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What Happens If You Break a Contract? The Ultimate Guide to Contractual Remedies (2022 Update)

What Happens If You Break a Contract? The Ultimate Guide to Contractual Remedies (2022 Update)

Contractual breaches can be devastating. Learn exactly what you can do and what remedies the courts may grant to rectify them.

17th November 2021
Reading Time: 11 minutes

This post has been updated in Nov 2021 for comprehensiveness.

Ever entered into a contract with a party who simply failed to deliver what they promised? What really happens if you break a contract?

It can be a bit stressful and quite disappointing when someone breaks a contract.

But, if you had a legally binding agreement in place, then you may be in luck.

When it comes to contractual breaches, having a legally binding contract in place is almost like the golden ticket to contractual remedies!

So, whether you want to engage a lawyer or try to resolve the breach on your own, there are a few things you can do. In fact, you may have more options than you think.

In this guide, we walk you through what happens when you break a contract. Learn exactly how breaches can occur and what steps you can take to stay protected. Most importantly, we’ll tell you all about the most common legal remedies you can seek. 

Read on about what you can do if someone happens to break a contract.

Table of Content:

What does it mean to break a contract?

Before we go through what happens when you break a contract, let’s figure out what a broken contract is.

Firstly, breaking a contract refers to failing to perform the contract according to its terms.

A broken contract is commonly referred to as a contract that has been breached or violated.

Most commonly, if a contract is breached, it usually means that the promises made under the contract have not been fulfilled at all.  

In actual fact, our law recognises 4 major types of breaches that can open the door to legal remedies. It’s important to know what each type of breach is so you can spot them before it’s too late.

These 4 main types of breaches include:

  • Material breach,
  • Minor breach,
  • Anticipatory breach,
  • Substantial performance.

If your breach falls into any of these categories, you may have a claim for a range of legal remedies.

Below, we go through each type of breach as well as provide you with an example for each.

Material breach

This is probably the most severe type of breach that can occur. 

A ‘material’ breach is also commonly referred to as a ‘fundamental’ breach. It happens when the key elements of the contract have been broken by a party.

Example of material breach

Imagine, for example, you take your car to a mechanic to get a new radiator. The mechanic simply puts in new coolant and changes the oil, but he doesn’t fix the radiator. He does, however, charge you for the price of a new radiator. In this example, the mechanic happens to break the contract in a material way. After all, getting a new radiator was the whole reason you took your car in, in the first place.

Minor breach 

As its name suggests, a minor breach is only a small failure to perform some agreed-upon term in a contract. Usually, the minor breach is so small that it does not affect the essential terms of the contract. However, there is a failure to meet some smaller obligations. 

Example of minor breach

Let’s say you take your car to a mechanic to get a service. The mechanic stipulates that upon a full service, any oil or dust on your car will be rinsed off with water. If the mechanic fails to rinse the car but performs the whole service, then only a minor breach would be present. In this example, failure to rinse the car is only a minor element of the contract. Therefore, the mechanics’ failure to do so is only a minor breach of contract.

Anticipatory breach

An anticipatory breach is an interesting type of breach recognised by the law. 

An anticipatory breach occurs when it is anticipated or suspected that one party will not fulfil their contractual obligations.

It’s basically a demonstration that one party won’t follow through with the contract.

Example of anticipatory breach

For instance, you’ve hired a bathroom remodeler to renovate the bathrooms in your office by a specific date. You’ve paid a hefty deposit and now you can’t seem to get a hold of them. The due date is getting closer and you’re still trying to get in contact with them. It’s almost as if they’ve disappeared. You then learn they’ve gone into liquidation. The remodeller happens to break the contract by an anticipatory breach, as it’s clear they won’t be fulfilling the contract.

Substantial performance 

If a contract is substantially performed, yet not 100% performed, it is possible for a breach to be, nonetheless, present. 

This type of breach comes from the idea that when you hire someone to do a job, you expect it’ll be done fully, properly and accurately. The contract must be so close to completion, that it would be unreasonable to not pay them for their services.

Example of substantial performance 

For example, a painter comes to re-paint your whole house. You notice that they’ve missed a small spot on the ceiling. You cannot refuse to pay them for their work as every other area is painted quite well. The painters have substantially performed the contract, even if they missed a small spot. In this scenario, the breach is small. However, you may be able to recover some small compensation for the painter’s failure to fully paint your house.

In both commercial and personal contracts, any one of these types of breaches can have devastating effects. Most commonly, a breach will leave one of the parties out of pocket.

