What happens when you break a contract?

This article is part of a series addressing popular topics and questions that clients and the public may have about the legal profession.

A contract is a legally binding agreement, in which two or more parties exchange certain rights and obligations, typically involving the performance of an action, or delivery of goods, in return for money.

Legal disputes often arise because a contractual relationship is one governed by words – and words, depending on context and a person’s interpretation, can have more than one meaning. According to an article by Supply Law, a firm concentrated on small-business contract law, most contractual disputes arise over differing interpretations to an agreement.

When one party to a contract violates the terms of the agreement, the best move for those involved is to engage in a dialogue and resolve the issue among themselves, says Konata Lake, a partner at Torys LLP and head of the firm’s Emerging Companies and Venture Capital Group. “That's the most efficient way,” he says.

The aggrieved party should deliver informal, written notification to state their position and invite the counterpart to settle the issue, says Lake. If that does not work, the party claiming a breach should hire a lawyer, who will deliver a formal correspondence, detailing the breach and calling on the other party to rectify it immediately. If the request is not satisfied, the lawyer will bring the claim to a court.

For an agreement to be legally binding, says Josh Morrison, it must contain an “offer, acceptance and consideration.”

“Consideration is a word that lawyers use to describe an exchange of value,” says Morrison, a partner at MLT Aikins LLP, in Regina, Saskatchewan. “In order to prove a contract, you need to prove those three things existed, whether in writing or orally.”

The prove there has been a breach, the party first needs to prove the terms of the contract and then demonstrate the other side’s non-performance of their obligations, he says.

But just because one side broke the contract, does not mean the other is necessarily released from their own contractual obligations, say Lake and Morrison. A breach does not always terminate the contract.

“It depends on the terms of the contract,” says Lake. “This is why it's important to clearly set out in contract what are the consequences of a breach.”

Unless the contract specifically said it would be terminated for a breach, it is unlikely a breach would render the agreement void, he says.

If the breach is such that it deprives the non-breaching party of the entire benefit of the contract, that party can choose to terminate and sue for damages or insist on performance and sue for damages, says Morrisson.

“It's up to the non-breaching party to make a decision as to whether or not they want to hold the breaching party to the contract, or whether they want to treat the contract as being at an end,” he says. “In either circumstance, though, the non-breaching party has a duty to mitigate their loss, they can't sit back and allow the losses to accumulate.”

Most of the time, contract breakers will face a lawsuit – at worst. But Canadian law does include a criminal breach of contract, and violators could face up to five years in prison.

Section 422(1) of the Criminal Code makes it an offence to wilfully break a contract, while knowing or having reasonable cause to believe that would probably endanger human life; cause serious bodily injury; destroy or seriously injure valuable property; deprive a group of people their supply of light, power, gas or water; or delay or stop a train.

“Haven't seen it in my career where a breach of contract rises to a Criminal Code offense,” says Morrison. “But it does exist if you are putting life and limb in danger.”