Breach of Contract and Lawsuits

Business contracts create obligations between two parties. One party has to do something, and the other agrees to pay for it. Small business owners make dozens of these contracts every day. If one party fails to act on the terms of the contract, they have "breached" the contract.

What happens when there is a breach of contract? What are the legal rights of both parties? Can the breaching party be legally in the right? This article reviews what goes into a breach of contract case and what your legal rights and options are if one occurs.

What Is a Breach of Contract?

A "breach" of the contract is one party's failure to fulfill any of its contractual obligations. There are three requirements for a breach:

• A valid contract,
• Performance by one party, and
• Damages suffered by the performing party.

If the breaching party:

• Fails to perform on time,
• Fails to perform at all, or
• Fails to perform according to the terms of the agreement.

That may not mean they have done anything to harm the other party. A breach must be a material breach for the injured party to have grounds for legal action.

For instance, suppose the contract called for Producer to deliver widgets to Store by Thursday afternoon. Producer had some shipping problems, and the widgets did not arrive at Store until Friday morning. Store had the widgets unloaded and ready for sale by the time they opened. Even though Producer breached the contract, Store may not have grounds for a breach of contract lawsuit because they suffered no financial loss.

Can I Sue for Breach of Contract?

You can sue for breach of contract whether you have suffered a minor breach or a serious breach. The terms of a contract may provide the remedy for a minor breach without needing a lawsuit. For instance, in the case of Producer and Store, Store might work with Producer to amend the contract to adjust delivery times and dates.

When a breach of contract occurs, one or both parties may wish to have the written contract enforced. This can include trying to recover damages caused by the breach.

Remedies for a Breach of Contract

When an individual or business breaches a contract, it harms the other party. They may sue for relief, or a remedy, under the law. The main remedies for a breach of contract are:

• Damages
• Specific Performance
• Cancellation and Restitution
• Damages

The written contract may specify damages, or they can be awarded by the court. A breach of contract claim may order specific damages by the contract's language. Types of damage include the following:

• Compensatory damages put the non-breaching party in the position they would have been in had the breach not occurred. Suppose Store needed the widgets for a big promotion, and Producer was a week late with the delivery. Store can receive compensatory damages for the money it would have made during the sale.
• Liquidated damages are damages the parties may have considered in the contract itself. They are usually damages that may be difficult to determine in advance but will cost the performing party. For instance, a construction contract may contain a liquidated damages clause that fines the contractor every day the project runs over the deadline for completion.
• Nominal damages are a small amount of damages awarded when an immaterial breach occurs. Nominal damages are a warning for inconveniencing the performing party.
• Punitive damages are payments to the breaching party for egregious or harmful acts against the non-breaching party. Punitive damages to punish the breaching party are rarely seen in contract cases.

Specific Performance

If the subject of the contract is unique or where no amount of money will make the non-breaching party whole, a court may order specific performance. Specific performance requires the breaching party to perform under the terms of the contract.

Specific performance is most often seen in real estate cases, since each piece of property is unique. Constitutional prohibitions against involuntary servitude prevent orders for specific performance for breach of service contracts.

Rescission and Restitution

A non-breaching party may cancel the contract and decide to sue for rescission if it appears that the contract is irreparably breached. Contract law allows either party to cancel a contract based on a material breach and ask the court to rescind the contract. This discharges all remaining obligations between the parties.

If the non-breaching party has benefited the breaching party, they may request restitution and cancellation. This restores them to their position before the breach and terminates the contract.

Dispute Resolution Alternatives

Depending on the nature of the legal issue, parties have options for resolving their problems. These are some of the most common:

• Mediation. The easiest form of alternative dispute resolution is mediation. In mediation, the parties and their attorneys sit down with a neutral third party and resolve their problems without involving the court.
• Arbitration. Arbitration is overseen by an administrative law judge, who issues a binding ruling on the contract dispute. Like mediation, the parties still have the opportunity to talk to one another and discuss alternatives to the case.
• Small claims court. For cases below a statutory amount that is usually less than $10,000, parties may go to court themselves and avoid hiring a contract lawyer. For small business owners, avoiding costly business litigation can be as important as winning breach of contract lawsuits.

Get Legal Help With Your Breach of Contract Dispute

In a breach of contract lawsuit, quite a bit may be at stake. It's important to understand every aspect of what's happening. Before proceeding with your business dispute, it's a good idea to consult an experienced small business attorney near you. Your business lawyer can explain your options in a breach of contract suit and help you achieve the best outcome possible.