Fortunately, there are a few things you can do. Find out below. 

What to do if someone breaks a contract

Man wondering what happens if you break a contract

So you’ve entered into a transaction with someone, you have a written and clear contract, but the other party hasn’t kept their end of the bargain. 

In one way or another, the other party has breached or broken the contract.

Maybe they refused to pay for your services, or they’ve done the opposite of what they promised, in writing, to do. Alternatively, they may have done an incredibly sloppy job in performing the contract, in an attempt to move on to the next job.

So, what happens when they break the contract? What can you do?

Don’t stress, there are a few steps you can take. The best part? You can take the steps below before you decide whether or not you want to take legal action.

1. Try and contact the breaching party 

The first thought many people have when thinking “what happens now that there is a break in the contract?” is to take legal action right away.

However, we know all too well that litigation is costly, time-consuming and quite frankly, sometimes it’s unnecessary.

So, your first step should be to try and resolve the issue or breach outside of court. After all, when you speak to a lawyer one of the first things they will ask is “have you tried contacting them about [the breach]?

By contacting the breaching party, you can attempt to work out any issues you both may be having. It’s quite possible that the party in breach may be having some issues on their end. If their issues have an easy solution, then a simple chat or negotiation can do the trick.

Sometimes, breaches occur from a simple lack of communication. So, try and get in contact with them to see if you can both resolve the problem simply and amicably.

2. Send a formal warning letter to the breaching party 

If you’re having trouble getting in contact with the other party or having trouble reaching an agreement, it may be time to send a formal warning letter. 

The type of formal warning letter you’ll need will, of course, depend on the type of breach that has occurred. 

For instance, if you are attempting to recover a debt for any services you’ve provided, you may want to think about sending your first Letter of Demand. If the party fails to respond or pay the debt owed, you may try a Letter of Demand (2nd Attempt) and Letter of Demand (Final Attempt).

However, if you wish to formally request the breaching party stop engaging in their breaching behaviour, then a Cease and Desist Letter may be best.

Each of these letters acts as a formal warning that a party is in breach or violation of their contract, urging them to either pay up any money owed or to refrain from their breaching behaviour.

3. Get in touch with a lawyer

If you’ve gone through steps 1-2 and you can’t resolve the breaching behaviour, then it may be time to speak to a lawyer.

Your lawyer will guide you through what you can do about the breach, as well as give you advice regarding what legal remedies you may be able to claim.

thinking about what happens if you break a contract

Types of remedies available for contractual breaches

Fortunately, there are quite a few legal remedies out there that can rectify a contractual breach. 

Just remember, if you choose to take legal action, you must prove your case to a judge.

Unfortunately, it is not as simple as “Party B owes me money for failing to do what they promised”. You must satisfy the judge that a real breach has occurred. If the judge finds there was a breach, then the question of remedies will arise.  

So, what remedies are available when someone happens to break a contract?

Find out the answer below.

Compensatory damages

Compensation, or compensatory damages, is arguable the most popular type of remedy available. Why? Because it’s the only remedy that allows the injured party to receive money to fix (as far as money can) a broken promise made by another party.

Compensatory damages are awarded to a party who has suffered some loss at the hands of another party. Its purpose is to place the injured party in the position they would have been in, had the contract been performed properly. 

In other words, compensation is awarded to put the injured in the position they should have been in, had the breach not happened at all. 

However, it is not as simple as, “Party A breached the contract so I think $10,000 in compensation will suffice”. The courts must make an accurate and precise examination of what loss you’ve suffered to come up with the best-suited compensation for your circumstances.

Now, when the courts are trying to determine what amount of compensation is best, the courts will actually look to 3 different types of compensatory damages. 

The 3 different types of compensatory damages are:

  1. Direct damages, otherwise known as expectation damages,
  2. Damages for lost opportunity and, 
  3. Reliance damages.

Each of these types of compensatory damages is calculated in a different way. All in all, the lump sum amount of compensation you’ll receive will be a combination of all these types of damages.

Let’s have a closer look at each below.

Expectation damages 

Expectation damages, or direct damages, is money awarded to cover the direct losses suffered from the breach of contract. 

So, if you contracted to buy a $12,000 car but you never received that car, your expectation damages would be $12,000. 

Generally, expectation damages aren’t too hard to calculate and they usually form the bulk of most claims for compensatory damages.

Damages for lost opportunities 

It’s possible to receive compensation for a lost chance or lost opportunity that is a direct result of the broken contractual promise. In other words, if the breach meant that some related opportunity now no longer exists, then it’s possible to claim compensation for it.

