Business Contracts and Material Breach

By Eric Misterovich

In general, a breach of contract is any failure to perform what you agreed to do. Examples would be:

  • Failure to deliver the goods promise
  • Failure to deliver the goods in a timely fashion
  • Failure to pay, etc.

Contractual obligations are set forth in the contract between the parties. If the contract is in writing, a court will generally look to the “four corners” of the written agreement to determine what was agreed. The court will then compare what was agreed to what was done. If there is a material variance, then the court will declare a material breach and damages will be calculated and a judgment issued. Problems arise when contracts are oral and based on course-of-dealing. But even under those circumstances, courts will look to what was said and done in the course of dealings and, from that, the court will determine what was agreed.

If your business involves manufacture and sale of goods, in addition to what is written in your agreement, the law will often “add” various provisions, called “implied provisions.” This is done principally through the Uniform Commercial Code (“UCC”). The UCC consists of a series of numbered sections, each dealing with specific categories of commercial activity and how to deal with certain problems, such as impossibility of performance. See discussion below. Versions of the UCC have been enacted in all 50 states and the District of Columbia.

These implied provisions can give rise to breach of contract claims. For example, UCC Article 2, section 314 imputes into commercial contracts and dealings an implied warranty of merchantability. Basically, this means that any goods made or sold must be suitable and saleable for the intended purpose. So, even if your specific written agreement does not define “merchantability,” your buyer could still claim breach of contract if the goods in question do not meet the standards.

Breach of Contract Remedies

In general, when a party breaches a contract, that party can be sued and can ask a court of competent jurisdiction to compensate the nonbreaching party. Such compensation might include:

  • Payment of the purchase price
  • Interest
  • Return delivery or restocking costs
  • Lost profits
  • Other losses that are reasonably foreseeable
  • Specific performance

The UCC also provides some self-help mechanisms such as a seller withholding or stopping delivery of goods where the buyer has failed to pay for previous goods or where the buyer has stated that payment will not be made. Buyers also have self-help mechanisms, the most important of which is the right to refuse non-conforming goods. However, a buyer must be careful to make an “effective rejection.” Any use or long-term continued possession of the non-conforming goods might be seen as acceptance of the goods. Failure to pay under those circumstances would give the Seller a claim for breach of contract even though the goods did not conform.

The remedy of specific performance is another complex area of the UCC. In general, for breach of contract, you are entitled to all of the monetary damages necessary to fully compensate you for your losses. However, sometimes money damages cannot provide full recovery. This most often involves cases of unique products. See UCC 2-716 (1). Under such circumstances, specific performance can be ordered. Essentially, the court ordered the parties to perform the contract. As example, say you are an interstate dealer in vintage automobiles. Vintage cars, in particular, are rare and, as time passes, they become more unique. If you fail to deliver a vintage car under contract, a judge might order specific performance and require you to deliver the specific unique automobile.

As you can see, issues involving commercial transactions and the UCC are complex. You will need experienced legal counsel to help you. Further information on the UCC can be found here.

Sometimes Non-performance is Not Material Breach of Contract

There are a few circumstances in which non-performance of your obligations under a contract will not be considered breach of contract.

One such example is when your nonperformance is considered non-material. In general, only a material breach of contract will give rise to a lawsuit. To use a simplistic example, say you contract with a tailor/seamstress to custom-make clothes for your wedding-party. The tailor/seamstress agrees in the written contract to deliver by August 1st (and the wedding is scheduled for October). If the clothes are delivered on August 2nd, that might be a technical breach of contract, but it might not be a material breach particularly since the wedding is many weeks off.

Material breach vs. non-material breach is decided by the courts on a case-by-case basis. The courts consider many factors including:

  • How much of the contract has already been performed and will/can the breaching party finish performing the contract?
  • Was the breach intentional, negligent or an innocent mistake?
  • What were the real world consequences of the breach?
  • Is there unjust enrichment or some other inequity?
  • What are the actual damages?

In our seamstress/tailor example, you can see that all the factors weigh heavily in favor of deeming the breach nonmaterial. The clothes are finished, the one-day delay was probably innocent, there are no real-world consequences since the wedding is in October, it would be unfair to absolve the wedding party of having to pay for the clothes under these circumstances and there are no actual real-life damages.

Material breach and nonmaterial breach also touches on legal issues involving substantial performance. In many commercial transactions, depending on the case, substantial performance will be deemed sufficient performance.

These Legal Principles Apply to all Business Contracts

The legal principals discussed above apply to all business contracts. The UCC does not cover the provision of services, for example. But similar legal issues related to breach and nonperformance will apply to any contract whereby you agree to provide services. The courts will use the legal principles underlying the UCC and will come to similar results. Thus, if you are providing tax preparation services and your services are essentially non-conforming, your customers may be able to sue for breach of contract even if your written contract is silent on the issue of nonconforming services.

Contact Revision Legal

Commercial transactions can be confusing and distracting. Every business needs experienced business attorneys to help draft and review complex business contracts which leaves you free to run your business. You need the professionals at Revision Legal. We can be reached by using the form on this page or by calling us at 855-473-8474. If you are being sued or being threatened with suit for breach of contract, we can help. We look forward to helping your business succeed and protecting your legal rights.

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