Sometimes a party indicates before performance is due that they will not fulfill their obligations. This anticipatory breach allows the other party to treat the contract as breached immediately rather than waiting for the actual failure to occur.

The Lawsuit Process

Initiating Legal Action

When informal resolution fails, the injured party may file a lawsuit for breach of contract. This typically involves filing a complaint describing the contract, the breach, and the damages sought. The defendant then has an opportunity to respond, and the case proceeds through discovery, potential motions, and ultimately trial if not settled.

Burden of Proof

The plaintiff in a breach of contract case must prove the existence of a valid contract, their own performance or excuse for non-performance, the defendant's breach, and damages resulting from the breach. This burden is typically by a preponderance of the evidence, meaning more likely than not.

Defenses to Breach

Defendants may raise various defenses including that no valid contract existed, the plaintiff also breached the agreement, performance was excused due to impossibility or frustration, the statute of limitations has expired, or the contract is unenforceable for reasons such as fraud or duress.

Types of Damages

Compensatory Damages

The primary remedy for breach of contract is compensatory damages designed to put the injured party in the position they would have been in had the contract been performed. This includes both direct damages flowing immediately from the breach and consequential damages resulting from special circumstances.

What Is Liquidated Damages

Many contracts include a liquidated damages clause specifying a predetermined amount payable upon breach. Courts will enforce such provisions if the amount is a reasonable estimate of anticipated harm and actual damages would be difficult to calculate. If the amount is excessive, courts may deem it an unenforceable penalty.

Liquidated Damages vs. Actual Damages

When a contract includes a valid liquidated damages clause, that amount typically represents the exclusive remedy for the specified breach. The injured party cannot recover more even if actual damages exceed the liquidated amount, but they also receive the stated sum even if actual damages are less.

Nominal Damages

When breach is proven but no actual loss resulted, courts may award nominal damages, a small sum recognizing the breach without significant compensation. This matters primarily for establishing that a breach occurred.

Punitive Damages

Unlike tort cases, punitive damages are generally not available for breach of contract. The law seeks to compensate for loss, not punish bad behavior. However, if the breach also constitutes an independent tort or fraud, punitive damages may be available for that separate claim.

Equitable Remedies

Specific Performance

In some cases, money damages are inadequate, and courts may order the breaching party to actually perform their contractual obligations. This remedy is typically available only when the subject matter is unique, such as real estate or rare goods, and money cannot provide adequate relief.

Injunctive Relief

Courts may issue injunctions preventing parties from taking certain actions that would breach the contract or cause irreparable harm. This is common in cases involving non-compete agreements or confidentiality obligations.

Rescission and Restitution

Rather than enforcing the contract, courts may rescind the agreement and order restitution to restore parties to their pre-contract positions. This remedy is typically available when breach is fundamental or the contract was induced by fraud or mistake.

Practical Consequences Beyond Legal Remedies

Relationship Damage

Beyond formal legal consequences, breach damages business relationships. Even if you ultimately prevail in any dispute, the relationship with the other party is likely irreparably harmed. This matters particularly in industries where reputation and ongoing relationships are important.

Credit and Reputation Effects

Breach can affect your credit rating and business reputation. Judgments appear in public records and may influence future business partners' willingness to work with you.

Cost of Litigation

Regardless of outcome, litigation is expensive. Attorney fees, expert witnesses, discovery costs, and the time spent on legal matters rather than business operations all impose significant burdens. Many parties settle disputes at a discount simply to avoid these costs.

Mitigation of Damages

The Duty to Mitigate

Injured parties have a duty to take reasonable steps to minimize their damages. You cannot simply allow losses to accumulate when reasonable action could reduce them. Failure to mitigate can reduce the damages you are entitled to recover.

Practical Implications

If a vendor fails to deliver, you should seek alternative sources rather than simply absorbing losses. If a tenant abandons a lease, the landlord should attempt to re-let the property. Documentation of mitigation efforts is important for proving damages.

Contract Provisions Affecting Breach Consequences

Liquidated Damages Clauses

As discussed, a liquidated damages clause can predetermine breach consequences. When reviewing contracts, pay attention to whether such clauses apply, whether the amounts are reasonable, and whether they are exclusive or in addition to other remedies.

Limitation of Liability

Many contracts cap the damages recoverable for breach. These provisions can significantly limit your recourse, potentially making breach economically rational for the other party if their liability is capped below the harm they cause.

Waiver of Consequential Damages

Contracts often exclude recovery of consequential damages, limiting recovery to direct damages only. Since consequential damages often represent the majority of real-world harm, these waivers substantially affect breach consequences.

Indemnification Provisions

Indemnification clauses can shift breach consequences from one party to another, particularly for third-party claims arising from the breach.

Alternatives to Litigation

Negotiation

Many breaches are resolved through direct negotiation between the parties. This approach preserves relationships, avoids litigation costs, and allows creative solutions that courts cannot order.

Mediation

Mediation involves a neutral third party helping the parties reach a voluntary resolution. While non-binding, mediation often succeeds in resolving disputes more efficiently than litigation.

Arbitration

Many contracts require disputes to be resolved through binding arbitration rather than litigation. Arbitration can be faster and less formal than court proceedings, but it also limits appeal rights and may favor repeat players who frequently appear before particular arbitrators.

Statute of Limitations

Time Limits on Claims

Breach of contract claims must be brought within the applicable statute of limitations, which varies by state and type of contract. Written contracts typically have longer limitation periods than oral agreements. Once the limitation period expires, the claim is barred regardless of its merits.

When the Clock Starts

The limitation period generally begins when the breach occurs, not when the injured party discovers it. However, some jurisdictions apply discovery rules for certain types of claims.

Preventing and Preparing for Breach

Due Diligence

Before entering contracts, evaluate the other party's ability and willingness to perform. Check references, review financial stability, and consider their reputation in the industry.

Clear Contract Terms

Ambiguous contracts lead to disputes. Clear, specific terms about obligations, timelines, and standards reduce the likelihood of breach and simplify resolution when problems arise.

Documentation

Maintain thorough documentation of contract performance. If disputes arise, contemporaneous records are far more persuasive than after-the-fact recollections.

Early Communication

When problems develop, early communication often prevents them from becoming breaches. Addressing issues before they escalate preserves relationships and reduces legal exposure.

Conclusion

Breach of contract triggers a range of consequences from compensatory damages to equitable remedies. Understanding these consequences helps you assess risk when entering contracts, make informed decisions when problems arise, and protect your interests when disputes develop.

The best approach to breach is prevention through careful contract drafting, proper due diligence, and early attention to problems. But when breach occurs, knowing your rights and options positions you to respond effectively, whether through negotiation, alternative dispute resolution, or litigation.

Contract provisions including liquidated damages clauses, liability limitations, and damage exclusions significantly affect what happens when breach occurs. Review these provisions carefully before signing, because they define the consequences you face and the remedies you can seek.