Understanding

Contract Law & Breach of Contract

 

How to Approach Contract Law

 

Contract law follows the dictates of common sense and fairness. After looking at all the facts and circumstances, you should answer the following questions:

 

1. Was there an agreement?
2. What did each party commit to do?
3. Did either party – or both – fail to do what he or she promised?
4. If yes, how do you measure the cost to the nonbreaching party?

 

The usual objective of remedying contract claims is to put the parties in the position they would have occupied if the contract had not been breached.

 

What is a Contract?

 

Contracts are agreements that the law will enforce. Contracts are individual, or private, rights and duties created by oral or written agreement and consent of the parties. Contracts may include obligations imposed by law even if the parties are not aware of those obligations. “Performance” on a contract basically means doing what you’re obligated to do under the contract.  {Click for a study of "Contract Law"}

 

What are the Different Types of Contracts?

 

Express Contract: The promises are communicated by language, either oral or written. Example: John promises to paint Dan’s car in return for Dan’s promise to pay him $100. {Click here for "Contract Questions & Answers"}

Implied Contract: The conduct of the parties indicates that they consented to be bound. Example: Toni fills her car with gas at Tina’s gas station. There is a contract for the purchase and sale of gas.

Unilateral Contract: A person accepts an offer by performing a requested act. The terms of the offer must clearly indicate that an act is required for acceptance. Example: John tells Dan that he will pay Dan $100 if Dan paints his car, and that Dan should show acceptance of the offer by the act of painting the car. Dan accepts by painting the car.

Bilateral Contract: A person accepts an offer by promising to do the requested act. Example: Red Company offers to buy 100 widgets from Green Company for $100. Green Company promises to deliver the 100 widgets to Red Company.

 

When Does a Contract Exist?

 

When a party files a suit claiming a breach of contract, the first question the judge must answer is whether a contract existed between the parties. The complaining party must prove four elements to show that a contract existed:

 

1. Offer - One of the parties made a promise to do or refrain from doing some specified action in the future.

2. Consideration - Something of value was promised in exchange for the specified action or nonaction. This can take the form of a significant expenditure of money or effort, a promise to perform some service, an agreement not to do something, or reliance on the promise. Consideration is the value that induces the parties to enter into the contract. The existence of consideration distinguishes a contract from a gift. A gift is a voluntary and gratuitous transfer of property from one person to another, without something of value promised in return. Failure to follow through on a promise to make a gift is not enforceable as a breach of contract because there is no consideration for the promise.

3. Acceptance - The offer was accepted unambiguously. Acceptance may be expressed through words, deeds or performance as called for in the contract. Generally, the acceptance must mirror the terms of the offer. If not, the acceptance is viewed as a rejection and counteroffer. If the contract involves a sale of goods (i.e. items that are movable) between merchants, then the acceptance does not have to mirror the terms of the offer for a valid contract to exist, unless:

 

(a) the terms of the acceptance significantly alter the original contract; or
(b) the offeror objects within a reasonable time.

 

4. Mutuality - The contracting parties had “a meeting of the minds” regarding the agreement. This means the parties understood and agreed to the basic substance and terms of the contract. When the complaining party provides proof that all of these elements occurred, that party meets its burden of making a prima facie case that a contract existed. For a defending party to challenge the existence of the contract, that party must provide evidence undermining one or more elements.

 

Does a Contract Have to be Written?

 

In general, there is no requirement that a contract be in writing. Although the Statute of Frauds requires certain types of contracts to be in writing, South Carolina recognizes and enforces oral contracts in some situations where the Statute of Frauds does not apply.

 

One important difference between oral and written contracts is the statute of limitations that creates deadlines for filing lawsuits concerning the contract. For oral contracts, the statute of limitations is four years. For written contracts, the general statute of limitations is six years. However, if the written contract is for the sale of goods, the statute of limitations is four years unless the parties contract for a shorter period. The shorter period cannot be less than one year.

 

How Is a Contract Interpreted?

 

The court reads the contract as a whole and according to the ordinary meaning of the words. Generally, the meaning of a contract is determined by looking at the intentions of the parties at the time of the contract’s creation. When the intention of the parties is unclear, courts look to any custom and usage in a particular business and in a particular locale that might help determine the intention. For oral contracts, courts may determine the intention of the parties by considering the circumstances of the contract’s formation, as well as the course of dealing between the parties.

