| BREACHES AND REMEDIES
Breach of Contract
Q. What is a breach of contract?
A. A breach of contract - also called a default - is one party's
failure, without a legally valid
excuse, to live up to any of his or her responsibilities under a contract.
A breach can occur by:
• failure to perform as promised;
• making it impossible for the other party to perform;
• repudiation of the contract (announcing an intent not to perform).
Q. What qualifies as a failure to perform?
A. One party must not have performed a material part of the contract
by a reasonable (or
stated) deadline. Suppose your friend promised to buy your Yugo for $1,000,
and to pay you
"sometime early next week." It would be a material breach for
your friend never to pay you, or
to pay you six months later. If your friend paid you on Thursday of next
week, however, it
probably would not be a breach. You did not explicitly make time an essential
part of the
contract - the source of the phrase "time is of the essence."
Q. How is a contract breached by making performance impossible?
A. Suppose you hire a cleaning service to clean your house on
Sunday at a rate of ninety
dollars for the day. Early Sunday morning you go out for the day, neglecting
to make
arrangements to let the cleaning people into the house. You've breached
by making
performance impossible, and would owe the money since the cleaning service
was ready and
able to clean your house and presumably turned down requests to clean
for other clients.
Q. What if someone partially breaches a contract?
A. That happens when the contract has several parts, each of
which can be treated as a
separate contract. If one of those parts is breached, you could sue for
damages even though
there isn't a total breach. An example of this would be a landowner hiring
a contractor to
perform a construction project within certain deadlines. These deadlines
have already been
missed, but overall the project is going well. As long as the delay (the
breach) is not material,
the owner can continue the contractual relationship but sue for whatever
damages were
suffered as a result of the delay (for example, canceled leases). On the
other hand, if the delay
is material - so damaging to the project that it seriously undermines
its value - the breach
strikes at the heart of the contract and is total. The owner may terminate
it and pursue
remedies against the builder while hiring someone else to finish the job.
Q. What is a breach by repudiation?
A. Repudiation is a clear statement made by one party before
performance is due that the party
cannot or will not perform a material part of that party's contract obligations.
Suppose that on
the day before your friend was to pick up the Yugo that you promised to
sell to her, you sent
her a message that you decided to sell the car to someone else. That would
be a repudiation.
It's not repudiation if one party will not perform because of an honest
disagreement over the
contract's terms.
Remedies for Breach of Contract
Q. What are the main types of remedies for a breach?
A. When someone breaches a contract, the other party is no longer
obligated to keep its end of
the bargain, and may proceed in several ways:
• urging the breaching party to reconsider the breach;
• if it's a contract with a merchant, getting help from local, state,
or federal consumer
agencies;
• bringing the breaching party to an agency for alternative dispute
resolution;
• suing for damages or other remedies.
Q. What's the point of asking the breaching party to reconsider?
A. One advantage is that it's cheap. Often the only cost is the
price of a telephone call and a
little pride. The breaching party may have breached the contract because
of a
misunderstanding. Perhaps the breaching party just needs a little more
time. Or maybe you
could renegotiate. That would almost certainly leave both of you better
off than if you went to
court. If you do hire a lawyer, the first thing that lawyer is likely
to do is try to persuade the
breaching party to perform.
Q. Should I keep records of my communications with a breaching
party?
A. Yes. Once you see you're in for a struggle, make a file. Keep
copies of any letters you send
and move all receipts, serial numbers, warranty cards, and the like to
this file.
Q. Assuming the breaching party does not budge, what else can
I do?
A. If the dispute is between you and a merchant, you might want
to contact the manufacturer
of the product. If it involves a large chain of stores, contact the management
of the chain. This
goes for services, too.
If that doesn't help, contact a consumer protection agency, either in
your city or state.
The Federal Trade Commission is less likely to get involved in small disputes.
If, however,
the FTC believes that what happened to you has occurred to many people
nationwide, it might
be interested. The FTC's involvement carries a lot of weight. The same
goes with your state
attorney general or local consumer agency. Another resource is your local
post office, where
you can report any shady business practices that took place through the
mail.
Q. If these methods don't work, what else can I do short of filing
a lawsuit?
A. The first and second chapters of this book discuss many different
types of alternative
dispute resolution systems, such as arbitration. Note that the contract
itself may include a
specific type of alternative dispute resolution that you must use. You
may have already agreed
not to go to court to resolve disputes.
Stopping Payment
Q. What if I want to cancel a contract or void a purchase that
I made, but I already paid with a check?
A. First, you should call the seller and ask for a cancellation
of your contract and the return of
your check. If the seller won't do this, you may call your bank and "stop
payment" on that
check. Remember, you're still liable for the purchase price, and you may
be sued by the seller
for its amount, unless you have a legal excuse not to pay. Also be aware
that when you stop
payment, you raise the stakes and diminish the chance of a settlement.
Merchants don't take
kindly to this technique.
Q. Isn't stopping payment on a check a criminal act?
A. No. It's not the same as having insufficient funds to cover
the check, which may carry
criminal penalties. Stopping payment on a check is your legal right.
