Introduction

Picture this: you’re in a great business deal, everyone’s happy, and then—bam. Something goes sideways. You can’t deliver on your promises, or maybe you decide you’re better off bailing. Whatever the reason, you’ve just breached a contract. But what does that actually mean, and what happens next?

Read: 7 common contract mistakes that could cost your business thousands

What is a breach of contract, anyway?

First things first: a breach of contract is when one party doesn’t fulfill their end of the bargain. Imagine a contract as a playbook—everyone has their roles, and if you forget your lines or skip your part, that’s a breach. It could be something minor (a missed deadline) or major (like deciding you’d rather start a llama farm than deliver those 500 widgets you promised).

Breaches come in two main flavors:

• Material breach: This is the big one—the “you had one job” level of failure. A material breach is serious enough to affect the whole point of the contract. For example, if you’re supposed to deliver 1,000 custom T-shirts by Friday and you deliver socks instead, that’s a material breach. The other party is likely to be pretty upset, and they may even have grounds to sue you.

• Minor (or non-material breach): Think of this as a small hiccup that doesn’t derail the entire contract. Maybe you delivered the T-shirts a day late, but the client was still able to sell them at their big event. You’ve breached the contract, but it’s not a total disaster. The other party might still be able to recover damages, but they can’t cancel the whole deal.

Read: What is a material breach of contract?

What happens when you breach a contract?

Now that we know what a breach is, what actually happens if you’re on the hook for one? Here are the common consequences you could face.

The most common outcome of a breach is having to pay damages—a fancy word for “money you owe because you messed up.” Here are the different types of damages you might be looking at:

• Compensatory damages: These are meant to cover the actual losses suffered by the non-breaching party. If you didn’t deliver those T-shirts and the client had to order replacements at a higher price, you’d be on the hook for the difference.

• Consequential (or special) damages: These cover losses that aren’t directly tied to the breach but are still a result of it. If your missed T-shirt delivery caused the client to lose out on a big promotional event, they might try to claim the lost profits as “consequential” damages.

• Liquidated damages: If the contract included a clause specifying a certain amount to be paid in case of a breach, those are liquidated damages. It’s like a pre-agreed penalty. Sometimes it’s a flat fee; sometimes it’s a percentage of the contract value. This can help both parties avoid drawn-out disputes over how much is owed. Always check your contract to see if you’ve agreed to any liquidated damages.

• Punitive damages: Rare in contract law, these are meant to punish the breaching party for particularly bad behavior (think fraud or deliberate deceit). Most of the time, you won’t see these unless there’s some shady stuff going on.

Specific performance: there’s not getting out of it

Sometimes, a court may order specific performance, which means you have to fulfill your end of the contract. This usually happens when monetary compensation isn’t enough to cover the breach. For example, if you contracted to sell a one-of-a-kind painting, the court might order you to deliver the painting instead of just paying damages.

Specific performance is a bit like a parent telling their child, “You made a mess, now go clean it up” Only this time, it’s legally binding, and it’s a judge instead of a parent.

Cancellation and restitution: hitting the reset button

In some cases, the non-breaching party might decide they want out of the deal entirely. This is called cancellation. They can cancel the contract and seek restitution which means getting back any money or benefits they’ve already handed over.

Think of it like getting a refund after buying a faulty product. The goal is to put both parties back in the position they were in before the contract was signed—like the breach never happened (well, except for all the drama).

How to avoid breaching a contract

Of course, the best way to handle a breach of contract is to not breach it in the first place. Here are some tips to keep you on the straight and narrow:

Know what you’re signing up for

Make sure you fully understand the contract before signing. If there are any vague terms, get them clarified. The last thing you want is to realize halfway through that you’ve agreed to something impossible.

Keep good records

Keep detailed records of all correspondence, documents, and actions related to the contract. If something goes wrong, having a paper trail can be a lifesaver.

