What is a breach of contract?

A scenario you hope to avoid - a breach of contract occurs when one party fails to fulfil some (or all) of its obligations as stipulated in the contract. From missing a payment deadline, faulty delivery of goods or services, or refusing to perform at all - there are many examples that come to mind. They all undermine the agreement between parties and can trigger legal remedies. Of course, there are limitations to this principle; we’ll explore some scenarios below.

Four common types of breach

• Minor or partial breach
  A small deviation that doesn’t destroy the deal’s core value. For example, delivery a day late.

Typical remedy: depending on the impact, monetary damages for any proven loss may be appropriate. Typically, parties forego remedies here.

• Material breach
  A substantial failure that defeats the contract’s purpose. For example, supplying the wrong product specification.

Typical remedy: damages plus the innocent party’s right to terminate.

• Anticipatory breach
  One party clearly signals (by words or conduct) that it will not perform before the due date.

Typical remedy: the non-breaching party may treat the contract as immediately breached and sue or seek alternatives.

• Actual (Fundamental) breach
  Total refusal to perform or performance so defective the contract is worthless.

Typical remedy: damages, termination, and sometimes a court order of specific performance.

Exact remedies depend on jurisdiction and contract language, and these examples are just to illustrate that there is a range of remedies available, depending on the gravity of the situation. 

What should I do when a breach of contract occurs?

If you suspect your counterparty is not fulfilling their end of the agreement, there are several steps you should take to limit start a resolution procedure. Consider the following 5 steps. 

1. Review the contract – Check important clauses like notice periods, remedies, and clauses describing how disputes should be resolved.
   
   
2. Send written notice – Formally document the breach and notify the other party. Allow any contractual cure period where they can resolve the situation.
   
   
3. Mitigate damages – Take reasonable steps to reduce your loss. For example, start to find another supplier.
   
   
4. Document everything – Keep emails, delivery receipts, and cost records for evidence.
   
   
5. Invoke the dispute mechanism – Mediation, arbitration, or litigation, as the contract dictates.

See also: remedies for breach.

Common limitations of an alleged breach

Breaching a contract is not so black and white - sometimes it is completely out of the control of another party, or perfectly within the scope of the agreement. The appropriate legal terms for these are:

• Impossibility / force majeure – Consider whether performance is prevented by significant events beyond your control (natural disaster, war).
  
• Waiver or estoppel – The counterparty knowingly accepted defective performance (such as a certain failure rate, quality assurance standards, etc.)

For more details: see also force majeure.