Breach of Contract - Contracts - Cha. 24

Anticipatory Repudiation

The seller repudiates the contract if, before delivery is due, the seller informs the buyer he will not perform his contractual duties. The buyer may then cancel (i.e., terminate) the contract and declare a breach.

UCC - 4 Types of Nonperformance

(1) nondelivery, (2) failure to make perfect tender, (3) breach of warranty, and (4) anticipatory repudiation.

Determining Material of a Breach - Restatement (Second) of Contracts §241

(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.

The Restatement materiality factors can be summarized as follows:

1. Amount of benefit not received 2. Adequacy of damages 3. Forfeiture suffered by breaching party 4. Likelihood of cure 5. Lack of good faith and fair dealing

Total Breach

A breach is total when a party has materially breached an agreement and is unwilling or unable to cure the breach. With a total breach, the non-breaching party is justified in not performing his side of the bargain. The non-breaching party may then terminate the contract and seek damages.

Does a court or jury decide when a contract is breached?

A court.

Material Breach

A material breach occurs when a party has not substantially performed. A material breach allows the non-breaching party to suspend performance and then provide an opportunity for the other party to cure its breach. If the breaching party cures the material breach, then the material breach has become a partial breach. If the breaching party does not cure the material breach, then it ripens into a total breach.

Partial Breach

A partial breach consists of minor deviations where the breaching party has substantially performed. If the breach is partial, then the non-breaching party must still perform his side of the bargain, though he may seek damages for any loss suffered.

Breach of Warranty

A seller may breach by delivering goods that do not conform with either an implied or an express warranty.10 If the buyer accepts the non-conforming goods, then the seller may still be liable for warranty damages.11 By accepting the goods, the buyer no longer has the right (under the perfect tender rule) to terminate the contract. Instead, the buyer will keep the goods and receive damages equivalent to the difference between the value of the goods as they were delivered and the value of the goods as they were warranted.

Nonperformance

ANY nonperformance when performance is due is a breach.

Right to Suspend Performance and Opportunity to Cure

At minimum, a material breach gives the non-breaching party the right to suspend performance. This gives the breaching party an opportunity or right to cure the breach. If the circumstances suggest that the breaching party might cure their breach, then the non-breaching party should suspend their performance for a period of time to allow the breaching party to fix the problems with its performance.

Adequacy of Damages

Courts may find that a breaching party substantially performed if it is possible to accurately estimate the cost to complete the performance. In construction contracts, the defects can sometimes be corrected by hiring someone else to do the work and awarding the excess cost to repair the problem as damages to the non-breaching party. A court that grants specific performance must make a determination that damages are inadequate as a remedy.

Types of Material Breach

If a party has materially breached a contract, then the non-breaching party may terminate the contract unless the circumstances suggest that the breaching party will cure its breach. If the breaching party is given a chance to cure the breach, then the non-breaching party may suspend performance. If the material breach remains uncured, then it becomes a total breach and the non-breaching party may withhold performance and terminate the contract.

Forfeiture Suffered by Breaching Party

If terminating the contract results in a forfeiture to the breaching party, then courts may favor a determination that the breach is not material. Remember, if the court determines the breach is material, then the non-breaching party may suspend performance and terminate the contract. This could cause a significant hardship to the breaching party, who might not be compensated for work they did. A court may favor a conclusion that the breaching party substantially performed if to do otherwise would cause a significant forfeiture for them.

Lack of Good Faith and Fair Dealing

If the breaching party is not operating with an intention to fulfill the implied duty of good faith and fair dealing, then the court may conclude that the breach is more material. Good faith and fair dealing is an important factor in a court's determination of materiality. However, just because a party is operating in good faith does not mean that the nonperformance will be a partial breach. Additionally, a bad faith breach would not transform a partial breach into a material one if the non-breaching party substantially received the benefit of the bargain and any damages are adequate.

Right to Terminate and Damages

If the breaching party will not cure its breach, then the non-breaching party may (1) withhold performance, (2) terminate the contract, and (3) sue for damages. In this scenario, the non-breaching party's duties under the contract have been discharged.

Non-Breaching Party Terminates too Early

If the non-breaching party terminates the contract without giving the breaching party an opportunity to cure, the non-breaching party risks the possibility that a court determines that a breaching party would have corrected the errors if given an opportunity to do so. In such a scenario, the non-breaching party is transformed into the breaching party because he terminated the contract too early.

Right to Damages

In a partial breach, the non-breaching party may recover damages for any harm caused by the partial breach.

Nondelivery

Naturally, if the seller does not deliver the goods, then the buyer may sue for breach and seek a remedy. The remedy would include money damages to compensate for any economic loss the buyer experienced because of the breach. In some situations—where the goods are unique or there is a shortage of a commodity—the buyer may seek specific performance.

Substantial Performance

Substantial performance occurs when there are only small deficiencies in the quantity or quality of performance where precision is not critical. If the breaching party substantially performs, then the non-breaching party will not be relieved of his duties, though compensation may be given for any damage caused by the partial breach. If the breach is relatively minor compared to the duties under the contract. The terms "substantial performance," "partial breach," "minor breach," and "immaterial breach" are used interchangeably by the courts and have the same meaning.

Likelihood of Cure

The more likely that the breaching party will cure their breach and fully perform the contract, the more likely the court will find for substantial performance. Whether it is probable that a breaching party will cure may depend on an assessment of the good faith and fair dealing.

No Right to Terminate

The non-breaching party may not terminate the contract if there has only been a partial breach. The non-breaching party must still perform its obligations, though it can recover money damages for any harm caused by the partial breach.

Amount of Benefit Not Received

The primary focus is on the degree to which the injured party has not received the full performance expected under the contract—in other words, how much of a loss has occurred. The more that the non-breaching party has been deprived of the benefit, the more material the breach. Likewise, the greater the benefit received, the less material the breach. Another way to express this concept is to say that the more the breaching party has delivered what was expected by the non-breaching party, the more substantial the breaching party's performance.

Perfect Tender Rule (UCC)

UCC §2-601 Buyer's Rights on Improper Delivery. Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may: 1. reject the whole; or 2. accept the whole; or 3.accept any commercial unit or units and reject the rest.

Failure to Make Perfect Tender

Unlike the common law, the seller must perform exactly according to the terms of the contract; otherwise, the buyer may refuse delivery of the goods. Although sellers are given a right to cure their breach, this bright-line rule can cause a hardship for a seller if the defect is trivial. The rule is controversial, and some courts limit its application.

Breach - Restatement (Second) of Contracts §235(2)

When performance of a duty under a contract is due any non-performance is a breach.

"Time Is of the Essence" Clauses

When timing is important for a client, an attorney will often include a "time is of the essence" clause. Such clauses typically state that a party will be in total breach if performance does not occur by a certain date at a certain time. Such a clause typically negates the right of the breaching party to cure. Courts do not always enforce the "time is of the essence" clause. Such clauses can lead to harsh results if a party misses performance by only a little time.

Efficient Breach

Where a party intentionally breaches a contract because it is cheaper to pay damages to the non-breaching party than to perform.