Contract Breach: How to Protect Your Company from Losses

Contract breach—meaning the failure to fulfill obligations assumed under a contract—represents one of the greatest risks to business activities. Whether due to delays, interruptions in service delivery, defective performance, or non-payment, losses caused by third parties can financially compromise entire operations.

In this article, we explain what constitutes a contractual breach, what rights the injured company has, and, most importantly, how to structure contracts and procedures to protect against future losses and disputes.

1. What Is a Contractual Breach?

A contractual breach occurs when one party fails to perform, in whole or in part, the obligations assumed under the contract without justification. It may take the form of:

·         Absolute breach: the purpose of the contract is defeated by the breach (e.g., failure to deliver within an essential deadline);

·         Relative breach (default/mora): the obligation is performed late or defectively, but is still useful;

·         Willful or negligent nonperformance: when there is intent to breach or unjustifiable negligence.

These situations generate legal consequences ranging from termination of the contract to payment of damages.

2. Legal Basis and Duty to Indemnify

The Brazilian Civil Code clearly establishes that contractual breach entails the duty to compensate the injured party for damages, regardless of fault, unless there is an exclusion of liability (Art. 393, Civil Code).

Relevant provisions include:

·         Art. 389, Civil Code – Breach gives rise to damages, interest, monetary adjustment, and legal fees;

·         Art. 395, Civil Code – The debtor is liable for damages, even for unforeseen events, if in default;

·         Art. 475, Civil Code – The injured party may terminate the contract and claim damages;

·         Art. 416, Civil Code – A penalty clause for breach may be enforced cumulatively.

3. Main Losses Caused to a Company

A contractual breach can result in:

·         Loss of revenue and cash flow interruptions;

·         Disruption of deliveries and services to third parties;

·         Strain in relationships with clients and suppliers;

·         Contractual fines with third parties or public agencies;

·         Litigation and increased legal costs.

In many cases, the loss is not limited to the value of the breached obligation, but triggers a chain reaction, impacting the company’s reputation and financial performance.

4. How to Protect Your Company from Contract Breach

Prevention is the best strategy. Below are best practices to avoid or mitigate losses:

a) Well-structured contract

·         Clear clauses on obligations, deadlines, payment terms, and penalties;

·         Inclusion of a penalty clause for total or partial breach;

·         Definition of what constitutes a material breach.

b) Contractual guarantees

·         Inclusion of real guarantees (e.g., surety, collateral, mortgage) or personal guarantees;

·         Partial advance payment or use of escrow arrangements.

c) Continuous monitoring of contract performance

·         Track deliveries, payments, and compliance with clauses in real time;

·         Keep formal records of partial breaches or recurring noncompliance.

d) Termination and resolution clause

·         Provide for termination in cases of material or repeated breach;

·         Set notification and cure periods before termination.

e) Forum selection or dispute resolution method

·         Define the competent jurisdiction or an arbitration/mediation clause, depending on the nature of the transaction.

5. Case Law: How Courts Handle Breach

“The contracting party is entitled to terminate the contract, with restitution of the parties to their prior state, in cases of material breach by the other party.” (STJ – REsp 1.046.513/SP)“A penalty clause stipulated for contractual breach is enforceable regardless of proof of loss, provided it is reasonable and proportional.” (TJSP – Civil Appeal 1008521-31.2021.8.26.0100)“Partial nonperformance may justify termination if it frustrates the economic purpose of the contract.” (TJMG – Civil Appeal 1.0702.000987-2/001)

6. What to Do in Case of Breach

1.       Formally notify the other party

2.       Send notice by email with read confirmation, registered letter, or extrajudicial notice.

3.       Review penalty, termination, and guarantee clauses

4.       Invoke the contractual mechanisms provided.

5.       Record actual damages suffered

6.       Document losses, business interruptions, financial harm, or lost profits.

7.       Assess the feasibility of judicial or extrajudicial action

8.       If amicable resolution is not possible, seek judicial remedies for termination, specific performance, or damages.

7. Final Considerations

Contractual breach is inevitable in some business relationships, but its effects can be controlled. Well-drafted contracts, balanced clauses, and internal monitoring mechanisms are a company’s main allies in reducing the impact of nonperformance.

Companies that invest in preventive legal counsel, secure negotiations, and strategic contractual clauses are better prepared to enforce their rights and minimize losses, without halting operations or compromising their market reputation.