What Constitutes a Breach of Contract
A breach of contract is the failure of a party to perform what they agreed to in the contract. Therefore, essentially, a breach of contract occurs when one party fails to fulfill their obligations under the contract. There are several elements involved for a claim of breach of contract. First, there must be a valid contract. Id. Second, the breaching party must have failed to perform (i.e., has fallen short of the stipulated terms of the contract). Id. Third , the other party must be harmed by this failure to perform. Id.
Some types of breaches are material breaches and minor breaches. A material breach occurs when one party fails to render full performance under a contract. Id. at *3 (citing C&M Properties, LLC v. 2013 W. Founders, LLC, 852 S.W.2d 16, 20 (Tex. App.— Houston [14th Dist.] 1993, writ denied)). In other words, an essential term of the contract has not been satisfied and has substantially defeated the purpose of the contract. Id. A minor breach is less substantial. It occurs when the breach is not so crucial to the contract that it materially defeats its purpose. Id.
Legal Remedies Available for Breach of Contract
When a breach of contract occurs, the injured party is entitled to a legal or judicial remedy. Legal remedies are generally monetary damages. Different precepts are followed for calculating monetary damages in tort actions.
Damages. In a breach of contract case, a plaintiff may seek compensatory damages (actual damages) or consequential damages (special damages). "Actual damages" include the loss of what was promised in the contract. These damages fall under both contract law and tort law. However, actual damages do not cover losses that do not arise from the breach itself. For instance, consequential damages in a contract case arise from special circumstances outside the contract. Damages are recoverable for those losses only if both of the following circumstances are shown:
1) The loss must have been within the contemplation of both parties when the contract was made as a probable result of a breach.
2) The loss must be the result of special circumstances that would cause the loss in addition to the loss directly flowing from the breach.
For example, in a contract to repair an automobile, the owner usually expects to recover the cost of repairs that are in the contract. However, the owner does not have a right to recover rents due to inconvenience of not having the car or money in excess of the repair cost. In other words, the damages caused by a breach of contract are limited to those damages reasonably foreseeable at the time the parties entered into the agreement.
Specific Performance. In some circumstances, a party may be awarded specific performance. Specific performance occurs when a court requires performance or fulfillment of the terms of a contract. Specific performance may be ordered as a remedy when remedy in action for damages would be inadequate. However, specific performance is not often ordered.
Rescission. A rescission occurs when a court order cancels all obligations under a contract and returns the parties to their original positions. A contract will be rescinded when a party obtains an agreement under a mistake of material fact.
Type of Monetary Damages
As noted above, there are four types of remedies available for a breach of contract. As to the first type of remedy, monetary damages, the starting point is the principle that such damages are designed to compensate the wronged party for its losses arising out of the breach. The goal is generally to make the non-breaching party whole. Thus, the most basic form of damages is compensatory damages – some form of monetary compensation awarded to the non-breaching party (also known as the non-breaching party) as compensation for the loss of a right or breach of an obligation. Compensatory damages are measured the value of the benefit of the bargain – the value of the promised performance less the value of the performance rendered. So, for example, if a seller breaches a contract with a buyer to sell widgets for $100, and each widget has a market value of $250, then assuming that the buyer can mitigate its damages, the buyer could recover $150 in compensatory damages ($250 – $100).
Punitive damages (also known as exemplary damages) are a second type of potential damages. These are awarded over and above compensatory damages and are designed to punish the breaching party when its acts rise to the level of egregious misconduct. Punitive damages are typically not available for breach of contract. However, when the breach of contract claim is also joined with a tort claim, like fraud, a plaintiff may be able to recover punitive damages for the breach of contract claim.
Nominal damages (also known as token damages, or damnum absque injuria) are another type of damages. These are awarded when there is a breach of contract but no actual damages incurred by the non-breaching party. The purpose of nominal damages is to recognize that a legal right of a party has been violated even though the party has not suffered actual damage.
The fourth type of damages is liquidated damages – damages that have been agreed upon in advance by the parties. Courts will enforce such liquidated damages provisions, provided that the damages set forth therein are not deemed to be a penalty.
Non-Monetary Relief
In contrast to monetary remedies, which require the breaching party to pay a sum of money to the non-breaching party (or parties), some contracts may also allow for non-monetary remedies for breach. The most common non-monetary remedy for breach of contract is specific performance. This remedy may be ordered by the court if the non-breaching party will be irreparably harmed by a breach. For instance, if a contract for the sale of real property (including contractual agreements for the lease of real property) has been breached, specific performance may be ordered by the court to force the sale of real property. Specific performance is also appropriate in situations where goods that are unique or one-of-a-kind are the subject of the contract and cannot be duplicated or replaced. Specific performance requires that the parties perform their obligations under the contract, or to provide exactly what they agreed to provide.
Specific performance is often available if a party breaches a contract to build or design a structure or an improvement to real property that the non-breaching party wants. It is also important that a court will not order specific performance unless the contract can be enforced in part. Conversely, if the court feels that it cannot enforce all parts of the contract, then the court will likely not order specific performance to enforce any part of the contract.
