Which of the following is the most common situation resulting in the discharge of a contract?

Contract end due to a breach

A contract can end where one party has breached an essential term of the contract and the other party decides to end the contract because of that breach.

What a 'breach of contract' is

A person will have breached a contract if they either:

• fail to do what is required of them under the contract
• make it clear, before the work is due, that they are unwilling or unable to do what was promised.

Example of a breach of contract

Effie's contract with Rekall Ltd requires that Effie deliver all of her catalogues by 4pm on Friday. If Effie fails to do this, she is in breach of her contract. If Effie only delivers 90 per cent of the catalogues by 4pm on Friday, she is still in breach because she did not complete the job. This is called 'part performance'.

Effie's truck breaks down and she tells Rekall Ltd on Monday that the catalogues will not be delivered by Friday. Effie is in 'anticipatory' breach of the contract.

When a contract can be terminated for breach of contract

A breach of a contract will not automatically bring a contract to an end (unless the contract expressly states this). Normally a breach just gives a right to 'damages' – the right to sue for any loss caused by the breach of contract. The obligations under the contract continue to be binding.

When the breach of contract is a serious breach or a breach of an essential term, the other party will have a right to terminate the contract or keep the contract going. However, your contract may require the hirer to provide you with a 'notice to remedy a breach' before it can be terminated.

Example of a breach of an essential term

Lee has a contract with Rekall Ltd to develop new software by 30 June. Rekall Ltd requires the software by this time because it has promised clients that from 1 July the software will be available for sale. If Lee fails to develop the software by 30 June, this will be a breach of an essential term. It is essential to Rekall Ltd that the software is ready in time.

It’s not always easy to know whether a particular breach is serious enough to allow you to end the contract. If you try to terminate a contract for breach where you have no right to, the termination will have no effect. You will still be required to comply with the rest of the contract.

One way to reduce risk is to include a provision in your contract that expressly states that if a particular term is breached, the other party has the right to terminate the contract. Always seek advice before you try to end a contract in this way. Having a good dispute resolution clause in the contract will help manage these issues.

What happens if you breach your contract

If you breach a contract and the matter goes to court, you may be ordered to either:

• pay damages to the other party
• perform your obligations under the contract (also called 'specific performance').

Some contracts specify what will be payable if there is a breach by one party of a particular contractual obligation. This is often called 'liquidated damages'. As long as this agreed sum is an honest estimate of the likely damage caused by the breach, a court can enforce it. However, a court will not enforce it if the agreed sum is significantly greater than the cost of the damage and considered unacceptable.

If someone breaches a contract with you or your company, you deserve justice.

Fortunately, there are a number of potential remedies for breach of contract. These can range from enforcing the terms of the contract to monetary compensation.

If you or your business is facing a contract dispute, the knowledgeable commercial litigation attorneys at the Miller Law Firm can help. We can review your contract and help you pursue a remedy for breach of contract that will best compensate you for the breach.

There are several common remedies for breach of contracts. The appropriate remedy depends on the terms of the contract, the nature of the breach, and the specific circumstances of the case.

1. Compensatory Damages

An award of compensatory damages is the most common of the legal remedies for breach of contract.

The calculation of compensatory damages is based on the actual losses you have sustained as a result of the breach of contract. They typically fall into two categories: expectation damages and consequential damages.

Expectation damages

Expectation damages—also referred to as general damages—are those that directly result from the breach of contract.

For example, imagine a company that provides bus tours enters into a contract to buy a bus for $100,000. However, the seller backs out of the contract and refuses to sell the bus. The bus company finds another seller with a similar bus, but they won’t take less than $110,000. In that case, the expectation damages would be $10,000—the difference between the contract price and the amount the company had to pay another seller for the same product.

Consequential damages

Consequential damages are those that flow as a natural consequence of the breach.

Consequential damages often comprises profits that a company lost as a result of the breach.

In the case of the bus example, imagine it took an extra week to secure the new bus. As a result, the tour company had to turn away 1,000 customers that would have each paid $50 for a bus tour. In that case, the company could likely recover consequential damages for the $50,000 they lost in ticket sales.

