Breach of Contract

A breach of contract claim is at the heart of business litigation. The elements of a breach of contract claim are (1) the existence of a contract, (2) performance by the party seeking recovery, (3) non-performance by the other party, and (4) damages attributable to the breach. Each of these elements have been the subject of prolix litigation in both the federal and the state courts of New York.

With respect to the first element, for a contract to exist, there must be an offer, acceptance, consideration, mutual assent and intent to be bound. There must be, in other words, an objective meeting of the minds sufficient to give rise to a binding an enforceable contract. And in particular, an acceptance must comply with the terms of the offer and be clear, unambiguous and unequivocal. If the acceptance is qualified with conditions, it is equivalent to a rejection and counteroffer. And mere silence, when not misleading, can not be construed as acceptance.

With respect to the second element, the Federal courts permit the plaintiff to plead in general terms that he has satisfied all conditions precedents to bringing the action, such as performing his end of the bargain. In some instances, the plaintiff may be excused from performing, such as where his performance was conditioned on the defendant's performance, which did not take place. In such cases, the plaintiff need only allege facts showing he was excused from performance.

For example, it often happens that the plaintiff's performance is conditioned on the defendant first performing the defendant's obligations. For example, the buyer of goods doesn't need to make payment until the seller has delivered goods in accordance with the contract of sale. In such cases, a failure by the defendant to perform excuses the plaintiff from performing.

Where the condition is express, it must be literally performed; substantial performance will not suffice. But if the condition is not expressly stated, substantial performance of the condition will suffice to trigger the other side's obligation to perform.

Thus, suppose, for example, that a buyer issues a purchase order to a seller specifying the exact kind of goods that need to be delivered. If the goods deviate at all from the purchase order, an express condition to payment has not been fulfilled, and the buyer is excused from performing (i.e., making payment).

But suppose a contractor builds a house where not all of the details have been specified in the contract. Because the conditions are not express, substantial performance by the contractor will trigger the homeowner's obligation to make payment.

With respect to the third element, the breach must be what's called a "material breach". A material breach is one that goes to the root of the agreement between the parties. It must be so substantial that it defeats the object of the parties in making the contract.

In one case, the producer of a prepaid card entered into a contract with a money transmission service. The service's delay in approving advertising for the cards was deemed not a material breach. In another case, an architect's delay in completing construction plans was not a material breach, where the contract did not specify a deadline and the plans were completed within a reasonable time period.

On the other hand, where a contract states that time is of the essence, a failure to meet a specified deadline constitutes a material breach. By the same token, a printer of a bird guide materially breached its contract with the guide's publisher where the colors of the birds were incorrect, rendering the guide unsaleable.

With respect to the fourth element, resulting damages, the law seeks to put the injured party in the same position as if the contract had not been breached. In that endeavor, the law permits the recovery of both "direct damages" and "consequential damages".

Direct damages are those that flow naturally and probably from a breach of contract. For example, where the seller delivers imperfect goods, the buyer's direct damages are the difference between the value of the defective goods and their value if they had been perfect. Or if the buyer doesn't make payment, the seller's direct damages are the money he was owed.

Consequential damages include whatever was within the contemplation of the parties when they entered the contract. Thus, consequential damages includes lost profits, damage to the good will of the plaintiff, and special or incidental losses (such as the cost of correcting a defective good, or of transporting the defective goods back to the seller.)

But a plaintiff may not recover any damages which are speculative or indefinite. To surmount this problem, plaintiffs in substantial lawsuits will sometimes hire an expert witness, such as someone with an MBA, to opine on the degree of damages. Such witnesses aren't inexpensive-- e.g., $25,000-- but in a big case it may be worth the expense.