What Is A Breach of Contract?
A breach of contract is a violation of the terms of a legally binding agreement between parties. Contracts can range from simple, informal verbal or written agreements to complex, multi-page documents filled with legal jargon. But generally speaking, if a party fails to fulfill their agreed-upon obligations to the other party, a breach of contract has occurred.
A breach occurs any time one of the parties to the agreement fails to perform the promises they made in the contract. This can include anything from late payments to subpar quality of work to not delivering what was promised.
Not every minor lapse will be considered a breach, however. The Parties may still have some degree of leeway. A harmless mistake or a minor delay will likely not be sufficient to pass the threshold for breach. For example, if you hire a contractor to paint your house and he holds up progress on the job by a few days , it’s probably not sufficient to merit a breach of contract claim. However, if you hire your neighbor’s brother (who you were told has experience painting), and he instead turns up ready to do the work a la Jackson Pollock or Picasso, that’s probably a different story.
Of course, clarifying the boundary between minor lapse and actual breach can be tricky. This is where the courts step in. In cases of disagreement over whether or not a breach occurred, the parties can petition the court to help resolve the matter.
Defenses are important because most people are familiar with the concept of "innocence" or "no wrongdoing". For example, just because a driver hit a lamp post, doesn’t mean the driver is liable for the damage. The driver can present evidence that the pole itself was installed improperly and/or the accident was unavoidable.
The Components of Affirmative Defenses
While defenses to claims of breach of contract can be divided into two groups, permissive and affirmative, rarely is the distinction between them important. In practice the distinction between the two tends to blur, with almost all of the factors subsumed in the analysis of an affirmative defense being introduced by the opposing party.
They are called affirmative defenses because in asserting them the party addresses the substantive issues raised by the breach claim. The same is not true of most defenses, which simply go to rebutting the breach allegation without addressing the substantive merits.
It is important to keep in mind that in defending against an allegation of breach, both parties carry the risk of bearing the burden of proof. Since a defense is an avoidance of the claim, the defendant has the burden of coming forward with evidence to establish the facts that excuse the liability that the plaintiff claims. Once the defendant does so, both parties share the burden; the plaintiff must prove any issues raised by the defense.
A party asserting an affirmative defense does so in the form of a pleading, which gives notice to the party against whom the affirmative defense is being asserted, and through evidence. A pleading is a diagnostic device, designed to educate the litigants and the court about the issues and contentions likely to be presented at trial. Because it has this purpose, the fault that an otherwise valid answer may contain creates an opportunity for amendment. And it is the job of that party’s lawyer to amass the evidence needed to both support the affirmative defenses and persuade the judge or jury.
One of the few instances in which an affirmative defense has independent significance is when it alters the burden of proof. It does this by converting what might otherwise be argued as a permissive defense into an affirmative defense by requiring proof of that element as part of the prima facie case. In so doing, it requires the other party to respond with evidence that rebuts the affirmative defense.
Duress and Coercion Defenses
Another potential defense to claims of breach of contract is the showing of a policy issue that invalidates the contract through the defenses of duress and coercion. The policy issue first must be determined as a matter of law before the fact finder can then consider whether or not that policy issue has been violated under the specific fact scenario in question.
A showing of duress is founded on the premise that a contract may be shown to be invalid when the fear created by one party in connection with the contract is such that it deprives the other party of a reasonable choice and compels the other party to enter into the contract. Concern regarding whether or not the action taken was lawful or not is not the focus. Rather, the focus is on the effect the action had on the other party.
Contracts induced by duress are said to be voidable at the option of the party subject to the duress. Thus, a party under the threat of criminal prosecution could have exchanged property for a promise to refrain from prosecution but the contract would be voidable by the party who supplied the property.
Coercion is very similar to duress but involves a contractual violation of a legal duty. An example of coercion might be where a home builder holds the sale or construction of a new home hostage until the buyer purchases an additional lot. The buyer who is coerced can void the contract.
