What is a Breach of Contract
A breach of contract occurs when one party to a contract fails to perform their obligations under the contract without a lawful legal excuse. The legal excuse may be an "act of God" or perhaps an antecedent agreement between the parties, but those excuses are rare. Bringing a breach of contract action requires that there be a grievous violation of an obligation so fundamental to the contract that it goes to the "root" of the matter. A breach of contract is material and actionable — meaning the injured party can commence a lawsuit if the breach is so egregious — when it "defeats the purpose of the agreement, or makes it impossible for the other party to perform." If a breach of a contractual obligation is not material, but instead is immaterial, even if it does not conform to the specifications contained in the agreement, it will not ordinarily excuse nonperformance or formation of a cause of action by the non-breaching party against the breaching party. In other words, the party complaining of the breach must have been materially damaged as a result of the breach in order to bring an action. The courts are required to evaluate whole performance, not piecemeal, and then determine whether the failure to conform to all aspects of the contract deprived the other party to the agreement of the benefit of her bargain. If it did, then a material breach has occurred (or violated the contract.) A material breach of contract is a breach going to the root or essence, as opposed to a breach of collateral provisions or conditions of the contract that do not go to the essence of the contract . A breach of a contract will only be found material if the non-defaulting party would not have entered into the agreement had it known that the other party would not fully perform as required by the agreement. A material breach is "material" to the contract because it is so substantial it destroys the essential objects of the parties’ agreement, the benefit for which the parties bargained. A material breach constitutes such substantial non-performance as to allow the aggrieved party to cancel the contract. When a party materially breaches a contract, the other party is released from all further obligations under the agreement. A material breach of contract may entitle the injured party to relief in a damages award to be paid by the party who breached the agreement. There are several different types of breaches of contract, including: Not all breaches allow the injured party to be awarded damages. If the injured party committed the first material breach of the contract, then the party first committing the injury is precluded from recovering on their claim for a subsequent breach, as the party who first breached the contract cannot complain about the injurious effect of the second breach. When the breach is partial and unintentional, "the [injured] party may recover for the breach only to the extent of the loss actually caused by it." If however, the breach is one of good faith and however trivial it was due to non-adherence to the agreement, it will not prevent recovery of an entire agreed upon price.
Legal Remedies for Breach of Contract
In the U.S. legal system, contracts are largely enforced through cultural norms and social pressures, rather than through laws and regulations. Traditionally, lives are at stake in criminal cases, while contractual agreements can be resolved through negotiation and compromise.
That said, the law does offer remedies for breach of contract. There are two general categories of potential remedies: those that provide compensation to the injured party and those that require the breaching party to perform according to the terms of the contract.
Compensatory damages are designed to make the injured party whole again. The injured party should be returned to the position he would have been in had the contract not been breached.
Generally, compensatory damages take one of two forms: expected damages and consequential damages. Expected damages relate to the monetary value of the exact promised performance in the contract. In other words, if a party has breached the contract and the other party can easily find a replacement or substitute for the items or services promised in the contract, then the damages expected would be the price difference.
However, let’s say the contract states the seller must personally come to your house and inspect all bicycles before they are sold. If they fail to do so and you buy a damaged bike, the selling party cannot argue that it would have been easy to find a substitute.
Similarly, consequential damages are awarded when a contract does not specifically spell out what happens if the terms of the contract are not fulfilled. If a party breaching a contract can show that the other party could have mitigated the damages, the injured party may not be compensated in full.
The goal of compensatory damages is to compensate the injured party for lost profits. There are limits to these damages: for example, an injured party can’t claim a boatload of compensatory damages from a seller who simply couldn’t fulfill the contract. Instead, the court will seek to minimize the damages for both parties.
There are some situations in which money can’t provide relief. Imagine a situation where one party has promised to paint a mural on the bedroom wall of someone’s house. Once the wall is painted, it cannot be unpainted. In such a case, the court may not be able to provide sufficient relief through monetary compensation alone.
Specific performance requires a party to fulfill his obligations according to the terms of the contract. It is considered an equitable remedy, meaning the court will seek to balance the respective contributions of both parties to make sure their actions have as close to equal monetary value as possible.
The main difference between specific performance and compensatory damages is that the former requires performance according to the contract, while the latter requires compensation in exchange for performance.
