What is a Breach Clause?
A breach provision is a standard feature in all business contracts, and it is the legal equivalent of a "Plan B" to prepare the parties in the event of a failure to perform under the contract. When a party fails to perform under the contract (i.e., when one party breaches), a breach clause will determine what happens next and how the other party may react or be compensated.
In essence, breach clauses detail the contractual responsibilities of a party and the ramifications of failing to live up to those duties. For example, if a motorist were to crash into a light pole, the breach would be an accident, and the duty would be to compensate the pole’s owner. However, if one party to a contract fails to perform, the default would be to terminate the agreement and the duty would be to compensate the other party for the unreimbursed expenses.
Breach clauses can resemble a sieve and control the events that take a performance from an intended contract to a breach . There are many instances in which a standard, general breach clause would serve to avoid all contractual disputes, even though the actual problem may not involve a breach of the contract. For example, let’s say a party to a motor vehicle accident caused the wreck through gross negligence in failing to stop at a traffic light. A breach of contract may really occur even though the standard, general breach clause in a contract does not regard such an event as a breach, if the injured party (the individual struck by the car at the light) has a contract with the negligent party (the driver) and the contract has been breached.
Sometimes, breach clauses are used to exclude certain areas of liability while also covering other areas. For instance, a breach clause between partners could be used to bring in a partner who agreed to perform a duty and didn’t do so for physical or mental reasons.
An unspoken, informal breach can be rendered into a written contract violation if a breach clause is included. The contract will be able to legally include language that implies one thing that is actually not explicitly stated in the contract.
Breach Types in Contracts
The less serious kind of breach a contract may be subject to is a minor breach of contract. In a case of minor breach of contract, the injured party is entitled to damages — but the damages shall be smaller than the amount of damages that would have been awarded in a case of fundamental breach of contract.
Under a minor breach of contract, the party responsible shall not be liable for compensating the injured party for any and all damages caused by the breach. However, the injured party shall have a right to obtain compensation for those damages that he can prove were incurred because of the breach of contract and that he could not reasonably have avoided.
A material or "partial" breach of contract involves some significant change, alteration or failure to comply with an obligation, the effect of which is to deprive the injured party of some advantage or benefit contemplated by the contract. A material breach is different, however, from a fundamental or total breach of contract whereby the entire contract is affected. Materially breached contracts tend to be salvageable and the services of the breaching party may be required to make the contract fully performed.
As with most areas of law, the concept of material breach or partial breach of contract can vary from jurisdiction to jurisdiction. Courts applying the material breach standard generally go by the following factors:
A fundamental breach of contract, on the other hand, is a serious violation or breach of a contractual obligation. There is no longer any purpose served by requiring the performance of the contract and the injured party loses part of the benefit of the contract.
The parties to a contract generally have a good faith duty to attempt to deal with the offending party to a contract within the spirit of the agreement. But where a party’s actions constitute a fundamental breach of contract, it is then considered reasonable to discontinue performance and recoup the losses caused by the fundamental breach.
An anticipatory breach of contract occurs when one party to a contract refuses to perform under the terms of the contract, or first signifies that he would not render new performance of any kind on his part, thereby putting an end to the contract as a complete obligation.
In an anticipatory breach of contract, the injured party may treat the repudiation as a total breach and can sue for breach immediately or wait until the time for performance by the other party arrives, and then sue the other party if they do not fulfill the remaining obligations under the contract.
Elements of a Breach Clause
Just as there are many types of breaches, the components of a breach clause can vary. In its most basic form, a breach of contract is defined in the clause. A breach of contract is any act or omission that adversely affects the rights of a party to the agreement so that any of the benefits the party was supposed to receive as a result of the agreement are impugned. The clause will often provide an example of what is meant by a breach of contract.
Breaches that should be defined include:
- A breach of warranty: Where an incorrect representation of the future is made.
- A breach of conditions: Where a requirement of the contract is not met but acts as a condition precedent to entering the contract.
- A breach of representations: This is similar to a breach of warranty. A representation is a statement of fact that must be correct and it usually refers to the present.
The next component of a breach clause sets out when a party must alert the other party or other parties in a joint contract of a breach. It should note how far in advance a breach should be notified and the method in which it must be communicated, including any specific persons who must be copied into the communication.
The last component of a breach clause is what happens if there are repeated failures. Specifically, a breach clause should note:
- The periodicity of breaches that must occur for a party to have the right to withhold or withhold entire contract performance.
- A course of dealing: A course of dealing is the conduct between parties of entering a contract and another subsequent agreement. It can be used as evidence for the meaning of a term or expectation.
- Specific route of recourse: This should be the procedure for specific performance or clarify whether a claim for damages is necessary.
A breach clause should illustrate how a breach affects the underlying agreement. A contract can help mitigate an issue and lessen the impact on a business.
Legal Ramifications of Breach
The specific legal consequences that may result from breaching a breach provision have a range of potential outcomes. In most cases, the parties to the contract will resort to litigation in order to resolve the matter. The litigation can lead to damages being awarded and/or are penalties being imposed against the party that is found to have breached the contract, as long as such damages or penalties are clearly set forth in the contract.
While damages are often the simplest remedy that a court will award a party that is harmed by a breach, the amount of damages can be difficult to ascertain. To obtain an award for damages, the non-breaching party must show sufficient evidence to prove that it was harmed by the breach. This evidence can be time-consuming and expensive to present. Any party that suffers harm to its business as a result of a breach has a responsibility to mitigate its damages. If substantial action has not been taken to avoid damages, the party claiming them could recover less than what it expects.