Contractual duress and coercion is enabled by the common-law rule that a contracting party may not be ordered to perform certain actions against public policy. Although modern courts have long recognized the rule’s function in protecting parties from enforcement of unconscionable agreements, there remains a need for the rule to protect the public welfare.
In a recent case where this issue arose, the Supreme Court of Virginia held that a negotiation between a university and a construction company violated public policy because the university’s agreement to indemnify the contractor rendered it immune for its acts of negligence.
Misrepresentation and Fraud
The claim that a party has committed fraud in connection with a contract is a shield (or a defense) to a breach of contract action. Misrepresentations can be made either intentionally or unintentionally – each of which is an important factor in determining the validity of the contract. Fraudulent, negligent and innocent misrepresentations, all which require different levels of proof, are used as defenses to breach of contracts claims that arise out of sales and purchases of goods and services.
Fraudulent misrepresentation occurs when one party to a contract has made an intentional misrepresentation of material fact which induced the other party to enter into the agreement because it relied upon the intentional misrepresentation of fact. Negligent misrepresentation occurs when one party to a contract has made a misrepresentation of material fact which it had no reasonable basis for knowing was false, but which it nevertheless knew or should have known was false, resulting in a breach of the contract because the other party relied upon the misrepresentation. Innocent misrepresentation occurs where one party to a contract has made a misrepresentation of fact and, as a result, has breached the agreement because the other party relied upon, or was induced to enter into the contract, based upon the innocent misrepresentation. Whether intentional, negligent or innocent, each type of misrepresentation can serve as a defense to an action for breach of contract and bar/enforce the contract itself.
Mistake as a Contract Defense
The concept of mistake as a defense to a breach of contract claim involves the notion that a mistaken belief of the parties was the reason for the contract and the mistake goes towards the heart of the contract claim itself. As such, if a party to a contract is able to successfully demonstrate a mistake was the reason behind the inception of the contract, this will bar enforcement of the contract by the non-mistaken contracting party. This occurs because, "In a contract where there is a mistake of fact…such a fundamental mistake going to the foundation of the contract as to the character of the subject matter is a type of mistake which makes a contract voidable by the party against whom enforcement is sought."
The general principle is a unilateral mistake will not prevent enforcement of a contract unless a specific exception applies, whereas a mutual mistake may entitle a party to rescission or avoidance of the contract. A unilateral mistake exists where only one party is mistaken and is not aware of the mistake after reasonable research. A mutual mistake, on the other hand, occurs when both parties are mistaken on a fundamental material fact or realized such a mistake yet perpetuated it by expressing incorrect facts in the contract. "Unilateral mistake is not a defense to an action for breach of contract when the mistake is induced by the opposing party’s negligent misrepresentation of fact.
The "mistake" defense is an affirmative defense in New Jersey, which means, once the defendant establishes there was a mistake, the burden then shifts the plaintiff to establish the contract is still enforceable despite the mistake.
Impossibility and Impracticability
Courts have long recognized the defenses of impossibility and impracticability. Under these defenses, the offer or performance of the contract becomes impossible due to a change in the law or due to an unforeseen event. The difference between impossibility and impracticability is that impracticability only happens when there is a cost issue. So if the contractor can still perform the contract but it’s going to cost him significantly more, and the parties clearly contemplated the possibility that this could happen, then some courts said that the contract would not be impossible or impracticable, and held the contractor to his bid price. However, this is not the general rule, and it is much easier to prove impossibility than impracticability. So the defense of impracticability is not generally recognized.
So if a defense of impossibility may be pursued as a defense to a breach of contract claim, the party claiming the defense bears the burden of proving by clear and convincing evidence that the contract was impossible to perform. This means that the party must show that it was absolutely impossible for the party to perform its obligation in the contract.
One example of impossibility is destruction of the subject matter of the contract. Let’s say that a contract calls for the delivery of certain product to a client. And somewhere along the way, the product is destroyed at the hands of a hurricane. That would likely be impossible to perform.
