Breach of Contract Basics

Introduction

A contract is a promise to do (or not to do) something in exchange for something of value, which may itself be a reciprocal promise.

Just as there are numerous ways in which a person or business might obligate themselves to another, there are a wide variety of contractual agreements that are made to define those obligations - from standard employment agreements to purchase order agreements to specific performance agreements, and many more. The diversity of contracts and their provisions can be somewhat overwhelming to the uninformed observer, but in truth, even the most complicated contracts must follow a set of core rules.

First, and perhaps most importantly  contracts can be breached. Over the course of a contractual relationship, disputes may arise over certain provisions of the contract or the execution thereof. Performance issues, timeliness issues, and quality concerns are common reasons for the breakdown of a contractual relationship.

If you are interested in bringing a suit for breach of contract, or if youre the defending party, you should consider whether a valid claim even exists given the circumstances.

A valid breach of contract claim requires that: 1) the parties entered into an enforceable contract; 2) there was a breach; 3) there is an available remedy at-law; and 4) there are no legitimate defenses.


Foundations of a Valid, Enforceable Contract

Breach of contract cannot occur without the existence of a valid, enforceable contract, which has three fundamental requirements: one party must make an offer, another party must accept that offer, and something of value must be exchanged between the parties (otherwise known as consideration).

Offer

The language of an offer must make it known to the accepting party that the offering party is willing to bind themselves to the terms of the agreement as proposed.

The terms must be specified to the degree necessary for both parties to reasonably understand their meaning. Depending on the industry and the training and individual knowledge of each party, certain unspecified or unspoken meanings may be implied. For example, if it were common practice in the mechanical device industry for sellers to provide maintenance services with the device sold, then it may be reasonable for a buyer to expect those maintenance services, unless the seller explicitly indicates that they do not wish to offer such services. Industry norm arguments are very fact-specific, however, and depend largely on your attorneys ability to bring experts into the case who can argue for or against the industry norm (to your benefit).

An inquiry does not constitute an offer. For example, if one party were to send an email to another party asking whether 100 dollars would be a suitable price for a particular product, the courts would not consider such communication to rise to the level of an offer.

Acceptance

An acceptance, like an offer, must indicate the partys willingness to be bound by the terms of the offer.

If the accepting party alters the terms of the contract or otherwise supplements the contract with additional conditions, then their response would constitute a counter-offer, not an acceptance. Once a counter-offer has been made, the initial offering party must respond with an acceptance in order for there to be a valid contract.

An offer can be accepted through action, not just words. If the offering party orders goods and/or services and indicates a willingness to be bound to the pre-specified terms, then the accepting party can go ahead and provide the goods and/or services instead of having to separately accept the offer first.

Consideration

Consideration is the exchange of something of value between contracting parties for the purposes of the contract. Value is not limited to measurement in terms of money, goods, and services. In contract law, even the promise of a student to his parents that he will attain high honors may constitute valid consideration (peace of mind).

Gifts do not qualify as valid consideration. Generally, gift-giving cannot be enforced under contract law - except in cases of promissory estoppel - as there is not a true exchange of value between parties. The gift-giver is simply unloading value onto the receiving party.

Past consideration is not valid consideration, as all consideration must be bargained for. In other words, any and all consideration must be put on the tableat the same time. For example, a student may attain high honors for a semester in University, which his father later wants to reward him for. If the father promises to pay his student son $1000 in return, this does not qualify as valid consideration because the students consideration (his academic success) occurred in the past and wasn't bargained for.

Oral Contracts

Not all contracts have to be in writing, though many do. Whether a particular contract is governed by a written requirement ultimately depends on your state and local law, but it is good practice to put your important contracts into writing if possible. Written contracts are easier to litigate as they provide explicit, clear evidence of the terms of the agreement, which will then be assessed by the court, or by an independent mediator or arbitrator, in resolving the matter.

Implied Contracts

Contracts can be formed without any explicit reference to the terms of the agreement, written or oral, though courts tend to be cautious when imputing implied contracts.

Implied contracts are often formed via open offers. For example, imagine a garage sale open to the community-at-large, with a collection bin for payment, and where the host does not remain present during the garage sale. The garage sale has signs indicating that all items are priced at $5, to be placed in the collection bin. If a person takes an item from the garage sale without paying, they will have violated the implied contract.

Promissory Estoppel

In certain situations, pseudo-contracts may be enforced despite the fact that they are not valid contracts. Promissory estoppel occurs when one party has essentially been inconvenienced by the promise of another party, usually through inducement.

For example, though gift-giving is not enforceable through contract law, a promise to give a $1000 gift may be enforceable through promissory estoppel if the promise reasonably induced the gift-receiving party to spend money due to the expectation of receiving the $1000 gift later. Assuming that the gift-receiving party does not actually receive the gift, they would then have a $1000 promissory estoppel claim against the gift-giving party.

 

Breach of Contract

Breach is simply the failure to perform contractual obligations. This simplicity is deceptive, however. Obligations are rarely black-and-white, and interpretations can be highly subjective, especially with regard to quality. The determination of whether breach has occurred is a complicated and fact-specific analysis, as it depends on the particular terms of the contract, standards and expectations of the parties given their training and knowledge, and potentially, on evidence that is available in communications outside of the contract.

Materiality vs. Immateriality

Not all contractual obligations are created equal. Breach can be material (essential to the contractual bargain itself) or immaterial (secondary to the contractual bargain, inessential).

Assuming the contract is enforceable, there are potential compensatory, restitution, and specific performance remedies available for material breach, but immaterial breach is more difficult to recover from - you will have to show the damages you suffered as a result of the immaterial breach, which is difficult given that the breach is by definition immaterial, but you are also limited to actual damages. Immaterial breach cannot be remedied through specific performance.