At times, this can be difficult to value and also difficult to prove. You must show that the lost opportunity would have been more than likely to eventuate, had the contract been performed properly.

Reliance damages 

Reliance damages are also a common form of compensatory damages. Basically, if you’ve entered other contracts or paid for items or services in reliance upon the original (breached) contract being performed properly, then you may be able to be compensated for that wasted expenditure. 

In other words, you can recover compensation for any wasted expenditure spent in reliance that the other party was going to fulfil their side of the contract.  

Specific performance 

Sometimes, money just won’t do.  

Specific performance is a court order made out to a breaching party, legally ordering them to keep their contractual promises and fulfil their side of the contract. There are no ifs and buts when it comes to specific performance. If it’s ordered by the courts, then the contract must be fulfilled.

For instance, you have a contract to buy an extremely rare vintage car, owned by Elvis Presley himself. The seller refuses to hand over the car. It’s a one of a kind car and damages are not sufficient to cover the loss you’ll suffer. The court will be able to order, by specific performance, that the seller hand over the car and fulfil the contract as they originally promised. 

All in all, specific performance is a legally mandatory order. If if a party breaks that order, they’ll land themselves in hot water.

Injunction

Injunctions are another form of non-monetary remedy that courts can grant as a remedy to a contractual breach.

In actual fact, they’re quite similar to a specific performance, however, a court can grant an injunction ordering someone to (1) do something or (2) refrain from doing something.

Accordingly so, injunctions can be:

Most commonly, the courts will use an injunction to stop someone from continuing to breach a contract. So, you can think of an injunction as a giant legal stop sign. 

In other words, if the breaching party is engaging in some behaviour that is the cause of the breach, the court will order a prohibitory injunction to stop them. 

For instance, you may have a contract with someone that has a non-compete clause or a confidentiality clause. It becomes clear to you that the other party is breaking those clauses. The court could order a prohibitory injunction to legally refrain them from continuing to breach your contract. 

what happens if you break a contract

Burning questions surrounding contractual breaches and remedies 

Can I legally exit a contract without breaching it?

In short – YES.

You can legally terminate a contract without actually breaching it. In fact, there are a few ways you can terminate a contract legally. 

Below, we explain the 3 most popular ways to end a contract, without breaching it.

Firstly, you can choose to terminate the contract by agreement. 

This simply means that if by yourself and the other party agree that the contract should end, before it’s performed or before the work is complete, then it can simply end. Remember, if you both mutually choose to end the contract, get it in writing to stay protected against a possible future dispute.

Secondly, if your contract has a termination clause, then you can simply terminate the contract in accordance with the termination clause.

Generally, a termination clause will say that reasonable notice of the desire to terminate must be given to the other party. Sometimes, these termination clauses can require a payment of compensation. However, it ultimately depends on what your termination clause expressly says. So, take time drafting your contracts termination clause.

Thirdly, you can end a contract due to frustration.

Ending a contract due to frustration means that the contract must end because the failure to perform the contract, or the breach, was beyond either parties control. In other words, the breach occurred and made the performance of the contract impossible, for a reason either party couldn’t control.

For instance, in NSW, COVID-19 restrictions meant that many contracts concerning large wedding receptions had to end in frustration, as they would have been impossible to perform without breaking NSW government orders.

My contract isn’t in writing, can I still claim remedies for a breach?

It’s possible. But unfortunately, it can be a bit difficult.

In order to be able to claim compensation or other remedies for breach of a verbal contract, the verbal contract must be a legally binding contract. This means that the verbal contract must have the following 5 elements: (1) offer and acceptance, (2) consideration, (3) intention to create legal relations, (4) legal capacity and (5) certainty.

You see, although there is no requirement that all contracts must be in writing for remedies to be available, all contracts must be legally binding. If they aren’t, then you won’t be able to claim remedies for any breaches.

Key takeaways

At times, it can seem a bit overwhelming to figure out what happens when parties break a contract.

All in all, your first step should be to figure out what type of breach has occurred.

Secondly, you should try and contact the breaching party to see if you can come to some resolution.

If you can’t, then it may be necessary to get in contact with a lawyer to discuss what remedies may be available to you.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest lawyer marketplace.

Author
Mai Sarkissian

Mai is a Digital Marketing Coordinator at Lawpath, working as part of the Content Team. She is in her final year of a Bachelor of Laws degree at the University of Wollongong. She is interested in Business Law and Employment Law.