Types of Contract Breaches: The Fundamental Breach of Contract

January 4, 2023 • Contract Management • 4 minutes

Despite every effort to the contrary, unfortunately, some contracts simply go unfulfilled. Whether it was an intentional breach of contract or another problem that occurred that caused a party to simply be incapable of fulfilling a contract, terms go unmet and the agreement is broken.

While a contract breach is never ideal, knowing what type of breach occurred and how to deal with it is critical for moving forward successfully. Here are some ways to better understand the fundamental breach of contract — what it is, why it happens, and what can be done about it.

What is a fundamental breach of contract?

A fundamental breach of contract refers to one of the parties in the agreement not keeping their part of the deal by failing to complete a contractual term that was essential to the agreement so much so that another party could not complete their own responsibilities in the contract. Because this type of breach is so critical to the contract being carried out, it is often grounds for the aggrieved party to cancel the contract entirely.

For example, three parties can agree upon a deal where Party 1 orders a product, but Party 2, who makes the product can’t deliver it, so Party 3 agrees to make the delivery to Party 1. Party 2, however, never made the product.

Because Party 2 never made the contract, Party 3 cannot deliver it, and Party 1 cannot pay for it. Because Party 2 failed to comply with a basic premise of the agreement — making the product — neither of the other parties can fulfill their portions of the contract.

Party 3 now has a loss of income as a result of their inability to deliver the product and potential grounds to sue for damages. In smaller deals, this may not be as much of an issue, but if a larger-scale deal went south, it may be the best way to mitigate losses. Party 1, in turn, has grounds to cancel the contract entirely and move to a separate vendor to procure the product.

What Legal recourses are available?

There are a variety of different courses of action that can be taken in the instance of a fundamental breach of contract. Four of these actions are:

  • Specific Performance: One option is requesting a court order that all parties be required to complete the terms of the contract. While this may prove difficult for certain parties depending on the circumstances of the breach, it is effective in getting the required goods and services contracted for.
  • Rescission: Another option is to cancel the contract and get a refund for the attempted service or product. While this option is easier for most parties, it often leaves the initial party without their goods or services.
  • Reformation: Another way to deal with a fundamental breach is to rewrite the contract to be more versatile, forgiving, or helpful to the party who could not fulfill the contract. While this option does extend the life of the contract and delay the delivery, it is diplomatic to all parties as a renegotiation can take place to determine an outcome that is best for all sides.
  • Sue for Damages: Finally, when nothing else can be done, reclaiming the money for damages that the offending party has caused is another option. If a company has no other means of paying damages and there’s no need to maintain a good relationship with the offending party, this is often the best move to make.

Preventative actions for a fundamental breach of contract

While less-than-ideal situations happen when dealing with contracts, working preventatively to ensure they are as rare as possible is essential. To stay safe in case of a breach of contract, many companies add exemption clauses to their contracts. These clauses exempt the company from liability if they are found to be at fault for the breach of contract. However, they can sometimes be difficult to enforce in court. To be successful, you need to prove that a breach of contract occurred and that the exemption clause was valid. For this reason, it is a good idea to have a clause library created by a lawyer before you start drafting your own contracts. The clause library helps ensure that your exemption clauses are written correctly, and it improves the speed and efficiency of drafting contracts.

Contract lifecycle management software can also greatly support the entire contract management process from negotiation to renewals. It makes contract management much more streamlined and efficient, meaning happier parties and clearer contracts. Unforeseen issues may sometimes occur, but being prepared with the right tools and strategies will ensure the aftermath of those situations is as simple as possible.

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