Q. How do I stop payment on a check?
A. Call your bank and tell them the relevant information about
the check. The bank will then
send you a form to confirm your instructions in writing, which you must
return within a
certain number of days for the bank to honor your original request. If
you don't provide all the
information your bank requires, your stop-payment order might not be good.
The bank's
charge for this service will usually be ten to thirty dollars or even
more.
Don't try to avoid the fee by reducing your bank balance so the check
won't clear. The
bank can't read your mind, so other checks you've written may not be paid,
or the bank might
even pay the check you don't want paid, in an attempt to accommodate you.
More important,
you will have gone from exercising a legal right (stopping payment) to
committing a legal
wrong (passing a bad check).
Q. Is there anything else that I should do after I place the
order to stop payment?
A. You could inform the seller of your action, but you don't
have to.
Q. What if the seller has already deposited the check in a bank
account?
A. If the check has not cleared your account, your bank may still
put through the stop-payment
order. If your bank has paid the check, you'll have to try to void the
contract and get your
money back in other ways discussed here.
Q. What if I'm dissatisfied with goods or services that I've
paid for with a credit card?
A. Then the Fair Credit Billing Act may protect you. Under the
Act, products that you
rightfully refuse to accept on delivery or that aren't delivered according
to an agreement are
regarded by the law as billing errors which the card issuer must investigate
and may correct by
granting you a credit. The same is true of shoddy or damaged goods or
poor service. The Act
may allow you to withhold payment or, if you've already paid, to get back
your money. See the
"Consumer Credit" section for more details.
Getting Out of a Contract
This chapter has tried to emphasize that it is more important to recognize
when you have
actually made a contract than to worry about a breach of contract.
Sometimes, though,
someone will breach a contract with you. Or you'll find yourself in
a position where you have
to breach a contract. Breaching a contract isn't always a bad thing
to do, as long as you're
ready to take your lumps. Sometimes the price you pay through a remedy
for breach is less
damaging than performing a contract that has just become a big mistake.
Remember, though, that a contract is your pledge. If you want to be
known for keeping
your word, you'll take your contract commitments seriously - even
if you don't profit each
time. |
Suing for a Breach of Contract
Q. What's the most common legal remedy for a breach of contract?
A. The usual legal remedy is a suit for damages, usually compensatory
damages. This is the
amount of money it would take to put you in as good a position as if there
had not been a
breach of contract. The idea is to give you "the benefit of the bargain."
Q. What's an example of compensatory damages?
A. Suppose you hired a contractor to paint your house for $500.
This job could cost as much
as a $650, but you're a good negotiator. Now the contractor regrets agreeing
to the $500 price
and breaches. If you can prove all the facts just stated, you can recover
$150, or whatever the
difference is between $500 and what it ultimately cost you to have your
house painted.
Q. What other kinds of damages are there?
A. The most common ones are:
• Nominal damages, awarded when you win your case but you have not
proved much of a
loss. The court may award you a small amount as a matter of course.
• Liquidated damages, an amount that is built into the contract.
Although one or both parties
have effectively breached the contract, this term will stand, as long
as it fairly estimates
the damages. In contrast, the courts will not enforce a penalty clause,
an amount of
liquidated damages that is way out of line with the actual loss.
• Consequential damages, as discussed in the section on warranties.
These are rarely
available in a contract suit, unless they are provided for in the contract.
• Punitive damages, available if the breaching party's behavior
was offensive to the court.
Punitive damages are virtually never recovered in a suit for breach of
contract, but it may
be possible to get punitive damages or some form of statutory damages
(legal penalties)
under a consumer fraud law or in a suit for fraud.
Q. Are there other remedies in a contract suit besides damages?
A. Yes. The main one is specific performance, a court order requiring
the breaching party to
perform as promised in the contract. Courts are reluctant to award this
because it is awkward
to enforce. They will impose specific performance only if there is no
other remedy available
because of the contract's unique subject matter, such as real estate or
a unique piece of
personal property.
Lawsuits As Remedies
This section will discuss the different kinds of relief you can ask
a court for, considering what
you already learned about contract defenses.
Remember: Any time one side can prove one of the contract defenses
discussed in the
second section, there's no breach of contract because there's no enforceable
contract. Then the
party that does not or cannot perform merely has to pay back any money
or return any goods
transferred in the agreement. |
Q. What else can a court do?
A. A court may rescind (cancel) a contract that one party has
breached. The court may then
order the breaching party to pay the other side any expenses incurred;
it could also order the
return of goods sold. Or, the court could reform the contract. That involves
rewriting the
contract according to what the court concludes, based on evidence at trial,
the parties actually
intended. Although these have traditionally been rare remedies, they are
being used
increasingly under the provisions of many states' consumer fraud laws
(discussed below).
