Updated: June 23, 2021
BEFORE PURSUING A BREACH OF CONTRACT LAWSUIT, IT IS IMPORTANT TO CLEARLY ASSESS THE CHANCES OF SUCCESS, THE APPLICABLE DAMAGES, AND OTHER FACTORS
Few things are more frustrating for a business owner than having a client or vendor breach a contract. The other party failing to live up to its end of the bargain can result in a variety of scenarios that cause operational and financial distress. One option is to sue to recoup damages. However, this is a decision that requires careful consideration.
An attorney will carefully assess the viability of a case, including its strength, the potential damages that a business may be entitled to, the possible expense of a suit, and the defendant’s ability to pay if a lawsuit is successful. This analysis will provide a business with the information it needs to determine whether a suit is worth the effort, time and expense.
THE COMPONENTS OF ASSESSING A CASE
Before starting legal proceedings, it is essential to clearly assess the case in terms of likelihood of success, the time and expense involved, and the possibility of receiving an award for damages.
- First, is there a breach of contract? Are you likely to win the case?
- How much will the case cost you? Is the money you will have to pay for legal and other fees worth it based on what you can expect to recover?
- What are the potential damages you can collect? Are consequential damages a possibility and, if so, to what extent?
- Can the breaching party afford to pay you? If it is a smaller business without much capital, a lawsuit may be a waste of time and money.
- Is there an attorneys’ fees clause in the contract? Some contracts include a provision that stipulates the losing side must pay the winning side’s reasonable legal fees if there is a breach that results in a verdict.
A business that has suffered a contract breach and its qualified legal team will assess and answer these questions before proceeding with a lawsuit.
WHAT IS A BREACH OF CONTRACT?
Under New York law, four elements must be present to prevail on a breach of contract claim:
- There must have been a valid, binding, contract
- One party performed its obligations under that contract
- Another party failed to perform its duties
- Damages resulted from the non-performance
A high-profile example occurred in 2012, when Macy’s department store sued Martha Stewart Living and J.C. Penney. Macy’s alleged that Stewart Living, who had an exclusive contract with Macy’s, chose to sell select items through J.C. Penney after J.C. Penney bought a minority stake in Stewart Living. Macy’s claimed that this arrangement violated the terms of its agreement with Stewart Living and hurt its sales. After Macy’s and Stewart Living settled out of court, the court ruled against J.C. Penney, eventually ordering the retailer to pay roughly $3.5 million in damages in 2016. J.C. Penney appealed the ruling, and the case was settled via an undisclosed agreement reached in 2017.
THE TYPES OF CONTRACTUAL BREACHES
Before pursuing damages, a company’s representatives should understand the types of breaches that may exist.
The first is a minor or impartial breach in which some of the contract is fulfilled, while other parts are not. For the violation to be considered minor, it must not prevent the rest of the agreement from continuing as planned and the non-breaching organization must fulfill its obligations. For example, if a clothing store orders items from a manufacturer and some goods do not arrive, the store could sue for damages resulting from the partially failed delivery. In this case, the store has to pay for the items that do come to fulfill its end of the contract.
A more serious situation is a material or total breach, where the unfulfilled portion of the contract is substantial enough that the parties cannot continue the arrangement. In this scenario, the non-breaching party can stop fulfilling its obligations and of course opt to sue for damages. Using the same example as above, if the manufacturer does not deliver the product to the clothing store, the store does not have to continue providing compensation for future items in the contract, regardless of whether the breaching party can deliver them.
An anticipatory breach occurs when one organization informs the other or otherwise indicates that it won’t be able to fulfill its obligations. In this case, a non-breaching party must attempt to avoid incurring additional losses or expenses that result from the breach to be able to recover the damages caused by it. Basically, if a company knows the other party will not live up to its end of the bargain, it cannot purposely rack up charges and expect to get the money back later.
For example, if the clothing store was planning a significant sale of a unique item and had a contract with a manufacturer to deliver that item by a certain date, but the manufacturer informed the retailer that it could not meet the demand after the contract was signed. The store’s ability to claim extensive damages later is undermined if it continued advertising the sale after this notification.
There are various damages, including compensatory, consequential, nominal, and liquidated damages, that a company might receive based on the type of contractual breach and the losses it incurs.
THE TYPES OF DAMAGES FOR A BREACH OF CONTRACT
If a case is successful and it is ruled that the other party breached its contract, a business can collect damages.
Nominal damage and liquidated damage awards are typically smaller awards that apply to particular cases. Nominal damages may be seen in cases in which no real harm was caused by the breach. Thus, these damages are often small and symbolic (e.g., $1). They simply signify that the plaintiff was “in the right.” Liquidated damages represent the amount the parties have pre-emptively agreed to pay in the event of breach. They are often stipulated in the contract, often when it is understood that actual damages will be hard to calculate in the event of a breach. Two other forms of damage—compensatory and consequential—are usually far more important when assessing the merit of a case and its potential worth.
Compensatory damages (also known as direct damages) are meant to put the non-offending party in the exact same financial position it would have been in had the breach not occurred. For example, if a company had waited on a $500,000 shipment of clothing to arrive at its retail store, the breaching party would have to provide it with these goods or, if this is not possible, completely reimburse what was paid for them.
Consequential damages go beyond compensatory because they look at various monetary elements that a company may have lost as a result of the contract breach. For example, if a company spent money promoting a sale, lost sales as the result of the clothing shipment not arriving, or the payment of expedited shipping costs to an alternate supplier, it can potentially collect those sums in consequential damages.
These damages may also cover losses if the non-breaching party failed to deliver on its contracts with other parties that relied on the manufacturer fulfilling its obligations. A key to understanding consequential damages is that they should be “reasonably foreseeable” rather than “speculative.”
WHEN ARE CONSEQUENTIAL AND COMPENSATORY DAMAGES AWARDED?
To fully understand the difference between consequential and compensatory damages and how each may apply, we will continue using the example of the clothing store and one of its manufacturers. In this scenario, the retailer has paid $500,000 for a large shipment of clothing. The store also has another contract in place with a smaller retailer, where it will deliver a percentage of this clothing for re-sale.
Four days before the order is due to arrive, the manufacturer contacts the retailer and says it will be late. The store desperately needs this clothing, so it agrees to this new timeline. The manufacturer, however, fails to deliver on the new date, leaving the retailer in a bind because it has the second contract in place with the smaller retailer. As a result, the retailer must rush to track down another clothing supplier to avoid breaching its contract—and this may result in expedited shipping costs and a higher price for the goods.
This situation could include both compensatory damages and consequential damages being awarded by a court. The compensatory damages would be a repayment of the original $500,000 because the retailer did not receive the goods it ordered. The consequential damages may include the charges that resulted from the retailer having to find a new supplier.
KNOW WHAT YOU’RE DOING BEFORE YOU BEGIN
Always consult a lawyer before engaging in any legal proceedings. Romano Law provides litigation services in a variety of business disputes, including breach of contract. Get in touch to set up a consultation that will review which actions may apply in your situation.
This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.