When negotiating an agreement, it is smart to take time to make sure that all of the terms are clear and precise to avoid litigation. Where there is a breach, the non-breaching party will likely want to avoid the costs that could result from being too vague. If the term at issue does not limit liability, there are potential damages that may be recovered. However, if the term limits damages, the parties may be prohibited from recovering any damages whatsoever for that particular breach.
As previously stated, where there is a breach of a limited term, recovery of damages is prohibited. If the breach of the term is willful or intentional, the party in breach may still be awarded any other damages that may be recovered—if the parties did not agree otherwise.
Drafting a Strong Breach Clause
A breach clause is only as secure as the language within it. Use precise language but leave the door open for reasonable risk-determination in cases where black and white language would be more likely to result in a claim being denied. For example, rather than saying: "an unusually high incident of data theft during quarterly data audits will qualify as a breach of the data security requirements of this contract", try something along the lines of: "a breach of contract would occur if, during an audit of our client’s data once every three months , an unreasonably high incidence of data theft occurred."
Add language to your contract that describes how a claim will be handled should one arise. If you have evidence that you’ve gone above and beyond to safeguard a client’s data, the first step in responding to a claim on the breach clause could be to simply ask the question "what have you done?"; that question is much more sensible and rational than, say, "prove me wrong". It’s doubtful that a court would uphold a "prove me wrong" clause as it may be impossible for the responding party to do so.
Use plain language rather than legalese, and always seek the counsel of a lawyer experienced in contract negotiations to secure your interests.
Examples of Breach Clause Disputes
Several high-profile cases illustrate the real-world complexities of breach clauses. In 2017, United Airlines faced class-action lawsuits after its employees were caught on camera forcibly removing a passenger from an overbooked flight. The lawsuits alleged that the airlines’ actions constituted breaches of contract and express and implied warranties. Ultimately, the parties settled for a reported $50 million. While case law in this area remains sparse, the United Airlines situation goes to show what happens when breach charges are arguably breached by the drafter.
Drugmaker Actavis was sued over its price-discounting program after a whistleblower claimed that it launched the program to drive competitors out of business, not because it thought a price-cutting program would help consumers. Actavis’ products had already been discounted and so the program, if effective, might actually have hurt, not helped, customers. The judge granted Actavis’ summary judgment, ruling that the case did not involve a breach-of-contract dispute against the company.
Payment platform PayPal and its credit-dealership partner, eBay, also found themselves the subject of a breach suit in 2016. That year, online shoppers mounted a class-action suit alleging that PayPal breached its privacy policy by turning over more customer information than was necessary or authorized. The court dismissed the suit, finding that the claim was overreaching and stating that "[a]lternative constructions of the policy terms could point only to some additional information that PayPal may have collected, which is either disclosed or implicit in the policy language."
Cases of fraudulent phishing scams where contractors go online in search of fraudsters also serve to highlight the need for clear definitions of breach clauses. For example, in 2013, investigators tracing a bitcoin theft in which a scammer had impersonated the buyer and attempted to trick the seller into transferring ownership of a computerized wallet were forced to obtain a warrant to sift through the virtual currency’s network records. The cryptocurrency, which started as a speculative trading platform, has increasingly attracted users and investors. A growing number of mainstream payment platforms have begun accepting the currency.
Breach Clause FAQs
It is no surprise that frequently asked questions tend to be the same or similar. One of the most frequently asked questions is as follows: What is a "breach" of a contract?
A breach of contract is defined as an instance in which one party to the agreement fails to perform a "contractual obligation". There are really two types of breaches: (1) a minor breach, and (2) a material breach. A minor breach can be thought of as being mostly complete but not quite completed, while a material breach is much worse because it is basically a total failure to perform. A material breach can also be described as the party who fails to perform having no good intentions of performing at all. And the difference between a minor and material breach is important because if there is a minor breach, then the other party must still perform. If a material breach occurs, then the party who has suffered the breach is likely not required to perform at all.
Another of the most frequently asked question is the question about how to remedy a breach of contract. The law provides several remedies, including the following: Damages. Damages are probably the most common remedy awarded where a breach has occurred. These can be categorized into two categories: (1) compensatory damages, and (2) punitive damages. Specific performance . Specific performance is also a fairly common remedy and involves the court telling the non-breaching party to perform. This is what you signed up for – so the court may be literally forcing you to perform. Rescission. Rescission is exactly what it sounds like. Basically, undoing the original contract as if it never happened. Some of the requirements to qualify for rescission are the following: (1) A material misrepresentation must occur. Material means the misrepresentation would likely have affected the decision of the non-breaching party to enter into the contract. (2) The misrepresentation has to be made as one of the terms of the contract. (3) The non-breaching party must actually rely on the other party’s statements. Again, the reliance must be reasonable and in good faith. (4) The mistake must be an obvious mistake with respect to the details of the contract. Restitution. Restitution is seeking the return of any money paid to parties to a contract in exchange for things given to that party. It is not a form of damages but a return of money or things paid. It is basically asking for unjust enrichment to be undone where the non-breaching party received a benefit from the other party. Injunctions. Injunctions are fairly difficult to obtain but they are an effective tool to use. With an injunction, the court orders the parties to refrain from performing some action that is dictated by the contract.
