What is a Breach of Contract | ContractWorks

Simple in theory, breach of contract is a concept that can seem almost infinitely complex in reality — the source of unending lawsuits and the basis for an entire subset of contract law. But what is breach of contract, exactly, and why is it an increasingly important part of basic business strategy?Technically, a breach of contract is when a party fails to meet any or all of the obligations outlined in a binding agreement with one or more other parties, or when it impedes another party from doing so. The contract can be written or oral, and the parties can be individuals, businesses, government entities, or virtually any other type of group or organization.
 
Breaches can be as clear-cut as failing to finish a job, deliver a product, or meet a timeframe. But they’re often much more complex, involving misinterpretations of contract language, unanticipated contingencies (like supply chain issues), or the failure to properly define important terms. Breaches are rarely considered to be criminal acts, but rather a common legal procedure between private parties.
 
Let’s take a closer look at the different types of breach of contract, their consequences, and a few ways to avoid the fallout of unintentional breaches.

What are the 4 Types of Breach of Contract?

The four types of breach of contract are material, minor, anticipatory, and actual.

Material Breach of Contract

A material breach occurs when one party receives significantly less benefit, or a significantly different result, than what the contract specified. This can include failure to meet all or part of an obligation, or a failure to do so on time. Direct and indirect damages may be pursued by other parties to the contract.

Minor Breach of Contract

Also called a partial or immaterial breach, a minor breach of contract occurs when the main deliverable is fulfilled, but one or more other obligations are not. Legal remedies may be pursued only if financial losses can be proved, so contingencies like late deliveries may not qualify.

Anticipatory Breach of Contract

In an anticipatory breach of contract, one party makes it clear it doesn’t intend to fulfill its obligations, even if an actual breach has not yet occurred. Anticipatory breaches can be explicitly announced, or inferred from a party’s actions or communications.

Actual Breach of Contract

In an actual breach of contract, a party has already failed to fulfill its obligations within the agreed-upon timeframe — or done so incompletely or improperly. Remedies include compensatory damages for direct economic losses, and consequential damages for indirect losses also resulting from the breach.

What are the Consequences of a Breach of Contract?

Although breaches can be resolved privately and amicably without legal action, the most common consequences of a breach of contract are lawsuits and monetary damages equaling the exact amount owed.
 
So, for example, if only half of a $50,000 obligation was paid, the most likely outcome of a successful legal action would be the remaining $25,000 in compensatory damages. Exceptions would include consequential and reliance damages, which provide compensation for expenses incurred in the fulfillment or anticipation of a contract, or as a result of it — for instance, the cost of materials purchased for a project that ultimately didn’t happen.
 
As stated above, a breach of contract must be material to qualify for a lawsuit, with a provable loss of value or material change to its agreed-upon outcomes. In some cases, rulings may require one party to resume carrying out the contract, rather than pay monetary damages. In some cases, the consequences of a breach may be specified in the actual contract (e.g., a dispute resolution clause).

With some exceptions — such as fraud — a contract breach isn’t criminal, and rulings aren’t punitive. (Some states simply don’t allow punitive damages.) In fact, breaches are often regarded as a healthy part of a working economic system and even a social good, letting businesses make necessary adjustments out of operational or strategic necessity. (See, for instance, the efficient breach theory.)

But even without criminal penalties, a breach of contract can still have harmful consequences, including legal fees, reputational harm, and the loss of referrals and new business.

How to Reduce Risk of Breach of Contract

The risk of contract breach can be reduced by making sure everyone is aware of their responsibilities, keeping tabs of contract performance, and ensuring that all contracts are easily accessible at times.

Make sure everyone is aware of their responsibilities

It’s not uncommon for breaches to occur through simple oversight or lack of awareness — or for the individuals or teams involved in negotiating a contract to be different from those who must fulfill it. A thorough process for contract management that pays diligent attention to handover will help ensure that obligations are understood and upheld throughout the organization.

Learn more about building a better contract management process

Keep tabs on contract performance 

Time is of the essence when it comes to containing losses. Actively monitoring contract performance helps ensure that all parties meet their obligations, and can help identify and contain potential problems before they’re actionable. Contract management software solutions that include automated notifications and reminders make this step relatively simple and straightforward.

Learn about contract automation software

Make sure your contracts are always accessible

Knowing where to find every active contract and being able to quickly access any key detail can significantly reduce the chances of an important deadline or deliverable slipping through the cracks — and thus, risk of accidental breach. Today, a variety of tools can help tackle this task, from simple contract management software to more complex end-to-end lifecycle management systems.

Learn more about contract lifecycle management (CLM)

What’s Your Strategy for Avoiding Breach of Contract?

Today, a breach of contract may be a fairly mundane legal procedure rather than a serious criminal act. But, as we’ve seen, the consequences can still be harmful, and even ruinous — particularly in the case of an accidental or unforeseen breach. For that reason, a comprehensive process for contract management is a must not only for large businesses, but for any organization looking to safeguard its future.

You can find more information about how to implement an effective contract management process here. And download our General Counsel's Guide to Contract Execution, Storage, and Renewal for more simple, effective tips for avoiding the common legal and financial risks associated with contract management.