As with the breach itself, the determination of the materiality of a breach is also highly fact specific. In a contract involving the delivery of a basket of goods, for example, the timeliness of delivery might be material if the written contract specifically describes the need for the goods to be delivered on time, but might be considered immaterial if the written contract does not describe the importance of timely delivery and if the delivery was only a few hours late.

Anticipatory Repudiation

Anticipatory repudiation, or anticipatory breach, is when one party unconditionally refuses to perform under the contract. For example, if a person has promised to sell you a car and to deliver it to you in a months time, but you find out a week later that they have already sold and delivered the same car to another buyer, then that person has repudiated the contract.

Anticipatory repudiation is useful for the non-breaching plaintiff since they can immediately claim breach of contract and seek a legal remedy, and do not have to make any further payments in order to assert their breach of contract claim.

 

Remedies and Damages

The non-breaching party may seek various remedies for breach, but depending on the available damages, legal recourse may not be worthwhile. A damages claim of $10,000 may initially seem worthwhile, but if the opposing party is extremely hostile and difficult, then the road to recovery may be too long and too fraught with obstacles to bother. This is an unfortunate reality of litigation.

Actual Damages

In many breach of contract cases, successful plaintiffs can recover compensatory damages to make the situation as close to possible to one in which the breach had not occurred. Depending on the circumstances of the breach, there may be a punitive damages component, which equal as much as seven times the compensated amount.

Restitution

In those cases in which the plaintiff non-breaching party has already given something of value to the breaching party (i.e., the plaintiff has paid for services but has not received them), the plaintiff may cancel the contract and seek restitution. Restitution as a remedy, unlike compensatory damages, is not intended to fulfill the contract as though the breach had not occurred, but is instead intended to restore the non-breaching party to its position prior to the breach itself.

Specific Performance

In limited circumstances, the courts may remedy the breach by requiring that the breaching party actually perform as per the contract. Specific performance is only a remedy in cases where monetary damages are not satisfactory to put the plaintiff in a place as though the breach and not occurred.

For example, if a famous singer has agreed to perform at a venue, the court may require that the singer perform at the venue if it is a young venue that was relying on the fame of the singer to establish a good early reputation. In such a situation, monetary compensation would not suffice to remedy the venue for the breach.

If specific performance would force the two battling parties to work in close proximity (e.g., an office worker breaches their employment contract and specific performance requires them to go back into the same office with people who served as witnesses), the courts generally make efforts to avoid such friction and will do the best they can to award monetary damages that suffice.

 

Defenses to Breach of Contract

The party that allegedly breached the contract may assert certain defenses leading to a finding that the contract was unenforceable in the first place. If the contract is found to be unenforceable, the breaching party cannot be held liable for the breach.

Illegality

Only contracts with a valid, legal purpose are enforceable. A contract to undertake some illegal endeavor or a buy/sell agreement for a banned product is not enforceable.

Incompetency

Minors cannot be held to their contractual agreements, as they inherently lack the capacity to contract - and thus they have the power to void their contracts. If a minor turns the age of majority without having voided their contract, however, then they cannot thereafter void the contract, even if they entered it prior to the age of majority.

If one of the contracting parties was mentally incapacitated at the time, whether through alcohol, drugs, or some mental disorder, then the contract is void. The presence of mental illness, alcohol, and drugs do not themselves instantly void a contract, however. There must be such intoxication or illness that the contracting party lacked the capacity to enter into a contract. The test for capacity demands that the contracting party was, at the time of contract formation, able to understand the nature, meaning, and effect of the contract. It should be noted that the courts tend to be much harsher in determining the incapacity of an intoxicated party. As a matter of public policy they prefer that the intoxicated party to accept the consequences of their intoxication.

Mistake of Fact

A mutual mistake as to an essential fact may lead to a finding of unenforceability. For a fact to be considered essential, it must affect the contractual bargain itself (i.e., a buy-sell agreement for red paint would be void for mistake of fact if both parties had a different understanding of what tone best represents the color red).

Unconscionability

Unconscionability is a blanket defense that gives the court a great deal of discretion in determining whether the circumstances are so oppressive or unfair that the contract should be considered void.

Factors weighing in favor of an unconscionability finding include, but are not limited to: significantly unequal bargaining power at the time of contract formation, significant informational asymmetry at the time of contract formation, a contract that is disproportionately and unreasonably favorable to one party, the presence or lack of legal aid during contract formation, significant inequity in the education and training of the contracting parties, and more.

Duress, Undue Influence, and Misrepresentation

You cannot be fraudulently induced into signing a contract - in other words, you cannot be lured into entering a contract that you would not have otherwise signed were it not for the manipulative influence of someone else. This can manipulative influence can take the form of duressundue influence, or misrepresentation.

Duress requires that a threat of harm (physical, financial, or social) is used to intimidate you into entering the contract.

Undue influence is when a person in a special position of power or authority abuses that position to manipulate you into entering a contract. Undue influence is sometimes an issue in nursing homes, where nurses or caretakers ostensibly become emotionally close enough with the elderly patients to manipulate the patients into including them in their wills.

Misrepresentation is simply a lie that, once told, has the effect of encouraging the lied-to party to enter a contract. Misrepresentations are frequently made as to the quality of goods, the training or education of a service provider, about the availability of a contracting party, and more.

If you believe that your contract is valid and enforceable, that a breach has occurred, that you have a damages claim and that the claim is substantial enough to be worthwhile, and that the opposing party cannot pose any legitimate defenses, then your claim likely has some merit.

For a free consultation with an experienced contract attorney, call the Law Offices of Brian OGrady at (650) 318-6131 to set up your appointment today.