Equitable Remedies for a Breach of Contract
After determining the whole or partial remedy sought via a damage award to compensate for a legal breach of contract, one must consider whether also to seek an equitable remedy, a separate category of recovery that may be available to parties harmed in a breach of contract action. "In general, the common characteristics of an equitable remedy are as follows: An equitable remedy, such as an equity court process, treats the parties fairly and resolves the conflict over the nature and extent of their rights." There are different types of equitable remedies available in a breach of contract case, among them:
Injunction Suppose you are a builder, hired to refurbish a home. The contract details the scope of work and estimated timeframe that work is to be profiled and completed. You find that your client is negligent in making materials available for your use, and this delays the completion and incurs excess exorbitant costs. You can seek injunctive relief to stop your client from witholding the required materials, and to mandate your client to make the requisite materials available so that you can complete the home restoration project.
Rescission Suppose that instead of having the developer/developer representative procure written specifications regarding the renovation of the home, you assigned one of your employees to speak directly with the homeowner as to that homeowner’s vision for the home. The homeowner and your employee reach a verbal understanding, and you begin work to comply with that verbal agreement, instead of what was detailed in a written contract. Rescission of the contract may be warranted here, in order to return the parties (the homeowner and the builder) to a point prior to their entering of a contract within which they did not understand the terms.
For each instance of breach of contract, there are specific contract and tort actions that may be available, yet often a judicious use of equitable remedies would go far in remedying the harms.
Problems Type of Remedy Can Create
The misstep in selecting the proper remedy can often be the difference between a successful resolution to a dispute or a costly, and perhaps worst case scenario, credible successful defense of the suit against you. It is important to understand the risks, benefits, and value in pursuing a particular remedy before selecting the remedy for breach of contract to pursue. Advisably, an evaluation and consultation with an attorney experienced in evaluating and deciding what is the appropriate and legal remedy to pursue or defend against.
Negotiating Accommodations in a Breach of Contract
Resolving a dispute through negotiation is always the most cost-effective option for both parties. While it is widely assumed that all disputes will end in litigation with a judge or jury making a decision on the outcome, frequency statistics show that most types of cases are disposed of prior to a trial. Approximately only 2% of all civil cases that are filed in state and federal courts ever end up going to trial.
When you agree to a contract, you are implicitly agreeing that you will fulfill the terms of your performance as agreed. If you fail a particular term, or are alleged to have breached some other aspect of the contract, the first response should be to see if you can resolve the matter amicably with the other party.
The reason for this is quite simple, the cost of litigation. When a matter becomes contentious between two parties, the costs to each party to litigate a matter are often in the thousands of dollars. From the initial cost of hiring an attorney, to the costs for filing fees, service, discovery, depositions, experts, and court filings, you will not likely spend less than $5,000 for an uncomplicated breach of contract action. In a situation where there is significant money on the line, you will likely spend between $25,000 and $100,000 or more to litigate the matter to conclusion. Most business dispute attorneys recommend that the costs be considered a combination of the attorney fees and damages at risk . Accordingly, if you are exposing yourself to $50,000 in damages and you want to hire an attorney with an hourly rate of $250 per hour – you should expect to pay, at minimum (worst case scenario) 50 hours in attorney fees ($12,500), plus any damages ($50,000) and be prepared to spend that money after a final determination from the court in the matter. The same analysis could be done on the defense side of the action.
Therefore, compared to the probable cost of litigation, negotiating a resolution with the other party, and reaching a settlement will often save you time and money. Keep in mind, the dollar amounts given above are high level figures based on the cost of attorney time – they do not include the cost of court reporting, transcripts, or expert witnesses. In addition, in the case of the breach of contract, if damages sought are $10,000 to $25,000, you can bet that legal fees will soak up most of the damages even if you recover your judgment.
In contracting, it is always advisable to have a dispute resolution clause that provides for another method of trying to achieve a resolution short of taking the matter to court. These clauses include mediation and arbitration of the matter.
So, before you decide to take on the legal system to prove that you have been wronged by some other party – think about whether there is an opportunity to resolve the problem amicably and whether it is worth the toll and financial cost to wade through the courts to get there.
Taking Your Case to the Court
When faced with a situation where a remedy for breach of contract is sought, several options are available. The first step toward resolution is at least some effort at communication, typically by sending a letter of demand. The demand letter should be brief and to the point. It should specify the pertinent terms of the contract, the breach(es) that have occurred, and what relief the injured party seeks.
If the injured party is contractually obliged to engage in dispute resolution before litigation is commenced, such as through a mediation and/or arbitration process, the demand letter should generally provide that the injured party is prepared to pursue that resolution process in an earnest manner. If applicable, the injured party should also advise the other party that it must comply with this contractual provision before a lawsuit is pursued.
Once sufficient time has passed without any response or sufficient response, or if the response received makes it clear that litigation is necessary, the matter should be discussed with counsel. A consultation with an attorney is not formally required before commencing legal action, but failing to consult with counsel can carry significant negative consequences. An important example of those negative consequences is late fees and interest on a common-law judgment that runs from the date the lawsuit is filed, rather than the date of breach of contract. Such timing can cost the injured party thousands of dollars if they fail to file the lawsuit within the requisite period of time set out below.