Another example would be an act of God. I know we all hear about acts of God in the context of insurance policies, but this also applies in the context of contracts. An act of God is something of a natural disaster that makes performance of a contract impossible.
An unexpected act of nature, even if it is severe, usually does not excuse performance . A familiar example of an unanticipated act of nature that did not excuse performance is Hurricane Katrina. The argument there did not carry much weight to say that because of Hurricane Katrina they were unable to perform under the contract.
The most common area where we have seen courts recognize the defense of impossibility is in cases where a change in the law has made performance of a contract impossible. A classic example of that is the increase in the minimum wage by the City of Chicago. When the City Council enacted legislation that dramatically increased the minimum wage for workers and increased the number of paid time off days that employees must be provided, many Chicago employers noticed that their contracts with their employees became impossible to perform because the contracts they had previously entered into with those employees did not permit them to increase the wages or provide the PTO days in wage increases at all. The employees got together and collectively filed a lawsuit stating that the employer was now in breach of contract and they were entitled to the increased wage and the PTO days. However, the employers here had several defenses to the claims. Of course, one was the change of law defense, but they also claimed that there was no offer on their part to the employee regarding the raises. These employees had no reasonable expectation that after three years they would get a raise. They were being paid the same rates of pay for the entirety of their employment. So they could not have reasonably relied on the offer of the employers to get that extra money later on in the future. So that would make that contract void. These are all very detailed and fact specific arguments to investigate and think about when defending a breach of contract case.
Frustration of Purpose Doctrine Defenses
The next possible defense is the doctrine of frustration of purpose which, again, is similar in some ways to the impossibility of performance doctrine. While impossibility of performance occurs when the unforeseen event has made a contract objectively impossible to perform, the doctrine of frustration of purpose occurs when the unforeseen event has frustrated the original purpose of the contract. Put another way, the doctrine of frustration of purpose applies when the purpose of the contract is thwarted by an unforeseen event. For example, if Susan and James enter into a contract for Susan to buy James’ car for the purpose of having it delivered to Pennsylvania where she moves a month after the sale, if Susan does not move to Pennsylvania, the purpose of the contract is frustrated even though Susan still has the car.
Contract law does not require actual impossibility, to excuse performance under a contract. In this way, the doctrine of frustration of purpose is similar to impracticability of performance which does not actually require impossible performance. The doctrine of frustration of purpose is only applied in very extreme cases and requires that two elements be established: First, the purpose of the contract must be so completely and fundamentally undermined by the intervening event that, had the event been present at the time the contract was formed, the contract would have never been agreed to. Second, the frustration must be occasioned by something unusual, unexpected and unpredictable that is not within the control of the parties. In other words, if performance could have been made but only with great effort or if control of performance could have been made contractually assignable from the breaching party’s risk area to the non-breaching party’s risk area, then the doctrine of frustration of purpose would not apply.
Statute Of Limitations as A Breach of Contract Defense
The statute of limitations is an important defense in breach of contract cases. California Code of Civil Procedure section 337(a) provides a four year statute of limitations for all actions on written contracts. An action on a written contract for the sale of goods or services under the UCC has a four year statute of limitations under California Commercial Code section 2725. Any action on an oral contract must be commenced within two years from the date of the breach under California Code of Civil Procedure section 339(1). In an action to recover damages or seek nonperformance for fraud or mistake the California Uniform Fraudulent Transfer Act (TUFTA) provides a four year statute of limitations to assure that a claim will not be rendered stale with time. Although many lawyers consider four years to be ample time to bring a lawsuit, plaintiffs sometimes have legitimate reasons for not filing within the statute of limitations period. Parties who attempt to settle a case by negotiating with a plaintiff through counsel for months or years may be surprised to find the statute shortens their settlement window. Moreover, the statutory periods are different depending on the nature of the contract; therefore, it is important for parties to know when their time is about to run out. The statute of limitations may be shortened by agreement of the parties. The statute may also be extended by equitable tolling, estoppel, waiver, or some basis in law or contract that provides for an extended limitations period.
