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What happens when a business contract is breached?

Business contracts between two parties are meant to be binding. They are contractual agreements defining the obligations to be fulfilled by each party. Unfortunately, there are times when things happen that prevent a party from carrying out his or her portion of a contract.

When this happens, it is considered a breach of contract. Depending on the severity or importance of the breach, it can be considered "material" or "immaterial." These classifications of a breach determine what type of legal action needs to be taken to make things right.

What is the difference between a "material" breach of contract and an "immaterial" breach of contract?

The difference between the two is usually based on the damages caused by the breach. For instance, if one party is obligated to make a delivery of materials at a construction site on May 13 so work can begin on May 15, and the delivery is not made until May 14, it may be immaterial. However, if the delivery was not made until May 17, the late delivery of the materials may have affected a lot of components of the job, such as scheduled rental equipment or having construction crews ready on the jobsite. A breach of this type might cause the company to lose money and miss deadlines; therefore, it would be considered material.

What happens when a contract is breached?

When a contract is breached, the nonbreaching party can try to resolve the issue through mediation or arbitration, or more commonly, through a lawsuit. Breaches that are immaterial often see no ramifications as long as the breach is not a regular occurrence.

If damages are minimal, such as less than $7,500, the issue is sometimes resolved in small claims court. High-dollar damages are usually resolved by business litigation in a formal lawsuit. Resolution may include restitution for damages, specific performance by the defendant to remedy the situation or cancellation of the contract along with restitution for the damages.

Source: FindLaw, "Breach of Contract and Lawsuits," accessed Dec. 07, 2017

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