Breach of Contract and Defenses
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What is breach of contract?
As previously stated, if any party fails to perform (completely or substantially) or fails to find an excuse to the obligations in the contract, then there is a breach. A breach may include inaction, incomplete action, or the wrong action by the party with a duty to perform. Example: Perry enters into a bilateral contract with Vince to wash his car. Time passes and Perry never washes Vinces car. After a reasonable time (or the period stated in the contract), Perry has breached his contract with Vince. Even if Vince never takes action to enforce the agreement, Perry is still in breach. Vince has not breached, as Perrys failure to fulfill a condition (wash the car) means that Vinces duty to perform (pay Perry) never arose. Note: As demonstrated above, doing nothing when there is an obligation to act is a breach. Likewise, acting when there is an obligation not to act is also a breach.
What is a material breach of a contract?
When a party fails to perform some material aspect of a contract (i.e., does not substantially perform) there is a breach. In such a case, the non-breaching party may halt performance and sue for damages under the contract. Example: Thomas hires Danny to illustrate the childrens book he has written. Thomas agrees to pay Danny in installments as he completes sections of the book. Thomas fails to pay Danny the second installment. This is a material breach and Danny may stop work on the book and sue for damages. Note: If a party substantially performs, the other party may still sue for any loss of value due to the incomplete performance. Courts employ a number of factors to determine whether the failure to perform any part of a contract is material and therefore a breach. These factors include: Whether the non-breaching party will suffer a detriment (or forgo a benefit); Whether the non-breaching party can be adequately compensated for the other partys failure to completely perform (such as through offset); Whether the party breaching party is willing, able, or likely to cure the breach; and Whether the breaching party did so intentionally (acted in bad faith) or innocently (acted in good faith). If a party fails to perform only a non-material aspect of the contract, then she has substantially performed the contract, and there is no breach.
What are a partys rights to cure a material breach?
Under the common law (transactions not involving the sale of goods), jurisdictions are split as to whether a party who commits a material breach of contract can cure that breach. Some jurisdictions allow the party to cure the breach as long as the period for performance has not lapsed. Other jurisdictions only allow a party to cure if the contract expressly grants that right. Under the UCC (transactions involving the sale of goods), the ability of a seller to cure a material breach of contract depends on the timing of the transaction. If the period for performance has not lapsed, then the breaching party may generally cure. If the contract is silent regarding a time period, then the breaching party may cure in a reasonable period of time. Example: Samantha enters into a contract to sell equipment to Kate. The contract calls for Samantha to deliver the equipment before the end of the week. On Monday, Samantha supplies a piece of equipment that is not functioning properly. Kate notifies Samantha on Tuesday. Samantha will likely have until the end of the week to replace the faulty equipment with equipment functioning appropriately.
What does it mean to tender performance?
Tendering performance simply means to offer or attempt to perform ones obligations under a contract. It is the tender of one partys performance that generally triggers another partys duty to perform. Example: Mabel enters into a contract with Steven to purchase supplies. She attempts to make payment to Steven. This is tendering performance. Upon a reasonable tender of performance by Mabel, Steven now has the obligation to deliver those supplies. If Steven, through his own fault, does not accept the tender of performance from Mabel (payment), he still has a duty to deliver the supplies. At that point, he simply has the right to collect the payment from Mabel.
What is a non-conforming tender of goods?
Under the UCC, the perfect tender rule states that, in a contract for the sale of goods, if the goods fail to conform exactly to the specifications of the contract, the buyer may reject the goods. Any failure to deliver goods in the time, manner, and quality described under the contract is a non-conforming tender. Basically, it is an attempt at performance of the contractual obligations that falls short. Example: In the case of Mabel and Steven, suppose Steven either delivers supplies that do not meet the requirements specified in the contract, delivers the goods at the wrong time, or delivers the goods to the wrong location. Any of these situations constitute a non-conforming tender of performance. In any of these situations, Mabel has the right to reject the tender of performance. This means that her duty to pay for the goods does not arise. If Mabel accepts the non-conforming tender (e.g., retains the goods delivered at the wrong time), then she will have a duty to perform (pay for the goods).
What are the rights of a party to reject a non-conforming tender of goods?
Before or within a reasonable time after receipt of non-conforming goods, the recipient may reject those goods. The recipient must notify the seller of the goods. If she does so, then she has not accepted the goods. If, however, the Buyer accepts the goods, then she generally cannot reject the tender (but she may be able to revoke acceptance in certain circumstances). Her sole remedy will be to sue for breach of contract. Example: In the case of Mabel and Steven, if Steven delivers non-conforming goods, Mabel must reject the goods within a reasonable time of receipt. This generally means that she must notify Steven that she is rejecting the non-conforming goods. If she fails to reject the non-conforming goods, she is deemed to have accepted them.
What happens if there is a defective tender in a single shipment under an installment contract?
