Breach of contract

The right to contract forms the cornerstone of business.  Contracts provide companies with assurances as to what they can expect from the companies they do business with and provide stability and the ability to plan for and predict future business.  They may also provide procedures as to how problems will be resolved if they occur.  A contract may provide that a party is entitled to “liquidated damages.”  Liquidated damages This provides that the non-breaching party will automatically be entitled to recover a pre-set amount of money in the event the other party is found to have breached the contract. With limited exceptions, contracts either may be written, oral, or implied through conduct that reasonably indicates the parties agreed to be bound by the terms of the agreement.

When companies enter into a contract they believe the agreement will be legally binding and that all its terms will be enforceable. They also generally believe the other party will honor the contract. Sometimes, however, one party believes the other has not honored its contractual obligations and litigation may ensue. In that process, it is sometimes found that one of the contractual terms will not be enforceable.

Whether an agreement constitutes a legally binding contract depends on the following. First, the parties must have mutually agreed to the same material terms. A material term is one that is essential to the transaction; in other words, a term which, had it not been a part of the agreement, would have caused one of the parties not to enter into the contract. In addition, the contract must supported by what is referred to as “adequate consideration.” Adequate consideration is something of value and may consist of some right, interest, profit, or benefit accruing to one party or some forbearance, burden, detriment, loss, or responsibility given, suffered, or undertaken by the other. An agreement based on an exchange of mutual promises is supported by adequate consideration if performance of each of the promises would constitute adequate consideration. In any event, the benefit to one party or the burden on the other party must result from the bargain which caused the parties to enter into their mutual agreement.

When a breach of contract occurs, the law essentially provides that the injured party is entitled to be placed in the same position it would have occupied had the other party performed as required by the contract. This may be achieved through two different categories of remedies.

First, the non-breaching party may be entitled to “money damages,” which is the standard remedy for a breach of contract. Money damages are generally measured by direct damages plus consequential loss minus any cost or other loss the non-breaching party avoided by not having to perform; also, as noted above, damages may also be measured by “liquidated damages” where provided for by the contract.

Direct damages are the economic losses that usually or customarily flow from a breach of contract. Essentially, the non-breaching party is entitled to damages measured by the loss in the value of the other party’s performance caused by its failure or deficiency.

Consequential damages include any loss resulting from the non-breaching party’s circumstances of which the other party knew or should have known at the time the parties entered into the contract and which the plaintiff could not reasonably have prevented. Consequential damages include costs or obligations reasonably incurred by the non-breaching party in preparing to perform its responsibilities under the contract, prior to being able to respond to the breach, in response to the breach, and for the purpose of minimizing the injury resulting from the breach.

Liquidated damages consist of a pre-determined amount stipulated to in the contract. Courts will not enforce a liquated damages clause if it was intended to act as a penalty. A liquidated damages clause is enforceable where the damages which the parties reasonably anticipated are difficult to ascertain because of their indefiniteness or uncertainty and the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach. As a practical matter, they may operate as an incentive not to break the contract. For example, a real estate developer who needs to have a project completed by a certain deadline may include a provision in the contract providing that the general contractor must pay a specific amount per day for every day that the general contractor is late in completing the project.

In the alternative to money damages, the non-breaching party may be entitled to “specific performance.” This remedy requires the breaching party to perform under the contract. Specific performance is usually available only where ordinary money damages are inadequate because the contract involves some kind of unique goods or other unusual benefit. Real estate is often the subject of specific performance because, in most cases, each piece of property is unique; thus, a non-breaching party may be able to bring a lawsuit to force a breaching party to sell at the agreed-upon price.