A breach of contract can cost in the range of $1,000+ to millions depending on the terms of the contract. A legal contract is enforceable in court, and not abiding by its terms and conditions can lead to serious consequences. The following blog will highlight the consequences of a breach of contract, its cost, and other associated details.
What Is a Breach of Contract?
A breach of contract happens when two or more individuals enter an agreement, but one fails to fulfill their part without any legal excuse. The breach that occurs is a legal cause of action, and the US law considers it a type of civil wrongdoing. The breach happens when a binding agreement is not honored by one or more parties who signed the contract because of non-performance or interference with performance. As a result, the contract fails to fulfill its obligations, partially or wholly, as described in the agreement.
When there is a breach of contract, the party who failed to abide by the terms and conditions must pay for the resulting damages incurred by the other party.
What Are the Costs and Benefits Associated with a Breach of Contract?
The costs and benefits of upholding a particular contract or breaching its terms determine whether a party has an economic incentive to commit the offense. If the net cost of breaching is less than the expected cost to fulfill the agreement, then the party has an economic incentive to breach the particular contract. However, if the cost of fulfilling the contract is less than the cost of breaking the agreement, it makes no sense for a party to respect it. When the expected cost to a party that is a part of the contract is more than the expected benefits, the party will be incentivized to forgo the transaction involved.
How to Calculate a Breach of Contract Cost
Individuals and lawyers need to understand how to calculate the damages caused in breach of contract cases in the United States. It is because the offense gives the injured individual or party the right to damages against the other party in breach. The question arises here regarding calculating a breach of contract cost. Here is a breakdown of steps to follow to calculate the breach of contract costs in the United States.
Gather All Documentation
An individual must be able to document the terms and conditions of a contract, the things that went wrong with the agreement, and how the money was lost because of the breach to calculate the damages. The documents must include invoices for materials the individual had to purchase to make up for the shortfall. It will prove that the person had to pay more expenses to fix a particular situation because of the breach of contract.
Separate Tangible and Intangible Damages
Actual damages refer to those goods and services that an individual had to pay for or makeup because of the breach of contract. Anyone can prove such damages by producing invoices or receipts to display the amount of money spent within a particular period. Intangible damages may be tougher to classify than actual damages. It includes loss of business opportunities or reputation because of the breach of contract.
However, the easiest type of intangible damage that an individual can prove is the loss of a contract or a customer. However, such damages are speculative and hard to prove. Individuals may consult a professional lawyer to discuss how to quantify such intangible damages in court or receive compensation.
Classification of Damages into Legal Categories
The US law recognizes different categories of damages related to a breach of contract – reliance, expectation, and restitution.
Reliance: An individual may have taken certain actions based on the contract. If the incurred costs are based on the promise that the other party would deliver goods and services, the person may claim the cost of such actions from the defaulter party.
Expectation: An individual may have entered a contract expecting a certain result. The person’s documents can display the claim for lost sales or profits if the other party cannot commit to keeping up with the expectations mentioned in the contract.
Restitution: Direct restitution includes price differences or returns of deposits discussed between both parties before they signed the contract. Indirect restitution refers to the cost of excess wages, replacement goods, or hiring another contractor.
An individual or group can seek the breach of contract cost from the other party by considering the three categories set by US law.
Key Terms Related to Breach of Contract
Breach of contract involves complicated laws that may not be easy for everyone to understand. That is why individuals must know a few key terms related to the offense, as mentioned below.
- Alternative Dispute Resolution: ADR is the method of resolving a dispute outside the court.
- Arbitration: An effective dispute resolution method in which a tribunal determines the agreement between the parties of a contract.
- Assignment: The document comprising the liabilities, rights, obligations, and other details related to the parties involved in signing a contract.
- Bankruptcy: The official status of a particular person or organization that cannot repay debts owed to creditors.
- Condition: An essential term included in contracts or agreements.
- Confidential: A secret clause that should not be disclosed publicly except under specified circumstances.
- Counterpart: A copy of the main contract created for each party.
- Damage: The amount of money quoted to one party to compensate for the loss for another party.
- Deed: A legally binding and enforceable contract that does not require any party’s consideration to be passed.
- Express Terms: The conditions written or verbally agreed upon in a contract before or when both parties sign it.
- Obligation: Something that either party must do or act upon as a part of a particular contract.
- Severability: The allowance included in a contract for correcting or removing a few portions that may be incorrectly drawn up.
The breach of contract cost comprises compensatory damages that a party pays to another for failing to abide by certain terms and conditions. A court orders a particular person who breached the contract to pay the other party enough money to go elsewhere to get the services. However, not everyone can decide the breach of contract cost without consulting with legal counsel. That is why it is recommended to approach a lawyer for such requirements.
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