Factors in Choosing a Case Remedy
When a court is faced with the question of what sort of remedy should be awarded in the event that a breach of contract has occurred, it will take a number of factors into consideration, including the severity of the breach, the available evidence and the nature of the detriment suffered by the non-breaching party. In addressing the issue of severity or materiality of the breach, some courts have explained that it refers to something substantial and fundamental that goes to the heart of the agreement or the issue of whether the breach "frustrated the purpose of contract performance". Some jurisdictions require that a material breach goes to whole essence of the contract or is of the essence of the contract; other jurisdictions need not reach that high standard. Whether a breach frustrates the purpose of a contract is an objective test and varies with the surrounding circumstances. For example, where the purpose for which the contract was entered into is one that the breaching party could be said to have had in mind when the agreement was made, then they cannot be heard to complain that the contract is not being performed in accordance with their expectations. However, care must be taken because the court may well find that there has been no breach if the party seeking to rely on frustration really bargained for protection against a particular eventuality and was prepared to accept a different result from the one which would have arisen without the supervening event. The extent of the harm or detriment suffered by the non-breaching party is a vital consideration in determining whether any remedy should be imposed or whether the innocent party should be required to show that the breach has been sufficiently harmful to it to justify the imposition of a duty on the court to give effect to that party’s reasonable contractual expectations. In particular, where the detriment or injury suffered is so slight as to make enforcement of the innocent party’s expectations a harsh remedy, the court may be inclined to give the contract a purposive interpretation so that the breach is found not to be material . Whether or not a breach was likely to cause, foreseen or foreseeable loss also comes into play here. An example given in one American case: Thus, if A enters into a contract with B to grow tomato plants in brackets, and unknown to them, B’s cousin C enters into a contract with D to buy, and D contracts with E to sell, tomato brackets produced by persons other than A, and the tomatoes that E buys are infested with deadly blight, and the first plants fail to produce any tomatoes, and A learns about all this but fails to return the phone call of B, who wants to know why he has not delivered all his produce, the former may be thought to have suffered from a breach, but the latter cannot be said to have done so. On the other hand, if A, at the time he contracted, had known that B had been called away by C and therefore would have been the victim of an accepted failure to perform by his sub-contractor, normal business practice might have required him to send some one-day warning, once that risk emerged, that this contract with B might have to be regarded as at an end. Therefore, whether the breach was ‘trivial’, or occurred ‘in circumstances where the innocent party chose to run the risk of a breach’ will play a significant part in the court’s decision on whether the innocent party’s expectations at the time of contracting should be given effect. While a view of merely theoretical realism may require a rejection of such expectations, the demands of justice may require that a degree of acknowledgement of them should be made; that is, it would be contrary to public policy to repudiate a contract in full knowledge that the breach is inevitable or that one party has no intention of performing. The correct approach that should be adopted may consist of the application of an objective test. The circumstances shared by the parties, their expectations, the purpose for which they contracted and the goals they hoped to accomplish in taking up the relationship must be kept in mind.
Prevention & Contract Terms
To reduce the chances that a dispute under a contract will land you in court, consider incorporating an arbitration clause, which requires parties to submit their claims to private arbitration. Typically in arbitration, a neutral third party, usually a retired judge or an attorney, acts as the arbitrator and makes a decision after both sides present evidence and legal arguments. Arbitration is generally faster and cheaper than going through the court system. That said, you usually can’t appeal the arbitrator’s decision. If you don’t want arbitration, you can consider including a limitation of liability clause in your contracts. This can help keep claims and damages in check. A limitation of liability clause sets caps on the amount of damages the nonbreaching party can recover, no matter how bad the damage or how reckless or fraudulently the breaching party acted. Such a clause won’t protect either party from liability for gross negligence or intentional misconduct, and it may not be enforceable in your state if it’s deemed unconscionable. (An unconscionable provision is one that is one sided to the point that it’s grossly unfair.)
Examples: Breach of Contract
Throughout this article, we’ve discussed what contract breach means and ways to seek remedy for that. But how are contract breaches applied in the real world? We’ll take a look at a few case studies. In Norcon Power Corp., the plaintiff alleged that Norcon failed to pay for services, in claim for money due. However, the court found that there was no contract, thus dismissed the case. The plaintiff informed the defendant about the delay of one the components and when that would be delivered. The defendant required certain assurances from the plaintiff that it would meet the completion schedule even though the delay, which the plaintiff provided. The court held that that evidence was a contract to agree to agree , which made it unenforceable.
The plaintiff entered into a land development agreement with the defendant for 70 residential lots. The agreement called for the plaintiff to obtain a loan or loans to fund the purchase of the land and infrastructure costs. They intended to develop the property as a single project. The plaintiff then changed its mind, only wanted 10 lots and sued the defendant for not preparing plans for the single project. The court found that for a prior contract to work for one of the lot owners, there had to be a new contract that modified the original terms. The plaintiff entered into a 10-year contract to purchase specific aircraft spare parts from the defendant, but the defendant failed to deliver them. The court held that the intent the parties made clear in the agreement showed that damages were for the loss of bargain, and this justifies awarding expectation damages.