Contracts, Warranties, Buying Tips Article

Breach of Contract

A contract is a legally enforceable mutual exchange of promises. A contract is formed when one party promises to do something (for example, to sell a car to a buyer) in return for the other party promising to do something else (for example, to pay a specific amount of money to the seller). But what if one of the parties (in this case, the seller of the car) later refuses to fulfill their promise (for example, by taking the buyer’s money but never supplying the promised car)? What, if any, legal options does the wronged party (in this case, the buyer) have? May they sue the other party (in this case, the seller) for breaking their promise?

The purpose of this article is to answer the question of when and how a wronged party may sue another party to a contract because that other party has broken (or signaled that they intend to break) an important promise. In law this is called breach of contract. This article provides a very brief introduction to how a contract may be breached and to the sorts of remedies that the wronged (or non-breaching) party may be able to obtain through the civil legal system.

If you would like to learn more about how contracts are formed in the first place, please read the accompanying article on contract formation: “What is a Contract?” [link]. If you are a party to a contract and believe that something you read in this article may apply to your situation and potentially give you a basis on which to sue another party for breach of contract, you should speak with an attorney.

What are the main types of contract?

The three main types of contract are:

    -  express contract
    -  implied-in-fact contract
    -  quasi (implied-in-law) contract.

An express contract is a contract created by the contracting parties’ words. It does not matter if the words were written down or merely spoken. This is important: verbal agreements are contracts.

An implied-in-fact contract is a contract created by the contracting parties’ conduct. For example, if a person enters a barbershop or a hair salon and sits down in the hairstylist’s chair for a haircut, a contract is created between the customer and the hairstylist, which means that, even though the hairstylist never asked for any money in exchange for a haircut and the customer never promised to pay any money in exchange for the haircut, once the customer’s hair has been cut the customer owes the hairstylist money.

A quasi (or implied-in-law) contract is not actually a contract. It is an equitable remedy. An equitable remedy is something a court may impose in order to provide restitution to a party that did not receive the benefit of the agreed-upon bargain. If one party is unjustly enriched by a contract, then the court may attempt to help even things out.

What is breach of contract?

A breach of contract occurs when one or more of the parties to a contract fails (or signals their intention to fail) to fulfill a promise that they made in the contract – and they do so without having a valid legal excuse.

The phrase “breach of contract” also refers to what the law calls a “cause of action,” which is the particular legal theory under which a wronged party files a lawsuit. In other words, when one party breaches a contract, and the other party wants compensation or some other remedy from the civil justice system, the wronged party may file a complaint with the court against the other for “breach of contract.” (It is not only a factual statement of what happened but also the grounds for a legal complaint.)

When a wronged party claims that a breach of contract has occurred, the court will attempt to answer to the following questions:

    1.  Did a contract exist?
    2.  If so, what did the contract require of each of the parties?
    3.  Was the contract modified at any point?
    4.  Did the claimed breach of contract occur?
    5.  If so, was the breach material to the contract?
    6.  Does the breaching party have a legal defense to enforcement of the contract?
    7.  What damages were caused by the breach?

How may a contract may be breached?

A breach of contract may be either minor or material, and the parties’ obligations and the legal remedies that may be available to them usually will depend on which type of breach occurred.

A minor breach of contract is the comparatively insignificant breach of a contract.

A breach is minor if, even though the breaching party failed to perform some aspect of the contract, the other party still receives the item or service specified in the contract. For example, unless a contract specifically states that “time is of the essence” (that is to say, that the deadlines specified in the contract are firm and may not be altered) or states that delivery must occur on or before a particular date, then a short delay by one of the parties may be considered by the court to be only a minor breach of the contract.

When a breach is minor, the wronged party remains obligated to fulfill its own promises under the contract, but it may recover any monetary damages it suffers as a result of the breach.

A material breach of contract is the significant beach of a contract.

A breach is material if, as a result of the breaching party’s failure to perform some aspect of the contract, the other party receives either nothing at all or something significantly different than what the contract specified. For example, if the contract states that one party will receive a Ford F-150 pickup truck in exchange for a specific amount of money, but the vehicle that is delivered to the buyer is a Hyundai Elantra sedan, then the breach is a material one.

When a breach is material, the wronged party is no longer required to fulfill its own promises under the contract and it may seek compensation for breach of the entire agreement. A minor breach accompanied by what the law calls an “anticipatory repudiation” of the contract – a statement or hint by the breaching party that it will not be fulfilling its promises – is often treated as a material breach.

