Breach of contract
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|Part of the common law series|
|Defenses against formation|
|Excuses for non-performance|
|Rights of third parties|
|Breach of contract|
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|Other common law areas|
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. If the party does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract, he is said to breach the contract.
In a "minor" breach (a partial breach or immaterial breach or where there has been substantial performance), the non-breaching party cannot sue for specific performance, and can only sue for actual damages.
Suppose a homeowner hires a contractor to install new plumbing and insists that the pipes, which will ultimately be hidden behind the walls, must be red. The contractor instead uses blue pipes that function just as well. Although the contractor breached the literal terms of the contract, the homeowner cannot ask a court to order the contractor to replace the blue pipes with red pipes. The homeowner can only recover the amount of his or her actual damages. In this instance, this is the difference in value between red pipe and blue pipe. Since the color of a pipe does not affect its function, the difference in value is zero. Therefore, no damages have been incurred and the homeowner would receive nothing. (See Jacob & Youngs v. Kent.)
However, had the pipe colour been specified in the agreement as a condition, a breach of that condition would constitute a "major" breach. For example, when a contract specifies time is of the essence and one party to the contract fails to meet a contractual obligation in a timely fashion, the other party could sue for damages for a major breach.
A material breach is any failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach. A breach of contract will constitute a material breach if the term of the contract that has been breached is a condition. A term is a condition if it satisfies the test of essentiality. The test of essentiality requires that the promise (term) was of such importance to the promisee that he or she would not have entered into the contract unless he had been assured of strict or substantial performance of the promise and this ought to have been apparent to the promisor. This is an objective test of the parties' intention at the time of formation of the contract.
If the contractor in the above example had been instructed to use copper pipes, and instead used iron pipes that would not last as long as the copper pipes would have lasted, the homeowner can recover the cost of actually correcting the breach - taking out the iron pipes and replacing them with copper pipes.
There are exceptions to this. Legal scholars and courts often state that the owner of a house whose pipes are not the specified grade or quality (a typical hypothetical example) cannot recover the cost of replacing the pipes for the following reasons:
1. Economic waste. The law does not favor tearing down or destroying something that is valuable (almost anything with value is "valuable"). In this case, significant destruction of the house would be required to completely replace the pipes, and so the law is hesitant to enforce damages of that nature.
2. Pricing in. In most cases of breach, a party to the contract simply fails to perform one or more terms. In those cases, the breaching party should have already considered the cost to perform those terms and thus "keeps" that cost when they do not perform. That party should not be entitled to keep that savings. However, in the pipe example the contractor never considered the cost of tearing down a house to fix the pipes, and so it is not reasonable to expect them to pay damages of that nature.
Most homeowners would be unable to collect damages that compensate them for replacing the pipes, but rather would be awarded damages that compensate them for the loss of value in the house. For example, say the house is worth $125,000 with copper and $120,000 with iron pipes. The homeowner would be able to collect the $5,000 difference, and nothing more.
The Restatement (Second) of Contracts lists the following criteria can be used to determine whether a specific failure constitutes a breach:
In determining whether a failure to render or to offer performance is material, the following circumstances are significant:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
American Law Institute, Restatement (Second) of Contracts § 241 (1981)
A fundamental breach (or repudiatory breach) is a breach so fundamental that it permits the aggrieved party to terminate performance of the contract. In addition that party is entitled to sue for damages.
A breach by anticipatory repudiation (or simply anticipatory breach) is an unequivocal indication that the party will not perform when performance is due, or a situation in which future non-performance is inevitable. An anticipatory breach gives the non-breaching party the option to treat such a breach as immediate, and, if repudiatory, to terminate the contract and sue for damages (without waiting for the breach to actually take place). For example, A contracts with B on January 1 to sell 500 quintals of wheat and to deliver it on May 1. Subsequently, on April 15 A writes to B and says that he will not deliver the wheat. B may immediately consider the breach to have occurred and file a suit for damages for the scheduled performance, even though A has until May 1 to perform.
Example: if Company A refuses to pay substantial interim payments to Company B, Company B can begin legal action due to anticipatory breach. Company B could also stop performing its contractual obligation, potentially saving time and or money.
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Breach of contract