Q. What are consumer protection or consumer fraud acts?
A. Laws prohibiting unfair and deceptive trade practices in consumer
transactions have been
enacted in every state. They apply to almost all consumer transactions
and are both extremely
flexible and very potent - often providing for treble (triple) damages
where a violation is
found. Generally requiring lower legal hurdles than traditional fraud
remedies - for example,
intent to deceive is usually not a requirement - these laws usually provide
both for state action
and recovery by private lawsuits. These laws are the ultimate legal reaction
to caveat emptor.
Their use involves numerous technicalities, though, and competent legal
advice is absolutely
necessary to take advantage of them.
Q. If I have a contract for services or goods with a company
that goes out of business,
what can I do?
A. If another firm bought the company, as in a corporate merger,
usually the new company
must take responsibility for the contract obligations of the old company.
If, however, the
company went through the bankruptcy process, your contract could legally
be disavowed,
though any debt owed to you might not be.
If the company has ceased doing business, or is under the protection of
the bankruptcy
laws, your chances of recovering anything of value are small. If you have
a contract that still is
in force with a troubled company, you may have to get the rest of your
contract needs filled by
another company if the one you have a contract with can't come through.
Then you may have a
damages claim against the first company. If the company is in bankruptcy,
you may be
contacted by the bankruptcy court, or you may need a lawyer's help to
put in your claim. If
your claim isn't substantial, though, it's usually not worth the trouble.
Q.I realize that I may have to get goods from another company.
What about any money
the first company may owe me under the contract?
A. If the company is in bankruptcy, you can file a claim against
it through the bankruptcy
court. You'll have to "stand in line" with the other creditors,
and you may get only a small
percentage of what the company owes you, if you recover anything at all.
If the business is a
corporation that's dissolving under state law, you can file a claim against
the corporation
through the state agency (usually the secretary of state) for any losses
you have accumulated.
Whatever assets remain will be divided according to the number of claims
filed and their
amounts.
Q. If the financially troubled company is holding goods for me
on layaway, can I still get my goods?
A. Most companies that go out of business will notify people
that they are closing; often they
want you to come in and finish the purchase because they need the cash.
If they've tried to
contact you and you haven't responded, they may sell those goods, and
you'll have no way to
recover the merchandise, although the law still entitles you to any money
you paid toward the
purchase.
Q. If the merchandise is gone and I've paid money, how can I
recover that money?
A. If the store still is open, it probably will pay you when
you present your receipt for
payments made toward the purchase price. If the store has closed, you
might need to file a
claim in the bankruptcy court or with the proper state agency, as described
above.
Q. What do I do about merchandise that was under warranty? Who'll
cover it now that
the seller has gone out of business?
A. If you've purchased a national brand of goods, there probably
will be a service center or a
licensed warranty center in your area. It may not be as convenient for
you as the seller's store.
Almost all manufacturers will stand behind their products regardless of
where you purchased
them. The only drawback is that you may need to present an original receipt
to show that the
manufacturer's warranty still covers the product.
Q. I also purchased an additional retailer's warranty when I
bought my goods that
extended the manufacturer's warranty. What will this extra retailer's
warranty cover?
A. Retailers usually offer this warranty to extend parts and
labor for a much longer period of
time than the manufacturer offers. Unfortunately, the retailer's warranty
is useless if the place
that made the promise is now out of business, unless its obligations have
been taken over by
another company.
When In Rome
Why are there so many foreign legal terms? Many legal concepts trace
their roots to Roman
legal principles, though the classical Anglo-American judge-oriented
legal system - the
common law - has less in common with Roman law than does the European
"code" system.
(The code system is also used in Louisiana, where the Napoleonic code
took hold before the
territory became part of the U.S.) Also, much of the infamous redundant
language of the law -
such as "cease and desist," "open and notorious"
- is a result of the introduction of Norman
French terms alongside Anglo-Saxon ones in legal procedure after the
Norman conquest of
England in 1066. (English legal proceedings were carried on in the
French language until the
late 14th century.) Numerous French terms are still in common use,
such as petit and grand
juries.
With the decreased knowledge of classical languages and the trend
away from elitism,
fewer and fewer non-English terms have remained in use over the years.
Any lawyer who tries
to impress you with his proficiency in Latin legalisms should be taken
with what the great
Roman advocate and orator Cicero would have called cum grano salis
with a grain of salt. |
More On Reasonableness
Earlier we discussed the "reasonable person." There are
two principles that extend that
fictional person's capacities into the practical realm. One is the
concept of the "reasonable
observer," a reasonable person who sets the standard of whether
an action or statement would reasonably suggest, for example, an offer
or acceptance, or a repudiation. This person is not an eagle-eyed
expert, but stands for common sense.
Closely related is the concept of "knew or should have known."
If parties to a contract
are considered to know, or be "on notice" of something -
say, that their offer has been
accepted - it is not enough to ask whether they actually knew it.
If it were, we would have only their word as really reliable evidence
that they knew or didn't know. The law will not allow parties who
should have known something through the reasonable exercise of their
senses and intelligence to fail the use them. Thus it isn't enough
to say, "I didn't know the Yugo I sold you had no engine."
That's something that someone selling a car reasonably should know.
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