Often the breaching party will attempt to avoid paying consequential damages by claiming that they are too speculative or that they are not foreseeable. Also, sometimes parties to a contract may limit or preclude either party from recovering consequential damages. An experienced attorney can help you combat these arguments and maximize your damages award.

2. Specific Performance

Specific performance is a type of remedy for breach of contract in which a court orders the breaching party to perform their end of the bargain.

Monetary damages are typically favored over specific performance as a remedy for breach of contract. However, specific performance may be available when monetary damages won’t adequately compensate you. For example, they may apply to a contract for something that is unique and can’t be easily replaced.

In the bus example above, monetary damages would be sufficient to compensate the tour company for its loss. But imagine that the new bus had been used previously by a famous singer. The tour company wanted to use the bus for tours of the singer’s home town. In that case, the tour company could argue for specific performance rather than monetary damages because no other bus would be comparable to the one it contracted to buy.

3. Injunction

Injunctions serve a similar purpose as specific performance. The difference is that with specific performance, the court orders a party to do something. With an injunction, the court often orders a party not to do something.

An injunction may be permanent or temporary. Temporary injunctions are often ordered while litigation is pending to prevent potential damage. For example, in a lawsuit that concerns a breach of a noncompete contract, a court might order the defendant to cease the allegedly competitive activity until the lawsuit is resolved. A permanent injunction, as the name suggests, is permanent. A judge may issue a permanent injunction as part of their final ruling in a lawsuit.

4. Rescission

Rescission allows a nonbreaching party to cancel the contract as a remedy for a breach. Rather than seeking monetary damages, the nonbreaching party can simply refuse to complete their end of the bargain. Rescission puts the parties back in the position they would have been in had they never entered into the contract.

However, to justify rescission, the breach must be material. That means that it has to go to the heart of the contractual agreement.

For example, imagine that you contract to provide catering services for an event. The contract requires the other party to pay half the contract price by a certain date, but they never pay.

Since payment goes to the heart of the contract, you would be justified in rescinding the contract and refusing to provide the catering services.

5. Liquidated Damages

Liquidated damages are a specific amount the parties agree to in the contract as compensation for a breach.

Contracts often use liquidated damages provisions where it might be difficult to calculate the correct amount of compensatory damages.

Real estate purchase agreements and construction contracts commonly rely on liquidated damages. They might be a specific sum, such as the amount of the earnest money on a purchase contract. Or they could depend on a formula, such as a certain amount of money for each day a deadline is not met. Partnership agreements are also likely to include liquidated damages provisions.

Although courts typically uphold liquidated damages clauses, they may disregard them if the amount of liquidated damages is drastically smaller or greater than the value of the actual harm the plaintiff has suffered.

6. Nominal Damages

A court may award nominal damages as a legal remedy for breach of contract when the plaintiff cannot support their claim for compensatory damages. With nominal damages, the court recognizes that a breach of contract occurred, but no harm can be calculated.

While receiving nominal damages may feel like a pyrrhic victory, the plaintiff does get the benefit of the ruling in their favor. This may be simply a moral victory, or it may pave the way for the plaintiff to pursue another type of legal action. If the contract has an attorney fee provision, an award of nominal damages may also enable the plaintiff to seek their attorney fees from the defendant.

The Miller Law Firm: Your Contract Attorneys

To learn more about potential remedies for breach of contract in your case, contact Miller Law. For more than two decades, we have served the business community in Michigan, and we have recovered over $3 billion on behalf of our clients. We can help you determine what types of remedies for breach of contract you might be entitled to collect. Contact us online now or give us a call to discuss your options.

For more information, please visit the following resources:

• What Are Your Legal Rights When a Partner Is Sabotaging Your Business?
• Anticipatory Repudiation, Coronavirus, and Breach of Contract: Facts You Should Know
• What Are the Elements of a Valid Breach of Contract Claim in Michigan?

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