Breach of Contract

The Contract Is King

Anytime there is a question whether a party has breached its obligations, the first place that must be reviewed is the contract itself. The contract will outline the duties and obligations of the parties. Questions may arise as to the meaning of words or phrases, but absent such ambiguity the contract controls the relationship between the parties. However, there are often times when important terms are left out, either by accident or poor contract drafting. Those errors can affect the rights and obligations of the parties.

The "parole evidence rule" forbids a court from looking outside the "four corners" of a written agreement to expand its terms. What that means is that the language of the contract will generally be given its plain meaning and, unless there is language that causes an ambiguity, no outside evidence can be brought in to make the contract have additional or changed terms. All jargon and legal rules aside, if you want to know if you or someone else has breached a contract, you must first look at the plain meaning of the contract itself.

Failure To Perform

The most obvious type of breach of contract is when one party to a contract refuses or fails to render its performance. If the time has come for a party to a contract to do some act and they simply don't show up or otherwise fail to render their performance, it is obvious that the party has breached the contract. However, we see many contracts that don't include a time for performance. If that is the case, can the party just put off its performance indefinitely?

The above scenario is all too common. We recently represented a homeowner in a dispute with a residential construction contractor. The homeowner signed over a large sum of money from her insurance company when the contract was signed. More than six months had passed and no work on her property had been completed. When she would complain, the contractor would argue that it had a year to complete the repairs under the contract even though the contract was silent as to when performance should occur. In fact, the contract was a form which had a space for time of completion, but it was left blank. The Restatement (Second) of Contracts says that the court will supply a term "reasonable in the circumstances" when the parties to a contract have omitted an essential term (such as time for performance) and there is plenty of case law suggesting that when the time for performance is not specified there is an implied clause that performance should be in a "reasonble time" under the circumstances. In this case, we argued that failure to render performance for more than six months after contract execution was not reasonable and therefore the contractor had breached its obligations.

Whether the time for performance has been specified or a party has to resort to relying on the implied "reasonable time," there still exists the issue of whether the breach is material or non-material. The issue of material versus non-material breach of contract is imperative with respect to protecting your rights. If there is any doubt or question as to whether a breach of contract is material or non-material, contact the breach of contract attorneys at Johnson & Associates Law at 402-718-9881 and seek a legal opinion.

Material v Non-Material Breach of Contract

Generally speaking, a non-material breach does not excuse or discharge the obligations of the non-breaching party. For example, we had a scenario - another residential construction contract - in which a homeowner had contracted for new siding. As part of the contract, the contractor was to install a specific type of insulation under the siding. Upon inspection by the homeowner it was discovered that the insulation under the siding was of a different type and quality than what was called for in the contract. Obviously there was a breach of contract, but does that excuse the homeowner from its duty to pay? No - because it was determined that the breach was non-material.

Whether a party has committed a material breach rather than a non-material breach may be the most important factor in a breach of contract case. Essentially, the question is whether the non-breaching party has been deprived of the "heart" of the bargain. Here are some factors that will be considered when determining if the breach is material:

  • Availability of a Remedy

    If the non-breaching party can simply be compensated by money and essentially receive what they were promised under the contract, then the breach is likely non-material.

  • Will The Breaching Party Suffer Forfeiture?

    If the breaching party will suffer a forfeiture if the non-breaching party is released from its obligations, then the breach is less likely to be considered material. We had a scenario where a developer had hired a general contractor to build a custom home. At the end of construction, it was determined that walls were placed not in accordance with the plans and in various places the wrong type and quality of material had been used. The developer refused payment, claiming that the general contractor breached the agreement. While it is true that the contractor failed to render performance in accordance with the construction specifications, this breach was considered non-material and the developer was still under an obligation to pay. The main argument was that the incorrect placement of the interior walls deprived the developer of the "heart" of what he had contractor for. However, in the end, the developer was only entitled to a reduction in the contract price. These scenarios are fairly common - and the non-breaching party is generally entitled to the difference in price between what they had contracted for and what they actually received. This is called "dimunition in value" and it presents problems of its own. After all, what is the "value" of having walls placed in different areas than what was promised? To read more on such issues visit the breach of contract remedies page.

  • Was The Non-Breaching Party Ready And Willing To Perform?

    If a party intends to claim that the other party has breached its obligations under a contract, then the party should make efforts to show that it is ready and willing to perform under the contract. Failure to do so may give the other party grounds to claim that it refused performance because it had a reasonable doubt the other party could perform its duties. Many of these issues take the form of "anticipatory breach," which is a theory that one actually breaches the contract prior to its time to perform. For example, imagine that a developer hires a general contractor to build something and it is estimated that the general contractor will have to outlay a considerable amount of capital to complete the work, but then the developer finds out that the contractor has recently filed for bankruptcy or that the contractor's lines of credit have been depleted. Such a scenario probably gives the developer a reasonable doubt that the contractor can perform. The developer is entitled to demand adequate assurances that the contractor can perform its obligations, such as evidence of financing. If the contractor fails to give adequate assurances the contractor will be held to have breached the contract, even if the contractor wasn't required to start the job at that time. These types of issues come up all the time in construction contracts and parties to a contract need to take precautions before refusing to pay, kicking a contractor off the job, walking off the job, or hiring another contractor to complete the work. While the contract language will prevail, often times these subtle issues are not addressed before they occur. Generally, the non-performing party is entitled to be given the chance to cure any defect or provide adequate assurances of performance before the other party can successfully claim that the contract has been breached.

There are other factors that a court can and does consider. If you have entered into an agreement and need to determine if there has been a breach or whether such a breach is material or non-material, call the breach of contract attorneys at Johnson & Associates Law today for a free consultation at 402-718-9881.