Breach of Contract

I. Breach of Contract

A contract is an agreement between two parties that is enforceable by law. A contract is created through an offer by one party, acceptance of the offer by another party, and the exchange of consideration between the parties. Consideration is when the parties provide each other with something of value.  A breach of contract occurs when one party to the contract does not fulfill their obligation to the other party.

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II.  Elements of Breach of Contract

In order to prevail on a breach of contract claim in New York, the party seeking to enforce the contract  must prove (1) the existence of a contract between the parties, (2) the material performance of their contractual obligations, (3) the other party to the contract failed to materially perform their commitments under the contract, and (4) damages resulting from the other party not upholding their obligations under the contract.

III.  Types of Breach of Contract

A party can breach an agreement in several ways and not all breaches are treated the same under the law.  Below are some examples of breaches and the legal consequences of each. 

 

Minor Breach/Impartial Breach

A minor breach arises when a party does not breach the whole contract but it fails to perform a part of the contract. The minor breach must not prevent the parties from completing the rest of their obligations under the contract for it to be considered minor.  If there is a minor breach, the non-breaching party must continue to fulfill their obligations under the contract and they may sue for damages.

 

Material Breach/Total Breach

A material breach occurs when the breach affects the parties so much that the contract obligations can no longer be fulfilled. In the event of a material breach, the non-breaching is entitled to stop performing their obligations under the contract and can sue for breach of contract damages.

 

Anticipatory Breach/Anticipatory Repudiation

An anticipatory breach arises when one party of the contract tells or indicates, either through words or actions, the other party that they will not be able to fulfill their contractual obligations. When there is an anticipatory breach, the non-breaching party should avoid incurring extra costs or expenses. If the non-breaching party does not attempt to mitigate their damages, they may not be able to recover the additional damages that they incurred.

IV.  Damages and Other Equitable Remedies for Breach of Contract

 Generally, there are two types of damages that can be awarded in a breach of contract case: compensatory damages, sometimes called actual damages, and consequential damages, sometimes called special damages.

 

Compensatory Damages

Compensatory damages are designed to put the non-breaching party in the same place they would have been if the breach had never occurred.  An example of compensatory damages is the reimbursement for goods or services purchased in order to replace the goods and services that should have been provided by the breaching party under the contract.

 

Consequential Damages

Consequential damages are related to the breach of contract “without direct correlation”.  An example of consequential damages that a Court may award are reimbursement for lost business due to the breach of contract.  To obtain these damages, the injured party must show that it was damaged either as a direct result of the breach or the damages were reasonably foreseeable as a result of the breach.

 

Nominal Damages

 

Nominal damages are damages that are awarded when there was a breach of contract but no real harm resulted from that breach.  These damage awards are very small, sometimes $1 or $10, and are granted to show that the non-breaching party was “in the right.”

 

Liquidated Damage Awards

The parties’ contract may provide for “liquidated damages.”  Liquidated damages are the amount the parties have agreed to pay in the event of breach.  Liquidated damage provisions are often included in contracts where it would be difficult to quantify the amount of damages in the event of breach.  Courts will enforce liquidated damage provisions when they are reasonably related to anticipated loss caused by the breach of contract.

 

Limitations on Monetary Damage Awards

A party enforcing a contract cannot recover damages that are speculative. There must be some basis for the damages that the party seeks.

In the United States, each party is expected to bear their own legal fees and costs for breach of contract cases.  However, some agreements provide that the prevailing party to a contract dispute is entitled to recover their legal costs and fees.  In those instances, the prevailing party is entitled to recoup their reasonable legal costs and fees.

In New York, there is also a duty to mitigate damages. The duty to mitigate requires the non-breaching party to take action to minimize their losses resulting from a breach of contract.  If the losses incurred by a non-breaching party could have reasonably been avoided, the court may not award damages for that loss.

Generally speaking, Courts applying New York law will not award punitive damages for breach of contract.

 

Specific Performance

Specific performance is when the court orders the breaching party to fulfill and perform their contractual obligations.  Specific performance is typically awarded when money cannot compensate the injured party and when the contractual obligation is unique and difficult to value.

A common case where specific performance is awarded is the sale of land.  If a person owning land breaches their contract to sell land, an award of money cannot help the prospective purchaser.  In this instance, a Court may order the owner or the land to sign over the deed to the land because land is unique and cannot be purchased elsewhere.

Another example is when a company agrees to sell its product exclusively to a store.  If the company subsequently agrees to sell the same product to the store’s competitor, specific performance would be appropriate because it will be difficult to measure the store’s lost revenue.

In order to obtain specific performance in New York Court, the non-breaching party must prove (1) there is a contract, (2) the non-breaching party is “ready, willing, and able” to perform the contract, (3) the breaching party has the ability to perform the contract but has failed to do so, and (4) there is no other adequate remedy in order to grant specific performance.

 

Rescission

 

Rescission occurs when a court undoes the contract and puts all the parties back to the position they were in prior to executing the contract. The court typically only grants rescission of a contract when the non-breaching party has no other adequate remedy and they can go back to the position they previously occupied before entering the contract.  A non-breaching party cannot obtain rescission of the contract and damages – it must choose one of these remedies, not both.

Contract Reformation

 

Contract reformation is a remedy that is rarely granted.  A party seeking reformation is asserting that its contract does not accurately reflect the actual agreement reached by the parties.  This remedy is permitted when the same contractual term was misunderstood by both parties or where one party is mistaken and the other commits fraud or engages in inequitable conduct.

V.  Defenses to Breach of Contract Claim

There are many defenses to a breach of contract lawsuit.  A few of these defenses are listed below.

 

Impossibility

Impossibility is when a party can no longer fulfill their contractual obligation. For example, if a band has a contract to perform at a concert hall and then the concert hall burns down the day before the performance, it is impossible for the concert hall to host the scheduled concert.

 

Lack of Capacity

Capacity is having the legal ability to enter into an agreement. If one party to the agreement lacked capacity when they entered into it, the court will likely not uphold the agreement.  Examples of persons who lack capacity are children and persons that are intoxicated.

 

Mistake

A contract may not be upheld if both parties were mistaken of the facts at the time they entered into an agreement. For example, if both parties mistake the authenticity of a work of art, the transaction may then be undone. If only one party is mistaken, it cannot always be undone.

 

Unconscionability

A contract will not be upheld if it is ruled to be unconscionable. There are two types of unconscionability, procedural and substantive. Procedural unconscionability is when methods of how the parties entered the contract were unfair. Substantive unconscionability is when the terms of the agreement are unfair.

 

Illegality

Illegality is when the contractual obligation is illegal. If the act you are contracting for is an illegal act the agreement will not be upheld in court.

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