Nonperformance and Breach of Contract: What You Need to Know
If one party deviates from the terms of the contract and the other party does not agree to this then the deviating party is said to have breached the contract. 7 min read
Exceptions to Contractual Performance and Contract Breaches
The basic rule of contractual performance is that parties must perform as specified in the contract with two exceptions:
- The parties agree to the change in the contract's terms.
- The actions of the party who deviates from the terms of the contract are implicitly accepted ("ratified") by the action or non-action of the other party.
If one party deviates from the terms of the contract, and the other party does not agree to this deviation and the deviation is serious enough to make a real difference in the intended result of the contract, then the deviating party is said to have breached the contract. Their justified prevention or interference with the performance of the other party is also a breach.
Of course, if one party fails entirely to perform the contract, or totally prevents performance of the other party, the situation is straightforward. The situation becomes more complex when the argument is over the quality of materials, the timing of work, or a similar subject.
When a breach of contract occurs, the breaching party can be sued for damages by the other party, and the non-breaching party is no longer held to their previous contractual obligations.
To help support their claim for breach, the non-breaching party should have fulfilled their contractual obligation up to the time the breach occurred and should not have interfered with the other party's performance in any way.
The nonperforming party will likely try to excuse the breach and may try to place blame on the other party.
Substantial Performance of Contracts
There are so many ways for performance of a contract to give rise to dissatisfaction that the courts have been forced to analyze the matter in much more subtle terms than "breached" or "not breached."
The doctrine of "substantial performance" saves a party who has largely fulfilled their obligations under a contract from suffering major loss merely because they have unintentionally fallen short in some particular that does not affect the essence of the contract.
There must be some limit to what a dissatisfied customer can sue for, or the courts would be swamped with trials over precise shades of paint and tiny imperfections in services. A party can unintentionally fall short of perfection, but if they have substantially performed their duties under the contract, they can still sue the other party for payment.
On the other hand, the dissatisfied party can usually win some amount of compensation for the minor defects in the performance.
If a party's failure to perform was unintentional but the failure did affect the essence of the contract, the party who failed cannot sue the other party "on the contract" in order to be paid. To the extent that the work has benefited the other party, the party who performed the work may recover on the theory of a contract implied by law (quasi-contract), as explained above.
Remedies for Breach of Contract
Monetary damages are the most common remedy for a breach of contract.
As mentioned, a contract should always anticipate the possibility of nonperformance, whether intentional or unintentional, and should outline what is to be done if the contract is breached. Some contracts go so far as to include an agreement on a set amount of "liquidated damages," which are to be paid when something goes wrong with the contract.
Courts will usually accept liquidated damages as long as the amount is a reasonable estimation of the potential monetary damage of a breach of contract. If the liquidated damages are so excessive that they could be considered a penalty or fine, the courts will ignore the liquidated damages clause and assess damages by actually measuring at trial the financial harm done by the breach.
Unless the provision poses a worse threat to you than to the other party, specify in your contracts that if a breach results in legal action, the losing party will pay all attorney's fees.
If you and the other party live in different geographical jurisdictions, you should try to include a provision which says that the contract is to be enforced under the laws of your jurisdiction. This makes it possible for any litigation concerning the contract to take place in a court near your home.
Why Are Damages Awarded?
The purpose of damages in breach of contract suits is to put the injured party in the financial position they would have enjoyed had the contract been performed. At the very least, damages should put the injured party in their pre-contractual position. In other words, no one should suffer loss because another has failed to perform a contract properly.
Where nonperformance is total, for example, the damaged party should get back any money they have paid, along with additional money to compensate them for any actual financial loss which resulted from the nonperformance. The loss must have been a reasonably foreseeable result of the nonperformance.
Do not expect, however, to receive money damages that are meant to punish the breaching party for their conduct. These are known as punitive damages, and they are usually only available for personal injury suits and not in breach of contract cases. Of course, if you can allege that you were defrauded, then you are suing for wrongdoing beyond the breach of contract, and you may receive punitive damages.
Contract Suits Involving Fraud
Accusations of fraud most frequently arise where a contractual situation is involved. For example, fraud could occur when one party agrees to the contract due to a deliberate misrepresentation made by the other party.
Here is an example of how you might establish a case for fraud:
- Party A makes a representation about a fact.
- Party A knows that the representation is false, OR they make it with complete and reckless disregard of whether it is true or not.
- Party A intends Party B to rely on Party A's misrepresentations.
- Party B does rely on Party A's misrepresentations.
- As a result of their reliance, Party B suffers harm for which there is a legal remedy.
Facts to Keep in Mind to Protect Yourself From Fraud
Mere silence may not be fraudulent. One party may not necessarily be duty-bound to tell the other party what they know in all cases. In some circumstances, however, there is a responsibility to reveal certain information. For instance, a seller may be found guilty of fraud if they fail to tell the buyer about a hidden defect which would not be found through ordinary inspection. The seller must, of course, know about the defect before they can be responsible for revealing it.
Words are not necessary to create fraud. Calculated actions designed to misrepresent something can be fraudulent. For example, for six months a dealer uses a car solely for test drives and then rolls back the odometer and sprays the interior with new car scent before putting the vehicle on sale as a new car.
Fraud does not occur when a person promises to do something with the intent on following through and then changes their mind and does not fulfill the promise. Fraud does occur, however, when a person misrepresents their intentions. If one party says to another party, "If you'll buy this store, I'm leaving town and taking my business with me," and the first party's actual intention is to open a larger, competing store across the street from second party, then the first party is making a fraudulent misrepresentation.
If you rely on a person who does mean what they say at the time they say it, but who later changes their mind and you are harmed, you may be able to pursue damages in a breach of contract lawsuit if there was a contract in place. If there is not a formal contract, you may be able to file a suit in quasi based on promissory estoppel, depending on the circumstances.
Opinions cannot be fraudulent. If Party A says to Party B, "This foal is going to be a really great racehorse," and Party B buys the foal and it never wins a race, Party B can't win a suit for fraud. On the other hand, if Party A says, "This horse cost me $50,000.00," but they actually paid much less for the horse, and Party B buys the horse because they are impressed with its value, then Party A may be guilty of fraud.
Finally, even if Party A knowingly makes a false representation of fact, they may not be found guilty of fraud if Party B failed to find out the truth when it was available to them through reasonable investigation. Party B is not required, however, to make unreasonable exertion to verify everything Party A tells them. If Party A gives Party B a financial statement that doesn't have some obvious defect on its face, Party B is entitled to rely on it rather than to hire accountants to go over Party A's books.
What to Do If You Have Suffered Fraud
If you have been the victim of fraud, there are several ways that you can respond:
- If convenient, simply do not perform your contractual obligations and then wait for the other party to sue you. During the suit, you can use the other party's fraud as your defense. For example, keep the horse but stop making payments to the seller. When the seller sues you, you can then ask the court to remedy all your losses which have resulted from the seller's fraud.
- Carry out your part of the contract and sue the other party for damages caused by their fraud. Remember, though, that it is usually better to let the other party go to the trouble and expense of suing you if you can arrange it that way.
Instead of treating the contract as valid, you could rescind the contract, offer to return to the other person whatever consideration you received from them, and sue them for the return of whatever consideration you gave to them. You cannot both confirm the contract and rescind it, so you would choose the remedy that will put you in the best position.