Types of Breach
| Type | Description | Effect |
|---|---|---|
| Material breach | A failure that defeats the essential purpose of the contract | Injured party may suspend its own performance, terminate, and sue for damages |
| Minor (partial) breach | A failure that does not destroy the contract's value | Injured party can recover damages but must still perform |
| Anticipatory repudiation | A clear statement or action, before performance is due, that a party will not perform | Injured party can treat it as a breach immediately |
| Actual breach | Failure to perform when performance is due | Remedies available immediately |
Under the UCC for sales of goods, a buyer can generally reject goods that fail to conform in any respect (the perfect tender rule), subject to the seller's right to cure in some situations.
Money Damages
Compensatory (expectation) damages
The basic remedy. They aim to give the injured party the benefit of the bargain — for example, the extra cost of buying replacement goods or hiring a replacement contractor.
Consequential damages
Losses that flow indirectly from the breach, such as lost profits from a delayed production line. They are recoverable only if they were reasonably foreseeable when the contract was made (the rule from Hadley v. Baxendale) and can be proven with reasonable certainty. Many business contracts exclude consequential damages.
Incidental damages
Reasonable costs of dealing with the breach, such as inspection, storage, or shipping costs for rejected goods.
Liquidated damages
An amount agreed in the contract in advance. Courts enforce it if actual damages were hard to estimate and the amount is a reasonable forecast, not a penalty.
Restitution
If the contract is canceled, a party can recover the value of what it gave the other side, to prevent unjust enrichment.
Equitable Remedies
When money is not enough, a court may order:
- Specific performance: requiring the breaching party to perform, typically used for unique items like real estate or rare goods.
- Injunction: ordering a party to stop doing something, such as violating a valid non-compete or confidentiality clause.
- Rescission: undoing the contract and returning the parties to their original positions.
- Reformation: rewriting a contract to reflect what the parties actually agreed when a written document contains a mistake.
The Duty to Mitigate
The injured party must take reasonable steps to limit its losses — for example, finding a substitute supplier or re-renting space. Damages that could have been avoided with reasonable effort are usually not recoverable.
Common Defenses
- No valid contract (missing elements or statute of frauds problem)
- The plaintiff breached first or did not satisfy a condition
- Impossibility, impracticability, or frustration of purpose caused by unforeseeable events
- Force majeure clause excuses performance
- Fraud, duress, mistake, or unconscionability
- Waiver or later modification of the terms
- The statute of limitations has expired
Deadlines
Each state sets limitations periods for contract claims, often 4 to 10 years for written contracts and shorter periods for oral contracts. For sales of goods, the UCC sets four years from breach, which the parties can shorten to one year in the contract (UCC § 2-725). Contracts may also include notice requirements or shorter deadlines for claims.
Steps to Take After a Breach
- Read the contract for notice requirements, cure periods, dispute resolution clauses, and limits on damages.
- Document everything: the agreement, communications, invoices, and evidence of losses.
- Send written notice of the breach, and allow any required cure period.
- Mitigate your losses and keep records of what you did.
- Try to negotiate or use mediation, especially if you want to preserve the relationship.
- Follow the dispute clause — some contracts require arbitration instead of court.
- File suit in the proper court before the deadline. Small claims court can handle smaller business disputes in many states.
