Glossary
Breach of Contract
Breach of contract is the failure of a party to perform a promise in a legally enforceable agreement, such as a customer failing to pay for goods or services it agreed to buy.
Breach of contract is the legal theory behind most commercial collection lawsuits. When a business agrees to buy goods or services on stated terms and then fails to pay, it has usually breached the agreement. The contract can be a formal signed document, a credit application with terms and conditions, a purchase order accepted by the seller, or in some situations an agreement shown by the parties' conduct. Sales of goods are also governed by Article 2 of the Uniform Commercial Code as adopted in each state.
To win a breach of contract claim, a creditor generally must show that a valid contract existed, that the creditor performed its side, that the debtor failed to pay or otherwise perform, and that the creditor suffered damages as a result. The exact wording of the elements varies by state, but the proof is similar everywhere: the agreement, invoices, delivery or completion records, the account history, and correspondence. The debtor may raise defenses such as defective goods, late delivery, or an agreed modification.
Take a fictional example. Ironwood Fabrication agrees to build steel railings for a builder at a price of $62,000, with payment due 30 days after installation. Ironwood installs the railings, the builder signs off, and then pays only $40,000. Ironwood's claim is for the $22,000 balance, plus interest and attorney fees if the contract or a state statute allows them. The signed sign-off sheet helps defeat a later claim that the work was incomplete.
Understanding breach of contract matters to a creditor because the terms of the contract shape the remedies. A written agreement can set interest on late payments, allow recovery of collection costs and attorney fees, choose which state's law applies, and pick the court where a suit must be filed. Without those terms, the creditor is often limited to the unpaid balance and whatever interest state law provides.
Example
Ironwood Fabrication finishes a $62,000 railing job and is paid $40,000. It sues for breach of contract to recover the $22,000 balance plus any contractual interest and fees.