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How to Determine What is a Breach of Contract

One of the more common forms of business disputes is a dispute over the failure to perform certain obligations set forth in a contract, and many businesses and individuals often wonder what is or what constitutes a “breach of contract.”

If you entered into a contract, performed your obligations under that contract, and you are experiencing issues with getting the other party to perform its own obligations, you may have a situation where that party has not fulfilled its end of the bargain.

What do you do next? This is a question that haunts many businesses and individuals. How do you know what is a breach of contract? Are there any specific steps that need to be taken to make that determination? Should you go back and read the actual contract? How long do you have to do this? Should you talk to an attorney?

In this article, I will try and provide a simple step-by-step process that will help you understand what is a breach of contract, and that will help you determine when you have one yourself and what you can do about it.

What is a Breach of Contract?

 

1) Determine if you have a contract

This initial step might appear unnecessary, but it is a consideration worth addressing. A claim for breach of contract requires proof of four elements:

  • The existence of a contract;
  • Breach of the contract;
  • You suffered damages; and
  • The breach caused you the damages you claim you suffered.

Thus, before doing anything, you should first determine if a contract exists at all.

Photo by stockimages

Photo by stockimages

Contracts can be written or oral. But for a few exceptions, a contract generally does not have to be in writing. (I highly recommend, however, that you reduce all contracts to written form.) Therefore, even if the agreement at issue is verbal, you are not out of luck, and you may have a claim for breach of contract.

If the contract is in writing, you should verify that the contract was actually signed by both parties. You should ensure that the individual or company that you contend has not performed certain obligations under the contract actually signed the contract. If they did not sign the contract, you may not be able to prove a contract existed at all (except in a few instances, which are beyond the scope of this article). Thus, you should review the contract before you decide to proceed and determine whether it was signed by both sides.

2) If the contract is in writing, read it

Simply reviewing the contract to ensure it was signed is insufficient. Before you can decide whether a contract has been breached, you should read it. This will help you determine what obligations are set forth in it and potentially other crucial items of information that are covered below. A lawyer will often be able to help you in understanding a contract. However, most contracts are written in straightforward English, and you can understand what it contains simply by reading it.

Photo by Stuart Miles

Photo by Stuart Miles

3) Determine if you are within the statute of limitations

After determining whether a contract exists and reading it, but before you proceed, the next thing you should do is determine if you are within the statute of limitations. Every state has a law or a series of laws called a “statute of limitations.” These laws provide time limits for filing a lawsuit. There are different time limits for different types of claims, and these time limits vary from state to state.

For example, the statute of limitations for a breach of contract claim in New Hampshire is three years. In Florida, it is five years for written contracts and four years for oral contracts. In some instances, a contract may shorten the applicable statute of limitations. Hence, as discussed above, you should read the contract to ensure you understand whether it contains such a provision.

The time begins to run when your claim “accrues.” The word “accrue” refers to when your legal right or claim under the contract becomes enforceable. In other words, when the “breach” or wrongful conduct that you are complaining about occurs, your claim has “accrued.” Therefore, once you realize – or should have realized – that this conduct occurred and your claim has “accrued,” the clock on the limitation period begins ticking.

Photo by adamr

Photo by adamr

If you do not file a lawsuit within the time period prescribed by the statute of limitations, it will be barred, and any future attempts to file a lawsuit (outside the limitations period) will almost certainly be dismissed.

Thus, if you are thinking of challenging or suing someone for breach of contract, you need to be mindful of the statute of limitations. If you do not want to file a lawsuit right away, you should calendar the deadline by which a lawsuit must be filed so that you are aware of it.

4) Determine if there was a “breach”

In addition to the existence of a contract, another key element needed to prove a claim for breach of contract is showing that there was a breach. For our purposes here, the word “breach” means conduct that fails to observe, follow, or satisfy one or more obligations in a contract.

For example, if you enter into a contract with a chimney company for the installation of a stainless steel liner in your chimney, but the company installs a masonry liner or a cast-in-place liner, the company breached the contract because it failed to install a stainless steel liner.

Likewise, if you enter into a contract with a window company for the installation of a certain quality of windows, but the company installs a cheap knock-off, the company breached the contract because it failed to install the quality of windows identified in the contract.

5) Determine if the breach is “material”

Establishing that a breach occurred, however, is not enough. To satisfy the “breach” element of a claim for breach of contract, you must demonstrate that the breach was “material.” Here, the word “material” means important, essential, or relevant, and affecting the purpose of the contract. In other words, the obligation in the contract that was breached must be an important or essential part of the contract.

Photo by Stuart Miles

Photo by Stuart Miles

For example, if you enter into a contract with a lumber company to deliver plywood on December 1, but the company delivers the wood on December 2, the company’s failure to deliver the wood on December 1 (as set forth in the contract) would likely not be considered a “material” breach (even though the company did, technically, fail to satisfy an obligation in the contract).

Likewise, if you purchased a car with a certain type of stereo system, but the dealership failed to deliver the car with that particular stereo system, that mistake – while it is a breach – would not be material because the dealer will likely be able to fix the problem by installing the right system.

On the other hand, in the example above regarding the chimney company, the company’s failure to install a stainless steel liner would likely be considered a “material” breach because the requirement that the liner be stainless steel is an essential part of the contract. (For example, you may be installing a pellet stove insert, and your local fire department requires the installation of a stainless steel liner before installing the stove. Thus, the entire purpose for contracting with the chimney company was to install a stainless steel liner.)

