An Introduction to Breach of Contract Issues for Business Owners
Most contracts that your business signs will be fulfilled without issue. The weekly cleaning service keeps your office spotless, and you pay them on schedule. You provide technology services to your customers that meet or exceed the specifications defined in your contract, and your customers give you plenty of lead time to implement changes and are never late with a payment.
But what happens when one party fails to meet their contractual obligations?Defining Breach of Contract: Material Versus Non-Material
Failure to perform in accordance with the contract terms, with no legal excuse for that failure, is known as breach of contract.
If the failure to perform is substantial, such that the core promise or purpose of the contract is not fulfilled, this is called a material breach of contract. If only a relatively small detail of the contract is not fulfilled, this is a non-material breach. An experienced contract lawyer can assist you in assessing the severity of a contract breach and understanding your legal options.Examples of a Material Breach of Contract
Here are a few typical examples of a material breach of contract:
- Delivery of services or products substantially different from what was specified in the contract. For example, delivering LED light bulbs when fluorescent bulbs were ordered.
- Delivery of defective products or services that fall substantially short of specifications. For example, delivering software that accurately performed only three of eight specified functions.
- Delivery of products or services so late that the recipient’s business need is not met. For example, a manufacturer delivering an order of holiday gift items to a retailer well after the holiday demand has passed.
- Failure to pay for goods or services per the timeline defined in the contract. For example, Brand-A grants Manufacturer-B a license to produce and sell products bearing the Brand-A name, but Manufacturer-B fails to pay the agreed-upon royalties to Brand-A.
Ideally, a contract between two firms will anticipate likely problems and define remedies. For example, a contract should define a payment schedule and specify what will happen if the buyer fails to make one or more payments on schedule. An experienced business lawyer can anticipate potential contractual disputes and define remedies for them in the contract itself. This is one reason it is a good idea to have an attorney review high-value contracts before signing them.
In the event of a material breach, the following remedies are generally available to the non-breaching party:
- Stop their own performance under the contract.
- Seek to resolve the dispute out of court through negotiation, mediation, or arbitration.
- File a lawsuit in state or federal civil court to compel performance by the breaching party.
- Sue for compensation of actual losses that resulted from the breaching party’s failure to perform, and possibly for punitive damages as well. For example, if an online store was down for two days as a result of a cloud services supplier’s failure to perform, the store could sue for lost sales.
Is your business troubled by a breach of contract situation, either as the aggrieved party or the one alleged to be in breach? A skilled Silicon Valley contracts lawyer can help. Call SAC Attorneys LLP at (408) 436-0789 to schedule a free consultation. You can rely on our experienced civil litigators to defend your contractual rights both in court and in out-of-court settlement negotiations.