A valid contract legally binds the parties in the contract to certain duties under the agreement. First and foremost, the parties have a duty to perform their obligations in good faith according to the terms of the contract. As long as they do so, there is no problem. Once both parties have fulfilled their obligations under the contract, the contract is discharged.
For example, when a buyer orders and pays for goods and a seller delivers the goods in the agreed upon time frame, no more obligations are left under the contract, and it is discharged. However, if performance is not completed according to the contractual terms of their agreement, then there is a breach of contract.
There are different types of breach of contracts, the most common being:
- Material Breach
- Immaterial Breach
- Anticipatory Breach
Material Breach of Contract
A party has materially breached a contract if they have failed to perform according to the essential terms of the contract. This includes the non-performance of a service or failing to deliver a good after receiving payment. These things are clearly essential and go to the heart of a contract.
A seller’s most essential duty is to deliver a good or service, and a buyer’s most essential duty is to pay for these goods or services. A material breach discharges the nonbreaching party from its own obligations under the contract, and provides grounds for them to sue the breaching party for damages.
Immaterial Breach of Contract
This is a contractual performance with a few minor errors. In other words, one party did not completely, but almost completely, perform its duties under the contract. Typically the non-performance only extends to non-contractual performance terms.
An example of an immaterial breach is when a tailor agrees to make a black suit with black buttons, but accidentally uses purple buttons instead.
In cases involving an immaterial breach, the non-breaching party must still perform their duties under the contract, although they will be allowed to deduct the cost of fixing the minor defects in the other party’s performance.
So, in the example above, the party who ordered the suit will still have to pay for it, but they will be allowed to deduct the cost of replacing the purple buttons with black buttons.
This occurs when, before the contracted performance is due, one party tells the other party that they will not perform under the contract. In other words, one party expresses its intentions to breach the contract.
For example, let’s say Party A ordered a suit to be made by Party B, then two weeks before the suit is ready, Party A informs Party B that they won’t pay for the suit. In this case, Party A has notified Party B of an anticipatory breach.
In cases of an anticipatory breach, the non-breaching party has two choices:
- Immediately treat the contract as having come to an end, and sue for damages; or
- Wait and see if the breaching party will change its mind and perform.
So, in the example above, Party B may wait and see if Party A will show up and pay for the suit, or immediately sue Party A for damages.
Consult with an Experienced Business Law Attorney
When you are in the negotiation, revision, or renewal stage of a contract, it is very important to reach out to a qualified business law attorney. A good business law attorney will ensure that the terms of the contract are legally enforceable and will protect you and your business in the case of a breach. For more information and for the help you need, contact Davis Business Law today to schedule a free case assessment.
The content on this page has been reviewed and approved by Matthew Davis: CEO of Davis Business Law.