Contract Breach Typology

Contract Breach Types & Examples

Contract Law is an extensive area of the law that covers everything from contract mistakes to more sinister acts like duress or fraud.

When one or more parties (meaning, companies or individuals) do not honor all or a part of that contract, (or even if one party asserts that another is not honoring the contract) a contract dispute is born.

If a party finds themselves unable to honor the contract (they could not deliver on their promises even if they wanted to,) this is called a breach of contract.

There are four primary kinds of contract breaches. Minor, Material, Fundamental and Anticipatory.

Examples of Minor Contract Breaches

Also called a partial breach, a minor breach is usually not as severe or ‘important’ than larger breaches.

Example 1: A hotel contracts with an interior decorator to re-design and re-decorate their hotel bar area. The hotel requests that there be a traditional crystal chandelier. Weeks later, during the walkthrough of the finished redesign, it is revealed that the designer had purchased, delivered and installed a more modern metal and glass chandelier.

Example 2: Another common example is of the ‘colored pipes’. If a pipe contractor is asked to install purple pipes, but instead installs normal white pipes, this could be a minor breach.

However, minor breaches can be graduated to higher breaches in court. One example is a minor breach becoming a ‘major breach’ depending on the circumstances. For example, if the hotel and designer’s contract had specifically stated that a traditional crystal chandelier would be used, or that all purchases and decisions would have to be approved and documented by the hoteliers (but weren’t), that may be able to be classified as a major breach.

Breaches can also be graduated to Material Breaches. We will explore these scenarios in a second.

Examples of Material Breaches

This level of breach is one in which the court can force the failing party to resolution. Resolution could mean:
-Compelling the failing party to perform and fulfil the contract.
-Financial damages.

Example: A flooring contractor was contracted to deliver an exotic Mountain Grade Jabota wood flooring, and the contractor delivered a sub-par, generic material, the flooring contractor may be forced to cover the costs of ripping up the inadequate wood product, purchase the contract-specified wood, and re-install it.

This being said, courts are reluctant to enforce these situations. This could be cited for “Pricing In” or “Economic Waste”.

“Pricing In” Example: If a breach of contract occurs and one party failed to perform, and that party’s cost to perform was minimal in comparison to the cost of repair, this could be enforced. For example, in a hypothetical situation where a piping contractor agreed to provide metal pipes, but provided PVC instead, they may be safe from paying for all related costs in tearing out the old pipes and replacing them again. However, they could still be held liable for the difference in value to the final product. In this scenario, it could be said that the property was worth $10,000 more if it had iron pipes over PVC pipes. The piping contractor could be liable for the $10,000 (which would be preferable over the total cost of ripping new PVC pipes, purchasing iron pipes, and re-installing them, patching and painting the walls, etc.)

Economic Waste Example: In the same scenario as above, it could be considered “Economic Waste” to pull out brand new PVC pipes to throw them away and replace them with Iron pipes.

As is common in law, there is a little bit of grey area. Law does not offer a flowchart for every possible situation. Therefore, general “tests” can be considered by judges. For Material Contract Breaches, these tests could be determining if the failure of performance is significant based on:

(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

-American Law Institute, Restatement (Second) of Contracts § 241 (1981)

Examples of Fundamental Contract Breaches

Fundamental (also known as repudiatory breaches) are breaches that are so significant that the “aggrieved” party is able to cancel the contract and the failing party is liable for damages.
For example, a food company in Brazil has a type of crop that is highly desired and in season. In the United States, there is a large Brazilian festival that has centered many of its activities around this food. A United States shipping vessel company agrees to deliver the shipment of food to the Festival organizers by April 3rd, which is two days before the festival.

The Shipping company doublebooks its vessel and instead dedicates its vessel to another customer’s shipment. The shipping company decides the other customer’s shipment is worth more to them, and notifies the Festival organizers that they will not perform on the contract. The law could compel the shipping company to fulfill their duty, and/or pay for damages caused by not originally fulfilling the contract.

Anticipatory Breach Examples

Anticipatory Breaches are contract failures and breaches that occur before the actual date that any deliverables, goods or services are to be rendered.

For example, let’s say a construction contract signs a contract with a vehicle manufacturer to build it’s manufacturing plant. Mid-way through the contract, the construction company owner tells the vehicle manufacturer that he is having labor issues and will be unable to complete the job. The vehicle manufacturer can sue in order to require the construction company fulfill their end of the contract. Although the construction company many not have technically failed to perform yet, there was substantial reason to believe that the breach would have occurred.

In another example, let’s say an olive oil farmer contracts with olive oil buyer for a contract of 12 months. It stipulates that every two weeks, the farmer will deliver 10 barrels of olive oil. Four months into the contract, the farmer gives notice that there has been equipment failure that will prevent him from fulfilling the contract. Should the buyer want to walk away from the situation, they could move to terminate the contract based on anticipatory breach to save time and money.

As always, remember to consult with an experienced business litigation attorney before taking action.

Blog provided courtesy of Nowland Law, a Newport Beach Business Law Firm serving Orange County and California.