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When Can Contracts Be Broken? Exploring Legal and Ethical Boundaries
Contracts are the cornerstone of modern business and legal relationships, providing a framework for parties to exchange goods, services, or promises. These agreements create a sense of security and predictability, ensuring that both parties fulfill their obligations. However, there are instances when contracts can be broken due to various legal, ethical, and practical reasons. This article delves into the circumstances under which contracts can be broken, considering both legal standards and moral considerations.
Breach of Contract: Legal Perspective
A contract is a legally binding agreement between parties, and its breach occurs when one party fails to fulfill its obligations as outlined in the contract. The breach can be material, where the failure is significant enough to undermine the contract’s purpose, or minor, where the breach is relatively insignificant. A contract can be broken in the following ways:
- Material Breach: If one party’s failure to perform a substantial obligation impairs the other party’s ability to receive the benefits they anticipated from the contract, it may constitute a material breach. This breach allows the non-breaching party to terminate the contract and seek damages.
- Anticipatory Repudiation: When one party indicates, either through words or actions, that they will not fulfill their contractual obligations in the future, the other party may have the right to terminate the contract before the breach actually occurs.
- Impossibility of Performance: If the fulfillment of a contract becomes impossible due to unforeseen circumstances such as natural disasters or legal changes, the affected party may be excused from further performance.
Ethical Considerations in Contract Breach
While the legal framework provides guidelines for contract breaches, ethical considerations play a significant role in determining when breaking a contract is justifiable:
- Good Faith Efforts: Ethically, parties are expected to make reasonable and genuine efforts to fulfill their contractual obligations. If one party makes diligent efforts but still faces insurmountable challenges, there might be room for negotiation rather than outright breach.
- Unforeseen Hardships: Situations may arise where fulfilling a contract becomes excessively burdensome due to unforeseen circumstances. In such cases, open communication between parties and exploring options for renegotiation can be ethically sound alternatives to outright breaking the contract.
- Prioritizing the Greater Good: There might be scenarios where adhering to a contract’s terms could lead to harmful consequences for one party or society as a whole. In such cases, breaking the contract might be justifiable ethically if it serves a more significant ethical goal.
Legal Remedies and Alternatives
When considering breaking a contract, parties should be aware of potential legal remedies and alternatives to breach:
- Negotiation and Renegotiation: Open communication and negotiation can lead to modified contract terms that accommodate changes in circumstances while avoiding a complete breach.
- Mediation and Arbitration: Parties can opt for alternative dispute resolution methods, such as mediation and arbitration, to reach a compromise without resorting to litigation.
- Damages: If one party breaches a contract, the other party may be entitled to damages to compensate for any losses incurred due to the breach.
Contracts form the foundation of business relationships and transactions, ensuring accountability and predictability. However, there are instances when breaking a contract becomes necessary due to legal, ethical, or practical reasons. Material breaches, unforeseen hardships, and the pursuit of greater ethical goals can all contribute to justifiable reasons for contract breach. In such cases, it’s essential for parties to navigate these complexities through open communication, negotiation, and, when needed, the legal system. Balancing legal obligations with ethical considerations can lead to fair and equitable outcomes for all parties involved.
When Can Contracts Be Broken?
I answered in a different question, which we will link to down below, that they can be broken when there are no damages. That is one scenario. Second, contracts can be broken when they are impossible to perform, not impractical, but impossible.
Let me give you an example of that. Let’s say you said, “Aaron, I will pay you $500 to be on this ship, which departs on Friday and will arrive at its destination on Saturday. I will pay you $500 to be on that ship.” Well, let’s say that ship never made it to the United States. So it is not going to be here on Friday, and it can’t possibly depart on Friday. It is impossible for me to perform that. That is a scenario of impossibility. Impossibility is a lawful excuse for not performing under a contract.
But impracticality is different. Let’s say, for example, I offered to sell you four electric bikes for $1,000 each, so a total of $4,000. And I did that based on my belief that I could get those same bikes for $700 each. But let’s say I later find out that they are now $1,500 each. Well, it is impractical for me to fulfill that contract because I will actually lose money on the deal. Is that a valid reason to get out of a contract? No. Impracticality is not.
