Breach of Contract

Remedies
of Breach
of Contract
What is a breach of Contract?
A breach of contract is a violation of any of the agreed-
upon terms and conditions of a binding contract. The
breach could be anything from a late payment to a
more serious violation, such as the failure to deliver a
promised asset.
A contract is binding and will hold weight if taken to

court. If it can be proved that a contract was breached,
the remedy would generally be to give the victim what
they were initially promised. A breach of contract is not
considered a crime or even a tort, and punitive
damages are rarely awarded for failing to perform
promised obligations.
Understanding a Breach of
Contract
A breach of contract is when one party breaks the terms of an
agreement between two or more parties. This includes when an
obligation that is stated in the contract is not completed on time—for
example, you are late with a rent payment—or when it is not fulfilled
at all, such as a tenant vacating their apartment owing six months’
back rent.
Sometimes the process for dealing with a breach of contract is

written in the original contract. For example, a contract may state
that, in the event of late payment, the offender must pay a $25 fee
along with the missed payment. If the consequences for a specific
violation are not included in the contract, then the parties involved
may settle the situation among themselves, which could lead to a
new contract, adjudication, or another type of resolution.
Types of Contract Breaches
Minor breach: A minor breach happens when you don’t receive an
item or service by the due date. For example, you bring a suit to your
tailor to be custom fit. The tailor promises (an oral contract) that they
will deliver the adjusted garment in time for your important
presentation but, in fact, they deliver it a day later.
Material breach: A material breach is when you receive something
different from what was stated in the agreement. Say, for example,
that your firm contracts with a vendor to deliver 200 copies of a bound
manual for an auto industry conference. But when the boxes arrive at
the conference site, they contain gardening brochures instead.
Further, a breach of contract generally falls under one of two

categories:
Actual breach: When one party refuses to fully perform the terms of
the contract.
Anticipatory breach: When a party states in advance that they will
not be delivering on the terms of the contract.
Legal Issues Concerning a
Breach of Contract
A plaintiff, the person who brings a lawsuit to court

claiming that there has been a breach of contract,
must first establish that a contract existed between
the parties. The plaintiff also must demonstrate how
the defendant—the one against whom a claim or
charge is brought in a court—failed to meet the
requirements of the contract.
Is the Contract Valid?
The simplest way to prove that a contract exists is to have a
written document that is signed by both parties. It’s also
possible to enforce an oral contract, though certain types of
agreements still would require a written contract to carry
any legal weight. These kinds of contracts include the sale
of goods for more than $500, the sale or transfer of land,
and contracts that remain in effect for more than one year
after the date when the parties sign the agreement.
Courts will review the responsibilities of each party of the

contract to determine whether they have fulfilled their
obligations. Courts also will examine the contract to see if it
contains any modifications that could have triggered the
alleged breach. Typically, the plaintiff must notify a
defendant that they are in breach of contract before
advancing to legal proceedings.
Possible Reasons for the Breach
The court will assess whether or not there was a
legal reason for the breach. For example, the
defendant might claim that the contract was
fraudulent because the plaintiff either
misrepresented or concealed material facts.
The defendant could alternatively argue that the

