What is a breach of contract?

Two people sat at a table signing a business contract

Many businesses rely on employees to ensure that the day-to-day running of the business is taken care of. Each permanent employee will have a contract that lays out certain terms and conditions that should be adhered to while working for the company, but what happens when there is a breach of such a contract?

What does breach of contract mean?

A breach of contract is a legal cause of action that occurs when a binding agreement (such as a contract of employment) isn’t honoured by one or more of the parties involved. A party member could include an employer, an employee, a contractor or a client.

The breach can occur when one of the involved party members fails to fulfil their contractual obligations (even partially), perform the obligations outlined in the contract, complete the work to a good standard or deliver goods or services as previously agreed.

It’s important to note that a contract isn’t always a written document, but can sometimes be verbally communicated or even implied. These types of contracts can also be breached.

There are generally four types of breaches of contract:

  • Minor
  • Material
  • Fundamental
  • Anticipatory

Where an employee breaches their contract, there are some decisions that need to be made by you, the employer, to decipher next steps and how you will handle the situation. Below, you can find out more about each type of breach, complete with real-life examples and what you can do.

What is a minor breach of contract?

A minor contract breach, also sometimes known as an immaterial or partial breach, is where important aspects of a contract were adhered to but some small part was missed or altered.

Examples of a minor breach of contract include:

  • An employee’s contract states that they must complete certain tasks every month as part of their job role, but these tasks are delivered late
  • A computer that you’ve ordered is delivered but the user manual is missing
  • A painter states that they will use a particular brand to paint your premises but they turn up on the day with an identical colour from another brand.

In each of these cases, the work is still being carried out and the items have been delivered, but perhaps not in the way you expected or that was initially agreed upon.

What is a material breach of contract?

A material breach of contract is one of the most serious breaches and involves an element of a contract not being completed or undertaken as agreed and results in serious consequences to the outcome of a project. Had you known this would be the outcome, you may not have entered into the contract in the first instance.

Examples of a material breach of contract include:

  • An employee’s contract states that they must complete certain tasks every month as part of their job role, but the wrong set of tasks was delivered
  • You purchase a new computer for an employee and receive the monitor but not the computer tower
  • A builder substitutes a part that was specified in the contract for another similar part, but this one is cheaper, worse quality and generally won’t last as long as the alternative.

In each of these instances, you received part of a service or product, but it wasn’t delivered as you expected or was stated in the contract.

What is a fundamental breach of contract?

A fundamental breach, also known as an actual breach, is one that is severe enough for the contract to be invalid or unenforceable. Generally, it comes about when one party doesn’t perform the duties laid out in the contract at all. It is usually serious enough for the contract to be terminated altogether, something we go into in more detail below.

Examples of a fundamental breach of contract include:

  • A client refuses to pay for work that you have completed on time and to an acceptable standard
  • A computer that you’ve ordered never arrives
  • A builder abandons their work on your premises mid-project and never finishes it.

What is an anticipatory breach of contract?

An anticipatory breach is where an involved party member, such as an employee, pre-empts that they won’t be able to carry out a specific part of their contract prior to it being signed or agreed upon. In most instances, this issue can be resolved by coming to some sort of agreement or compromise between the parties involved so that the contract can eventually be signed.

Examples of an anticipatory contract breach include:

  • An employee states they can’t make a deadline for a specific piece of work as laid out in their contract
  • A commercial photographer calls you to say they won’t be able to work because of some of the clauses in the contract
  •  A product cannot be delivered by the agreed delivery date.

Does a breach of contract terminate the contract?

A breach of contract doesn’t automatically terminate the contract and in some instances, this plan of action wouldn’t be advised either, particularly if the breach was very minor.

The innocent party has a right to terminate the contract if they believe that what was promised hasn’t been delivered or is in repudiatory breach. However, you can usually only terminate a contract when a breach is considered a ‘vital term’ in the legal document. When it is a vital term, you can terminate, no matter how small the breach.

A repudiatory breach usually makes the contract so useless that it is invalid.

Can you sue for breach of contract?

You can sue for a breach of contract, however you must be able to prove the following:

  • That there was a contract in existence - this means you will need to provide a copy of the signed contract or, if the contract was verbal, a recording that gives all the involved parties’ names, the date and the terms of the contract.
  • That an involved party didn’t complete their part of the contract in a satisfactory manner.
  • That you suffered a loss as a result of the breach

Regarding the final point, it will be expected that you have taken reasonable steps to mitigate these losses before taking legal action. This is known as ‘duty to mitigate’, and you may not be able to recover losses if you haven’t made any attempt to recover them yourself.

You should also consider whether suing is the right choice, evaluating whether it’s reasonable to do so, if it’s cost-effective and what your likelihood of winning is.

If a client takes legal action against you, if you have professional indemnity insurance in place at the time of the action, some costs such as your legal fees, may be covered, check your policy to be sure.

Legal expenses insurance will provide cover for legal costs incurred up to £120,000 in any one clam for contractual disputes. Again, it is important to read the policy to ensure you are covered. For details call 0330 127 7164

For a quote for your trades business insurance call Markel Direct on 0330 127 7164

Access to further guidance and legal resources for business owners

Where can you go for reliable legal information and advice about trademarks and a variety of other business issues, procedures and laws?

Often, online information regarding legal matters for businesses can be conflicting. For information you can rely on, visit the Markel Law Hub.

The Markel Law Hub is an online resource containing a range of documents and articles to help you manage the various laws you can encounter when running a business.

The Law Hub currently helps over 50,000 users and contains:

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