Is It Okay to Breach a Contract?

WHAT IS A BREACH OF CONTRACT?

We live in a world filled with contracts. Much of how and when we do things is regulated nowadays by contracts. If you have a credit card, there is a written contract between you and the credit card company. If you are renting an apartment, there is a written contract between you and the landlord. If you hire a contractor to build a home, there is a written contract between you and the builder. A verbal promise to trade a used lawn mower with your neighbor in return for his used clothes dryer is an oral contact between you and your neighbor. The list goes on and on. We all think we know what a contract is when we see it, but how the law defines a breach of contract may surprise you.

A contract is an agreement, oral or written, between two or more people to do or not do something, in return for money or something else of value – called “consideration.” Written contracts are much more common than oral contracts because it can be difficult to prove the terms and obligations of the parties to an oral contract.

To protect consumers, Washington state law requires certain types of agreements to be in writing in order to be valid.

Examples include:

• the sale of goods priced over $500 (unless the item is “specially manufactured” for the buyer and the seller cannot resell the good in the ordinary course of its business);
• sales or purchases of real estate;
• real estate broker commissions;
• services that cannot be performed within a year;
• promises by an executor or administrator to cover damages from their own estate.

Again, these situations require a written contract, but people and businesses are free to rely on written contracts in countless other situations. Renting a home or apartment is a classic example of when a landlord will use a written, not oral, contract. The contract contains the parties’ obligations or promises to each other.

For example: in return for the right to occupy an apartment for six months, the tenant promises to pay the landlord $1,000 every month. Sometimes one party does not fulfill a promise specified in the contract. If the party does not have a legal excuse for violating the contract, it is considered a breach.

Technically, a party’s breach of a contract allows the non-breaching party to file a lawsuit and recover his or her damages caused by the breach.

HOW DOES A JUDGE DETERMINE BREACH OF CONTRACT?

In determining whether to award damages for the breach, a judge will ask the following questions:

• Did a valid contract exist?
• If a valid contract existed, what were the parties’ obligations?
• Did the parties modify the contract at any time?
• Did a breach of contract in fact occur?
• If so, was the breach material to the contract?
• Does the breaching party have a legal excuse to enforcement of the contract?
• What damages, if any, were caused by the breach?
• When does a valid contract exist?

IN ORDER TO BE VALID, A CONTRACT MUST HAVE THREE BASIC ELEMENTS:

1) an offer
2) acceptance of the offer
3) consideration (that is, payment or a promise to pay).

For example: a contractor offers, in writing, to paint your kitchen by this weekend in return for payment of $500. If you accept the contractor’s offer, a valid contract exists. However, it is not entirely clear what the parties’ obligations are except to paint the kitchen by this weekend and pay $500. Which color will the kitchen be painted? Which type of paint will be used? Who is responsible for removing and reinstalling all cabinet and drawer handles? Is payment required before work begins or after?

If the homeowner suddenly remembers he is having people over for dinner this weekend and asks the contractor to paint the kitchen the following weekend, the homeowner has attempted to modify the contract. This is not a breach of the contract if the contractor agrees to the modification.

Suppose the homeowner and contractor agree the kitchen will be painted yellow using a semi-gloss paint and that payment is to be made upon completion of the work. If the contractor painted the kitchen yellow but used a satin finish, is that a breach of the contract?

If the homeowner refuses to pay the contractor for painting the kitchen using a satin finish, is that a breach of the contract? Since painting the kitchen using a semi-gloss finish was one of the terms of the contract, the contractor has breached the contract unless the homeowner accepts the work as is. Since paying the contractor upon completion of its work was one of the terms of the contract, the homeowner has breached the contract.

If the homeowner files a breach of contract lawsuit against the contractor, is the homeowner entitled to damages? Maybe. The amount of any damages will depend on whether using satin paint was a material or minor breach.

THE DIFFERENCES BETWEEN A MATERIAL AND MINOR BREACH OF CONTRACT

What is the difference between a material and a minor breach? A breach is material if the non-breaching party receives something substantially different from what the contract specified as a result of the breaching party’s failure to perform some aspect of the contract.