contract was signed under duress, adding that
the plaintiff compelled them to sign the
agreement by applying threats or using physical
force. In other cases, there might have been
errors made by both the plaintiff and the
defendant that contributed to the breach.
How to Avoid a Breach of Contract
Clarity: The language of the contract should be clear and
precise. If the other party is not a native speaker of the language
the contract is in, it may be worthwhile to hire an interpreter to
ensure that everyone understands their roles and expectations
under the contract.
Expectations: You and any other parties signing the contract
should understand the expectations it outlines and already
know that you are able to fulfill them. Your ability to meet those
expectations should not rely on future amendments because
those may not happen.
Legality: In order to be binding, your contract needs to be legal
where it is signed. If you are not sure, work with a lawyer who
specializes in contract law before anyone commits to signing.
Damages and Legal Remedies
Generally speaking, the goal of contract law is to ensure that anyone who is
wronged is basically left in the same economic position that they would have been
in had no breach occurred. A breach of contract is not considered a crime or even
a tort, and punitive damages are rarely awarded for failing to perform promised
obligations, with payouts limited to the figures listed in the contract.
For example, if you completed a job for which a contract stated you would get paid
$50,000, but you only got $20,000, you could be awarded damages of $30,000.
However, the doctrine of reliance damages does offer some exceptions in very
specific circumstances. Additional monetary damages may be awarded if it can be
proved that a reliance on the contract being fulfilled triggered other connected
expenses, such as lifeguard equipment being bought based on the assumption
laid out in the contract that a pool would be built.2
In such cases, those harmed will be rewarded extra damages only if they did their
best to get themselves out of that unfavorable situation—such as, in the example
above, by selling the lifeguard equipment.
Economics of a Breach of Contract
Economically, the costs and benefits of upholding a contract or

breaching it determine whether either or both parties have an
economic incentive to breach the contract. If the net expected cost to
a party of breaching a contract is less than the expected cost of
fulfilling it, then that party has an economic incentive to breach the
contract. Conversely, if the cost of fulfilling the contract is less than
the cost of breaking it, it makes sense to respect it.
Furthermore, when the expected cost to each party of following

through with a contract is greater than the expected benefit, both
parties have an incentive to forgo the transaction in the first place or
mutually agree to void the contract. This may occur when relevant
market or other conditions change over the course of the contract.
Example of a Mutually Beneficial Breach of Contract
A farmer agrees in the spring to sell grapes to a winery in the fall, but over the
summer, the price of grape jelly rises and the price of wine falls. The winery
can no longer afford to take the grapes at the agreed price, and the grape
farmer could receive a higher price by selling to a jelly factory. In this case, it
may be in the interest of both the farmer and the winery to breach the contract.
If the parties were to uphold the contract, the farmer would miss out on an
opportunity to sell at higher prices and the winemaker would suffer by paying
more than it can afford to, given what it would receive for the resulting wine at
the new market price. Consumers would also be punished; the change in
relative prices for grape jelly and wine signal that consumers want more jelly
and less wine.
Economists recognize that upholding this contract (making more wine and
less jelly, contrary to consumer demand) would be economically inefficient for
society as a whole. Breaching this contract, therefore, would be in the
interests of everyone: the farmer, the winemaker, the jelly maker, and the
consumers.
Societal Effects of Breach
of Contract
It could also be the case that a breach of contract is in the
interest of society as a whole, even if it may not be favorable to
all of the parties in the contract. If the total net cost of breaching
a contract to all parties is less than the net cost to all parties of
upholding the contract, then it can be economically efficient to
breach the contract, even if that results in one (or more) parties
to the contract being harmed and left worse off economically.
This is an example of what economists call Kaldor-Hicks

Efficiency: If the gains to the winner from breaching the contract
outweigh the losses to the loser, then society as a whole can be
made better off by breaching the contract.
key takeaways
A breach of contract occurs when one party in a
binding agreement fails to deliver according to
the terms of the agreement.
A breach of contract can happen in both a
written contract and an oral contract.
The parties involved in a breach of contract may
resolve the issue among themselves or in a
court of law.
There are different types of contract breaches,
including a minor or material breach and an
actual or anticipatory breach.
A breach of contract is not considered a crime
or even tort and rarely results in extra monetary
compensation.

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Remedies

A contract is binding and will hold weight if taken to

Sometimes the process for dealing with a breach of contract is

Further, a breach of contract generally falls under one of two

A plaintiff, the person who brings a lawsuit to court

Courts will review the responsibilities of each party of the

The defendant could alternatively argue that the

Economically, the costs and benefits of upholding a contract or

Furthermore, when the expected cost to each party of following

This is an example of what economists call Kaldor-Hicks

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