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 (424) 325-6388.
Breach of Contract in California
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:
- 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.
- 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.
- 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.
Material versus Immaterial Breach of 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:
- How much the party that did not breach will be deprived of what he, she or it reasonably expected to receive;
- The extent that the non-breaching party can be adequately compensated for the part of the contract that was not performed properly;
- The extent that the party failing to perform or offer to perform will suffer forfeiture;
- How likely it is that the breaching entity can and will fix the whatever he, she or it failed to do; and
- Whether or not (and how much) the party who did not completely perform on the contract complied with standards of good faith and fair dealing.
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. While this ultra-clear example is not always present, closer cases do allow for the filing of a breach of contract based on actions that are anticipated. Other examples taking the set of facts above would include a writer who, prior to the deadline, had been expressing an unwillingness to comply and had acted accordingly.
If the publisher, on the other hand, had been having well-publicized financial difficulties and has informed the writer that payment will be delayed or not made, the writer can sue for anticipatory breach. Either side, if it reasonably expects the other side to be unwilling to perform on its obligations, can sue for anticipatory breach of contract, forcing the other side to defend the action and explain why performance can be made.
Warranties in Real Property Transactions
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.
Liability for Breach of Warranty
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.
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.
These types of material or immaterial misrepresentations are different than misrepresentations made in the context of an agreement for the sale of goods or services without a warranty. In that context, misrepresentation can be intentional or negligent. Intentional misrepresentation, also called fraud, is an intentional tort and liability from fraud cannot be discharged in bankruptcy. On the other hand, negligent misrepresentation, which occurs as a result of some duty (here, to be honest or accurate) being breached (the lie or inaccurate statement) reasonably causing damages can be discharged in bankruptcy. Courts generally disfavor holding individuals liable for intentional misrepresentation or fraud in the context of breach of contract matters, and a demurrer (a motion to strike a pleading because of its insufficiency) is a viable tool against an intentional misrepresentation claim in a contractual dispute, absent evidence of actual fraud.
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 dissaffirms 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.
Contract rescission can happen for various reasons. First, both sides or parties to a contract can choose, at any time, with mutual agreement, to cancel or rescind the contract. This is a common type of rescission when the act would benefit both parties. Specifically, both sides may agree to a rescission if one side believes the other side may not be able to perform on the contract and where that lack of performance may be excused for some reason (such as a breach by the initial party or a condition contemplated in the original agreement).
A contact can also be rescinded unilaterally by one side, not both, if the contract allows for rescission. Some contracts, for various reasons, sometimes as an incentive for one party to enter into them, provide one or both sides the authority to terminate certain provisions or terminate the contract entirely. While this is a drastic step in some instances, in others it is often expected and more likely than complete performance of a contract. An example of this type of rescission would be an “option” to buy a piece of property or “option” to make a book into a motion picture. While it is always advisable to properly rescind any agreement in writing, the statute of frauds does allow, in certain circumstances, for a contract to be rescinded as a result of a verbal communication or even, in some situations, by the conduct of one or both of the parties. Further, a contract can always be rescinded if it was entered into because of duress, fraud, or a “mistake” (a failure to come to a common understanding about the terms of the contract). When fraud or duress are the reason for the rescission, only the injured party (the victim of the fraud or duress) can rescind the contract. In some situations, and always determined by a court using his or her discretion, the acts of non-signatories to a contract (third parties) can lead to the rescission of a valid contract.
Remedies to Breach of Contract
Many remedies exist to a breach of contract, and the type of remedy that a court will assign to a specific breach of contract case is specific to the facts and circumstances of that case. That being said, there are some common types of relief that a breach of contract defendant can be ordered to comply with. The most common types of damages in a breach of contract case are compensatory damages and punitive damages.
Compensatory damages, sometimes called actual damages, are by far the most common type and are losses that the party who is the victim of the breach of contract suffered because of that breach. Compensatory damages exist for the purpose of compensate the injured party for his, her or its losses in connection with a breach of contract. Within the umbrella of compensatory damages, two types exist: general damages and special damages (sometimes called consequential damages).
General damages are the type of relief that is supposed to place the injured party back in the original position he, she or it would have been in if the contract had not been entered into. Therefore, general damages are usually restricted to out of pocket damages, or expenses that the inured party incurred while fulfilling the terms of the contract. Examples of general damages can include actual costs of production, shipping costs, and independent contractor salaries.
