If you buy a car and sign loan documents, you’ve entered into a contract to pay a certain sum on a certain date each month. If you fail to do so, you will be considered in breach of contract, and the loan company can come to repossess your vehicle.
That’s just an everyday example of a contract, but when it comes to businesses, contracts are the lifeblood of operations. A business may contract with another person or entity to supply parts needed to manufacture its products, or it may contract with an accounting firm to keep its records, pay its employees, and honor all taxes. The examples are endless.
A breach of contract is said to occur when one party to the agreement fails to perform their side of the agreement. In other words, the contract has been broken.
Whereas repossessing a car due to a breach of contract presents a simple remedy, matters are not always so clear-cut or simple when it comes to business-based breaches.
If you’re involved in a breach of contract dispute in or around the Greater San Francisco Bay Area, whether you’re being accused of breach or you’re accusing someone else, reach out to Leet Law. For more than a decade, we have been helping clients with business disputes in San Jose, San Francisco, Oakland, Palo Alto, and the surrounding cities and communities.
Contracts can be written (known as express contracts), oral, or even implied. When it comes to a legal resolution, written contracts are easier to litigate. Everything should be spelled out clearly in the details (but often is not).
Oral contracts can be subject to interpretation—one party claiming this, the other party that. Implied contracts result from interactions between the parties that have been ongoing and repeated over time. Like oral contracts, implied contracts are open to contradictory interpretations.
Breaches generally fall into two categories: minor and material.
Let’s revisit the example of one business contracting with another to supply parts needed for manufacturing. The contract calls for the delivery of 200 microchips each Monday morning. If the supplier fails to deliver the chips Monday morning but gets them there by the close of the business day, that breach could be considered minor. If the supplier fails to deliver the chips at all or doesn’t get them there until Friday, the breach could be considered material.
In either case, the contracting party may be able to recover damages. If the minor breach resulted in the delay of finished products that caused a loss of sales, the manufacturer could recover damages – compensation – for the lost revenue. If the breach is material, the performing party – the one that contracted for the microchips – is no longer obliged to perform under the contract and can seek damages from the nonperforming supplier for harm to its business operations.
If a party to a contract signals through words or actions that it will be unable to perform its part of the bargain, this is known as an anticipatory breach. In other words, the breach has been announced and can be anticipated. In the event of an anticipatory breach, the party that stands to be harmed can take legal action immediately and not wait until an actual breach has occurred.
If the microchip supplier, for example, informs the manufacturing company to which it is contracted that it can no longer supply the chips because its sources for raw materials have dried up, that would be an anticipatory breach.
To prevail in court, the harmed party – the plaintiff – must establish that the elements of a breach have been met by the nonperforming party, the defendant. The “Essential Elements” of a breach of contract claim in California are set forth in the Judicial Council of California’s Civil Jury Instructions, or CACI’s, No. 303. These elements are:
The plaintiff and defendant had entered into a contract
The plaintiff performed as specified or was excused for nonperformance
The defendant failed to perform under the contract
The plaintiff was harmed
The defendant’s breach of contract was a substantial factor in the plaintiff’s harm
The legal remedies for a breach are threefold: compensation, an order to perform, and cancellation and restitution.
Compensation is normally for losses suffered. If a written contract calls for liquidated damages – meaning a multiple of actual losses, for instance, double the losses – those can be awarded as well. Punitive damages are possible but rare.
The court can also order, in addition to damages or by itself, that the breaching party carry out what is called “specific performance”: that is, to fulfill its obligations under the contract.
The non-breaching party can also cancel the contract and return to the situation it was operationally in before the contract. This is called restitution.
Business matters can escalate quickly, so it's important to know when you need legal representation. If you contracted an employee who didn't complete the job, an individual signed a nondisclosure and violated the terms, or your business partner backed out of a contractual obligation, reach out to us. By working with an experienced lawyer, you'll have steadfast representation in and out of the courtroom. Leet Law can help you navigate the legal system no matter what kind of contractual situation you find yourself in.