Contracts are the cornerstone of businesses in California, in New York, in Delaware ... everywhere. Businesses need them to interact with clients, customers, consumers, suppliers, vendors, employees, independent contractors, consultants, service providers, government agencies, and others. Each party to a contract – whether oral or written – enters into it for mutually beneficial reasons. When one party breaches the contract, disputes can arise. In some cases, the solution may seem straightforward while in other cases, the breach is more complex and problematic.
As a small business lawyer, startup attorney, corporate counselor, and a transactional advisor with extensive experience negotiating, reviewing, interpreting, writing, and advising business clients on contracts, I view my role as a sort of "risk manager" — counseling business owners, management teams, and corporate officers with the goal of avoiding possible breaches and other disputes in the future. If a breach of contract does happen or other dispute does arise, I can advise you on your options. If a breach or other dispute does happen and litigation or arbitration is either desirable or unavoidable, I can refer you to litigation counsel who will represent you in that challenging process.
To set up a Free Consultation, click on the phone number in the header above, or dial me directly at 310-567-5966 (California), 212-414-5966 (New York) or 888-774-1474 (Toll Free). Or click here to schedule an appointment directly.
For some additional, easy reading about what contracts are, and about how certain contract pitfalls can be avoided:
To learn what a contract is, see my article, "What Is A Contract?"
To read about some contract pitfalls, see my article, "7 Common Contract Traps."
What is the Goal in Contract Drafting?
Ideally, contract breaches are avoided or minimized by having well prepared contracts, by "screening" other people before you enter in to a contract with them, and by clear and regular communications during the performance of the contract. But, despite the contract, the best intentions, and the best communications, breaches may still happen. Whether you are the party who breached an agreement or you are someone who has been harmed by someone else's breach, settling the matter as soon as possible is (usually) in everyone's best interests.
Breach of Contract and Non-Performance in California, New York, and Delaware
A contract is a legally binding agreement between two parties, where one party offers to do something—for example, build a new house—and the other party accepts the offer and promises to do something in exchange—for example, pay money.
Businesses deal with contracts both regularly in the ordinary course of business, as well as in connection with extraordinary transactions. Business contracts are used, for example, for:
- Launching a startup 🌱
- Licensing intellectual property
- Mergers and acquisitions (selling and buying businesses)
- Entering into joint ventures with other businesses
- Angel financing (e.g., SAFE's and convertible notes)
- Venture capital financing
- Hiring business employees
- Retaining independent contractors
- Providing services to clients
- Forming an LLC, corporation or partnership with other people
If one party fails to perform their obligations under an agreement without a contractually valid excuse, the other party may be able to sue for breach of contract.
To do this, the contract itself must be valid—it must be legal and both parties must have the capacity to enter into it. A contract is also usually written, although a breach of contract can apply to a verbal agreement in certain situations.
Types of Breaches of Contract in California, New York, and Delaware
Not all breaches are alike, and as such, not all breaches may be resolved through litigation. The law categorizes breaches of contracts based on their seriousness and timing.
Material vs Minor Breach
Where a party sues for breach of contract, the party that fails to perform their obligations is called the defendant and the wronged party is called the plaintiff.
Material breaches occur when a defendant fails to perform an important obligation under the contract and that causes the contract to be “irreparably broken.” A material breach makes it impossible for the other party to perform their obligations under the contract.
Some contracts explicitly define a material breach of the agreement. If the contract is silent on the issue, a court looks at factors like whether or not the defendant acted in bad faith and whether the plaintiff can be compensated for their loss. An example of a material breach is when a buyer fails to pay for a product they received.
In comparison, a minor breach does not materially disadvantage the other party and the contract can still be substantially performed. For example, the delivery of a product one day late does not go to the core of the agreement and is likely a minor breach.
Actual vs Anticipatory Breach
An actual breach occurs when one party fails to perform a term under the contract.
Anticipatory breaches, on the other hand, occur when one party notifies the other that they will not comply with a term of the contract. This allows the other party to claim a breach of contract, even though it has not yet happened.
Remedies for Breaches of Contract in California, New York, and Delaware
Remedies exist to resolve contract breaches. What those remedies might be will depend on the facts and circumstances. More than one remedy may apply in your unique cases. Potential remedies for a breach of contract include but are not necessarily limited to:
- Compensatory damages, which are the most common type of remedy for breach of contract, covering the actual loss caused to the non-breaching party – these damages can be viewed in terms of (1) expectation damages where the non-breaching party recovers monetary damages based on the contract itself or the market value; and (2) consequential damages where the non-breaching party recovers indirect damages for reasonably foreseeable harm resulting from the breach
- Punitive damages are the least common type of remedy for breach of contract but when awarded, are meant to punish the breaching party who acted fraudulently, maliciously, or willfully when breaching the contract and to prevent the same type of breaches in the future
- Specific performance, which is the result of a court order requiring a defendant to perform an obligation under the contract
- An injunction, which is a court order requiring a defendant not to do something, either temporarily or permanently
- Rescission, which occurs when the court cancels the parties' obligations under the contract so that, theoretically at least, they are in the same position as before the contract was made
- Restitution, which is a court order requiring the defendant to pay the plaintiff the amount agreed to in the contract, which often involves the return of money or property
Again, the remedies available in your case depend on the jurisdiction, type of breach, specific terms of the contract, and circumstances in which the contract was made.
Possible Defenses to Breaches of Contract
It is important to know the possible defenses a business or consumer may have when they breach a contract. If you are the party to breach the contract, make sure to speak with an attorney about how any one of these or other defenses may apply in your case. If you are the non-breaching party, knowing these defenses can help you understand where the other party stands and provide insight on how to move forward to uphold the terms and conditions of the contract or to come to another resolution, even if that means litigation. A breach of contract lawyer in California and New York can help you assess the facts and circumstances and plan a strategy.
Defenses available to a party accused of breaching a contract include but are not limited to:
- Fraud, where the plaintiff intentionally misrepresented material facts about the contract, making it fraudulent and therefore invalid
- Invalid contract, where the contract does not meet the criteria of a valid contract
- Duress, where the breaching party was forced to enter into the contract against their will
- Incapacity, where the breaching party did not have the necessary capacity to enter into the contract in the first place – for example, because they were a minor at the time
- Unclean hands, where both parties are at fault for the breach of contract
- Mutual mistake, where the contract contains a mistake, different from what both parties intended
- Illegality, where the contract was an agreement to do something illegal – for example, commit a murder
Regardless of whether you are the breaching or non-breaching party, you should speak to a contracts lawyer to see what defenses may apply to your situation.
TRAPS FOR THE UNWARY
Contract law in the United States has developed over centuries. Much American law has come from England. Contract law is precise, but can also be arcane. Each state has its own laws, some created by States' legislatures and some devised by their courts. Even an agreement that includes all needed elements for an enforceable contract may still be missing, or may include, clauses and other language that can inadvertently create problems. Click here to read about 7 Common Contract Pitfalls.
DO IT RIGHT
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.