Breach of Contract

Breach of Contract

A contract is a legal agreement. The parties to a contract, through their signatures, agree to all terms. A breach of contract occurs when one party fails to meet the obligations of the contract. When a breach occurs, the innocent party can terminate the contract; the party who is guilty of the breach cannot—at least not without permission from the aggrieved party. ♦ Example: Andy and Claire agree that Andy will purchase Claire's condo for $235,000. Andy agrees to give Claire a promissory note for $5,000 with the promise to convert the note to a check with escrow within two business days. Five business days pass, and Andy still has not deposited his earnest money check.

Accept partial performance:

Although you haven't met all of your obligations, I'm willing to move forward with the contract anyway.

Mutual rescission:

Okay, this contract isn't working out for either of us. Let's put it in writing that we've agreed to call it quits.

Liquidated damages:

Things just aren't working out, so I'm going to cut my losses and accept liquidated damages per our agreement because you didn't hold up your end of the deal.

Terminate the Contract

Unilateral rescission: Fine, if the other party is not going to meet his obligations, I'm going to terminate.

Sue

for monetary damages: All right, then. If you don't want to fulfill your obligations through actions, with the court's help, I'll take out what you owe me in cash and call it even.

Sue

for specific performance: Hold on just a minute! You're not getting off that easy. With the help of the courts, I'm going to make sure you fulfill the terms of our contract.

When a breach occurs,

the parties have several remedies available to them. Using this example, Claire may: 1. Accept partial performance. If Andy deposits the earnest money check on Day Seven, perhaps Claire will be satisfied and go through with the contract. 2. Rescind the contract unilaterally. Claire has the option to rescind; Andy does not. 3. Sue Andy for damages. Claire could take Andy to court, claiming breach of contract, if they are unable to work out another solution. Claire could claim that by having her property off the market for six days, she suffered a monetary loss and could seek monetary damages. 4. Sue Andy for specific performance. A suit for specific performance requires the parties to make good on the promises they made. It's too late for Andy to meet the two-day deadline, but Claire could still sue him to deposit the check. Chances are she wouldn't do this because by the time the suit was filed, he could deposit the check. 5. Accept liquidated damages. In this case, Claire has no liquidated damages. Generally, the earnest money deposit serves as the seller's liquidated damages, and Andy hasn't deposited it yet. But this is an option for sellers when a buyer breaches the contract later in the game. In fact, the primary purpose of the earnest money deposit is to get some of the buyer's skin in the game and provide protection (legal remedy) for the seller. 6. Mutually rescind the contract. Let's say that Andy has changed his mind about buying Claire's property, and Claire has another buyer in the wings who is willing to pay even more. In this case, the parties would likely agree to mutual rescission of the contract.