Depending on the nature of the contract, it may be possible to commence a lawsuit through a pro se process, which requires the injured party to draft all of the documents necessary to initiate the lawsuit. This is not normally a good idea, and injured parties should strongly consider seeking representation when suing anyone. A lawyer will be able to draft the initial documents and ensure that they are properly served on the other party. They will also know the rules and procedures applicable to your case, so you don’t have to worry about missing any deadlines, and they will be able to speak to the other party, no matter how much they try to avoid you.
The strictest statutes of limitation with which most people are familiar are likely statutes of limitation on criminal charges – since these involve the government being able to come in and drag you away, they’re serious business. Generally speaking, for most contract-based claims, the period of time within which a lawsuit must be commenced in order to adequately protect one’s interests is three years from the date on which the other party breached the contract. For some contracts, such as written notes and bonds, the period of time is ten years. However, for statute of limitations purposes, a breach of contract claim is typically a tort claim – and most torts have a limitation period of just three years. This means that, starting the clock from the date of breach, any lawsuit must be filed within three years of the breach. If suit is not filed within that period, the entire claim may be barred.
In addition to the potential bar to recovery, if a lawsuit is not timely commenced, the injured party may be subject to pay the other side’s fees and costs of suit, because this type of claim is not usually considered to sound in equity and there is a long-standing principle that courts will only equitably award fees and costs in certain circumstances which may not apply to these suits. Even if fees are not awarded, the claim is inevitably abandoned.
Additionally, if the case is not timely commenced, all interest and late fees cease running from the date the suit should have been filed (i.e. when the statute of limitations period would have run), potentially costing the injured party thousands of dollars in penalties and interest on an otherwise valid and recoverable contract claim.
Breach of Contract Remedies in the Real World
Real World Examples of Remedies for Breach of Contract
There are many examples of how remedies for breach of contract have been used successfully in the real world. In a construction case, Monterey Mechanical Co. v. Special Data Processing Corporation, 125 Cal.App. 4th 831 (2004), the court awarded $422,000 in damages to a contractor where the owner of the property committed fraud in issuing an occupancy permit for the project. The practical effect was that the contractor was required to redo work twice and was out approximately $1.2 million in lost profit. Their sole remedy under the law was essentially cost of redoing the work as their contract was a "lump sum" contract.
In a case involving a breach of mediation clause, a party sought an order compelling mediation and enjoining the other party from proceeding to arbitration. Native American Art, LLC v. The Muse Group, Inc., 163 Cal. App. 4th 228 (Aug. 2008). The court of appeal affirmed the trial court’s order to compel the parties to mediation in accordance with the mediation clause in their contract. The trial court had exercised its injunctive powers to ensure that the parties would move forward with the contemplated mediation rather than go straight to arbitration. This case demonstrates that while a party may wish to avoid mediation and proceed to litigation or arbitration, the court has the power to stop the process if mediation was a requirement of the contract.
In another construction dispute, a contractor was awarded a combined total of $125,000 in damages for breach of contract and intentional interference with economic relations. Kenron Associates, Inc. v. S.D. Deacon Corp., 58 Cal. App. 4th 614 (1997) . In this case, the breach by the other contracting party was coupled with an attempt by that party to prevent the contractor from competing for a new job on the same project. The contractor was awarded the costs incurred in order to continue working on the project after it had been initially terminated.
In a case involving a non-disclosure agreement (NDA), a party was awarded $200,000 in damages against its former employee. eBay, Inc. v. Digital Point Solutions, LLC, 602 F.Supp.2d 1195 (N.D. Cal. June 17, 2009). In this case, an employee violated the NDA by disclosing information about a client of the previous employer. The damages included some lost profits and losses from customers lost to the former employer.
In another breach dispute involving a partner and a former business entity, one party was awarded $382,000 for unpaid partnership contributions, damages during the dissolution process, and interest. Bradshaw v. Newman, 64 Cal. App.4th 422 (1998). The court of appeal affirmed the judgment of the trial court even though the partnership agreement did not expressly provide for a right to interest during the course of the suit. The court explained that an award for prejudgment interest is governed by Civil Code section 3287 (a) which states: "Every person who is entitled to recover damages certain, or capable of being made 1003certain by calculation, and the right to recover which is vested in him, is entitled also to recover interest thereon from the time of the commencement of the action."
Whether 100% of damages will be recovered is always an issue in a breach of contract dispute. These cases illustrate that equitable approach taken by the courts when fashioning a remedy for a party who has been damaged by a breach.