Some of the factors that the court will consider in determining whether a breach is material or merely minor include:

    -  the extent to which the wronged party has already benefited from the contract
    -  whether the wronged party can be adequately compensated for the monetary damages     that it has incurred
    -  the extent to which the breaching party has fulfilled its promises under the contract
    -  whether the breaching party has acted either deliberately or negligently in breaking its     promises under the contract
    -  the likelihood that the breaching party will fulfill the rest of its promises under the     contract

What are some of the potential legal defenses to a breach of contract claim?

In addition to raising one or more of the contract formation-related legal defenses described in the article on this website entitled “What is a Contract?”, a party sued for breach of contract also may argue (if it applies) that:

    -  performance of the contract has become impossible (for example, because the bridge over     which the promised goods were going to be transported was destroyed in an     earthquake or because the famous singer who agreed to sing at an event came down     with a case of laryngitis on the night of the show)
    (the source of the impossibility must be objective (rather than subjective) and it must         arise after the     contract is formed)
    -  the purpose of the contract has been frustrated (for example, because a person was hired     to paint a barn, but the barn has since burned down)
    (the source of the frustration must completely or almost completely destroy the     purpose of contract)
    -  the contract itself limits the amount of monetary damages that a party can recover (for     example, because the agreement stated that, in the event of a minor breach, the     wronged party will be owed $100, regardless of what their actual financial loss is)
    (however, the agreement may not be so obviously unfair as to be “unconscionable”)
   
What are some of the remedies that a wronged party may be able to obtain?

When one party breaches a contract, and the wronged party takes them to court, what the wronged party requests, and, if successful, receives from the court is an order providing the wronged party with one or more of several potential legal (money-focused) or equitable (fairness-focused) “remedies.”

Potential remedies for breach of contract include:

    - damages (a.k.a. money)
    - an injunction
    - specific performance
    - contract rescission
    - contract reformation

Damages – which is what the law calls monetary (money) compensation awarded to the wronged party – is by far the most common legal remedy for breach of contract.

The basic purpose of damages is to place the wronged party in more or less the same position that they would have been in had the breaching party fulfilled its promises and the contract been performed. They are intended to cover the losses that the wronged party incurred as a result of the breach of contract.

Compensatory (or “actual”) damages of this kind come in three major forms:

    -  expectation damages are intended to allow the wronged party to purchase a substitute     performance through another similar contract if it wishes
    -  reliance damages are intended to put the wronged party in the exact same position that     it would have been in had the contract never been formed
    -  consequential damages (also known as “special damages”) are intended to help cover the     wronged party’s particular circumstances (for example, lost profits directly related to     the breach of contract)

In determining what amount of monetary compensation the breaching party should have to pay to the wronged party, the court will consider each of the following:

    -  causation: whether and to what extent the breach of contract actually caused the wronged     party’s losses (because any losses that are not a result of the breach of contract may not     be compensated)
    -  foreseeability: whether and to what extent the wronged party’s losses resulting from the     breach of contract were foreseeable when the contract was formed (because any losses     that were not foreseeable may not be compensated)
    -  calculability: whether and to what extent the wronged party’s losses are capable of being     accurately measured (because any losses that cannot be calculated may not be     compensated)
    -  unavoidability: whether and to what extent the wronged party’s losses were (un)avoidable     (because any losses that the wronged party could have prevented but failed to prevent     may not compensated)

Punitive damages (also known as “exemplary” damages) are another type of damages that are very occasionally awarded to the wronged party when a contract has been breached. They are awarded in addition to compensatory damages to the wronged party in order to punish or make an example of the breaching party when the breaching party has acted in a particularly egregious way either deliberately or recklessly and/or sought to defraud the wronged party.

An injunction is a court order prohibiting the breaching party from doing something or commanding the breaching party to do something.

Specific performance is an equitable remedy through which the court orders the breaching party to fulfill its promises under the contract or potentially be held in contempt of court. Specific performance is only potentially available as a remedy when rare or unique goods (such as a piece of land or a house or a famous painting) are involved or when a substitute contract will not help the wronged party and when performance of the contract is actually possible. As a general rule, a wronged party may sue for specific performance only in the event of a material breach.

Contract rescission is where the contract is cancelled, while contract reformation is where the contract is re-written.