If a contract is for the one-time delivery of goods, then the buyer who receives a defective tender may reject the delivery, accept the delivery (and sue for damages), or accept any part of the delivery and reject the rest. As previously discussed, this is known as the perfect tender rule. The buyer can reject the whole lot for deficiencies in a portion of the goods tendered. This rule is limited by the Buyers obligation of good faith. If the tender is part of an installment contract, the Buyer can only reject the tender of an installment if the non-conformity of goods substantially impairs that installment. Substantial impairment may pertain to the quality of the goods, timing of tender, quantity, etc. The non-conforming party will generally have the opportunity to cure the deficient tender. The buyer must reasonably cooperate with the attempt to cure through the offset of price, delivery of conforming goods, etc. If the party fails to cure, then this will give rise to a breach of contract. Example: Faith enters into a contract with Lawrence to supply steel for a construction project. Faith provides the first shipment and Lawrence accepts it. The second shipment, however, contains a different type of steel than the type ordered (a non-conforming good). Lawrence rejects the shipment and buys the needed steel for this shipment elsewhere. When it comes time for the third shipment, Faith ships the correct product. Lawrence may either accept the third shipment or reject it. The second shipment fails the perfect tender rule. Since it was non-conforming, Lawrence may cancel the entire contract, accept the non-conforming goods, or accept the 1st and 3rd shipments and reject the rest. In any scenario, Lawrence may sue for any damages suffered as a result of the breach of contract. Note: Under certain conditions, the buyer may be able to cure the deficiency or non-conforming tender. This is particularly true if the time for performance has not yet run.
When are goods deemed accepted and, thus, rejecting the tender offer is not possible?
Generally acceptance occurs when: the good has been delivered to the recipient, the recipient has a reasonable time to inspect the goods, and either: The goods conform to the contract, The recipient indicates that he will retain the goods even though they are non-conforming, The recipient fails to effectively reject the goods, or The recipient uses the goods in a way that is inconsistent with the sellers ownership of the goods (e.g., places the goods in service or sells them).
Can a party revoke the acceptance of goods?
Yes. As previously stated, a party in receipt of non-conforming goods can reject the shipment. If the party has already accepted the shipment, he can reject the goods within a reasonable time of receipt if the defective nature of the goods was not apparent at the time of receipt. This allows the party sufficient time to identify the non-conformity. The buyer may also revoke acceptance after receipt if he accepted the shipment under the assumption that the other party would cure the defective shipment. The recipient cannot revoke the goods if he should have discovered the defect within a reasonable time, but fails to do so. This often happens after the recipient uses the goods for a period or otherwise substantially changes the condition of the goods (such as incorporating them into the manufacturing process). In any event, the recipient must notify the other party immediately upon discovery of the defect. Example: Curtis enters into a contract with Lynn to supply parts for inclusion in production items that Lynn manufactures. If Curtis delivers faulty parts, Lynn can reject them at the time of receipt. If the defects in the parts are not obvious, then Lynn has a reasonable time to discover the defects and then to revoke acceptance of the shipment. If Lynn recognizes the defect immediately, he can retain the goods under the assumption that Curtis will replace the parts or otherwise cure the defect. If Curtis fails to cure the defect, then Lynn can revoke acceptance of the shipment. If Lynn recognizes the defect and is lackadaisical about notifying Curtis, he cannot revoke acceptance of the goods outside of a reasonable time period. If Lynn begins using the goods in the manufacturing process and substantially changes the condition of the goods, he cannot later revoke the goods. In this case, he would simply have to sue for breach and any damages suffered as a result of the breach.
What are a sellers rights to cure a non-conforming delivery or tender of goods?
A seller of goods is generally entitled to cure a defective tender of non-conforming goods if: the time for performance (delivery) has not expired, the seller notifies the buyer of the intention to cure within a timely manner, and the seller makes a conforming delivery within the applicable time period. Example: In the case of Curtis and Lynn, Curtis delivers faulty parts to Lynn. Lynn immediately notifies Curtis of the defective goods. If the time period specified for when Lynn needs the goods has not expired, Curtis may notify Lynn of his intention to supply conforming goods within the contract period. If Curtis indeed ships conforming goods within the contract period, then there is no breach of contract. Lynn must make the defective goods available for Curtis to reclaim. The seller may have additional time to cure (beyond the contract period) if she notifies the buyer within a reasonable period and she has a reasonable belief that the non-conforming goods would be acceptable with a money allowance for any non-conformity. Example: Continuing with the case of Curtis and Lynn, suppose Curtis delivered the non-conforming goods and notified Lynn that they were not exactly as specified in the contract. He states that the variation is minor and that he will offset the difference in value from the price. If he reasonably believes that this will be acceptable, he may be afforded additional time under the contract to ship the conforming goods if Lynn rejects both the non-conforming goods and setoff offer.
What is anticipatory repudiation?
