Countless business transactions occur every day. Some between individuals and businesses, and others between businesses. Almost all transactions and exchanges occur without a problem or disagreement. Occasionally, however, business disputes arise over contractual agreements.
Most of these disputes can be resolved amicably or with a limited amount of negotiations. A small percentage of disputes can lead to a lawsuit. Sometimes, one side is completely at fault. Other times, nobody is at fault but one side assigns blame unfairly. Civil litigation attorney Stanley P. Lieber has been representing clients in business and civil litigation matters since 1973. For a Free Consultation, call (213) 973-0051.
Breach of contract is the most common type of business dispute in the United States. For a breach of contract to occur, three separate requirements must be present:
1. First, there must be a contract that is actually formed. An agreement between two parties to engage in a sale of goods or services must actually be present.
2. Both parties must have the same understanding regarding what the contract says and what the duties of both parties are. This second requirement exists to protect people who sign an agreement where one side promotes or relies on an obvious misconception. However, one cannot simply void a contract and rely on this second requirement not being present by later saying that he or she (or it, in the case of a business) simply did not understand the contract. There must be evidence of a lack of understanding.
3. The final requirement for a breach of contract to occur is non-performance by one or both parties. This is the easiest of the three requirements to identify and can be spotted when one side does not do what he, she or it was required to do according to the terms of the contract.
In order for damages to be recovered in a breach of contract action, the non-performance cannot be “immaterial” – this just means that the failure to perform must matter. If Company X agrees to sell Company Y a car with 40,000 miles on it, and the car is delivered 3 miles over, that breach would not be material unless there was some reasonable need for Company Y to own a vehicle with exactly 40,000 miles.
Determining whether a breach of contract is material is often more difficult than the example listed above. Generally, the following considerations must be taken into account in closer situations:
If a party in compliance with a contract receives a clear and ambiguous indication that the other side will not or cannot perform on a contract before the period that he, she or it has to deliver or perform, the party in compliance may immediately consider the non-performing party in breach, and may file a lawsuit (or seek other remedies) immediately, as if the party who will not perform had already failed to perform.
A good example would be that if X and Y agreed that X would write a 500-page cookbook for Y, and Y discovers hours before the due date that X has written no pages, Y may sue X at any time under the theory of anticipatory breach.
A warranty in a real property purchase and sale agreement (i.e., contract) is an express or implied representation by the seller as to the quality or condition of the [real] property sold.
Generally, a warranty (whether express or implied) serves to compel the seller to disclose material facts pertaining to the property and give the buyer specific assurances regarding the state of the property. Express warranties consist of affirmative representations that a seller is generally not otherwise obligated to make. More precisely, any affirmation of the quality or condition of the thing sold, made by the seller at the time of sale, for the purpose of assuring the buyer of the truth of the facts affirmed, and inducing him to make the purchase, if so received and relied on by the purchaser, is an express warranty.
A seller’s liability for breach of a warranty varies with the specific type of representation made and the language used. For example, in an “as is” sale of real property, the seller effectively disclaims any and all warranties. However, if the seller includes express warranties in the purchase/sale contract, they may condition warranties on their knowledge.
For example, the seller may limit the warranty by conditioning it on his or her “actual present knowledge” or the “best of his or her knowledge.” In making an express warranty, a seller should also be wary of unforeseen repercussions down the line. To use another example, a seller’s warranty may be extended to a subsequent purchaser (i.e., seller sells property to buyer 1, and buyer 1 then turns around and sells to buyer 2) if he or she makes a misrepresentation to a buyer while intending, or having reason to expect, that the misrepresentation will be repeated to a subsequent purchaser. (Geernaert v. Mitchell, 31 Cal. App. 4th 601, 605-06 ).
If a representation turns out to be false and material (i.e., a breach of warranty), and the buyer can show that he or she relied on the representation in reaching the decision to purchase the property, the buyer can seek available remedies through the litigation process.
Unlike a failure of a condition to the contract, which excuses performance, the breach of a seller’s express warranty entitles a buyer to rescission of the contract or damages. Rescission is a remedy that in essence disaffirms the contract (i.e., the purchase/sale agreement).
Rescission assumes the contract was properly formed (i.e., valid), but effectively undoes the contract as though it never came about.As such, the contract and its terms cease to be enforceable. Thereafter, the buyer will be entitled to recover the price paid for the property, including amounts expended toward property taxes and mortgage interest. However, recovery of the price paid is conditioned on the return of the purchased property to the seller. On the other hand, if the buyer decides to keep the property, despite the breach of express warranty, he or she can affirm the contract and sue the seller for damages.
In essence, an express warranty is “both a statement of present fact and a promise that the fact will continue to be true, and that if not so, the person making the warranty will take the necessary action to make it so or make good any damage to the buyer.” As such, the buyer can bring a breach of warranty claim to compel the seller to either remedy the defect or pay damages. Where the buyer ultimately decides to affirm the contract (i.e., keep the property), a breach of warranty does not relieve the buyer of his or her obligation to perform under the contract.