Breach of Contract in the Business World

| Breach of Contract in the Business World| | | | | | | Table of Contents Executive Summaryiii I. Introduction1 II. Breach of Contract1 III. Immaterial Breach of Contract1 IV. Material Breach of Contract2 V. Remedies3 VI. Remedies at Law3 VII. Remedies in Equity5 VIII. Summary6 IX. Bibliography8 Executive Summary This paper discusses the legal concept of a breach of contract and the options a business has in pursuing a breach of contract case.It defines what constitutes a breach of contract, how a party may breach a contract, and it compares the legal distinction between an immaterial and material breach of contract. This paper concludes with a description of what remedies are available to the non-breaching party when a contract has been breached. It describes the types of remedies at law (monetary damages) and remedies in equity that may be awarded in a breach of contract case. Introduction Contracts form the very foundation of every legal business endeavor.They can dictate how a bu siness is formed, the terms and conditions of employment, or a sales agreement between a business and its customer. In a perfect world, both parties would benefit from a contract and no disputes would arise. In the real business world, delays occur, financial problems happen, and unexpected events may prevent a contract from being fulfilled. It is imperative that a business understands what constitutes a breach of contract, how a party may breach a contract, and what legal remedies are available to recover any damages that may be incurred.Breach of Contract A breach of contract occurs when one party fails to perform any term of a contract, written or oral, without a legitimate legal excuse (Hill, Breach of Contract). A businesses’ course of legal action against a breach of contract will depend on what type of breach has occurred, whether the breach is material (substantial) or immaterial (minor), and what damages have been incurred. Immaterial Breach of Contract An immaterial breach of contract does not substantially impair the value of an entire contract.An immaterial breach allows the non-breaching party to sue for the actual damages it sustains, but it does not excuse the injured party from its contractual obligations (Gifis, 2010). In the contract case of Jacob & Youngs v. Kent, the court dealt with the matter of an immaterial breach of contract (Jacob & Young v. Kent, 1921). In the case, the plaintiff sued the defendant for not paying for the installation of pipes in his home.The defendant refused to pay because the defendant learned that some of the pipes installed in his home were of the brand name Cohoes, instead of Reading. The defendant argued that the plaintiff should replace all of the piping with the brand agreed upon in the contract before having to pay the plaintiff. The plaintiff refused and asked that the final payment be made. The court found that the breach of contract by the plaintiff was immaterial because the pipes that were instal led were the same type and quality to which the parties had originally agreed.The only difference between the two pipes was the brand name. The defendant was ordered to remit the final payment to the plaintiff and received no damages because the actual difference of value between the two brands of piping was zero. Material Breach of Contract A material breach of contract discharges the non-breaching party from further performance under the contract and entitles the injured party to sue for damages or for performance of the contract (Jentz & Miller, 2007, p. 218).The Restatement (Second) of Contracts lists the following criteria to determine whether a specific failure constitutes a material breach: In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (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 c ompensated 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 dealing. (Restatement (Second) of Contracts, 1981) In the previously mentioned law case of Jacob & Youngs v. Kent, if the piping installed had been an inferior quality or material, the breach of contract would have been a material breach. In this case, the court would have agreed with the defendant and ordered the plaintiff to replace all of the piping with the correct brand and quality of piping. RemediesA remedy is the relief given to an innocent party to enforce a right to compensate for the violation of a ri ght (Jentz & Miller, 2007, p. 7). In law there are two types of remedies: remedies at law and remedies in equity. Remedies at law are typically classified as monetary damages while remedies in equity usually include rescission and restitution, specific performance, and contract reformation. A breach of contract case normally entitles the non-breaching party to sue for monetary damages (a remedy at law). In some cases, however, when the remedy at law is inadequate, a court will allow the non-breaching party to sue for an equitable remedy. Remedies at Law In most breach of contract cases, the non-breaching party is entitled to sue or monetary damages, also known a remedy at law. Monetary damages are designed to compensate the non-breaching party for the loss of the bargain and to try and put the innocent party in the position they would have occupied had the terms of the contract been fulfilled (Jentz & Miller, 2007, p. 226). Compensatory Compensatory damages are an amount of money aw arded by the court to compensate the non-breaching party for a particular detriment or injury sustained as a direct result from the loss of a bargain due to a breach of contract. The amount awarded is intended to replace the amount the non-breaching party lost and nothing more (Gale, 2010). ConsequentialConsequential damages or â€Å"special damages† are damages that arise only from the consequences of a breach of contract. Consequential damages may be awarded in a breach of contract case when it includes the loss of profit or revenue as a result of a breach of contract. The damages may only be collected if it is determined that the damages were reasonably foreseeable when the contract was made (Hill A. , 1974). Punitive Punitive damages are awarded to compensate the injured party, to punish the breaching party, and to deter others from committing the same act. Punitive damages are monetary damages awarded above and beyond what is necessary to compensate a party for their los ses.Punitive damages are normally not awarded in a breach of contract case unless a tort is involved but some suggest the stance on this may be changing (Sullivan, 1976-1977). Nominal Nominal damages are a small amount of money (such as one dollar) awarded to the non-breaching party in a lawsuit to show that the loss or harm suffered was technical rather than actual. It is also used to establish that the defendant acted wrongfully (Hill G. a. , Nominal Damages, 2010). Remedies in Equity In some breach of contract cases businesses are not interested in monetary compensation. In these cases, money is an insufficient substitute to the original terms of the contract and the non-breaching party may wish to sue for an equitable remedy instead. Rescission and RestitutionThe rescission of a contract essentially terminates the contract and returns the non-breaching parties to their former positions before the contract was made. Rescission is available when fraud, mistake, duress, or failure of consideration is present in a contract. The rescinding party is also entitled to restitution (Williston, 1922, p. 1455). Restitution requires both parties to return any goods or money that was given to the other party. Restitution is used to prevent the unjust enrichment of another party (Williston, 1922, p. 1456). Specific Performance Specific performance is an equitable court-ordered remedy that calls for the precise performance of the act promised in the contract (Wild, 2006).This remedy is often ordered by the court in the sale of a rare article or unique piece of land because awarding monetary damages would be insufficient to cover the perceived loss by the non-breaching party. Reformation Contract reformation is an equitable remedy available to parties of a written contract when the contract does not truly express the intention of both parties. â€Å"The mistake may be the mutual error of both parties to the contract, or the oversight of one party which the other knew or s uspected at the time of entering the agreement. † (American Home Ins. Co. v Travelers Indemnity Co, 1981) Contract reformation is also used when fraud is present and it allows the contract to be rewritten to reflect the parties’ true intentions. SummaryA breach of contract occurs when one party fails to perform any of the contract terms. The breach may be immaterial or material depending on whether or not the value of the contract has been substantially impaired. Remedies are the compensation awarded to the non-breaching party in a breach of contract case. There are two types of remedies for a breach of contract: remedies at law and remedies in equity. Remedies at law are pecuniary damages awarded to the non-breaching party to compensate them for the loss of the bargain while remedies in equity may include rescission and restitution, contract reformation, and specific performance. Bibliography American Home Ins. Co. v Travelers Indemnity Co, 122 (Cal.App 3d 951,961 1981 ). Gale, T. (2010). West's Encyclopedia of American Law. Retrieved April 21, 2010, from Answers. com:http://www. answers. com/library/Law%20Encyclopedia-cid-6927283 Gifis, S. H. (2010). Law Dictionary. Retrieved April 21, 2010, from Answers. com: http://www. answers. com/topic/breach-of-contract Hill, A. (1974). Breach of Contract as a Tort. Columbia Law Review (74), 40. Hill, G. a. (n. d. ). Breach of Contract. Retrieved January 6, 2010, from Law. com Dictionary: http://dictionary. law. com/Default. aspx? selected=93 Hill, G. a. (2010). Nominal Damages. Retrieved April 21, 2010, from The Free Dictionary by Farlax: http://legal-dictionary. hefreedictionary. com/Nominal+Damages Jacob ; Young v Kent, 230 (N. Y. 1921). Jentz, G. , ; Miller, R. (2007). Fundamentals of Business Law: Summarized Cases (Seventh ed. ). Mason: South-Western Cengage Learning. Restatement (Second) of Contracts  § 241. (1981) Sullivan, T. J. (1976-1977). Punitive Damages in the Law of Contract: The Reality and the Illusion of Legal Change. Minn. L. Rev (61), 207. Wild, S. (Ed. ). (2006). Webster's New World Law Dictionary. Retrieved April 21, 2010, from Yourdictionary. com: http://www. yourdictionary. com/law/specific-performance Williston, S. (1922). The Law of Contract. New York: New York Baker, Voorhis & Co.