When a business owner is let down by a client or vendor who has violated (or “breached”) a contract, legal action to recover damages from that breach may be an option to consider. Before bringing a lawsuit, however, it is important to understand what an actual breach of the contract is, what damages may be collected, the costs involved in pursuing a breach of contract lawsuit and the defendant’s ability to pay the damages you may be awarded in a lawsuit.
In New York, a breach of contract is established when:
(1) there is a valid and binding contract;
(2) one party has fulfilled their contractual obligations;
(3) another party has failed to fulfill their contractual obligations; and
(4) damages result from this non-performance.
There are different types of contract breaches:
The first is a minor or impartial breach. For this type of breach to occur, some of the contractual obligations are fulfilled by the breaching party, while others are not. For a violation to be considered minor, it must not prevent the rest of the agreement from being fulfilled. 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. However, the store must pay for the items that did arrive to fulfill its end of the contract.
A more serious situation is a material or total breach. This occurs when the failed obligation is substantial enough that the parties cannot continue to honor the obligations in the contract. In this scenario, the non-breaching party can stop fulfilling their obligations and sue the breaching party for damages. Using the same example as above, if the manufacturer does not deliver all of the products to the clothing store, the store does not have to continue to pay the manufacturer for future items and can terminate their agreement. The clothing store may do this regardless of whether the manufacturer can deliver the future items.
An anticipatory breach occurs when one party informs or otherwise indicates to the other party that it will not 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 that breach to be able to recover the damages caused by it. This is called “mitigation of damages.” 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 damages later would be limited if it continued advertising the sale after being notified of the manufacturer’s anticipated breach.
The type of breach that occurs typically dictates the type of damages a non-breaching party can collect.
Nominal damages are typically smaller awards seen in cases in which no real harm was caused by the breach. These damages are often small and symbolic (e.g., $1). They simply signify that the non-breaching party was “in the right.”
Liquidated damages refer to a specific type of damages stated in some contracts to account for the potential losses that might arise from a breach of that contract. These damages are agreed upon by the parties at the time of contract formation and are intended to provide a predetermined amount of compensation if one party fails to fulfill their contractual obligations.
The purpose of liquidated damages is to simplify the process of calculating damages in the event of a breach where the actual damages cannot be determined when signing the contract, such as breach of a confidentiality clause. By setting a predetermined amount in the contract, the parties can avoid the need to prove the actual monetary losses suffered due to the breach.
Compensatory damages and consequential damages are meant to put the non-breaching 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, consequential damages may include losses a company spent 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. These types of damages are not always recoverable, and are typically dictated by the language of the contract.
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 expenses that resulted from the retailer having to find a new supplier.
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.”
Before starting a lawsuit, 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. So, what questions should be asked to determine whether a breach of contract case is worth pursuing?
Before deciding to pursue legal action, you should weigh the above factors, such as the likelihood of success, damages that may be claimed and potential costs involved. Engaging qualified legal counsel to further assess the viability of your case is always a good idea before heading to court on your breach of contract claim.