Anticipatory repudiation is the ability to repudiate a contract (reject ones obligation under a contract) based upon the other partys conduct. Anticipatory repudiation begins with any words or actions by a party that reasonably make the other party believe that she is going to breach the contract. Any such words or actions allow the other party to repudiate (reject or break away from) the contract in anticipation of the other partys breach. Example: Jason enters into an agreement to paint Wyatts home by the end of the week. Wyatt really needs the house painted quickly to be ready for an upcoming event he is hosting. The next day Jason accepts a contract to paint a very large home on the other side of town. This will obviously take a long time and will take up the majority of Jasons time. Wyatt becomes aware of this and notifies Jason that he is canceling or repudiating the contract. He wants to free himself up to hire another painter. He tells Jason that he is repudiating the agreement because he anticipates that Jason will not be able to do a good job on his home if he does not devote his full time to the effort. If Jason later sues Wyatt for canceling the contract, Wyatts defense will be anticipatory repudiation. He cancelled the contract before Jason had the opportunity to breach it.
How does a party indicate that she is going to breach the contract and allow the other party the right of anticipatory repudiation?
A party can make a statement indicating that she intends to breach the contract. She can engage in conduct that makes it extremely unlikely that she will be able to perform the contract without significant hardship or loss. Further, one party may seek assurance of performance based upon some reasonable evidence or belief that the other party will not perform. If the other party fails to respond to the request, then it can give rise to anticipatory repudiation. Example: In the case of Jason and Wyatt, Jason acted in a way that was inconsistent with his intention or ability to fulfill the contract. If Wyatt has sought assurance from Jason that he would perform, then Jason would have to show that he would be able to complete the required work. This may have included an explanation that Jasons work crew would work on the other project, while Jason worked on Wyatts home. If Jason fails to provide some form of assurance, Wyatt would be justified in repudiating the contract.
What is a partys right to demand assurances of performance from another party?
Under common law and the UCC, when a party has reasonable grounds to believe that the other party will fail to perform their obligations under the agreement, she can demand an assurance of performance from the other party. Under the UCC, this demand must be in writing. If reasonable, the demanding party can suspend her performance until the other party provides the necessary assurances. If a party fails to provide the requested assurances within a reasonable time, this may justify repudiation of the contract. Example: In the case of Jason and Wyatt, Wyatts request for assurances from Jason is under the common law and does not have to be in writing. Wyatt can validly withhold payment until he receives assurances of performance from Jason.
What are the rights of a party who anticipatorily repudiates a contract?
Under the common law, the repudiating party is discharged under the contract and she can sue the breaching party for damages. If a contract is for the sale of goods, the party can suspend performance, notify the other party, and await performance by that party. After a reasonable period of time, the aggrieved party can sue for breach. Example: In the case of Jason and Wyatt, Wyatt may sue Jason for any damages he incurred because of Jasons breach. If Wyatt hires another painter of equal qualifications but who is more expensive, he may be able to sue Jason for the difference between the contract price and the replacement painters price.
Can a party who repudiates the contract undo or withdraw her repudiation?
A party who repudiates a contract based on the other partys anticipated breach may retract or withdraw her repudiation at any time before the other partys performance is due, unless the other party has cancelled the contract, materially changed her position, or otherwise accept the repudiation as final. In a contract for the sale of goods, the time when the contract is due would be the time of delivery of the goods or the next installment. In an installment contract falling under the common law, the repudiation can be withdrawn even after the time when the partys performance is due. Example: In the case of Jason and Wyatt, Wyatt may withdraw his repudiation at any time prior to the end of the week, when services are due. If Jason acknowledges the repudiation, however, it cannot be withdrawn. Likewise, if Jason relies on the repudiation and continues to book or work on other painting jobs, the repudiation is final as it would likely detriment him to allow the repudiation to be withdrawn.
What are the general defenses to a breach of contract?
All of the previously discussed elements of a valid or enforceable contract can serve as a defense to an allegation of breach of contract. As a recap, the general defenses are summarized as follows: Lack of Consideration - If a purported agreement lacks an exchange of consideration between the parties, it is not valid. Failure of Statute of Frauds - If a contract is subject to and fails to meet the requirements of the statute of frauds, it may be unenforceable. Mutual Mistake of Fact - Recall that a contract requires a meeting of the minds between the parties. Mutual mistake disrupts that meeting of the minds and thereby makes the contract voidable by either party. Lack of Mental Capacity - If a party lacks mental capacity at the time of entering into the contract or during the term of the contract, it could render the contract voidable by that party. Fraud, Duress, Misrepresentation - Fraud, Duress, or Misrepresentation are defenses to an alleged breach of contract. Unconscionable - An unconscionable contract is voidable as a matter of public policy. Impossibility or Impracticability - An impossible or impracticable contract either cannot be accomplished or would unduly burden one party as a result of an unexpected occurrence that was not the fault of either party. Equitable Principles - Principles of fairness and justice may give rise to a defense to a breach of contract. All of the above defenses are subject to the exceptions previously mentioned in the explanation of that particular contract element.