A broken contract is serious business. A contract is a legal agreement binding two or more parties. Thus, a contract breach can be a gateway to all kinds of penalties.
It’s typical for a breach of contract to result in civil penalties, including monetary fines, legal fees, and the inconvenience of civil proceedings.
Whether you’re thinking about breaking a contract or someone has broken one with you, it’s helpful to be aware of the consequences of a breach of contract beforehand.
What is a breach of contract?
The term “breach of contract” is used to describe a circumstance in which one or both parties have broken the legally binding terms set forth in a contractual agreement.
A breach of contract can be small or large. For example, late payment or shipment could qualify as a breach of contract. If the other party can prove that damages occurred because of the breach, like lost income over a missed deadline, they may have grounds for a lawsuit.
Types of Contract Breach
There are different ways in which a contract can be breached, and not all of them qualify for legal action. There are three primary forms of a breached contract: anticipatory, minor, and major.
An anticipatory breach of contract occurs when one party informs the other in advance that they’ll be breaking the contract. Depending on the contract terms and the nature of the breach, legal action may or may not be possible.
As its name implies, a minor breach refers to a small aspect of a contract that is broken. Typically, a minor breach of contract does not qualify for civil proceedings, as the damage done may not be significant.
A major breach of contract is when a significant part of the agreement is not honored. The majority of civil proceedings that occur over a broken contract are concerned with a major breach of contract.
When a Broken Contract Qualifies for Legal Action
For a broken contract to qualify for a civil lawsuit, you must be able to prove a few elements.
It must be shown in civil court that a breach of contract occurred and that measurable damages were incurred as a direct result of the broken contract. The intention is not required — even an accidental breach can be grounds for legal action.
The most common penalty that arises for a civil lawsuit of a breach of contract is monetary in nature. For example, the party that failed to fulfill their obligations may have to pay damages in the form of a fine.
Civil penalties for a breach of contract fall into one of two categories: legal remedies and equitable remedies.
Legal remedies are ordered by a court as a form of monetary compensation for damages. Common types include:
- Compensatory damages
- Nominal damages
- Liquidated damages
Equitable remedies are awarded when legal remedies don’t suffice to resolve the situation. Equitable remedies include:
- Specific performance
These types of equitable remedies don’t aim at financial compensation for damages. Instead, they aim to compel the breaching party to perform a necessary action, cease an action, or otherwise provide resolution to the situation arising from the broken contract.
Possible Defenses Against a Breach of Contract Lawsuit
There are a few common arguments used to defend the legitimacy of a breached contract.
In some cases, a breached contract can be defended in court. Situations that might justify a breached contract include:
- Illegal contracts
- Mutual mistakes
- Unconscionable contracts
- Incapacity (generally argued if one party is a minor or mentally incapable of signing binding contracts)
- Unclean hands (both parties committed wrongdoing)
Knowing which arguments you’re likely to come up against in court can help strengthen your own position and defend against the other party’s assertions.
Know the Risks
Sometimes, a broken contract is accidental or unavoidable. At other times, it’s intentionally done. Regardless of the circumstances, knowledge is key to avoiding serious legal consequences.
Before breaking a contract intentionally, explore alternative resolutions to satisfy the terms of the contract. Consulting with a knowledgeable business attorney is the best way to avoid significant consequences from a breach of contract.