Gray Area Scenarios: Mutual Mistake
There are some scenarios that are kind of in the gray area. Let’s say, for example, I said I will hire you to dig a trench from my house to my garage. It needs to be 10 feet deep, and you say, “All right, I can do that. It will be $1,000. Let’s say hypothetically, as you are digging through, you run into some solid rock, and you find out it is going to cost you $10,000 to get the equipment needed to go through that rock and actually drill or excavate that trench for 10 feet.
Is that impossible or impractical? Well, it is impractical. But here is the thing, neither one of us knew in this hypothetical that there was going to be solid rock there. We both reasonably assumed that it is just going to be some dirt, sand, clay. And so in that sort of case where there was a mutual mistake regarding the understanding of the performance of the contract, a mutual mistake is a reason that you can get out of a contract or contracts can be broken, not unilateral mistakes and not when one party makes a mistake. But when both parties make mistakes, usually, the performance of that contract is excused.
Time Sensitivity and “Time is of the Essence” Clause
There is also one other reason when a contract can be broken. If the other side materially breaches the contract first, then you don’t have an obligation to perform your part of the contract. I will give you an example. Let’s say the contract says, ‘If you pay me a thousand dollars, I will give you 10 t-shirts.’ And let’s say you had to pay me the $1,000 on Thursday, and I give you the 10 t-shirts on Friday. Well, if you don’t pay the $1,000 on Thursday, I don’t still have to perform, give the t-shirts on Friday. You failed to do what was at the heart of the agreement. Your essential obligation in the agreement was to pay me money for those t-shirts on Thursday. And if you didn’t do that, I am relieved from having to give you the t-shirts on Friday. But let’s say you gave the payment of $1,000 on Friday morning at 5 a.m. instead of on Thursday. Then the question was, well, was that really a material breach? It was a breach. It was delayed. But if it didn’t make a big difference, it is an immaterial breach. Sometimes contracts have a clause that goes like this: time is of the essence. That is a magic legal phrase that means you must pay exactly by the time required or you must perform exactly at the time required. And if you are even a little late, it is a material breach. But if a contract doesn’t have a time is of the essence clause, then a slight delay in performance is usually considered an immaterial breach or the type of breach that doesn’t matter much. So the other side is not excused from performing.
Determining Materiality of Breach
Let me give you an example of one more material breach. Let’s say that a county fair hires a printing company to print flyers to be delivered in mailboxes before the fair to publicize the fair. And let’s say that the flyer has a really big mistake on it. Maybe they accidentally had profanity, maybe it has the wrong date, maybe it has some embarrassing errors, whatever it is, the flyer has a big mistake. The printing company will argue, ‘Hey, we did our part. We produced a flyer. Yeah, we made some mistakes, but that was just a little bit of ink on each one. We generally fulfilled our obligation here.’ Does the county have to pay for that? That flyer would probably be a material breach because assuming that it wasn’t the flyer that the county ordered. And in that case, even though a flyer was produced in time because it did not follow the specifications required by the county, that would probably be considered a material breach, and the county would be relieved of paying for that. But let’s say there was a slight grammatical error or a period was missing where it really didn’t matter. That would be a breach, but it is immaterial. It is insignificant. It really doesn’t matter. And so the county would have an obligation to still pay, even though there was an insignificant breach. That is why it is so important to figure out if a breach is material or not. Usually, it takes an attorney to figure it out. The test is, did the breach go to the heart of the agreement? Did it go to the essential expectation of the party? If the breach did and the party’s essential expectations are violated, then the breach is material, and the other party is excused from performing.
So, when can contracts be broken? When they are impossible to perform, when there is a mutual mistake, when there are no damages, and then finally, when there is a material breach of the contract. The other side doesn’t have to perform.
All right. We have covered a lot of topics here. I look forward to the next live Q&A. If you haven’t already subscribed at aaronhall.com/free, you are welcome to check out our channel, where we have all sorts of other questions from business owners and the answers provided to you. I do these videos as a public service as a way to use my knowledge as a licensed attorney to help business owners avoid problems, spot issues to discuss with their attorneys, and improve the likelihood that you will have a successful company and successful life. It is great being here with you today.