Contracts set down in writing an agreement between two parties. When one party, such as a person, company or an organization, offers to provide goods or services, and the other party agrees, a contract formalizes the understanding.

Contracts cover a variety of subject matter and types of agreements. Contracts of sale, for example, govern the rules for acquisition of property in exchange for payment.

If you’re considering signing a contract, it’s important to understand the consequences of failing to honor the terms of the agreement, known as a breach of contract.

When Is a Contract Valid?

The law requires certain conditions to be met for contracts to be valid. All parties who sign a contract must do so of their own free will and they must intend to create mutual and reciprocal rights and obligations.

If someone consents to a contract by mistake, under duress, or as a result of a fraudulent representation of the contents of the agreement, the contract may be declared invalid by a court. Anyone who signs a contract also must be of sound mind for the agreement to be valid. Contracts must be reasonably precise to be enforceable

Assuming that a contract is created and executed in a legally valid manner and for a legal purpose, failure to follow the terms of the agreement can have legal consequences.

Consequences of Breach of Contract

Seeking a Remedy from Court

If one party, whether an individual or a business, fails to uphold the terms of a contract they have signed, that party has breached the contract and the innocent party can go to Court seeking a remedy.

Some contracts include wording defining what happens if one of the parties fails to perform one of his or her duties under the agreement.  In those cases, generally the wording of the agreement determines the remedies available to the innocent party.  Remedies can include specific amounts of financial compensation.

In the absence of contractual wording defining a party’s rights in the event of a breach by the other party, the general rule is that the innocent party is entitled to reasonable monetary compensation for the damages he or she has directly suffered as a result of non performance of the other party’s contractual duties.

A Fundamental Breach

A common issue that arises in cases of breach of contract is whether the innocent party is entitled to treat the contract at an end (excusing that party of any further performance under the contract) but allowing that party to sue for damages.  That remedy, which is known as ‘rescission’, may only be available in certain cases such as ones involving mistake, duress, undue influence, unconscionability, material misrepresentation or fundamental breach.

A fundamental breach is one that goes to the ‘root of the contract’, that is it deprives the innocent party of substantially the whole mutually intended benefit of the agreement.  For example, a vendor delivering different products than those described in a sale contract, or not delivering the products at all, could be considered a fundamental breach.

In addition to damages, in some cases it may be possible for the innocent party to ask the Court for an order compelling the party in breach to perform its obligations under the contract.  This remedy is known as specific performance and is available in cases where financial compensation is inadequate because of the unusual nature of the subject matter of the contract.  For example, the purchaser of a unique piece of land might be entitled to an order requiring the defaulting vendor to transfer the land to the purchaser pursuant to the terms of the contract.

Suing for Breach of Contract

Anyone who believes they are the victim, or will be the victim, of a breach of an important contract should seek legal advice quickly in order to determine how best to respond.  You may have options, based on the nature of the contract and type of contractual breach, to rescind the contract and seek damages or alternatively seek an order for specific performance.  In other breach of contract cases, you may only be entitled to a more limited remedy such as damages and you may still be required to continue performing your duties under the contract.

Inappropriately terminating your own duties in response to the other party’s breach may allow the other party to seek breach of contract damages against you or limit the types of remedies you can seek against them.


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