Whether or not a breach is “material” depends on the facts concerning the contract. Depending on your state, there may be a statute or court case that defines “material” more specifically or provides examples. Moreover, the contract itself might specify what type of conduct constitutes a “material” breach. For example, a contract that calls for a periodic set of payments for a specific service might state that the failure to make a single payment or a minor delay in making a payment constitutes a breach.

If you are trying to determine whether a breach in your situation is “material,” you should consult an attorney for assistance. An attorney will likely have dealt with numerous breach of contract cases and would be able to provide you with some guidance on whether your situation involves a material breach.

6) Determine if you suffered damages

The next step – after determining if a contract exists and that the other side committed a material breach – is identifying whether you suffered any damages. A simple question to ask to help you make this determination is, Did you lose any money as a result of the breach? If you did, then you suffered damages. If not, then you likely do not have a valid claim for relief.

In the example above involving the window company, you paid for a certain quality of windows, but the company installed windows of below-average quality. In that situation, you lost money: the difference in value between the quality of windows you paid for and the lower quality of windows that were installed.

Photo by Kittisak

Photo by Kittisak

In contrast, in the example above involving the lumber company, a one-day delay in the delivery of the plywood likely did not cause you to lose any money. Starting your home improvement project a day later does not cost you money. Thus, in that example, you did not suffer damages and do not have a claim for relief.

7) Determine if the breach caused you damages

Many individuals might overlook the final, but equally important, element of a breach of contract claim: causation. You must prove that there is a causal link between the breach you are complaining of and the damages you suffered. The best way to answer this question is figuring out whether you can state the following, “But for the other party’s conduct, I would not have suffered damages.” If you can make that statement, then the other party’s conduct caused you to suffer damages. If you cannot – meaning you would have suffered damages regardless, or some other intervening event caused you to suffer damages – then there is no causal link, and you cannot blame the other party for your predicament.

An interesting example involving my own experience will better illustrate these points:

I once represented a company that terminated an employee. The employee had a written employment contract with that company. The contract stated that, before terminating the employee, the company was required to provide her with 10 days’ notice and the opportunity to “cure” – meaning, during that 10-day period, she could improve the conduct or performance on which the company was basing its reasons for terminating her. Unfortunately, the company did not provide her with the required notice and terminated her on the spot.

The employee sued the company for breach of contract – specifically, the company’s failure to provide her with the 10-day notice. She alleged she suffered damages of approximately $500,000 in lost income because she remained unemployed following her termination for almost two years.

The problem with her argument, however, was that she could not show the company’s failure to provide her with 10 days’ notice (the breach she was alleging) caused any damages beyond the income she lost for those 10 days of employment the company failed to provide her. When I deposed her, she testified that she had interviewed for approximately 10-15 jobs, but not one of those companies hired her. So I asked her a critical question: Did she reveal to any of those potential employers that she had been terminated? She responded that, with the exception of one potential employer, she had not revealed to anyone that she had been terminated. As for the one company she did tell that she had been terminated, that company advised her that the reason it did not hire her was because it did not have a position for her, and not because it did not like the fact that she had been terminated. Thus, the facts that she was out of work for almost two years and suffered approximately $500,000 in lost income had nothing to do with her termination; instead, it had more to do with the fact that the economy and job market at the time were not favorable. I filed a motion on this very point a few months before trial. The judge decided to preclude the employee from introducing any evidence of her damages she alleges she incurred after the 10-day period identified in the notice provision in the contract. That ruling effectively reduced her damages claim to a fraction (approximately $10,000) of the amount she had initially alleged ($500,000).

Photo by David Castillo Dominici

Photo by David Castillo Dominici

The lesson? Before deciding to pursue a breach of contract claim, make sure you can argue that, but for the other party’s wrongful conduct, you would not have suffered damages. The other party’s conduct must have caused your damages.

8) Ensure you were able to perform your end of the bargain

In any breach of contract situation, you cannot merely point the finger at the other party and claim he/she/it breached the contract. You must also be able to demonstrate that you were ready, willing, and able to perform your obligations under the contract. If you cannot make this showing, then you will likely not prevail.

For example, if you contracted to purchase a house for $400,000, and the seller backs out at the last minute, to prevail in arguing that the seller breached the contract for sale, you must demonstrate you were ready, willing, and able to consummate the purchase – i.e., you had the ability to pay $400,000 for the house or had obtained financing for the purchase. If you cannot demonstrate either fact, you will likely not prevail.

9) Determine if you have waived the right to claim a breach of the contract

Assuming you are able to establish all of the elements of a breach of contract, you still have to make sure you did not waive your right to raise the claim. For instance, if you hired a pool company to construct and install a pool, and you wait until the end of the project to assert the pool company breached the contract early in the process by using a different kind of concrete in the foundation of the pool than that specified in the contract, you will likely have waived the right to assert that claim or argue that the breach was material. The pool company would likely lose much more time and money if you cancelled the contract at that point in time, or if it was required to tear up the foundation to fix the problem.

Thus, if you believe a breach as occurred, you should notify the other party as soon as possible (with a few exceptions). Ensure you have taken this important step to preserve your right to claim a breach.

You’ve Determined There is a Breach of Contract. Now What?

If you follow each step above and are sure a breach of contract has occurred, and that you can bring such a claim and want to pursue it, then you should make a demand of the other party for the monetary damages you have suffered and/or ultimately file a lawsuit. I highly recommend hiring a lawyer to assist you with this process (if you haven’t already in connection with any of the steps above). This process can be very time-consuming and often complex. There are also pitfalls (such as arbitration agreements) you may encounter if you are not familiar with the procedures and other formalities of pursuing a lawsuit.