The second type of compensatory damages are special damages, or consequential damages. These type of damages are not for out of pocket expenses and instead are intended to provide relief to the injured party, placing him or her in the position he or she would have been in had the breach of contract not occurred. An example of special damages would be the loss from the sale of a boat by a retailer because the boat was delivered late by the wholesaler. However, for the boat retailer to successfully recover special damages from the wholesaler, the boat retailer must prove that the wholesaler knew or reasonably should have known about the time sensitivity of the delivery and failed to comply. Further, special damages cannot be too speculative, there must be a direct and knowing connection between the prospective loss and and the conduct of the breaching party.
Another type of damages available in some breach of contract matters is “specific performance.” Specific performance is a remedy that forces one or both sides to carry out obligations other than the payment of money, contained within a contract. Specific performance can be ordered in a variety of breach of contract cases, but the most common type of specific performance is in the context of real property transactions (real estate transactions). If a seller and buyer of real estate have a valid purchase agreement and the seller unjustifiably refuses to transfer the property, California Civil Code § 3387, payments of money in the form of damages are presumed inadequate. The inadequacy of money damages are numerous: real estate is unique with money damages incapable of replacing them; and the solution of specific performance (transfer of the title) is quantifiable.
The final type of damages in a breach of contract case are punitive damages. By far the most well known type of damages, punitive damages are reserved when the conduct of the breaching party is egregious and when the conduct is deserving of additional consequences. Punitive damages are less common in breach of contract cases than in all other types of cases because of the nature of the claim: a breach of contract is usually only a dispute about the terms of a contract whereas a tort case (or personal injury case) is more likely to involve egregious conduct on the part of the defendant.
For example, an assault causing injury by a defendant upon a plaintiff would almost certainly qualify for punitive damages, as an incentive to deter that type of behavior by others and by the defendant going forward (there will of often also be a criminal case filed against the same defendant). If the conduct is proven true and an assault is found to have occurred, there is often no middle ground or reason for the assault based on a mistaken belief or assumption. Instead, a generic assault without justification is almost always egregious.
Contrast an assault with a breach of contract, where a dispute about the terms of an agreement exist. In a situation where a good faith dispute exists regarding the terms of the breach of contract, it is very hard to establish the type of evidence needed for an award of punitive damages. The breach of contract, for punitive damages to be awarded, must likely be vindictive in nature and not based on a different interpretation of the original agreement.
Contracts to Arbitrate
Parties who enter into a contract may choose to include a provision to arbitrate any disputes. Arbitration can be binding or non-binding. Non-binding arbitration is just that: arbitration without the necessity to obey the rulings of the arbitrator. Non-binding arbitration can often show the parties where they respectively stand in a given dispute and can assist in the resolution of a matter, but the results are not legally significant. On the other hand, binding arbitration typically requires a court to enter rulings consistent with an arbitrator’s decision. Except in cases involving abuses of discretion, binding arbitration decisions cannot be reviewed. For this reason, and for the reason that some believe arbitration favors large corporations, many individuals and some businesses resist signing contracts with binding arbitration clauses.
Some parties favor arbitration and others do not. Some smaller corporations or individuals see arbitration as a way to save costs and not to spend money on legal fees that can and often do drag on for significant periods of time with the possibility of an appeal even if a favorable judgment is reached. On the other hand, some smaller companies can see arbitration negatively, believing that because larger corporations use arbitrators more regularly, decisions will favor those who can provide continued business to the arbitrators. Larger corporations can also favor arbitration because it avoids costs of litigation and because juries can often be unpredictable. In short, there are significant advantages to arbitration and significant drawbacks to arbitration, for all parties to a dispute.
Arbitration is separate and distinct from mediation proceedings. Mediation, like arbitration, is a form of alternative dispute resolution. However, unlike arbitration, mediation is a process where no decision is made with respect to the claim of either side. Instead, in mediation, a neutral individual listens to the contentions of both sides of a dispute and then attempts to bring the sides together to resolve the matter. A mediator can often be an arbitrator, but if acting in the role of mediator, he or she will not hear evidence in any official capacity and will not make any findings. For these reasons, mediation in a contractual dispute can be beneficial and often does not have the drawbacks that many litigants seek to avoid in the context of arbitration.