What is a Breach of Contract?
A breach of contract is a violation of contractual obligations by any of the parties to the agreement without lawful excuse, when such a violation produces harm to the other party. The purported term "materiality" found in many business contracts does not apply to the breach itself, but rather relates to the innocent party’s expectation of future performance. Thus, if a contract explicitly states the specific performance contemplated, then the breach of that specific performance, whatever it is, may be material under the law. Consequently, any deception or misrepresentation that leads to the breach should be carefully scrutinized when determining damages or compensation for the errant performance (breach) of a contract.
A breach of contract can be either a negative representation (the implied promise that the statement is true) or a positive representation (the implied promise that the statement was approved), that is not true, i.e., is a deception committed during contract negotiation. Such deceit can occur either as an express misrepresentation or an intentional omission or concealment of a material fact . Additionally, the breach may lead to either tort (e.g., fraud) liability or contract liability. However, a breach of contract shall not cause any damage to its innocent party, often referred to as a "non-material" or "immaterial" breach.
Generally, a breach of contract occurs when a party to (or beneficiary of) a contract:
- fails to perform any term of the contract without a legitimate legal excuse (including a poor financial condition);
- fails to perform within a reasonable time, if the contract does not specify when time of performance is due;
- fails to perform to the specific quality, regardless of whether a specific time of performing is stated in the contract; or
- unjustifiably fails to fully perform its contractual obligations.
Contract law principles may differ from state to state, and from one case to another. Nevertheless, courts make every effort to enforce contract terms in accordance with their letter—the intent of the parties to the contract specifically and, generally, of commercial law.
Significant Historical Breach of Contract Cases
The following are some well-known historical cases concerning breach of contract:
Temptation Beverages, Inc. v Kelly: The plaintiff hired Kelly to sell its soda drink products in exchange for a 10% commission. Kelly breached the contract, but made $75,000 selling instead a competing product. The court held that Kelly’s liability for the breach was limited to the amount that he could have earned as a result of selling plaintiff’s product (i.e. 10% of $750,000).
Daskam v. Daskam: A mother and son signed a 99-year lease with an option to purchase. When the time came to exercise the option, the parties’ had a disagreement and the son walked away from the deal. The court held that an option to purchase real estate is a unilateral contract, meaning that the offer to purchase the property could not be revoked. The court held that the son must allow the mother to assign her interest in the property, and she would have a year to complete the purchase.
Astra USA, Inc. v. Santa Clara County, California: Astra sold drugs to wholesalers who would then distribute the drugs to medical plans and pharmacies. The price charged for drugs sold under the Medicaid program were at times more or less than the price paid by similar private purchasers. Astra first sought reimbursement from the wholesale purchaser, and after a period of time sued Santa Clara County for reimbursement of the amount paid for drugs purchased for Medicaid eligible patients. The court held that the state violated the assignment principle by directing the wholesale purchaser to seek reimbursement of its overpayments from Astra.
Recently Highlighted Breach of Contract Cases
One prominent breach of contract case in the last 10 years was Aguas Lenders v. Suez, which revolved around the duty of good faith. In this case, Suez SA and the Suez North America Group agreed to sell their 50.1% interest in Aguas Argentinas (AA) to companies owned by a group of Argentine businessmen. The sellers were to receive a $3.5 billion payment in five installments. However, shortly after the transaction was announced, the Argentine government enacted a law providing for the expropriation of AA’s assets at book value. Suez exercised its right to exit the agreement and sold its shares to the new owners for $500,000. Suez later sued for the remaining $1.6 billion in damages, arguing that the parties did not have a clear agreement limiting the sellers’ liability to the $500,000.
Despite the sellers’ arguments that Suez had a duty of good faith to stay in the contract until the payment was completed, the court ruled that there was no way to regulate Suez’s good faith in order to maximize the seller’s profit. Any provision to allow such a condition would have rendered the end of the contract meaningless.
Recent statutory breaches of contract cases include Shedden v. Connie Lee Ins. Co. (Reed Smith LLP handled this case) where the United States Court of Appeals for the Fourth Circuit decided that the insurers of the Travelers Indemnity Co. were liable to the insured for breach of contract. The underlying cause of action involved misrepresentation by the insured David K. Everich and that of an employee. In turn, this misrepresentation gave rise to Travelers’ cancellation of the policy. The general counsel of the insurance company decided that the policy never ceased to exist, although it was subsequently canceled by Travelers.
The court held that the Travelers’ letter mentioned above was ambiguous and that the insurance company had failed to affirm the coverage with the insured. As such, it proceeded to state that the Travelers’ letter constituted an offer to renew the policy that was accepted by Everich’s silence.
