What is Breach of Contract?
A breach of contract takes place when one party to a contract fails to perform their obligations as stipulated in the contract, or expresses an intention not to do so in the future. This can drastically impact the rights, obligations, and remedies available to the involved parties.
Types of Breach
- Actual Breach: This occurs when a party fails to perform their duties as per the contract terms at the time performance is due.
- Anticipatory Breach (Repudiation): This happens when it becomes evident that a party will not fulfill their contractual obligations in the future. The indication can be expressed through words or can be implied from actions.
Examples
- Actual Breach: A contractor fails to build a house as agreed upon within the contract’s timeline.
- Anticipatory Breach: A seller who contracted to sell a car to Buyer A sells it to Buyer B before the agreed delivery date with Buyer A.
Remedies for Breach of Contract
- Damages: Monetary compensation awarded to the injured party for losses sustained due to the breach.
- Rescission: The injured party treats the contract as discharged and is entitled to sue for damages.
- Injunctions: A court order preventing the breaching party from performing a particular action.
- Specific Performance: A court order requiring the breaching party to perform their contractual obligations.
Frequently Asked Questions (FAQs)
What is a Fundamental Breach?
A fundamental breach is a severe breach of a major term in the contract that allows the injured party to terminate the contract and sue for damages.
Can an Injured Party Treat a Contract as Discharged for a Minor Term Breach?
No, if the breach pertains to a minor term or warranty, the injured party may sue for damages but cannot treat the contract as discharged.
What is an Anticipatory Breach?
An anticipatory breach, or repudiation, is when it becomes clear that one party will not adhere to their future contractual obligations, either through express words or implied conduct.
What is Specific Performance?
Specific performance is a remedy where the court orders the breaching party to fulfill their contractual duties rather than just paying damages.
Can a Breach Be Implied Through Actions?
Yes, an anticipatory breach can be implied through actions. For instance, selling the contracted goods to a third party before fulfilling the original contract.
When Can Rescission Be Used?
Rescission can be used when an anticipatory breach or a fundamental actual breach occurs, allowing the injured party to treat the contract as terminated.
Can the Injured Party Affirm the Contract Instead?
Yes, the injured party may opt to affirm the contract and insist on performance despite the breach.
Related Terms
- Contract: A legally binding agreement between two or more parties involving mutual obligations.
- Damages: Financial compensation for loss or injury due to a breach or wrongful act.
- Injunction: A court order that requires a party to do or refrain from doing specific acts.
- Specific Performance: A legal remedy where the court orders the actual performance of a contractual duty.
Online References
Suggested Books for Further Studies
- Koffman, Laurence and Macdonald, Elizabeth. The Law of Contract. Oxford University Press, 2010.
- Poole, Jill. Textbook on Contract Law. Oxford University Press, 2016.
- Stone, Richard. The Modern Law of Contract. Routledge, 2017.
Accounting Basics: Breach of Contract Fundamentals Quiz
### What happens in an actual breach of contract?
- [x] A party fails to perform their duties as per the contract terms when performance is due.
- [ ] There is an expressed intention not to perform future obligations.
- [ ] Both parties mutually decide to terminate the contract.
- [ ] A non-contractual obligation is not fulfilled.
> **Explanation:** An actual breach occurs when a party fails to perform their contractual duties at the time when performance is due.
### What does an anticipatory breach (repudiation) imply?
- [x] One party indicates they will not perform their contractual obligations in the future.
- [ ] The contract is fully executed.
- [ ] Both parties have fulfilled their obligations.
- [ ] A contract is amended before the performance is due.
> **Explanation:** An anticipatory breach occurs when it becomes clear that one party will not adhere to their contractual obligations, either through words or implied actions.
### Which remedy involves a court order to fulfill contractual duties?
- [ ] Rescission
- [ ] Damages
- [x] Specific Performance
- [ ] Injunction
> **Explanation:** Specific performance is a remedy where the court orders the breaching party to fulfill their contractual obligations.
### Can a contract be rescinded for a minor term breach?
- [ ] Yes, it can always be rescinded.
- [ ] No, minor term breaches result in rescission by default.
- [x] No, only major term or fundamental breaches can enable rescission.
- [ ] Yes, if both parties agree.
> **Explanation:** A contract cannot be rescinded for a minor term breach (warranty); the injured party may sue for damages but cannot treat the contract as discharged.
### What is a fundamental breach?
- [ ] A minor deviation from the contract terms.
- [x] A severe breach of a major term in the contract.
- [ ] A mutual understanding to amend the contract.
- [ ] A breach that is rectified before performance is due.
> **Explanation:** A fundamental breach is a severe breach of a major term in the contract, permitting the injured party to terminate the contract and seek damages.
### When can the injured party affirm the contract instead?
- [x] During either an anticipatory or an actual breach.
- [ ] Only if the contract is rescinded.
- [ ] Only if the breach is minor.
- [ ] Affirmation is never an option.
> **Explanation:** The injured party may opt to affirm the contract and insist on performance in both anticipatory and actual breach scenarios.
### When is rescission applicable?
- [ ] In cases of minor breaches only.
- [ ] When both parties fail to perform.
- [x] For anticipatory breaches or fundamental actual breaches.
- [ ] Only after a court order.
> **Explanation:** Rescission is applicable in cases of anticipatory breaches or fundamental actual breaches, allowing the injured party to treat the contract as terminated.
### What is the role of damages in a breach of contract?
- [x] Monetary compensation awarded for losses sustained.
- [ ] Court orders to fulfill contract terms.
- [ ] A negotiation tool for new terms.
- [ ] Penalties imposed by law.
> **Explanation:** Damages serve as monetary compensation awarded to the injured party for the losses sustained due to the breach.
### What is specific performance?
- [x] A remedy involving a court order requiring fulfillment of contractual obligations.
- [ ] Financial compensation for breach.
- [ ] Termination of contract.
- [ ] An amendment to contractual terms.
> **Explanation:** Specific performance is a legal remedy where the court orders the actual performance of a contractual duty rather than financial compensation.
### Can anticipatory breaches be implied through actions?
- [x] Yes, they can be implied from conduct.
- [ ] No, they must be explicitly stated.
- [ ] Only if a court decides so.
- [ ] Only if both parties agree.
> **Explanation:** Anticipatory breaches can indeed be implied through actions, where conduct indicates that the party will not fulfill their contractual obligations.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
