A contract is a verbal or written agreement between two or more parties. When a group of individuals sign a contract, they are essentially making a “promise” that they will fulfill their end of a deal. A key difference here is that promises aren’t necessarily legally-binding. Contracts, on the other hand, are enforceable in a court of law (meaning that parties who break the terms—whether intentionally or by-accident—may be held legally accountable).
In today’s economic landscape, the importance of a durable business contract cannot be overstated. Especially for smaller businesses trying to scale-up operations, owners are increasingly turning to third parties for services or collaboration. Whether it be lenders, partners, insurers, or other businesses, an attorney-reviewed written contract should provide the backbone for any type of business relationship. Unfortunately, just because a contract is legally-binding doesn’t necessarily mean it can’t be broken—or in the terminology of contract law, “breached”.
Whether you committed the breach or are the non-breaching party, breaking a contract is often accompanied by a number of consequences, some of which are difficult to predict. In any case, the first step for business owners is to understand the vocabulary of contract breach. Only with a good understanding of the terminology can owners take measures to address breach of contract.
9 Terms Every Owner Should Understand regarding Contract Breach
Breaching a contract can happen in a number of different ways; most commonly, it occurs when one party simply fails to fulfill the terms and conditions of their agreement. However, breach can also result from a party missing contract-specified deadlines or intentionally deviating from the provisions of the agreement.
Regardless of whether your business committed the breach or was the non-breaching party, it’s important to familiarize yourself with the terminology of contract breach. Of course, if you find yourself in a breach situation, your first action should be to consult an experienced business attorney.
Here are 9 vocabulary terms that will likely surface in your attorney consultation or your negotiations with other parties:
1. Partial Breach
Apartial breach, also called a “minor breach”, is a type of breach that doesn’t fundamentally violate the core terms of the agreement. Although partial breaches are indeed unlawful, they tend to be less serious infringements that are nonessential to the original agreement. This differentiates them from “material breaches”, which are more serious violations that can undermine the entirety of the contract.
2. Material Breach
Material breaches are violations to a business contract that tend to render the agreement irreparable. Different from a partial breach, when a material breach occurs, the contractual agreement is often destroyed and litigation soon follows.
The term “legally-binding” is used to describe something that can be enforced in a court of law. When a contract is legally-binding, a signee can be rightfully sued for breaking or breaching the agreement.
4. Actual and Punitive Damages
These are two types of damages that can be awarded to the non-breaching party. Actual damages will repay funds or assets that were actually lost because of the breach (these are sometimes called compensatory damages as well). Punitive damages, on the other hand, are simply disciplinary financial penalties.
5. Liquidated Damages
Many business contracts will include a liquidated damages clause, which establishes a predetermined sum that’s awarded in response to a contract breach. Liquidated damages clauses are generally advantageous for both parties, however if the breach is clearly disproportionate to the preset amount specified in the liquidated damages clause, courts can rule to disregard the clause.
6. Anticipatory Breach
When one party assumes that the other won’t fulfil their contractual obligation, the non-breaching party can take their grievance to court and claim anticipatory breach to collect damages in anticipation for a contract breach.
7. Actual Breach
Complementary to anticipatory breaches, an actual breach occurs when one party actually breaches the contract. The fundamental difference between actual and anticipated breaches depends on when legal action occurs in relation to the breach; anticipatory breaches involve soon-to-be breaches, while actual breaches involve infringements that already occurred.
8. Irreparably Broken
The phrase “irreparably broken” is closely linked to the concept of a material breach. When a breach is considered material, it indicates that the fundamentals of the agreement were violated and the contract can’t be salvaged. In other words, the contract is not repairable—or irreparably broken.
9. Consequential Damages
Consequential damages cover indirect losses incurred by a contract breach. A common example is when suppliers fail to deliver their goods/services to a business, and as a result, the business can’t conduct their usual operations. In these scenarios, consequential damages can recover the revenue that was lost from the business being unable to operate.
The Bottom Line for Business Owners
These 9 terms are a great start for concerned owners, but more realistically, contract breach is a complicated process with huge consequences for all involved parties. If you believe you’ve breached—or plan to breach—your business contract, you should contact a legal professional immediately. Of course, the same goes if you’re the non-breaching party; an experienced business attorney will help navigate these situations, regardless of which side you’re on.
Some contracts will use the terms and provisions to specify exactly what constitutes as a material or partial breach. Oftentimes however, the agreement won’t contain this language, and the decision is up to the courts. Even before a breach occurs, it’s a good idea to have an attorney review the contract as a preventative measure. These types of situations are best handled by somebody with training and experience in contract law.