Have you ever felt puzzled while dealing with different types of breach of contract, unsure of when a minor oversight might snowball into a major issue? Or have you wondered about the specific points that differentiate a minor hiccup from a deal-breaking problem?
We’re here to answer these questions by breaking down the key classes of contractual breaches. In this post, we’ll explore all four main types: minor, material, fundamental, and anticipatory. Let’s dive straight in with some definitions.
What are the four types of breach of contract?
The four main types of breach of contract are as follows:
- Minor (or partial) breach: This occurs when a party fails to fulfill some minor contractual obligations.
- Material breach: This is a substantial failure to perform, significantly affecting the contract’s value.
- Fundamental (or actual) breach: A severe breach that allows the non-breaching party to terminate the contract and seek damages.
- Anticipatory breach: This happens when one party indicates they will not fulfill their future obligations, either explicitly or inferred from actions.
Now let’s look into each of these four types of breach in greater detail.
Type 1: Minor (or partial) breach of contract
- Definition: A minor (or partial) breach of contract is an immaterial breach that doesn’t affect the contract as a whole.
- Example: In the software industry, a vendor delivers a software update a week late, but this doesn’t impact the client’s overall project timeline.
- Characteristics: One party fails to fulfill some part of their contractual obligations, but the contract as a whole is basically fulfilled.
- Outcome: May result in compensatory damages, but typically doesn’t lead to contract termination.
Type 2: Material breach of contract
- Definition: A material breach of contract is a substantial failure to perform, significantly affecting the contract’s value.
- Example: In construction, a contractor fails to install a crucial component of the HVAC system, causing substantial delays and additional costs.
- Characteristics: One party fails to fulfill important contractual obligations, leading to significant financial losses for the non-breaching party.
- Outcome: The non-breaching party has the right to claim compensatory damages (remedies), and to terminate the contract.
Type 3: Fundamental (or actual) breach of contract
- Definition: A fundamental (or actual) breach of contract is a severe breach, allowing the non-breaching party to terminate the contract and seek damages.
- Example: In a product supply agreement, the supplier delivers a batch of products that are non-compliant with safety standards, posing health risks to customers.
- Characteristics: The breaching party fundamentally fails to fulfill their obligations, undermining the core of the contract.
- Outcome: The non-breaching party will likely file for termination of the contract, and potentially sue for substantial damages as well.
Type 4: Anticipatory breach of contract
- Definition: An anticipatory breach of contract occurs when one party indicates they will not fulfill their future obligations.
- Example: In a service agreement, a marketing agency informs their client two months in advance that they will not be able to undertake a major promotional campaign agreed upon for the upcoming holiday season.
- Characteristics: The breaching party expresses intention to fail to perform in the future. This may be explicitly stated, or inferred from their actions.
- Outcome: The non-breaching party has the right to terminate the contract and seek damages immediately.
Recognizing these types of breach of contract, and their unique characteristics, can help your business navigate contractual relationships with greater clarity. A clear understanding of their differences can also enable you to mitigate contract risks in more proactive ways.
By paying close attention to the wording, terms and obligations in your contracts, you’ll be able to prevent many disputes, and be prepared to take appropriate action when necessary. Using contract management software will save you a lot of headaches, too – helping you prevent contract breaches, and handle them more efficiently when they do occur.