Breach of contract is a cause of action at law whereby a binding agreement is not honoured. If a party to a contract fails to fulfill a binding contractual promise or indicates (expressly or implicitly) that the binding contractual promise will be unfilled, the party is said to breach the contract.
A minor breach of a contract can occur as a partial or immaterial breach or when the contract is substantially performed. In such cases, the non-breaching party is without a right to sue for specific performance. Only a right to sue for actual damages exists.
As an example of a minor breach, consider a homeowner that hires a plumbing contractor to install water pipes and states that the pipes must be red despite the fact that the pipes will be hidden within walls. Instead of complying with the 'red' specification, the contractor installs blue pipes that are equally functional. Although the literal terms of the contract were breached by the contractor, the homeowner is unable to take legal action that seeks a court order instructing the contractor to replace the blue pipes with red pipes. The only form of remedy available to the homeowner is damages, if any actually occurred. In this example involving colour of pipes, there is no difference between the value of red pipes and blue pipes; therefore, no damages were suffered by the homeowner and any legal action brought would yield nothing. This example is one of, "no harm, no foul".
A material breach occurs if there is a failure to perform that enables the non-breaching party to seek a court order for specific performance or compensatory damages. Continuing to use the example above, had the contractor agreed to install copper pipes and installed iron pipes instead and whereas the copper pipes have a longer expected lifespan and thus a greater value, the homeowner may sue for corrective costs such as tear-out of the iron pipes and replacement with copper pipes. However, as follows there are exceptions to this principle whereas the homeowner is unable to recover the tear-out cost and replacement for the following reasons:
1. Economic Waste
The law wishes to avoid destroying something with value. In the 'pipes' example, destruction of walls would be necessary to replace the pipes. The law discourages such waste. In such case, the remedy available is compensatory damages for the difference between the value of the home with the iron pipes and the value the home would have if the copper pipes been properly installed according to the contract. It is also important to bear in mind that this 'exception' to the specific performance remedy involves a variety of considerations. In our pipes example, if the difference in value of the home exceeds the cost of tear-out and correction, the 'tear-out' solution is actually the less costly solution and must be sought. Additionally, if a significant risk of future harm is present, the 'tear-out' solution may be reasonably necessary.
2. Pricing In
In most breach of contract situations, a party has simply failed to perform one or more of the contract terms. In these situations, the party in breach will reasonably have intended or expected to save costs by failing to perform. While the party should be without entitlement to the savings, in the above pipe example the contractor never considered corrective tear-out costs. It is therefore unreasonable to expect the contractor to pay for the tear-out costs.
Reflecting on the pipes example, most homeowners would be unable to collect tear-out and replacement damages but instead would be entitled to compensation for the reduced value of the house. If the house is worth $250,000 with copper pipes but only $240,000 with iron pipes, the homeowner would collect the $10,000 difference. Again, as above, if the cost of tear-out and replacement is less than this difference (i.e. less than $10,000 in this example) then tear-out and replacement is actually preferred by the law.
A fundamental breach of contract is a breach so significant that the non-breaching party may terminate performance of the contract and sue for damages. In our pipes example, had the homeowner discovered the contractor installing iron pipes early on in the work project (and with the contractor showing obvious intent to continue with the iron pipes), the homeowner may rightly deem the contract at an end and seek another plumbing contractor to correct and complete the work. In such circumstances, so long as the corrective tear-out is less costly that the reduction in value to the house, this remedy is acceptable.
An anticipatory breach of contract occurs when a clear indication is shown that a party will fail to properly perform in accordance to the contract when the performance is due. Upon an anticipatory breach of contract, the non-breaching party has the option to treat the contract as immediately breached rather than having to wait until the contract is indeed actually breached. For example, continuing to use our pipes case above, if the contract between homeowner and contractor stated that the work of installing the copper pipes is to begin on May 1st and the contractor sends an email to the homeowner on April 15th to inform that work will not begin until June 1st and iron pipes will be installed, the homeowner can immediately treat the contract as breached without waiting for May 1st to pass and the breach to actually occur. The homeowner is at right to promptly seek another contractor to 'step into the shoes' of the original contractor and also immediately sue the original contractor for resulting damages.
Businesses often attempt to add terms of interest by showing an interest clause upon an invoice; however, where an interest charge was without agreement at...Learn More
The principle of contra proferentem is a legal doctrine of contractual interpretation providing that ambiguous or conflicting terms within a contract should...Learn More
Business owners often attempt to encourage prompt payment by imposing delayed payment penalties (late fee) upon those who fail to pay on time. ...Learn More
Unlike many areas of law that restrict or restrain conduct, contract law is an area of law that expands freedoms by providing opportunity for parties to...Learn More
Everyday, we see numerous signs providing warnings such as "Not Responsible", "Use at Own Risk", and various other indications that rights are lost if we...Learn More
Often businesses will attempt to impose a 'limited liability clause' within contractual agreements. To the party against whom such a clause is against,...Learn More
In day-to-day business, people of varying levels of sophistication are called upon to enter into contracts during the process of an apparently routine...Learn More
The question regarding supremecy of contract in a business relationship often arises. The parol evidence rule states that where a written contract...Learn More