Breach of Contract: Making and Breaking Deals

Contracts are designed to promote stability. If the individuals or businesses entered into a contract fully understand and abide by the terms of the deal, the contract should fulfill everyone’s expectations. However, if one of the deal makers becomes a deal breaker, there can be serious consequences for everyone involved.

When is a Contract a Good Idea?

There are a number of scenarios or transactions in which having a contract in place is considered wise, whether it involves the performance of a service or the sale of goods. In the event that unexpected developments hinder or prevent a transaction from being carried out, a contract helps either the parties that are involved or a court of law find a remedy. Common types of contracts include:

• Employment contracts
• Construction contracts
• Lease agreements
• Partnership agreements
• Shareholder agreements
• Noncompete agreements
• Nondisclosure agreements
• Sales-related contracts
• Licensing agreements
• Financing agreements
• Intellectual property

Written Versus Spoken

Although contracts can be both written and spoken, oral contracts are sometimes difficult to prove. As a result, it is advisable to always “get it in writing.” Additionally, some types of contracts must be written to be enforceable by law, including those relating to marriage, payment of someone else’s debt, and the sale or transfer of land.

When is a Contract Considered Breached?

When the terms of the deal are not met, a contract is considered breached. For instance, if a painter agrees to paint a customer’s house within seven days, but after seven days, the house still has not been painted, the contract has been breached. In some situations, it is easy to recognize a breach, but in more complex situations, breaches can be harder to identify, and the specifics of the breach can implicate various legal issues.

The more specific a contract is, the easier it is to determine if a breach has occurred. For example, if a contract stipulates that a contractor will paint a house with “Sherwin-Williams eggshell blue within 25-days of the contract being signed,” it is easy to know if the terms have been met. However, if a contract simply states that the house will be painted “a nice blue color before it gets cold out,” determining whether the contract has been breached is more challenging.

Conditional contracts also can make it difficult to determine whether a breach has occurred. A conditional contract is an agreement that is enforceable only if a specific condition is satisfied. For instance, a contract could stipulate that a party will buy a house if the house appraises for $100,000 or more. If the house is appraised at $100,000 or above, the provisions of the contract become binding. This is because the condition has been met. If this house is appraised at $98,000, the provisions of the contract are not binding, as the condition has not been met. In this example, there is no breach of the contract.

Non-Material or Material?

A breach of contract can be non-material or material. Non-material breaches are minor in nature and don’t change the nature of an agreement. For instance, imagine that a party hires a contractor to install pipes in a new house. The contract stipulates that the pipes should be from company A, but the contractor installs pipes of the exact same type and quality, except they were manufactured by company B. This is a minor deviation and therefore considered a non-material breach. However, if the contract specifies that the pipes were to be made of copper and the contractor installed PVC piping, the deviation would be major, and the breach would be material.

Determining whether a breach is material or non-material is not always this easy, but it is critical to the success or failure of a lawsuit and to the amount of damages that may be recovered. For example, when a breach is non-material, the non-breaching party is still required to carry out their part of the deal but may be able to recover damages from the breach. When a breach is material, the non-breaching party no longer is required to perform their contractual duties and has the right to all remedies for breach of the entire contract.

An attorney that specializes in contract law can help assess whether a breach is non-material or material. Factors considered include the following:

Factors in Determining Materiality

• The amount of benefit (if any) received by the non-breaching party
• The degree to which the breaching party performed their contractual obligations
• The hardship caused to the non-breaching party
• Whether there was negligent or willful behavior by the breaching party
• How likely it is that the breaching party will carry out the remainder of the contract
• Whether the breaching party has the means to compensate the non-breaching party for the damage

This last factor is particularly important. If the breaching party has no money or assets, a judgement against them will be of no value. In this scenario, it may not make sense to pursue a lawsuit. That said, if the suit is against a contract or business that requires a state license to operate, the non-breaching party can apply to have the license suspended until damages are paid.

Duty to Mitigate Damages

Although a contract that has been breached is presumably damaging to the non-breaching party, it is that party’s responsibility to take reasonable measures to attempt to limit the damage. Referred to as the duty to mitigate, this obligation is not a law but an expectation of the court. If this expectation is not met, the court could reduce the losses or damages the non-breaching party may have been able to recover if they had attempted to curb the damage.

Consider a scenario in which a fisherman enters into a contract with a supermarket that commits to buying 500 pounds of live lobster from him every month. If the fisherman brings the live lobster to the supermarket and the supermarket refuses to take delivery, he must take reasonable measures to sell the lobster to someone else. The fisherman cannot sit idly by as the lobster die (and thus lose their value) and then sue the supermarket for the value of all of the lobster. However, if he took reasonable steps to sell them to someone else, but could not, the supermarket would be liable for the entire value of the lobster. Additionally, if the fisherman was able to sell the lobster for only 50% of what he would get from the supermarket, the supermarket would likely be liable for the difference in price.

Remedies

Contracts are promises that the law will enforce. As such, if the promise is breached, the harmed party may file a lawsuit asking the court to provide remedies. Generally, there are two types of remedies: monetary damages or specific performance. Like all civil actions, however, a breach of contract lawsuit cannot be filed if the statute of limitations has expired. In Colorado, the statute is three years for both written or oral contracts.

In the majority of situations, courts find that awarding monetary damages is the appropriate remedy. In these instances, the court orders the breaching party to pay the other side in an effort to “make the other party whole” or to put them in the same financial situation they would be in had the contract not been breached.

A common perception is that a breach voids the contract. For instance, if a painter painted only 75% of a house, the homeowner may conclude that they are not obligated to pay the painter any amount, as the job was not completed. This is not the case. In this situation, the homeowner would be responsible for mitigating damages by hiring a second contractor to finish the work. The court would then likely reduce the payment owed to the original painter by the amount of the second painter’s contract.

In some situations, courts will determine that awarding monetary damages is not the most appropriate remedy for a breach. Instead, they could order the breaching party to comply with the terms of the contract. This is called specific performance. Consider a scenario in which two parties enter a contract for the sale of a house and the owner of the house refuses to sell the house. In this case, the court could order specific performance that mandates the owner to sell the house to the opposing party (buyer) per the terms of the contract.

Although this article provides a general understanding of what a breach of contract is and outlines possible remedies in the event of a breach, because of the complexity of contracts it is a good idea to consult with an experienced and knowledgeable business or contract attorney.

If you are party to a contract that has been breached, contact an attorney at Robinson & Henry, LLC at 303-668-0944.