It is unclear whether using a similar paint finish is a material breach, so we will use another example. Suppose a written contract requires the seller to ship a box of tennis balls to a tennis club. For some reason, the buyer receives a box of baseballs instead. Is this a material breach of the contract?

To determine when a breach is material, courts consider the following information:

• the amount of benefit received by the nonbreaching party;
• whether the nonbreaching party can be adequately compensated for the damages;
• the extent of performance by the breaching party;
• the hardship to the breaching party;
• whether the breach is due to negligent or willful behavior of the breaching party;
• the likelihood the breaching party will perform the remainder of the contract.

When a breach is material, it is considered a breach of the entire agreement. The non-breaching party is no longer required to perform under the contract and can immediately seek all remedies for the breach. In our tennis ball example, receiving baseballs would appear to be a material breach because the product is substantially different from what the contract specified, but we would need additional information to know for sure.

A breach is minor if the non-breaching party still received the item or service specified in the contract, even though the breaching party failed to perform some aspect of the contract. When a breach is minor, the nonbreaching party is still required to perform under the contract but may recover damages resulting from the minor breach. A court would likely consider using satin finish a minor breach because the homeowner otherwise received the service specified in the contract.

WHAT ARE VALID DEFENSES TO BREACHING A CONTRACT?

Breaching a contract is usually not advisable, but there are times when it is entirely appropriate to breach a contract.

In these situations, a party has a valid defense to the contract being enforced and paying any damages for breach. Consider the following situations:

• Enforcement of the contract would violate public policy. Example: a party to an employment contract may join a union even though doing so breaches the contract because employees cannot be prohibited from joining a union under Washington State law.
• Performance of the contract has become impossible, or the purpose of the contract has been frustrated. Example: Dan hires a contractor to remodel his home, but Dan’s home burns down before the contract can be performed. Dan does not need to comply with the contract.
• The contract is illegal. Example: a contract for murder.
• The contract lacks consideration. Example: Dan promises to pay a contractor $100, but the contractor does not promise to provide any services in return. Dan is not required to pay the contractor.
• The contract was obtained by fraud. Example: Dan wants to buy a used car with less than 30,000 miles on it. Dan signs a contract with EZ Car Co. to purchase a car with 20,000 miles on the odometer. In truth, EZ Car Co. rolled back the mileage from 50,000 to 20,000 miles. The contract is void because EZ Car Co. misrepresented a material fact about the carto induce Dan to enter the contract
• The contract limits the amount of damages that can be recovered. Example: The contract states that in the event of a breach, no matter how minor, damages will be $10,000 regardless of actual loss.
• The contract contains a mutual mistake, stating something different from what either party intended. Example: Both parties to a contract intended delivery of a product on March 15, but the contract says April 15. There is no breach because both parties were mistaken.
• The contract contains a unilateral mistake that was material to the agreement and the other party knew or should have known of the mistake. Example: Dan always wanted a painting by Pablo Picasso. He paid an art dealer for a painting signed “Picasso.” The art dealer knew Dan thought “Picasso” meant Pablo Picasso, when in reality it was painted by Alberto Picasso, but the art dealer did not correct the misunderstanding. In that case, Dan does not have to pay for a Pablo Picasso painting.
• The parties have accepted the contract performance, or a substitution for the performance, as adequate. This is called accord and satisfaction. Example: Dan owes a contractor $1,000 for painting his house. The contractor agrees to accept $100. Months later, the contractor changes its mind and sues Dan for $900. The court will not enforce the original contract because the contractor has accepted $100 as performance of the contract.
• One or both of the parties lacked capacity to make the contract. Example: A 17-year-old signs a contract to purchase a house. Since you must be at least 18 years of age to enter into a contract in Washington State, the contract is not valid.

GET THE HELP YOU NEED IN THE TRI-CITIES AT AULTMAN LAW

Contracts are critical in our society. They can be simple or complex. Regardless of the type of contract, Aultman Law is a small law firm with big law firm experience representing businesses and consumers in breach of contract litigation, business disputes, construction defects, and personal injury matters. Clients enjoy unparalleled customer service, transparent fees, and an excellent track record. Experience is the difference.

If you would like more information or want to schedule a free consultation, call attorney Jeff Aultman at 509.282.2456 or complete our Online Contact Form.