Communicate

If you’re running into issues that could lead to a breach, communicate with the other party as early as possible. Sometimes, you can negotiate an extension or a modification to the contract terms that avoids a breach altogether.

Read: The importance of having a dispute escalation process in your contracts

Consult a lawyer

If you’re worried about breaching a contract, it might be worth getting a lawyer involved before things go south. They can help you understand and explore your options.

What to do if you’ve breached a contract

Okay, so let’s say you’ve already breached the contract. Now what?

Own up to it

If you know you’ve breached a contract, a good first step is to acknowledge it. Trying to sweep it under the rug will (usually) only make things worse. Approach the other party and discuss the situation openly.

Negotiate a settlement:

Sometimes, you can work out a compromise that keeps you both out of court. Offer to pay damages, provide additional services, or find another way to make up for the breach.

Use dispute resolution methods

Consider mediation or arbitration as alternatives to going to court. These methods are usually quicker, less expensive, and more flexible. Plus, they keep things private.

Prepare for legal action

If all else fails, prepare for the possibility of a lawsuit. Gather your evidence, review the contract terms, and consult with a lawyer to figure out your next steps.

Read: Anticipatory breach: Overview, definition and example

An example of a breach of contract in action

Let’s bring this to life with a real-world example: imagine a scenario involving two businesses, FreshFruits Co. and Green Grocer Inc.

The contract

FreshFruits Co., a supplier, enters into a contract with Green Grocer Inc, a local grocery chain, to deliver 10,000 pounds of fresh organic apples every month for a year. The contract specifies several key terms:

• Delivery date: FreshFruits Co. must deliver the apples by the 5th of each month.

• Quality standards: The apples must be certified organic and free of blemishes or defects.

• Payment terms: Green Grocer Inc. agrees to pay $15,000 monthly upon delivery.

• Penalty clause: If FreshFruits Co. fails to meet the delivery deadline, a penalty of $1,000 per day late will be applied.

The breach

All goes well for the first three months—until one month, a severe storm hits the region where FreshFruits Co. sources its apples. Due to the storm, they experience significant delays in harvesting and shipping. They notify Green Grocer Inc. that the delivery will be late by a week.

FreshFruits Co. delivers the apples on the 12th, a full seven days after the agreed-upon date. Not only is the delivery late, but 20% of the apples are bruised or do not meet the quality standards specified in the contract.

The consequences

Green Grocer Inc. considers this a material breach of contract. The late delivery disrupts their supply chain, causing them to miss out on key sales for the week, and the subpar apples lead to customer complaints and returns.

Green Grocer Inc. decides to enforce the penalty clause in the contract for the late delivery: $1,000 per day for seven days, totaling $7,000. Additionally, they claim compensatory damages for the loss in sales revenue (estimated at $5,000) due to the delay and the poor quality of the apples.

FreshFruits Co., recognizing the breach, immediately reaches out to negotiate. They offer a 15% discount on the next three months of deliveries and agree to cover the $7,000 penalty fee. After some back-and-forth, both parties agree on this settlement, avoiding a costly legal dispute.

The lesson

In this example, the breach could have escalated to a full-blown lawsuit, but quick communication and a willingness to negotiate helped both parties find a mutually acceptable solution. FreshFruits Co. admitted their fault, and Green Grocer Ltd. secured compensation for the breach without taking it to court.

The key takeaway? Even when a breach occurs, proactive communication, a clear understanding of contract terms, and a readiness to negotiate can help you navigate the fallout smoothly and keep your business relationships intact.

Conclusion

Breaching a contract isn’t the end of the world, but it’s not a walk in the park, either. Whether it’s paying damages, facing specific performance, or dealing with a canceled contract, there are consequences you might need to handle. The best strategy is to avoid breaching in the first place by understanding the contract, keeping good records, and communicating openly.

But if you do breach, don’t panic—take action, explore your options, and be ready to negotiate or seek legal advice. After all, contracts are about finding a fair balance, not sending you straight to the principal’s office.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

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