Liability in Contract Law

bizfluent article image

Jupiterimages/Comstock/Getty Images

In contract law, parties face liability when they breach a contract. "Breach" means that one party had a duty to perform under the contract, and either did not perform or only partially performed that duty. One contract party who sues another for breach has the evidentiary burden to show that he was ready to perform, but the other party did not do so. Contract law may depend on the jurisdiction; those with legal questions about specific contracts should consult an attorney.

Minor Breach

Typically, when one party alleges a breach of contract, the law will classify that breach as either material or minor. A breach is minor when, despite the other party's failure to completely perform, the performance was enough that the complaining party basically got the benefit of his bargain. For instance, Tom promises to give Ann 400 roses, but only gives 399. At this point, a court would likely find the breach minor. In a minor breach situation, the complaining party still needs to perform his end of the bargain, despite the breach; however, the complaining party may have the right to damages.

Material Breach

Material, or more serious, breach, occurs when the complaining party has not received the substantial benefit of his bargain. For instance, if Ann promises to give Tom a car and only delivers the hood, roof and tailpipe of an automobile, that would be a material breach. In such cases, courts often allow the complaining party to act as though the contract has terminated, meaning the complaining party need not perform his end of the contract. The complaining party may also then sue for damages.

Determining Materiality

In the previous examples, materiality of breach is fairly clear-cut. But in cases in which materiality is difficult (for instance, what if Ann delivers an entire car, except it's missing two tires?), courts may look at a number of other factors, including any negligence or willfulness that motivated the breaching party's behavior; whether the breaching party tried to perform; and how well the complaining party may be compensated by damages alone. In cases of complete performance that's made late, courts typically won't find the breach material unless the contract stipulates that "time is of the essence," or the contract is of a type that makes on-time performance essential.

Compensatory Damages

The usual remedy for contract liability is compensatory damages. These types of damages usually put the complaining party in the exact position he expected to be in if he had received the benefit of his bargain. In other words, compensatory damages are the complaining party's position if breaching party had performed as the contract required. Should these "expectation" damages be impossible to calculate, courts may award one of two types of damages. "Reliance" damages put the complaining party back in the financial position he'd be in if the contract had never existed. "Restitution" damages compensate the complaining party by putting the breaching party back in the same position he'd be in if the contract had not been made.

Punitive Damages

Depending on the type of contract and any egregious conduct on the part of the breaching party, breach may entitle the complaining party to punitive damages as well. However, punitive damage awards are rare in commercial (sales and business) contracts.