Release and Waiver as A Contract Defenses
Waiver and release are affirmative defenses to claims of breach of contract. They play a role when a party is said to have intentionally relinquished its right to enforce the terms of a contract or to have released the other contracting party from liability. "Waiver is the voluntary relinquishment by a party of a known right, advantage or benefit . . . . [I]t is generally held that a waiver may be either express or implied." Vaguely defined: An express waiver is one that is expressly stated or communicated; whereas an implied waiver is one that can only be implied from conduct. An implied waiver – or an unwritten but presumed or assumed waiver – is typically found to exist by a party’s future conduct toward the contract or an aspect thereof. When a waiver is not express, it is implied, absent an express reservation of rights. Release, on the other hand, is "[a] release is . . . an instrument, unilateral or bilateral, intended to assure the obligor that he will not be liable to the releasee for a liability, whether existing or future, arising out of a designated transaction, or all transactions in which they have a common subject matter." A release is a future conduct tool for eliminating or establishing the scope of the covenant not to sue. It divests a party from a claim against another party as to particular matters and sets parameters on the claims it will assert against another in the future. Together, waiver and release may – or may not – progressively limit the rights and remedies of a party to a contract. In fragmented agreements like leasing or credit card agreements, release often takes the form of arbitration, establishing limitations of liability, severability clauses, and other provisions that define and narrow who, what, where, when and how events or transactions give rise in the future to various contractual rights and obligations.
Successful Contract Defense Examples
Contract defenses are often only as good as their execution, and in litigated disputes, having a full arsenal of legal and factual arguments gives you the best chance to prevail. In this section we will discuss certain examples of how contract defenses have been used and their outcomes.
In 2004, Meyer v. Greenberg, No. 2:03-CV-01740 (E.D. La., Feb. 5, 2004), a defendant was able to successfully allege an Accord and Satisfaction defense successfully. Meyer was the buyer of land and manufactured housing units. Greenberg sold them, and Meyer sued Greenberg for breach of warranty on the housing units. Greenberg issued its financing company a check for the Settlement Agreement that Hal Greeman negotiated with Meyer and his partners. However, the financing company issued a check to Meyer. When Meyer received the check, he deposited it into his business account. Meyer attempted to cash the check as payment in full on his debt owed to Greenberg. The Court held that under Louisiana law, an accord and satisfaction occurs when the contracting parties agree to a substitution of performance or accord. When the aggrieved party accepts the substituted performance and the substituted performance is not for the same amount as originally agreed upon, there can be accord and satisfaction. Because the financing company sent the check, and Meyer cashed the check, the court held that there was accord and satisfaction as to the money that Greenberg had given to the financing company as payment in full.
In 2006, in Wilson v. Waldron P.D. Paint & Glass Co. , No. 2004-CA-0410 (La. App. 1 Cir. 4/12/06), the court found that a buyer’s initial breach of contract excuse the seller’s subsequent breach of contract and for it to recover against the buyer for any future breach. The case can instruct a creditor or seller on how to defend a breach of contract claim when certain conditions are met. The plaintiff was a real estate agent who contracted with the defendant to provide a survey of certain property, which required certain property improvements to be made before the survey is performed. The Buyer made improvements, but then refused to pay the Seller as it contended that the property could not be surveyed due to access issues. The court held that the Seller’s initial breach of contract excused the Buyer’s further breaches.
The City of New Orleans, acting under its charter as a home rule charter subdivision of the State of Louisiana, sued William A. Gross Construction Co. for breach of contract for extra work that had been performed on the construction of the New Orleans East Reinforcement Elementary School. The City sought judgment in the amount of $2,629,825.26. The trial court, on review of the verdict form, found that the jury verdict was a compromise verdict which contained an error. In Knight v. City of New Orleans, No. 2005-CA-1201, CA (La. App. 4 Cir. 5/31/06), the court held that the party benefitted from charging a cost plus fee by executing the change orders where the Contractor had made no effort to provide for changes in costs in its bid.
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