An error handling system is described herein that provides a facility for controlling the behavior of software when the software violates a contract condition. The system provides configurable runtime behavior that takes place when a contract fails. The error handling system provides an event that a hosting application or other software code can register to handle and that the system invokes upon detecting a contract failure. The application's response to the event determines how the system handles the failure. If the event is unhandled, the system triggers an escalation policy that allows an administrator or application to specify how the system handles contract failures. Thus, the error handling system provides increased control over the handling of contract failures within software code.