Common Causes of Contract Breaches
Identifying the Causes of Breach of Contract
While there is an extensive list of things that could lead to a contract being broken, there are three primary categories of breach that tend to be fairly common. These include:
• Non-performance. Sometimes, one party in a contract will simply not follow through on their part of the contract. In some cases, they may not perform the contract at all. If a customer hires you to clean their house every two weeks and you fail to do your job even once, you have breached your contract with them.
• Late delivery. Some contracts have very specific timelines, and failing to adhere to these timelines can lead to a breach of contract . For example, say you’re a construction company that agrees to have a store completed by a certain date, or a supplier that agrees to deliver a shipment of goods by a certain time. Late delivery on both of these cases could lead to a breach.
• Misrepresentations. Finally, misrepresentations made by one party about things like qualifications, experience or capabilities could also be considered a breach of contract. For example, if someone misrepresented their financial stability to a business rather than actually having the cash needed to make the purchases.
Because all of these situations could lead to a wide range of legal disputes, you should do everything in your power to avoid issues with clients or vendors stemming from a breach of contract.
Breach of Contract Legal Remedies
In the event of a breach of contract, a court may award a number of legal remedies to the victim. Compensatory damages and/or monetary damages are the legal remedies most requested in breach of contract cases. However, other forms of relief exist, such as equitable remedies like specific performance, rescission, restitution, cancellation, or reformation. Although these remedies are not compulsory, they may be sought if the circumstances of a particular breach of contract warrant them and the victim sees to file a complaint requesting these equitable remedies from the court.
Compensatory damages are probably the most commonly awarded type of legal remedy in breach of contract cases. Compensation is the idea behind compensatory damages; compensation can be received for loss of wages, price differences, or loss of profits. The point is to compensate the victim so that the benefit of the bargain of the contract is gained from the breach. For instance, if A buys a brand new car for $20,000 from B, but B subsequently breaches the contract by refusing to sell the car, A will be entitled to the property of the car or $20,000 in damages. The measure of recovery will most likely be equal to the original sale price of the car, assuming the measure of recovery did not already take into account the value of the defect in the vehicle at the time of the sale. As you can see, these damages will compensate A, the victim, so that A receives the benefit of his bargain and can purchase another vehicle for $20,000. However, the amount awarded may differ depending on the case at hand – this was just a hypothetical example.
Specific performance is an equitable remedy in which the court forces the defendant to perform his obligations stated in the contract. This type of remedy is also know as "order for specific performance." Most often, specific performance is awarded when money damages are not an adequate remedy for the breach. This would be the case where the victim of the breach would be getting less than expected from the party’s breach; the court will want to protect the victim from that. Specific performance substitute money damages where a special asset shall be returned. Specific performance is commonly requested for cases that involve employment contracts, real estate, partnership agreements, trade secrets, and construction. However, equitable remedies like specific performance are not typically awarded when the breach was relatively minor or if the breach could have been avoided with reasonable effort from the victim. Specific performance will only be granted when there are no other legal remedies available.
Rescission is the undoing of a contract, making it void and having no legal effect. Typically, rescission is sought when an innocent third party was misled into entering a contract and suffered damages as a result. Cancellation is a similar remedy to recission; a cancellation sets aside an agreement as defective or invalid. This relief is generally sought when a failure to perform on the contract would have caused great harm to the other party. Rescission and cancellation are often sought in real estate and partnership agreements.
Restitution is a remedy sought where the party in breach wishes to obtain a benefit from the contract with the party in breach and should pay a form of compensation for the benefits it wishes to obtain. Restitution serves the purpose of preventing unjust enrichment and is sometimes also known as unjust enrichment. To be unjustly enriched means to unfairly benefit from an unjust situation, providing more than was fair. Unjust enrichment can require restitution through money or property, all depending on the situation. Courts of law do not usually award restitution if the harm caused by the breach can be covered by money damages.
How to Avoid a Breach of Contract
Preventing a breach of contract can be rather simple and require minimal effort when a business pays attention to the needs of their contracts. In many cases though, simple mistakes or oversights can lead to grievances down the road. Therefore, careful drafting with clear terms is crucial. If the terms of an agreement are not clear, it often becomes a debate of interpretation with no guarantees that the result will be in your favor. Think ahead in regard to potential issues that may arise and try to include terms that will address the potential for a breach, how parties can avoid or prevent such a breach, and what consequences there may be if a breach occurs .
Regular communication is essential if you do not want to find yourself in a situation where you must look to other measures to enforce a contract. Make sure that you are in the loop with regard to the obligations of both parties. Equally important is the need for effective dispute resolution clauses that range from specifying the forum for litigation (or arbitration) to a specific list of remedies in the event of a breach. What requires emphasis is that these remedies be effective and clear. Will a business suffer consequential damages and if so, how will those damages be calculated? Are there any limitations on liability? These questions must be open to discussion and negotiated upfront or the parties may find themselves in an unexpected situation.