 

What Constitutes a Breach of Contract?

 

A contract case usually comes before a judge because one or both parties claim that the contract was breached. A breach of contract is a failure, without legal excuse, to perform any promise that forms all or part of the contract. This includes failure to perform in a manner that meets the standards of the industry or the requirements of any express warranty or implied warranty, including the implied warranty of merchantability. When a party claims a breach of contract, the judge must 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?

 

What is the Difference Between a Material and Minor Breach of Contract?

 

A breach of contract can be material or minor. The parties’ obligations and remedies depend on which type of breach occurred. {Click here for information on "Breach of 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 something substantially different from what the contract specified. For example, if the contract specifies the sale of a box of tennis balls and the buyer receives a box of footballs, the breach is material. When a breach is material, the nonbreaching party is no longer required to perform under the contract and has the immediate right to all remedies for breach of the entire contract. Factors that the courts consider in determining materiality include:

 

1. The amount of benefit received by the nonbreaching party; 
2. Whether the nonbreaching party can be adequately compensated for the damages;
3. The extent of performance by the breaching party; 
4. Hardship to the breaching party; 
5. Negligent or willful behavior of the breaching party; and
6. The likelihood that the breaching party will perform the remainder of the 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 the contract specifically provides that “time is of the essence” (i.e. deadlines are firm) or gives a specific delivery date of goods, a reasonable delay by one of the parties may be considered only a minor breach of the contract. When a breach is minor, the nonbreaching party is still required to perform under the contract, but may recover damages resulting from the breach. For example, when a seller’s delay in delivering goods is a minor breach of contract, the buyer must still pay for the goods but may recover any damages caused by the delay.

 

What Happens After a Contract is Breached?

 

When a breach of contract happens (or when a breach is alleged), one or both of the parties may wish to have the contract enforced on its terms, or may try to recover for any financial harm caused by the alleged breach.

 

If a dispute over a contract arises and informal attempts at resolution fail, the most common method used to resolve contract disputes and enforce contracts is through lawsuits and the court system. If the amount at issue is below $7,500 the parties may be able to use "small claims" court to resolve the issue.

 

Courts and formal lawsuits are not the only option for people and businesses involved in contract disputes. The parties can agree to have a mediator review a contract dispute, or may agree to binding arbitration of a contract dispute. These out-of-court options are two methods of "alternative dispute resolution."

 

No matter what avenue is chosen to remedy a breach of contract, the non-breaching party will most likely be entitled to some kind of remedy under the law.

 

Remedies for a Breach of Contract

 

When an individual or business breaches a contract, the other party to the agreement is entitled to relief (or a "remedy") under the law. The main remedies for a breach of contract are (1) damages, (2) specific performance, (3) or cancellation and restitution.

 

Damages

 

The remedy that is most often used for a breach of contract is the remedy of damages -- payment in one form or another, made by the breaching party to the non-breaching party. There are many kinds of damages, and generally speaking damages may be very specific to the kind of breach that has occurred. Following are some guidelines on damages.

 

Compensatory damages aim to put the non-breaching party in the position that they had been if the breach had not occurred.

 

Punitive damages are payments that the breaching party must make, above and beyond the point that would fully compensate the non-breaching party.  Punitive damages are meant to punish a wrongful party for particularly wrongful acts, and are rarely awarded in the business contracts setting.

 

Nominal damages are token damages awarded when a breach occurred, but no actual money loss to the non-breaching party was proven.

 

Liquidated damages are specific damages that were previously identified by the parties in the contract itself, in the event that the contract is breached. Liquidated damages should be a reasonable estimate of actual damages that might result from a breach. 

 

Specific Performance. If damages are inadequate as a legal remedy, the non-breaching party may seek an alternative remedy called specific performance.  Specific performance is best described as the breaching party's court-ordered performance of duty under the contract.  Specific performance may be used as a remedy for breach of contract if the subject matter of the agreement is rare or unique, and damages would not suffice to place the non-breaching party in as good a position as they would have been had the breach not occurred.

 

Cancellation and Restitution. A non-breaching party may cancel the contract and sue for restitution if the non-breaching party has given a benefit to the breaching party. "Restitution" as a contract remedy means that the non-breaching party is put back in the position it was in prior to the breach, while "cancellation" of the contract voids the contract and relieves all parties of any obligation under the agreement.

 

By: George M. Sistrunk