So You Think You Have A Breach Of Contract Claim: How a litigator evaluates your potential claim
We rely on contracts for predictability. They allow us to plan, or at least they should. We also rely on good faith performance by those with whom we contract. Unfortunately, that does not always happen. A breach can be caused by an ambiguously written contract, an unintentional failure to comply with the contract, or an inability to perform under changed circumstances. A breach can also be strategic, such as an intentional decision by one party to break the contract, or refusal to perform based on a theory by one party that the arrangements are technically not enforceable. Whatever the cause, a breach is almost always disruptive, distracting, creates uncertainty, and stalls your plans. Claims for breach of contract must be carefully considered and addressed strategically. There is a basic model lawyers use for this analysis.
The Elements of a Breach of Contract Claim
The basic elements of a breach of contract claim are:
- Formation of a contract
- Enforceable terms of performance
- A party fails to perform
- The default in performance is of some consequence or is material
Formation – Is There A Contract?
The first step is always to determine whether a contract was actually formed. There needs to be an offer of specific terms, and it must be accepted. This is often referred to as a “meeting of the minds.” A written document is the best way to prove a contract was formed, but the general rule is that contracts do not have to be in writing. Agreements can be verbal, or even evidenced by conduct.
When a contract is in writing and signed, formation is usually not in dispute. However, when agreements are not in writing, this initial element of the claim can be grounds for heavy battle over whether the parties even reached an actual, enforceable agreement. Clients are often pleasantly surprised to find out they do actually have an argument for existence of an unwritten contract, but may face a tough time proving its existence.
Enforceability – Is The Contract Specific And Lawful?
The second step is to look at the contract for enforceability. A contract must have terms that are detailed and specific. Without sufficient detail, there is a question of whether there really was a “meeting of the minds.” In addition, the Court cannot effectively enforce the agreement if it is not specific as to all parties’ obligations. Last, courts will not enforce contracts for illegal activities, so if the contract requires conduct that violates some regulation or statute, it is quite likely unenforceable.
Breach – Was There Really A Failure To Perform?
Next, there must be an actual failure of performance. In some contracts this is easy. For example, everyone knows whether a payment was made or not under a loan. However, contracts are often more complicated, including quality standards, triggers for deadlines, delivery arrangements, and other terms that are not always easy to evaluate. Sometimes we find clients are upset about something prematurely, or over something that falls within a reasonable margin of error. Sometimes the issue is that there is a breach in principal, but triggering events or deadlines need to occur before it is an actual breach. We often assist clients in laying the groundwork to establish the breach before declaring a breach occurred.
Nominal, Minor, or Material – Is the Breach Something That Really Matters?
Even if a breach has occurred, it is not always sufficient to assert a claim or refuse further performance under the contract. A nominal breach, one with little damages, is almost never worth pursuing. For a minor breach, there may be more at stake, and the non-breaching party may sue for damages. However, a minor breach does not relieve the non-breaching party from continuing to perform under the contract.
A more substantial breach is called a “material” breach. A material breach is one that defeats the purpose of the agreement. For example, payment a few days late is a minor breach, but refusing to pay at all is a material breach. When there is a material breach The non-breaching party is no longer required to perform under the contract. This is an important distinction, because the ability to refuse further performance can be a major factor in determining how to proceed.
How Do We Measure Damages?
Finally, a case is only worth pursuing, and will only be allowed by the court, if there are actual damages. There are several different ways to measure damages in a breach of contract case.
One method is specific performance. This is where the court orders a party to comply with the terms of the contract. This is not common, because we rarely force people to engage in particular actions or conduct. Specific performance usually comes up when the contract involves unique performance, such as a house or land that cannot be replicated. It is more likely a court will award monetary damages.
In property damage cases, the court will generally limit damages to the cost of restoration or the diminution in value, whichever is less. For example, if someone has damaged your vehicle with a value of $50,000, but the cost of restoring the vehicle would be $100,000, your recovery would be limited to the value of the vehicle in anticipation that you could just buy a replacement.
In supply cases, the measure is the difference in the contracted supply cost and the actual cost of replacement supply. For example, consider a company purchasing “widgets” for a dollar each. The supplier refuses to deliver and replacement cost is three dollars each from a new supplier. The plaintiff can recover the additional two dollars per widget cost from the original supplier.
Damages can be simple math. However, we also regularly see complex situations that involve complex damages calculations. In either case, there must be legitimate damages to assert a claim.
An Illustrative Case …
The case of Jacob & Youngs, Inc. v. Kent is well-known as an illustration of the importance of determining the nature of a breach and measure of damages. There, the plaintiff built a house for the defendant using “Cohoes” piping, even though the contract required pipe “of Reading manufacture.” The Cohoes pipe was of quality similar to that of Reading. However, when the defendant discovered this deviation from the contract, he asked the plaintiff to take the Cohoes piping out and replace it with Reading pipes. This would have been very costly because the building had already been completed.
The court found that the plaintiff did not have to replace the piping because the breach was insignificant. The court measured damages as the difference between the value of the house with Cohoes piping and the value with Reading piping. Because there was no difference in value, the defendant received no remedy, even though plaintiff clearly breached the contract.
Evaluating claims for breach of contract follows a logical model, but the evaluation can still be quite complicated. Some insight into how parties assert and defend cases helps determine whether a claim is worth making or defending. Claims require careful consideration, analysis, development, and strategy.
Chernoff Law has experience with contract disputes related to business, real estate, and insurance contracts. We develop creative solutions to your dispute so you can focus on your business and life. To talk to us about a contract dispute, call 480-719-7307 or contact us HERE.